American Assets Trust, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Hello, and welcome to the Q4 2020 American Assets Trust, Inc., Earnings Conference Call. . It is now my pleasure to turn the call over to your host for today, Mr. Adam Wyll, EVP and Chief Operating Officer. Sir, the floor is yours.

[Adam Wyll:]

Thank you. Good morning, everyone. Welcome to American Assets Trust, Inc.'s Fourth Quarter and Year-end 2020 Earnings Call. Yesterday afternoon, our earnings release and supplemental information were furnished to the SEC on Form 8-K. Both are now available on the Investors section of our website, americanassetstrust.com. Telephonic replay and on-demand webcast will also be available for this call over the next week.

[Ernest Rady:]

Thanks, Adam. Great job. First and foremost, I would like to wish all our stakeholders and their loved ones continued health and safety during these truly unprecedented times. Now that people are starting to get vaccinated, we are optimistic and even hopeful that eventually this pandemic will no longer be a threat. Lives will return to some kind of normalcy, and the economy will recover. However, at the present time, this pandemic continues to create challenges within our portfolio, particularly for our 3 theaters, gyms and our Waikiki Beach Walk properties. As most of you know, all of our properties in Hawaii are own, fee simple and are very valuable. We have a strong view that post pandemic, Waikiki will return to normal with pent-up tourism returning and every night being like a Friday night. While this pandemic still remains a threat, we believe we are well prepared to endure a prolonged pandemic with our irreplaceable portfolio, our best-in-class operating platform, our top-notch management team, our disciplined financial strength and a very strong balance sheet. In such regard, I am extremely proud to announce that our inaugural public offering, which we closed on January 26, 2021. The offering consists of $500 million of 3.375% senior unsecured notes due 2031, and by the way it was oversubscribed 4x. This bond offering provides substantial liquidity staying power and provided for the repayment of $200 million -- $250 million of debt and provides all funds needed for the development of La Jolla Commons III, which we plan to break ground this April. Success and demand of this bond offering in the midst of a pandemic is truly a testament to our incredible properties, efficient operating platform and our top-notch management team. Bob will provide more financial details on the bond offering.

[Adam Wyll:]

Thanks, Ernest. Good job. We remain optimistic...

[Ernest Rady:]

We were mutually cooperative.

[Adam Wyll:]

We remain optimistic with the overall performance of our portfolio, even in light of the pandemic, and we are pleased to report that 100% of our properties are currently open and accessible by our tenants in each of our markets. Of course, we too have felt the bumps along road, like everyone else in our sectors, yet our collections of monthly recurring billings due continue to improve in Q4 over Q3 and Q3 over Q2, with total collections to date of approximately 92% in Q4 versus 90% in Q3 and 87% in Q2. January is currently trending consistent with Q4, just over 91% to date, and likely to increase further, all despite the headwinds of Governor Newsom's shutdown restrictions in California that lasted through most of December and January. Collections for essential tenants in our retail portfolio, which represent approximately 1/3 of retail billed rents, were almost 100% in Q3 and Q4. And collections for nonessential tenants continue to improve from 69% in Q3 to over 74% in Q4. Of note, no tenant in our retail portfolio represents more than 2% of our ABR, and less than 6% of our retail portfolio is due to expire in 2021, assuming no exercise of lease options. And of the approximately 500 tenants in our retail portfolio, since the beginning of the pandemic, we have had 13 retailers file bankruptcy, covering 18 total tenant lease spaces, of which 13 spaces have been assumed or are in the process of being assumed in bankruptcy, which we believe is a testament to us having superior locations that these restructured tenants want to remain in. Notably, the rejected leases to date were less than 13,000 square feet in the aggregate. As you would expect, our primary collection challenges remain in the retail segment with our movie theaters and gyms as well as many of our retailers at Waikiki Beach Walk, which until mid-October, had no incoming tourism to sustain meaningful revenue for our tenants. Though we believe the pent-up demand for travel to Hawaii is massive, we expect the tourism to rebound to occur at a more deliberate pace until a broader vaccine rollout is achieved, hopefully, by this upcoming summer.

