American Assets Trust Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 9 speakers on the call.

Operator

Welcome to American Assets Trust Inc. 2nd Quarter 2024 Earnings Call. As a reminder, today's conference is being recorded. Please note that statements made on this conference call include forward looking statements based on current expectations, which statements are subject to risks and uncertainties discussed in the company's filings with the SEC. You are cautioned not to place undue reliance on these forward looking statements as actual events could cause the company's results to differ materially from these forward looking statements.

Operator

Yesterday afternoon, American Assets Trust's earnings release and supplemental information were furnished to the SEC on Form 8 ks. Both are now available on the Investors section of its website, americanassetstrust.com. It's now my pleasure to turn the call over to Ernest Rady, Chairman and CEO of American Assets Trust.

Speaker 1

Good morning, everyone. At American Assets Trust, I can assure you every strategic and operational decision is driven by our commitment to maximize both long and short term value. This dedication is reflected in our efforts to maintain a robust balance sheet and our continuous investment in enhancing our irreplaceable properties, ensuring they remain optimal in the respective markets. In Q2, 2024, our operating fundamentals once again exceeded expectation, even amidst much of the pessimistic market sentiment surrounding commercial real estate, particularly in the office sector, very upsetting to me frankly. Our strong performance has prompted us to raise our full year guidance once more, underscoring our confidence in our earnings trajectory for the remainder of 2024.

Speaker 1

This highlight success highlights the exceptional quality of our properties, the exceptional ability of our people and the expertise of our team who drive our long term growth and shareholder wealth creation. On that note, I am pleased to announce that Adam Weil, who's been with us now for 20 years, right?

Speaker 2

Correct.

Speaker 1

You joined us when you were 3, right, Adam?

Speaker 3

We have a young President.

Speaker 1

Our current President and CEO will be stepping into the role of CEO on January 1, 2025. Adam has been an integral part of our team contributing at all levels of our organization for 2 decades. His leadership, expertise, executional skills and deep understanding of the real estate industry in our portfolio has been invaluable to our success. Thank you, Adam. Adam's promotion to CEO is a natural progression for both him and American Assets Trust, reflecting the confidence that our Board and I have in his ability to steer our company toward continued success.

Speaker 1

Congratulations and again, thanks Adam. To our investors and stakeholders, I want to assure you that this translation will be seamless. I'm in good health, thank goodness, and will assume the role of Executive Chairman on January 1, 2025, continuing to lead our board meetings and strategy. Additionally, our incredibly talented, dedicated and long term long tenured executive management team will remain intact, including our CFO, Bob Parton, who suggests he has another decade on him at AAT at least. He joined when he was 4.

Speaker 1

I am continually impressed by this team's cohesion, collaborative spirit and experience, which fosters a strong sense of trust and mutual respect, enabling them to tackle challenges effectively and drive innovation. My colleagues Adam, Bob, Steve, Chris and Abigail will cover our Verus asset segments, financial results and update guidance update guidance shortly. But first, I am pleased to announce the Board of Directors has approved a quarterly dividend of $0.335 per share for the Q3. This decision highlights our strong financial performance and emphasize the Board's belief in our continued success. The dividend will be paid on September 19 to shareholders of record September 5.

Speaker 1

I'd like to express our sincere confidence and gratitude for your support and allow us to steward your company. Now, I'll hand the call over to Adam to commence a deeper dive into our quarterly performance and future outlook.

Speaker 3

Thanks, Ernest. I am honored to take on the CEO role at the start of 2025. Ernest, your entrepreneurial spirit, visionary leadership, business acumen and mentorship have been pivotal not only for my development, but also for the entire management team for which we are immensely grateful. I sincerely appreciate the trust you and our Board have placed in my leadership. I'm also thankful for Bob's support as well as all of my colleagues on our exceptional management team.

