American Assets Trust Q4 2024 Earnings Report

American Assets Trust EPS Results

• Actual EPS: $0.55
• Consensus EPS: $0.14
• Beat/Miss: Beat by +$0.41
• One Year Ago EPS: N/A

American Assets Trust Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $111.90 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

American Assets Trust Announcement Details

• Quarter: Q4 2024
• Date: 2/4/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, February 5, 2025
• Conference Call Time: 11:00AM ET

American Assets Trust (NYSE:AAT) is a full service, vertically integrated and self-administered real estate investment trust ("REIT"), headquartered in San Diego, California. The company has over 55 years of experience in acquiring, improving, developing and managing premier office, retail, and residential properties throughout the United States in some of the nation's most dynamic, high-barrier-to-entry markets primarily in Southern California, Northern California, Washington, Oregon, Texas and Hawaii. The company's office portfolio comprises approximately 4.1 million rentable square feet, and its retail portfolio comprises approximately 3.1 million rentable square feet. In addition, the company owns one mixed-use property (including approximately 94,000 rentable square feet of retail space and a 369-room all-suite hotel) and 2,110 multifamily units. In 2011, the company was formed to succeed to the real estate business of American Assets, Inc., a privately held corporation founded in 1967 and, as such, has significant experience, long-standing relationships and extensive knowledge of its core markets, submarkets and asset classes.

American Assets Trust Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to the American Assets Trust Inc. Fourth Quarter and Year End twenty twenty four Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, today's earnings call is being recorded.

[Operator]

I would now like to turn the call over to Meliana Leverton, Associate General Counsel of American Assets Trust. Please go ahead.

[Meliana Leverton, Associate General Counsel at American Assets Trust]

Thank you, and good morning. The statements made on this earnings 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. Yesterday afternoon, American Assets Trust's earnings release and supplemental information were furnished to the SEC on Form eight ks. Both are now available on the Investors section of its website, americanassetstrust.com.

[Meliana Leverton, Associate General Counsel at American Assets Trust]

It is now my pleasure to turn the call over to Adam Weil, President and CEO of American Assets Trust.

[Adam Wyll, President & CEO at American Assets Trust]

Thank you, and good morning, everyone. Thank you for joining us today and for your continued support during these extraordinary times. To start, I'd like to reaffirm our steadfast commitment to disciplined decision making that supports the long term growth of our earnings and shareholder value. This approach underpinned by our high quality, irreplaceable and diverse portfolio, robust balance sheet, exceptional management and employee team and agile operating platform positions us to adapt to evolving market dynamics effectively. We remain confident that this strategy will enable us to grow earnings accretively and drive sustained outperformance over the long term.

[Adam Wyll, President & CEO at American Assets Trust]

In an environment where replacement costs for high quality properties continue to escalate, we believe today's valuations for premier assets like ours will look increasingly compelling in hindsight. This is particularly important as we address upcoming transaction activity later in our prepared remarks. Turning to our results, we are pleased with our continued strong performance across all segments. Building on back to back record FFO years in 2022 and 2023, '20 '20 '4 marked yet another milestone as we achieved our highest FFO per share since our IPO more than fourteen years ago. This achievement is complemented by record total revenue NOI aggregate dividends over $103,000,000 and record average monthly base rents across our office, retail and multifamily portfolios.

[Adam Wyll, President & CEO at American Assets Trust]

Additionally, our Waikiki Beachwalk Embassy Suites delivered its highest ADR to date in 2024. These accomplishments are particularly noteworthy given the challenging and unpredictable economic cycles, global events and unpredictability of interest rate movements that we continue to navigate. This also reflects the strategic capital improvements we've made to enhance and amenitize our properties ensuring they remain best in class. This focus has been instrumental in driving tenant satisfaction, retention and rent growth, especially for our high barrier to entry modern properties located in areas of growth, innovation and education and with superior transportation access. Looking ahead, we continue to see significant opportunities for organic growth, including the lease up and stabilization of our new developments, maximizing rental rates, prudent expense management and the densification of existing assets with mixed use multifamily developments that we will do our absolute best to capitalize on over time.

[Adam Wyll, President & CEO at American Assets Trust]

Nevertheless, as you will repeatedly hear us say, our top priority remains maintaining a strong balance sheet, ample liquidity and increasing dividend through long term cash flow growth, ensuring we are well prepared to capitalize on opportunities while navigating any market volatility. As you have noted from our initial guidance, which Bob will give additional details on in just a moment, 2025 represents a reset of sorts for our FFO compared to last year, primarily due to certain one time opportunistic revenue generating items in prior periods that we do not expect to reoccur this year. Absent these impacts, we still anticipate continued positive momentum in our core operational performance over the ensuing years. But at the same time, we are accounting for increased interest expense from our bond offering last fall and the discontinuation of capitalized interest on La Jolla Commons Tower 3 And 1 Beech Street and maintaining conservative collection reserves to safeguard our financial position. These measures reflect our commitment to balancing growth with prudent risk management as we move forward, noting that we have no debt maturities until 2027.