[Robert Barton:]

Good morning, and thank you, Ernest and Adam. Last night, we reported fourth quarter and year ended 2020 FFO per share of $0.41 and $1.89, respectively, and fourth quarter and year ended 2020 net income attributable to common stockholders per share of $0.05 and $0.46, respectively. The lower FFO in the fourth quarter, which is approximately $0.05 lower than the Bloomberg consensus is primarily the result of additional reserves for theaters, gyms and Waikiki Beach Walk Retail. Nevertheless, we remain optimistic of this portfolio even in light of the pandemic. The highlights of this quarter are

[Steve Center:]

Thanks, Bob. At the end of the fourth quarter, net of One Beach, which is under redevelopment, our office portfolio stood at approximately 95% leased, with just under 5% expiring through the end of 2021. Our top 10 office tenants represent 51.5% of our total office-based rent. Given the quality of our assets and the strength of the markets in which they are located, with technology and life sciences the key market drivers, we continue to execute leases at favorable rental rates, delivering continued NOI growth in our office segment even in this challenging environment.

[Operator:]

. Your first question comes from the line of Craig Schmidt from Bank of America.

[Craig Schmidt:]

I'm wondering what does the retail leasing pipeline look like heading into 2021? And what do you think you'll do relative to the 303,000 you leased in 2020?

[Ernest Rady:]

Chris, can you answer that?

[Christopher Sullivan:]

Yes.

[Ernest Rady:]

I know it's not as -- the pipeline is not as barren as the press says, but certainly it's not as billions and -- as we'd like.

[Christopher Sullivan:]

Yes. Craig, can you repeat the second half of your question? You had a number there. You said 300,000?

[Craig Schmidt:]

Yes. I had 303,000 total retail square foot leased in 2020.

[Christopher Sullivan:]

All right. I was thinking you were referring to the roll that is going to -- that comes up through 2021. From a pipeline standpoint, you're starting to see retailers pop their heads back out. So given your activity started picking up a little bit in Q4, and it's continuing to roll some momentum coming into first quarter of 2021. I can't give you the exact number, but I'm way more bullish that they're starting to look around. I'm starting to do tours. Again, the phones are ringing with more activity. And then of course as for the roll of our renewals coming up, I think the majority of those will probably get renewed. As Bob said earlier, I think we really hit the trough in Q4. There's still some turbulence ahead. But spring is coming, and you're starting to see talk of going back to school, vaccines are coming and retailers are getting more optimistic.

[Craig Schmidt:]

Great. And then the trend of leasing spreads turned negative in the fourth quarter, but it sounds like you're going to -- you'll see a more positive results on leasing spreads in '21?

[Christopher Sullivan:]

Craig, I hope so. It's combat leasing from what I can tell you. The retailers, I don't know when the last time you bought a new suit was or any of us, but the retailers are still having their troubles in quite a few categories. So I don't want to lean to tell you that I'm going to be seeing rates come up. Some situations, it's a balancing act between occupancy and rate. And I'm always a fan of let's be there to fight another battle.

[Ernest Rady:]

It's hand-to-hand combat, Craig, and the retailers at the moment have the upper hand. I think that the biggest cost in real estate is vacancy, and we're going to focus on keeping our properties well occupied as possible, particularly as we come out of this difficult pandemic.

[Operator:]

Your next question comes from the line of Haendel St. Juste from Mizuho.

[Haendel St. Juste:]

Ernest, a question for you, I guess on the dividend. I guess we're all -- some of us are scratching our head here on why you're raising the dividend now versus maybe saving the cash and delevering a bit more, your leverage is above 7x? I understand the higher collections and confidence, but there's still a lot of uncertainty, spreads are under a bit of pressure, it sounds, Hawaii seems like it's going to be soft good near term. So I guess why not hold off a bit and delever a bit more?

[Ernest Rady:]

Haendel, that's a very good question. I suggested to the Board that to increase the dividend $0.01 or $0.02 to indicate that we have confidence in the quality of our portfolio, our financial position and our management. They felt that I was underestimating all those three, and they added another $0.01. So the Board made that decision independently. And I think they were fine. I mean we've differed by $0.01, but not much more. I think that -- this is going to be a significant recovery once we get a vaccine.