Speaker 3

Our daily collaboration has fostered a true sense of family among us as we've navigated numerous challenges and celebrated many successes over the years. Teamwork and resilience thrive at American Assets Trust, thanks to the tone Ernest has set at the top. Turning to our results. As Ernest mentioned, we have once again delivered strong operating performance across all segments of our diversified portfolio, including the highest quality office, retail, multifamily and mixed use properties. In times of economic and business unpredictability, it is crucial for us to focus on what we can control.

Speaker 3

This means adapting to and meeting evolving market demands in a volatile economy, particularly in commercial real estate. We have a proven track record of overcoming challenges with resilience, and we are confident that our high quality operating platform and real estate portfolio will remain steadfast despite the volatile financial markets. Moving forward, we will continue to base our strategy and decision making on actions we believe will drive long term financial outperformance. On the office utilization front, our estimates and those of our tenants indicate that office usage has remained relatively stable from Q1 to Q2. Specifically, San Diego and San Francisco are experiencing utilization rates between 70% 80%, with San Francisco largely driven by our 2 anchor tenants at Landmark, while Bellevue and Portland are at about 60% to 75%.

Speaker 3

We anticipate that a few more known return to office mandates from existing tenants, once implemented, can increase these figures by year end. Meanwhile, we understand that nationwide office utilization is just north of 50% of pre pandemic levels. Of course, the quality and location of our office buildings and the robust amenities we offer are key differentiators in our higher utilization, not to mention leasing efforts compared to the competitors in our submarkets. In the retail sector, which represents 27% of our portfolio NOI, we are currently about 95% leased. We have successfully renewed nearly all lease expirations this year and have begun executing on our 2025 renewals.

Speaker 3

As anticipated, our comparable retail leasing spreads have continued to trend positively each quarter over the past several years with a 6% increase on a cash basis and a 34% increase on a straight line basis for Q2 transactions. We are often asked about consumer spending in our retail properties. While we are not completely insulated from a potential slowdown, we believe that consumer spending is more resilient in the densely populated areas with favorable demographics surrounding our top tier shopping centers. Foot traffic has remained strong, supporting ongoing demand for the limited vacant space at our well managed properties, especially given the very limited supply growth in our submarket. As a result, our retail portfolio achieved its highest average base rent per square foot in Q2 since our IPO, which ranks among the top 2 of the retail peers that we track.

Speaker 3

Turning to our multifamily portfolio, specifically at our San Diego communities, we ended Q2 with an occupancy rate of 89% and a leased percentage of 95%. The dip in occupancy is mainly due to the seasonal move out of students at our Pacific Ridge Apartments. We note that leases for vacant units were rented at an average rate approximately 4% lower than prior rents, largely due to expiring prior tenancies that saw premiums of 20 plus percent over the base rate for month to month holdovers. While renewed units experienced an average increase of 9%, resulting in a blended average increase of 4% with minimal concessions offered. While the year began with the slowdown in rents, the stronger spring and summer leasing season in Q2 has allowed us to increase rates, especially on renewals.

Speaker 3

In Q2 at our Haslow and 8th multifamily community in Portland, we maintained flat rates on a blended basis between new move ins and renewals with our lease percentage holding steady at 96% and minimal concessions offered. While we had hoped for a slight increase in blended rates, maintaining flat rates still represents an improvement over prior quarters in Portland. Q3 has begun positively at Hassalo, and we are optimistic about sustaining this momentum. Meanwhile, it's worth noting that our multifamily portfolio achieved its highest ever average base rent in Q2 since our IPO as we saw our same store NOI increase almost 10% year over year for Q2 with very strong collections in Q2. And net effective rents for our entire multifamily portfolio are now 3% higher year over year compared to Q2 2023.

Speaker 3

Finally, we released our 2023 sustainability report in Q2, showcasing our operations and highlighting our initiatives and vision on various topics, including environmental sustainability, social responsibility, corporate governance and human capital. You can find it on our website, and we hope you find it informative. With that, I'll turn the call over to Bob to discuss financial results and updated guidance in more detail.