[Adam Wyll, President & CEO at American Assets Trust]

In regards to our office segment, as we enter the new year, we remain optimistic about a gradual yet steady improvement in office utilization across our portfolio, driven by return to office mandates from many of our tenants, including some of the largest organizations in the country. While it is still early to fully assess the impact of these policies, we believe the superior quality of prime locations of our office assets combined with best in class amenities will continue to set us apart leading to increased occupancy and leasing momentum over the ensuing years. Additionally, we are closely monitoring the new federal administration's policies, which appear to be supportive of business growth through tax reductions and regulatory easing. We anticipate that these measures will further strengthen tenant confidence and contribute to increased leasing activity. Looking ahead, we believe the Class A office market is positioned for meaningful improvement over the next twelve to twenty four months, assuming economic stability and a favorable or at least stable interest rate environment, which should drive higher long term occupancy and expanded space requirements.

[Adam Wyll, President & CEO at American Assets Trust]

Encouragingly, office demand at a national level is approaching pre pandemic levels with quarterly net absorption turning positive for the first time in three years. Our office portfolio closed the year at 85% lease reflecting a decrease of 200 basis points compared to the prior quarter. This decrease is primarily due to the remeasurement of certain properties, which resulted in additional vacancy. However, we expect to monetize this vacancy in the future. Additionally, the vacancy from a tenant for which we received an $11,000,000 termination fee in Q3 of twenty twenty four, as well as other tenant downsizing and attrition contributed to the overall decline.

[Adam Wyll, President & CEO at American Assets Trust]

In Q4, office leasing activity saw an approximately 2% increase on a cash basis and an 11% increase on a straight line basis. Q1 has begun with strong momentum having already executed leases for approximately 20,000 square feet with an additional 105,000 square feet currently in lease documentation, including 53,000 square feet of net absorption. Notably, these pending deals that have not yet been executed include the Top Floor or 16,000 feet at La Jolla Commons Tower 3 and 29,000 square feet at Timber Ridge in suburban Bellevue, which will bring that property to 97% leased. Additionally, our exposure to GSA tenants constitutes less than 5% of our total office square footage and approximately 3% of total office rent. The majority of these GSA tenants are secured under firm lease agreements with at least three years remaining.

[Adam Wyll, President & CEO at American Assets Trust]

Furthermore, we have been informed that all GSA tenants intend to return to the office five days a week in the early part of this year. As of today, just under 8% of our office portfolio is scheduled for lease rollovers in 2025 with an average deal size of 7,000 square feet. We anticipate approximately 181,000 square feet of attrition from known move outs at First and Main and 14 acres, formerly Eastgate. Office leasing activity remains focused on high quality, modernized and fully built out spaces as tenants increasingly seek options that allow for immediate occupancy with minimal downtime and upfront capital investment. Following our prepared remarks, Steve Senter will be available to address any questions regarding our office portfolio.

[Adam Wyll, President & CEO at American Assets Trust]

Turning to our retail segment representing 27% of our portfolio NOI, our best in class retail segment continued to excel in 2024 with with properties that dominate their trade areas and are at 95% leased with 5% same store NOI growth in 2024. Taking into account the renewal signed so far in 2025, we have less than 4% of our retail portfolio expiring in 2025. We are encouraged by positive leasing spreads, 6.5% increase on a cash basis and a 31% increase on a straight line basis for Q4 transactions and strong tenant sales supported by resilient consumer spending and the affluent supply constrained markets in which our properties reside. We remain confident in our ability to backfill known vacancies, including our two party city locations that we that have closed or are about to close, which will constrain twenty twenty five same store retail NOI numbers. And we are otherwise monitoring other retailers like Petco, Michaels and Angelica Theatres.

[Adam Wyll, President & CEO at American Assets Trust]

Finally, with respect to our multifamily segment, we realized same store cash NOI growth of over 6% in 2024 as compared to 2023. Our San Diego multifamily communities ended Q4 with a lease percentage of 97% and we saw a blended decrease of approximately 4% between new move ins and renewals as we work to push our lease percentage 3% higher in what is typically a seasonally slower period with end of the year concessions granted in the market. Recent trends indicate improving rental rates and we anticipate further momentum in the spring and summer leasing seasons. Net effective rents for our San Diego multifamily leases are now 2% higher year over year compared to the fourth quarter of twenty twenty three. Also pleased to report that we have extended our master lease with the University of San Diego for another three years directly across the street from Pacific Ridge, which will cover well over 100 units until the summer of twenty twenty nine, including annual rent bumps of 5% through 2026 and three point five percent through 2029.