[Robert Barton:]

Yes. Haendel, let me just add to that, is -- it's -- the methodology is also consistent with our collections. And we try to stay consistent on that or the Board try to stay consistent on that. And from -- the other thing is -- as we mentioned, is that we believe that Q4 is the bottom or if not close to the bottom. And what's changed is also too is that people are starting to get vaccines. So there's a lot more data points out there. And we think -- the Board thought that this is the right thing to do.

[Haendel St. Juste:]

Thanks for that, Bob. Maybe as an add-on for you. You mentioned the mid-5x debt-to-EBITDA as a long-term target. Curious on when do you think we'll get there? And do we start to see some inflection here in the next quarter or 2? The last couple of quarters, you've been trending up. So just curious on some perspective on reaching that long-term mid-size target?

[Ernest Rady:]

He wants to know when you're going to hit 5.5x. You said you'd like to get there and he wants a time frame.

[Robert Barton:]

Okay. Well, thanks for that question, Haendel.

[Ernest Rady:]

I get paid extra for being an interpreter.

[Robert Barton:]

Well, Haendel, that's why we also set a framework on how to think about the portfolio. I can't tell you what that percentage is for the second half of this year. But our view or my particular view would be -- is that once everybody in America is vaccinated or want to be vaccinated, and we get that herd immunity, it gives us approximately 12 months from that period of time, and I think we will trend back down to that 5.5x. Based on the growth, based on -- I mean think about how much we've lost out of Embassy and Waikiki Beach Walk Retail. I mean both of those -- each of those, the retail -- the Waikiki Beach Walk Retail and the Embassy are anywhere from $12 million to $14 million each of cash NOI. So that's probably about $0.14 each of them for additional FFO. So let us rebound. I mean let us get to the vaccine, get me to that point and give us 12 months.

[Ernest Rady:]

You have no idea how focused he is on 5.5x. I say good morning, Bob. He replies, 5.5.

[Haendel St. Juste:]

And then on Hawaii, I guess, what are you hearing for tourism expectations for this year? Obviously, there's lots of uncertainty. But I guess, what's the latest? Any stats from the tourism board? Or anything that you could put some numbers around to help us understand perhaps what the expectation is?

[Ernest Rady:]

I don't think we could tell you anything which you could take to the bank. It's just so uncertain. On the other hand, the direction seems to be right with vaccines become available. I feel strongly that there is a pent-up demand for Americans to travel. And many of us have the resources to travel. We've been pent-up for this last 9 months. And once we get out of home, we're going to travel. So I think -- I don't know how and I don't know when, but I expect it's coming.

[Operator:]

Your next question comes from Rich Hill from Morgan Stanley.

[Richard Hill:]

Ernest, I'm really curious about where you're going to go first when the world does reopen, but we can have that conversation off-line. Bob, I do have some questions for you. I appreciate the guidance or the nonguidance guidance, is that the way we're supposed to call it, Bob?

[Robert Barton:]

Yes.

[Richard Hill:]

As you think about 2021, it occurs to us that there's a lot of noise on straight-line rents and abatements. 4Q is a miss versus our numbers was almost all straight-line rents. So as you think about the leasing environment in 2021, and I appreciate the guidance about how we should think about the velocity in 1Q, 2Q, 3Q and 4Q. But can you maybe talk about what -- are all the abatements supposed to go away or all the deferrals supposed to go away? How are you thinking about that as you negotiate with retailers or retailers and office tenants for that matter?

[Robert Barton:]

Well, I think here, I'll try to answer that. I mean I think what is out there in terms of straight-line, in terms of deferred rents, we expect to collect those to the extent that we don't collect them or we don't think that we're 75% or more confident that we're going to collect them, we'll put a reserve up. But right now, I mean we're still confident on what remains on the books in terms of collecting those in 2021. We're hopeful. And I think everybody in the real estate industry is hopeful that once this vaccine comes together, you will start seeing the retail to start opening. And you'll start seeing the companies and the tenants that we do have straight-line rent across pursuing their growth in their companies that we've tried to nurse through this ugly pandemic. So we're still confident on what we got.