Speaker 4

Thanks, Adam, and good morning, everyone. First of all, I want to congratulate Adam on his promotion to CEO. Well deserved and it's been a pleasure working with Adam over the years. I look forward to many more years working with Adam, Ernest and this great group of professionals at American Assets Trust, which is a tight knit family focused on creating wealth for all of our shareholders and having fun while we do it. Last night, we reported 2nd quarter 0.24 FFO of $0.60 per share.

Speaker 4

2nd quarter 2024 net income attributable to common stockholders was $0.20 per share. 2nd quarter 2024 FFO decreased by approximately $0.11 to $0.60 per FFO share compared to the Q1 of 2024, primarily due to 3 things. First, as you may recall, we previously received a one time $10,000,000 litigation settlement in Q1 2024, which was approximately $0.13 of FFO per share, reducing the FFO by approximately $0.13 per FFO share in the 2nd quarter. 2nd, our multifamily properties contributed approximately $0.01 per FFO share of outperformance in Q2 twenty twenty four that was not previously included in our updated twenty twenty four guidance. And third, our retail properties contributed approximately $0.01 per FFO share of outperformance in Q2 2024 that was not previously included in our updated twenty $0.71 per FFO share in Q1 'twenty four to $0.60 in Q2 'twenty four.

Speaker 4

Same store cash NOI for all sectors combined was 2.1% growth year over year for the 2nd quarter. Breaking it out by segment and each compared to Q2 2023 is as follows. Our same store office portfolio's NOI was flat in Q2, primarily due to contractual rent abatements related to office lease renewals at our Solana Crossing in San Diego and Corporate Campus, East 3 in Bellevue. Our same store retail portfolio's NOI was positive, 3.2% in Q2, primarily due to higher base rents at our Solana Beach Town Center in San Diego, Del Monte Center in Monterey and Waikele Center in Oahu, Hawaii. Our same store multifamily portfolios NOI was a positive 9.5% in Q2, primarily due to higher than expected revenue and lower than expected expenses at our San Diego multifamily properties, particularly Pacific Ridge.

Speaker 4

At our mixed use portfolios, NOI was a positive 2.2% in Q2, primarily due to higher revenue at the Embassy Suites Waikiki. Specifically in Q2 twenty twenty four, paid occupancy was approximately 86% compared to 84% in Q2 2023. RevPAR was $3.17 compared to $3.12 in Q2 2023. ADR was $367,000,000 compared to $370,000,000 in Q2 2023. NOI was approximately $3,400,000 compared to $3,300,000 in Q2 2023.

Speaker 4

Liquidity. At the end of the second quarter, we had liquidity of approximately $515,000,000 comprised approximately $115,000,000 in cash and cash equivalents and $400,000,000 of availability on our revolving line of credit. Subsequent to quarter end, we drew down on our line of credit to pay off the $100,000,000 Series F notes that matured on July 19. As of the end of the second quarter, our leverage, which we measure in terms of net debt to EBITDA, was 6.4 times on a quarter annualized basis and 6.3 times on a trailing 12 month basis. Our objective is to achieve and maintain a net debt to EBITDA of 5.5 times or below.

Speaker 4

Our interest coverage and fixed charge coverage ratios were 3.6 times for the quarter on both an annualized basis and trailing 12 month basis. Please note, while we have access to capital from any sources, we are closely monitoring the public debt markets to manage our upcoming debt maturities. We anticipate taking action on this before the end of the year. Let's talk about our 2024 guidance. We are increasing our 2024 FFO per share guidance range to $2.48 to $2.54 per FFO share with a midpoint of $2.51 per FFO share, a 9.6% increase from our previously updated guidance that had a range of $2.24 to $2.34 with a midpoint of $2.29 Let's walk through the items that make up most of this increase in our 2024 FFO guidance.

Speaker 4

First, our retail properties have contributed an additional approximately $0.02 per FFO share this year from lower bad debt and operating expenses and higher percentage rents that were not previously included in our updated 20 24 guidance. 2nd, our office properties have contributed an additional approximately $0.02 per FFO share this year from lower bad debt and operating expenses that were not previously included in our 2024 guidance. And third, lower G and A and higher interest income has contributed an additional approximately $0.02 per FFO share this year. 4th, our multifamily properties have contributed additional any per FFO share this year that was not previously included in our updated 2024 guidance. And 5th, we have received a lease termination fee from a tenant at our Torrey Reserve property in San Diego that will be recognized and contribute approximately an additional $0.15 per FFO share in Q3 twenty twenty four.

Speaker 4

The tenant has also paid their existing rent through their new termination date termination date of September 30, 24. And the termination fee will cover approximately 4 of the 5 remaining years of base rent on the lease. For turnkey space that we are optimistic that we can re let within the next few years, if not earlier. These adjustments, when added together, will be approximately $0.22 per FFO share and represent the net increase in the 2024 midpoint over our previously updated guidance. While we believe the 2024 guidance is our best estimate as of this date of this earnings call, we do believe that it is also possible that we could perform towards the upper end of this range.

Speaker 4

In order to do that, 1st, the majority of the office or retail tenants that we reserve or must continue to pay their rents through the year end. As of the end of Q2, we have approximately $0.03 of FFO per share reserves remaining, occupancy and or less expenses. 3rd, tourism and travel to Waikiki needs to see a more meaningful return from our Japanese guests, which we are cautiously optimistic about, if not later this year, then in the ensuing years to come. It's just a matter of timing. As always, our guidance, our NOI bridge in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or incurables, future debt refinancings or repayments other than what we've already discussed.

Speaker 4

We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers. I also want to briefly note that any non GAAP financial measures that we've discussed like NOI are reconciled to our GAAP financial results in our earnings release and supplemental information. I'll now turn the call over to Steve Senner, Senior Vice President of Office Properties for a brief update on our Office segment.

Speaker 2

Steve? Thanks, Bob. At the end of the second quarter, our office portfolio was 86.6 percent leased, an increase of 20 basis points over the prior quarter. While we continue to experience some rightsizing of existing tenants and a few small office closings, they were more than offset by Q2 leasing activity as follows. The Q2, we executed 18 leases totaling approximately 96,000 rentable square feet, comprised of 2 comparable new leases for approximately 21,000 rentable square feet with rent increases of 4% on a cash basis and 26% on a straight line basis, including a 20,000 rentable square foot office tenant at First and Main in Portland.

Speaker 2

10 comparable renewal leases for approximately 32,000 rentable square feet, with rent increases of 6% on a cash basis and 10% on a straight line basis, including an 11,000 rentable square foot office lease at the Coastal Collection Torrey Reserve in San Diego and 6 non comparable leases totaling approximately 43,000 rentable square feet, including 2 leases totaling 23,000 rentable square feet at City Center Bellevue, 3 leases totaling 16,000 rentable square feet at the Coastal Collection Torrey Reserve in San Diego and a 5,000 rentable square foot leased First and Main in Portland. And the leasing momentum has continued into Q3 as follows. We've executed 7 leases today totaling approximately 57,000 rentable square feet. We have 9 deals in lease documentation totaling approximately 79,000 rentable square feet, approximately 62,000 rentable square feet of which is new leasing. Including deals and lease documentation, approximately 55% of the rentable square feet is new leasing, which is the first time since 2019 that our new leasing has outpaced renewals on a rentable square foot basis.

Speaker 2

Our lease expiration exposure is modest through 2025. We're down to approximately 4% rolling in 2024 given deals signed year to date with the average deal size of the remainder of approximately 8,000 rental square feet. This includes the early termination of the tenant that Bob mentioned to Torrey Plaza for approximately 46,000 rentable square feet or 1% of the portfolio that will hit on October 1. We have approximately 8% of the portfolio rolling in 2025 with the average deal size of approximately 6,800 rentable square feet. Concluding with some insights on our new development La Jolla Commerce 3 in the UTC submarket of San Diego.