[Richard Hill:]

Got it. So it sounds like 1Q and 2Q are going to be still a little bit messy, hand-to-hand combat, but then the world get back to normal from an abatement and deferral standpoint and rent growth standpoint thereafter. Is that a right characterization?

[Robert Barton:]

That would be my perspective where I stand today. That's our best guesstimate. And we think with the amount of vaccines that are being disseminated across at this point in time, I think Ernest had his second shot this last weekend.

[Ernest Rady:]

I've been hugging everybody.

[Robert Barton:]

That this world -- this pandemic will ultimately come to an end, and things will get better.

[Unidentified Company Representative:]

From both your lips to God's ears, let's make it happen.

[Richard Hill:]

Yes. So Steve, one quick question for you. I'm nitpicking here, but it looks like occupancy maybe declined slightly for La Jolla and One Beach, if I was looking at it correctly. Again, very, very slightly. Could you just maybe go into a little bit more detail on any quarter-over-quarter change in demand that you're seeing on those two properties?

[Steve Center:]

That wasn't One Beach. So I want to think about -- One Beach is kind of off-line right now as we redevelop it. But in UTC, we had TriNet who had subleased their space, move out of a 6,000 foot space. That was the blip there, if you will. But we successfully renewed other tenants. It's smaller tenants now in that building. So we've been really successful holding rates. There's no COVID discount. We've been more flexible on lease term, with smaller tenants who are uncertain about their future. I mean I've got an engineering firm that's got 3 people over 65. And so they're kind of -- I don't know that I can commit long-term right now. Fortunately, as we pointed out on the call, we've got -- about 51.5% of our tenants are our top 10 and very stable. Furthermore, they continue to grow. I mean, VMware, they're coming up 1 -- they've got 35,000 feet rolling next year. And we're already in discussions about trying to find another full floor for them in the building as well as talking renewal. So we're fortunate in that regard. I don't know about the other property. And then here in Del Mar Heights, we've strategically let a couple of smaller tenants roll to aggregate bigger blocks of space. So that's being smart about commodity space versus big blocks, which are scarce, we're going to get premium rents for. So the blip that you saw -- I mean there is some softness due to COVID, clearly. I mentioned the engineering firm. Our teams are doing a great job of taking care of our tenants. They want to stay with us. Some just say, I don't need 5,000 feet, I need 3,000. And if we're able to accommodate them and keep our existing customers, we're doing it. But we'll get -- '21 is a year of a bunch of small tenants. We have -- still have 41 tenants rolling at an average of 3,700 feet in 2021. '22 is a much better story, and that about 2/3 of the tenants rolling are big. They're the VMwares, they're other bigger customers. And then in terms of pricing power, this quarter, the ending risk new rate is a bit muted, but that just depends on where. So going through the portfolio, Bellevue, we're 97% leased, but we've got 23.5% rolling through 2022. But those are going to be outsized increases in rent. We've been very successful with rent increases there, and that should continue. Portland, same story, we're 97% leased there. We've got 8.4% rolling. And again, the rates are holding up there. So we're doing well. San Francisco, that we're out of business there until we have to renew Autodesk in 2022. And then San Diego down here, the rent increases are 2% to 6% versus 20% in Portland or 30% to 35% in Bellevue. So it's kind of lumpy. It just depends on when you're going to make these renewals and reset rents and what level. So this was -- this last quarter, it was just a bit quiet and mainly focused on markets that aren't as hyperinflationary as Bellevue and Portland.

[Richard Hill:]

Got it. That's helpful.

[Robert Barton:]

One Beach, to make it clear, we emptied it so that we could reposition it.

[Richard Hill:]

Okay. I'll go back and look at the disclosure. Bob, just one more question for me. Given that you're guiding without guiding, can you talk about 2022 a little bit? And is it just going to be back to -- I actually don't -- I'm not sure the market even cares about 2021 at this point. Is 2022 business as usual and all the plans that we were previously discussing this time last year fully intact?