Speaker 2

We are currently in lease documentation for the 3rd floor. We are one of 2 alternatives for a lease on the 10th floor. We have been shortlisted by law firm for 2 floors. We have several tenants that have toured that are expected to engage with RFPs for up to a total of 4 floors and we are in discussions with 1 prospective tenant for most if not all of the remaining vacancy. Prospective Tenant's industries include software, legal, advisory, tax and assurance, construction, banking, energy and management consulting and technology.

Speaker 2

They are seeking the best environment and experience with which to attract and keep the best talent and engage their customers. Note that UTC submarket San Diego remains strong. Net of Tower 3's vacancy, the Class A direct vacancy is just 4.5%. The only A plus competitor has just 3 direct vacancies, 2 that are about 4,000 rentable square feet and one that is 11,000 rentable square feet. We are excited about our prospects for success at Tower 3 and throughout our entire office portfolio.

Speaker 2

I'll now turn the call back over to the operator for Q and A.

Speaker 1

Good job,

Operator

Steve. Today's first question comes from Haendel St. Juste with Mizuho. Please go ahead.

Speaker 5

Hey, good morning and my congratulations to Adam and the team. I had a question, I guess, for you, Adam, first on, I guess, maybe a 2 parter. I guess, first, more broadly, any G and A impact we should expect from the announcement in this year's guide? And second, I guess I'm curious, I know it's early, but if there's any short, medium term goals or strategic priorities that you might have in mind as you transition to the CEO role?

Speaker 3

I don't think, Kent thanks, 1st and foremost, Haendel. I appreciate it. Don't anticipate any G and A impact this year. It's all going to be effective as of January next year. So you can rely on Bob's modeling going forward through this year.

Speaker 3

And in terms of change of what we're looking at, I mean, I think in a lot of respects, it's the same team, same group of folks. We have the same strategy and not a lot will change on that front. But we'll continue to brainstorm and look for ways to create value. Same thing you've heard from us for the past 10 years.

Speaker 6

Got it. Got it. Okay.

Speaker 5

And then maybe one on the lease termination fee in the quarter. I'm curious what you can tell us perhaps about the tenant, maybe why they terminated. Sounds like you're optimistic on backfilling here in the next couple of years, I think Bob mentioned. And then any read through here for office or are you hearing or expecting any more or having any more similar conversations?

Speaker 3

Well, on this situation specifically, this tenant was actually one we had on our reserve list that we had mentioned with guidance earlier this year, Haendel. And it was a life science tenant whose FDA approvals were not going in the right direction, and they had a fair amount of cash on the balance sheet. So with their cash burn and their situation going forward, we engaged with them to come up with a mutually acceptable deal. And so we were pleased with the outcome. I think they were as well.

Speaker 3

They're also a public company. But as Bob mentioned in his script, this is space at our old headquarters that is they did a great build out. It's turnkey space. Steve can chime in on the leasing prospects for that space in general. But net net, that was a deal where we could have seen this tenant run out of money within 12 months and not seeing the fruits of the lease.

Speaker 3

And so it turned out to be a great situation, we think, for both sides.

Speaker 2

Yes. The lease rates in place, Haendel, are about $12 annually below market. So we've got a below market situation. We've got really well built out space. And it's 45,000 contiguous square feet on 1 floor, which is unique in the marketplace.

Speaker 2

So we're encouraged by our prospects there.

Speaker 6

Got it. Steven, while I

Speaker 5

have you, maybe some color. I think you mentioned that new leasing in your office segment outpaced renewals for the first time in the year. So I guess I'm curious what the prospects for the near term look like, the level of tours and interest that you're seeing. And then I guess I assume with more new leasing going on than renewals that should result in an uptick in leasing CapEx. So any color on that would be appreciated.

Speaker 5

Thanks.

Speaker 2

It's interesting. Our CapEx, hitting on that last point, is actually at the historic average over the last 7 years. So it hasn't ticked up, although costs are up. So it just it speaks to we're very judicious about what we build out and we're conscientious about what we get back. So we've had numerous instances where we had spaces rolled that we built out in the last 7 years that are not expensive to re tenant.

Speaker 2

And many renewals are as is. So you'll see that our costs on a weighted average basis are pretty muted. What was your first question in terms of activity? Activity is up. I mean Q3 or Q2 is 96,000 feet.

Speaker 2

We're on pace to do much higher than that in Q3. And if this trend continues, it will be our 3rd best year from a leasing volume perspective. And keep in mind 2018 was the Google year and Autodesk year which were monster was a monster year. So leasing activity is up and furthermore the average deal size from a dollar per deal square perspective is the highest ever in the last 7 years. So, we're bullish.

Speaker 2

Our investments in our properties are paying off. Our margins remain good. We are the property of choice. And even with tenants that are rightsizing, we still experience that, they're staying with us. So they may downsize, but they renew their leases at higher rental rates.

Speaker 2

So we're excited about

Speaker 1

the prospects. The property of choice is a very important strategy. We maintain our properties well and we look after our tenants. Steve has introduced a culture of their not tenants, their customers, which serves us well.

Speaker 5

Thank you. I'll yield.

Operator

Thank you. And our next question comes from Antara Nogchoudhury with KeyBanc Capital Markets. Please go ahead.

Speaker 7

Hi. This is Antara on the line for Todd Thomas. First, just wanted to say congrats on the promotion, Adam, and good luck on retirement earnest. I just had a couple of questions.

Speaker 1

Wait a minute, wait a minute, wait a minute, I ain't retiring. I've got a lot millions of reasons why this company is so important to me. I'm glad Adam has got the job and congratulations, but do not think of me as retiring. God help me if I do.

Speaker 3

You knew better. I'm sorry.

Speaker 7

All right. Got it. But just regarding the balance sheet, I know you paid down the Series F notes using the line and you have a couple maturities in 2025 that are around $425,000,000 So do

Speaker 5

you have any updated thoughts given the move in the debt markets? And are you

Speaker 7

looking to permanently refinance some of that in advance?

Speaker 4

Yes, Tara, this is Bob here. We as I mentioned in script, we paid off $100,000,000 that was due July 19. We have the ability to either write a check for it, We have cash on the balance sheet or draw on the line of credit. We decided to draw on the line of credit. We keep the cash on the balance sheet, which is earning 5% plus return on that.

Speaker 4

In terms of the remaining $425,000,000 that's coming due in 2025, We're on it. We've been monitoring the market since probably early 2024 just to see where we are and what's the right time to lock in a swap contract possibly. We've noticed that the market continues to fall a little bit. We've noticed it came down, I think it was like 10 basis points this morning on the treasury. So we have a good team of part of our banking syndicate that we're working with and we're just looking for the right entry point.

Speaker 4

But if you look at our past experience, we've been very successful at the transactions that we've done. So we're engaged, we're hopeful and hopefully we put something to bed before the end of this year, hopefully sooner.

Speaker 7

Okay, perfect. And are there any other known move outs in the office segment that we should be aware of as we're thinking about the end of 24 and just

Speaker 1

2025? What's the question?

Speaker 2

No one move outs. So 2024, no, we're in good shape. 2025, we know the clear result will be vacating 4 floors. They're actually a tenant 5 floors and we've already leased one of those floors to an existing subtenant. So we've got 4 floors to go.

Speaker 2

We're in negotiations with a portion of one of those floors with an existing subtenant as well. That's 1st in May. 1st in May, yes. And it's a best in class building. We're just completing by the end of the year amenities program there as well.

Speaker 2

And so we're well positioned to backfill that space. It's beautiful space. It's top of the stack, building top signage is available. So we're optimistic there. Office has this or about it, which is concerning, but there's office and then there's office.