[Robert Barton:]

Yes. Nothing's changed on that. I mean we still expect our cash NOI to increase in the office sector by, I think, $12 million in '21, $13 million in '22. And we're just -- as we begin our development on La Jolla Commons III, which should conclude -- should be completed by the end of '23, I see a big pickup after that. And One Beach, One Beach should be finished by the end of '22. So what we're doing is we're taking advantage of the opportunities that currently exist within our own portfolio. We don't need any acquisitions to create value at this point in time. We're always looking. But we have plenty just within our home portfolio to create significant value.

[Operator:]

Your next question comes from the line of Todd Thomas from KeyBanc Capital Market.

[Todd Thomas:]

The first question just around the color in detail for '21 and '22. Bob, appreciate those comments. And you mentioned that 4Q would likely be the bottom or close to the bottom. Is that inclusive of the $0.05 make-whole that will be recognized in the first quarter? Meaning that excluding that make-whole, you would expect to be at around $0.46 as sort of a baseline, is that the right way to think about it?

[Robert Barton:]

Yes, that is. I mean -- so $0.41 does not include the make-whole. So that's -- so if you continue that, based on my comments, you would say, start with $0.41 in Q1. From that, you would deduct $0.05 for that make-whole and add -- and deduct another $0.03 for incremental interest expense in Q1. So on the script that we just shared with you, it will give you a road map on how we -- a road map for a framework on how I think or we think that you can view '21. And then in the second half of that, you make your own assessment or determine what you think the percentage should be on the pickup in that. But keep in mind, of that $0.41 for Q4 that I'm suggesting we start with in Q1, that includes $0.10 of reserves, $7.6 million of reserves in the fourth quarter. So as you start the second half, is that really going to happen? I don't think so.

[Todd Thomas:]

Okay. Got it. So $0.41 goes to $0.36 with the make-whole in the first quarter less some incremental interest expense, and then you'd expect to build back throughout the year, obviously, adjusting for the $0.05 make-whole?

[Robert Barton:]

Yes. Yes.

[Todd Thomas:]

All right. That's helpful.

[Robert Barton:]

And then if you get -- if you have any questions of, please feel free to reach out.

[Todd Thomas:]

Sure. I appreciate that. And then Steve or Bob, maybe regarding the $24 million of office cash NOI that's locked in, that's expected to commence during '21 and '22. How much of that is being straight-line today versus what has yet to commence for FFO purposes on a GAAP basis?

[Robert Barton:]

Yes. I don't have that in front of me. But really, that's been included in our presentation in terms of that -- the cash NOI growth. And really what we're showing is the growth in that FAD. And that obviously will drop on down and, obviously, has to be adjusted for anything related to the straight-line on that. But I don't have the exact number on that.

[Todd Thomas:]

Okay. And in terms of the $14 million in '21, what's kind of the cadence sort of quarterly? How should we think about the timing of the cash commencements throughout the year?

[Robert Barton:]

Well, in Q1 and Q2, we have big TIs going out. We have probably $25 million of TIs related to large tenants up in Landmark. So it will probably be more in the second half of the year.

[Todd Thomas:]

Okay. And then with -- at the multifamily assets, so it sounds like you saw a bounce in occupancy in January at Hassalo. Can you just talk a little bit about the pricing strategy there and use of concessions? And maybe provide some color on leasing activity in general. It sounds like you're -- it seems like you're holding rates in anticipation of a further return in demand. Just curious if you could sort of talk about Hassalo a little bit and the Portland assets?

[Ernest Rady:]

Yes. As Steve pointed out, our office portfolio in Portland is excellent. Our portfolio of residential is we had a management issue, which we've now taken care of. So it's too early to say how much of a recovery we're going to make. But the early indications, as Bob pointed out in his report, is that we're leasing up. The biggest cost in real estate is vacancy. So we may do some things in the short run to increase our occupancy and eliminate some of the vacancy. So I don't know how to answer that question properly. It's too early to say, but we'll make it work. I'll tell you that.

[Todd Thomas:]

Okay. And can you share what the occupancy build looked like in January?

[Ernest Rady:]

Do we have that?

[Robert Barton:]

I don't...

[Ernest Rady:]

I think we went from 75% to 85% or 87% occupancy, not that much...

[Robert Barton:]

Low 80s.

[Unidentified Company Representative:]

Low 80s.