Speaker 2

First of all, Steve does a great job. 2nd of

Speaker 1

all, we got properties that are very well located. 3rd of all, we maintain them in 1st class shape. 2nd of all, we treat 3rd of all, we treat our tenants as customers and really look after them as best we can. 4th of all, a lot of the competition is not blessed with the advantages we have. The liquidity we have assures our tenants, A, that we'll maintain the quality of our properties and B, that we'll do the tenant improvements and pay the leasing commissions.

Speaker 1

There's office and then there's office. We're not the office that bears the black mark that the market seems to lay on it. We're the best in class. We're proud of what we do and we think that the team does very well off at it and the property speak for themselves.

Speaker 7

Okay, got it. Makes sense. And if I could just sneak one more in. What is the progress on leasing at One Beach in La Jolla? I was wondering if

Speaker 5

you have any additional updates that

Speaker 7

you could provide on leasing?

Speaker 2

You're asking about La Jolla Commons 3? And One Beach. And One Beach. One Beach, I'll just be candid. San Francisco is a small tenant market right now.

Speaker 2

This building is either a single tenant or 3 tenants. So it's going to take some time for this average size requirement in San Francisco to get there. Our prospects at Tower 3, La Jolla Commons and UTC are excellent.

Speaker 5

And I think you covered that earlier.

Speaker 2

Yes, yes. We've got a lot of activity there.

Speaker 1

If you look at the transcript, I think you've covered it very well.

Speaker 2

Yes, yes. We're very busy at Tower 3. And as I mentioned, the direct vacancy in that submarket for Class A space is just 4.5%. So it's got to be the healthiest submarket, I think, in the country. So we think our prospects are really good.

Speaker 2

And for One Beach,

Speaker 1

the problem is not ours, the problem is San Francisco. We have a great property in a great location that's completely repositioned, but the market is the market.

Speaker 7

Got it. Thank you.

Speaker 1

Thank you for the question.

Operator

And our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Speaker 5

Hey, first congrats Adam and obviously congrats Ernest too on your continued role and engagement, not a retirement. So congrats to everyone, really well deserved. So just on just switching gears to office just a little bit here. I think you the opening comment seems like there's been sort of a lot of activity in the portfolio and so forth. I was just hoping you could give a little bit color of sort of the broader trends in the market.

Speaker 5

And do you think that your activity is sort of just more of a reflection of like the quality? Or are we actually trying to see some signs that the broader market is starting to see better trends?

Speaker 2

It's interesting and one of our strongest markets is San Diego and yet when you read CBRE's account of the market, it's not strong. It's challenging. So I think a large part it's a flight to quality. And I've said it before, even in a negative net absorption market, which many of our submarkets are, I don't need positive net absorption on the market to succeed. I need people to pick our properties.

Speaker 2

And we've been fortunate to have that happen. So much of the new leasing is tenants that are many of our downsizing. But when they downsize, they're looking for the best environment to get their people back in the office. So they want all of the amenities we've talked about. They want really nice properties.

Speaker 2

So that's how we're winning. So I would say our activity is more indicative of a flight to quality than it is the strength of the market. I will say though that up in Bellevue in particular, that market is recovering. Our City Center Bellevue property continues to really do well. And then the suburbs are picking up.

Speaker 2

So I'm encouraged there. We've got 281,000 feet in the I-ninety corridor. We've got multiple tours and proposals going on there, which is a big chunk of our vacancy in our overall portfolio. And then our 2 properties up on the 520 corridor are active as well. So Bellevue is improving.

Speaker 1

I think, Steve, if you would paraphrase it, there's a quite good quality from the landlord's point of view, from the building's point of view, from the financial ability of the landlord to perform, from the ability of the landlord to work with the leasing agents. So it's a multi tier market and we're, I believe, in the top tier. And that's really significant, top tier, all those categories.

Speaker 2

Really good point, Ernest. It's not just the real estate itself. It is our balance sheet. Bob's our balance sheet is our strength as well as our customer service. Also our flexibility, you'll see actually our weighted average lease term is shorter this quarter than the previous quarters in part because we flex with our customers.

Speaker 2

Some need shorter term solutions that we don't jam them for we work with them. And so that goes a long way too. We've got a law firm that just expanded into a 4,000 foot spec suite and the principal called me up and said, hey, here's the term I need. I know we're going to revisit our deal 2.5 years from now, but I need this short term expansion. I'll contribute free rent to pay for the tenant improvements and will you work with me?

Speaker 2

And the answer was yes. So it's all those things.

Speaker 1

So it's a good point, Ernest, right?

Speaker 5

So I hope the

Speaker 1

market is Because being with the same brush that everybody in that part of the real estate market is really disappointing. We are not the average office landlord. We are, I believe, very qualified and do an excellent job.

Speaker 5

Great. And then look, my second question was just sort of on the capital allocation. I mean, clearly, the priorities are leasing capital and rounding out the developments that you're working through. But when does sort of acquisitions come back into the picture? And how do you sort of balance that with trying to get leverage below 6 times?

Speaker 5

So just how are you guys thinking about capital allocation, protecting that balance sheet, but also potentially looking to play offense on the acquisition? Or is that even the thinking right now?

Speaker 1

Well, first of all, we are not looking at acquisitions at all.

Speaker 2

Bob Barton, who is can

Speaker 1

be violent on occasion, wants that net debt to EBITDA fall into a range that maintains and perhaps even enhances our credit rating. The secret to that is La Jolla Commons III. And Steve went through that. So at the moment, we're sitting back, watching and waiting for the success of La Jolla Commons 3 to come about and then we'll see what we can do. But I think that at the moment, office is kind of off our wish list because of the reputation it seems to have even though we continue to perform in a top tier fashion.

Speaker 4

Yes. Let me just add to what Ernest just said, Ron, is that, yes, the capital allocation is really important and we do want to protect the balance sheet. We think it's prudent like Ernest mentioned is to let's finish the leasing La Jolla Commons 3. With La Jolla Commons 3, we have about $215,000,000 invested over there with a great property in the market. And that's we need to get a return on that.

Speaker 4

So let's lease that up first. We are continuing to look at assets. But one thing that we've told many is that we're not looking to buy any more office. We love what we got. We got great assets.

Speaker 4

Steve is overseeing all that and we got great returns. We'd like to pivot to multifamily and probably throw in a sprinkle of retail along the way. But if you look at the history of this company, we have dedicated ourselves to creating value for each of our investors. And I got I'm a big believer that we will continue to do that from here on out as well.

Speaker 3

While we're not acquiring,

Speaker 1

we are investing daily in improving our properties. So Jerry, who handles construction, how many projects do you have going out to improve what we have?

Speaker 4

We have well over 100 projects going on.

Speaker 1

Yes. So we're not sitting back on our, you know what, waiting for something to happen. We're improving and making it better. And that's an investment without the risk of acquisition.

Speaker 5

Great. Super helpful. Congrats again. That's it for me. Thanks so much.

Speaker 1

Thanks, Ron.

Operator

Thank you. And our next question comes from Dylan Brzezinski with Green Street. Please go ahead.

Speaker 8

Hey, guys. All my questions have been asked, but I just wanted to say congrats to Adam. Well deserved.

Speaker 3

Thanks, Dylan. Great questions.

Operator

Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Rady for any closing remarks.

Speaker 1

Thanks, all of you for your interest in our company. We continue to do our best on your behalf. We hope at some point the market will recognize the difference between us and the average real estate company are significant and the results will prove it. So thank you all for your interest and your good questions.

Operator

Thank you, ladies and gentlemen. This concludes our conference call. You may now disconnect your lines and have a wonderful rest of the day.

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Earnings Conference Call
American Assets Trust Q2 2024
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