[Ernest Rady:]

So I mean, yes, we don't have that right in front of us.

[Unidentified Company Representative:]

But we turned the corner. We're in an upward trajectory.

[Todd Thomas:]

Okay. Got it. And just one last one, if I could, on the master lease at Loma Palisades and Pacific Ridge. Can you just remind us when that expires? And do you expect the school to re-up and renew that master lease? Or -- what do you expect to happen there?

[Robert Barton:]

I don't know that we have an expectation. We're certainly working on it. Abigail, do you want to say something, when it expires?

[Abigail Rex:]

So that master lease for both Pacific Ridge and Loma expires on May 31 of this year.

[Ernest Rady:]

And have you had any discussions about renewing it? Or is that still off the table?

[Abigail Rex:]

So off the table. We all hope that with the vaccine, students will be able to return to school in the fall. And that is the hope, I think, of every university. We'll just have to play it by ear and to hope that there's a renewal or that there's further partnership. But I don't have any further information at this current moment.

[Operator:]

Your next question comes from the line of Daniel Ismail from Green Street.

[Unidentified Analyst:]

This is Dillon on for Danny. Just a few questions on the development of one Landmark. You guys mentioned, I think, starting that sometime in the next few months. Are you guys -- is that subject to a pre-lease? Are you guys willing to start that on stack?

[Ernest Rady:]

Which one?

[Unidentified Company Representative:]

One Beach probably.

[Ernest Rady:]

Are you talking about One Beach or La Jolla Commons down in UTC?

[Unidentified Analyst:]

Sorry, La Jolla Commons.

[Ernest Rady:]

There's no pre-leasing. I had lunch yesterday with one of the senior partners in the law firm and they were considering that site, and they weren't sure if we'd start. There's never been pre-leasing in San Diego. So we have a couple of years to build it. During that time, we hope the market recovers. It's a very strong market. And that's kind of the story.

[Robert Barton:]

We're going.

[Unidentified Company Representative:]

Yes. Danny, I think Steve's comments that he shared are very strong reasons why we should pursue that without any pre-lease. For instance, on 2 remaining lots in Oregon Square, that's not a -- that is something that you would want to pre-lease.

[Ernest Rady:]

That you would want to rebuild. You wouldn't go...

[Unidentified Company Representative:]

You wouldn't go -- yes -- you . Correct. Yes. Thank you. That you'd want to get a tenant before you build that. Like Ernest said, in UTC and for what Steve's comments were, those are all the comments why you would want to go forward without a tenant at this point in time. Obviously, you would love to have a tenant. But by the time you finish, that's going to be an even stronger market than it is today.

[Ernest Rady:]

And we've used this time to buy the project out and I think we've had some savings that we would not have had if we were trying to build it a year from now.

[Robert Barton:]

So we are going.

[Unidentified Analyst:]

Perfect. That all makes sense. And then just kind of as a follow-up to that. I think our math where implies $80 rent a square foot at that property? Is that -- I guess, a, is that accurate? And b, how does that compare to where you guys signed the Illumina lease back in, I think, late '19 when you guys initially acquired those properties over there?

[Steve Center:]

Rents for new product are much higher. We're in the high 4s, triple net with $1.70 expenses. I'm talking on a monthly basis. I haven't converted to a gross per annual, but the Illumina lease started at $490 full-service and has 3% annual bump. So -- and that -- the rents I just mentioned -- the triple net rents I just mentioned are affirmed by two recent deals, one in June and one December for deals in new product. So that's today's rents, and that's what we put in the pro forma, and we'll see how the market goes, but we're bullish.

[Ernest Rady:]

Bullish, and we're also praying that the economy recovers. And -- but in the short run, the leasing is less certain than we'd like. In the long run, it's a giant win. It's a great location, great property.

[Operator:]

And I show no further questions at this time. I will now turn the call to Mr. Ernest Rady for any closing remarks.

[Ernest Rady:]

Guys, thanks for all those great questions. I hope you're all able to get a vaccine as quickly as possible so that we can all end this distance of interacting, and we can all get together. I miss you all. I hope to work with you again as quickly as possible. And thank you for your interest in our great company.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now all disconnect.