[Adam Wyll, President & CEO at American Assets Trust]

Up in the Pacific Northwest, our Hasselow and eighth Community in Portland saw a blended increase of approximately 2% between new move ins and renewals as our lease percentage ended the year at 92%. Net effective rents for our multifamily leases at Hasselow are up about 3.5% year over year compared to the fourth quarter of twenty twenty three. We remain bullish overall on our multifamily fundamentals in San Diego, supported by fairly low unemployment rates, prestigious universities, strong demographics, income growth and very high homeownership costs. And in Portland, where there has been some supply shock that is still being absorbed, we expect new completions to slow in 2025 with vacancy rates expected to decline as well, which hopefully sets the stage for rent growth later this year or next. Next, as mentioned earlier, I'm pleased to share a few updates on our long term portfolio strategy as we are constantly evaluating opportunities to maximize value for our stakeholders and position ourselves for long term growth.

[Adam Wyll, President & CEO at American Assets Trust]

Notably, we have entered into an agreement to sell Del Monte Center in Monterey, California. This decision reflects our strategy to focus on markets where we can achieve greater economies of scale and operational efficiencies. The sale expected to close in late February, subject to customary closing conditions, allows us to recycle capital into opportunities better aligned with our long term growth objectives. By concentrating on markets where we have established a greater presence, we're not only strengthening our position, but also ensuring that our resources are aligned with our long term objectives. This decision underscores our dedication to delivering sustainable long term growth and value creation, while maintaining our ability to be nimble as the circumstances dictate.

[Adam Wyll, President & CEO at American Assets Trust]

Additionally, we are in escrow in a multifamily community in San Diego with a terrific location, including very strong transit and retail access, which we believe has substantial upside. This property owned by the same family for decades has rents that we believe are significantly below market, possibly 30% plus with potential densification opportunity. We believe with certain upgrades, process improvements and our form of management that we can generate an attractive unlevered IRR over a long term hold. The acquisition of this almost 200 unit property is expected to close in late February, subject to customary closing conditions. While Del Monte Center is being sold at a higher current yield than the initial yield on the prospective multifamily community acquisition, the decision reflects our focus on long term value creation rather than short term yield metrics and further enhances our multifamily portfolio in the high growth market.

[Adam Wyll, President & CEO at American Assets Trust]

Lastly, I'm pleased to announce that the Board of Directors has approved a 1.5% increase in our quarterly dividend to $0.34 per share for Q1, reflecting our confidence in the company's long term financial performance and outlook. The dividend will be paid on March 20 to shareholders of record as of March 6. On behalf of the entire team at American Assets Trust, including Ernest, who will be available during Q and A, thank you for your confidence and continued support. With that, I'll turn the call over to Bob to discuss our financial results and initial guidance in more detail.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Thanks, Adam, and good morning, everyone. Last night, we reported fourth quarter and year ended 2024 FFO per share of $0.55 and $2.58 respectively. Fourth quarter and year ended 2024 net income attributable to common stockholders per share was $0.15 and $0.94 respectively. Fourth quarter FFO decreased by approximately 0.16 to $0.55 per share compared to the Q3 twenty twenty four, primarily due to $0.15 in termination refees received in Q3 that were not present in Q4 and a $0.01 decline in revenue at Embassy Suites Waitiquiti reflecting expected seasonality between the high Q3 and lower Q4 demand. Same store cash NOI for all sectors combined was 2.6% growth year over year for the fourth quarter and 1.4% growth for the full year ended 2024 as compared to the full year ended 2023.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Meanwhile, all sectors have positive same store cash NOI in the fourth quarter except for the office sector, which was negative 2.8%, primarily due to known move outs at our Tory Reserve and Timber Springs properties. As it relates to liquidity, at the end of the fourth quarter, we had liquidity of approximately $826,000,000 comprised of approximately $426,000,000 in cash and cash equivalents and $400,000,000 of availability on a revolving line of credit. Additionally, as of the end of the fourth quarter, our leverage, which we measure in terms of net debt to EBITDA was six point zero times on a trailing twelve month basis and 6.6 times on a quarter annualized basis. Note that subsequent to year end, we repaid our term loan B, term loan C and Series C notes totaling $325,000,000 in aggregate without penalty or premium utilizing cash on hand. Our objective is to achieve and maintain long term net debt to EBITDA of 5.5 times or below.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Our interest coverage and fixed charge coverage ratio ended the quarter at 3.4 times on a trailing twelve month basis. Let's talk about 2025 guidance. We are introducing our 2025 FFO per share guidance range of $1.87 to $2.01 per FFO share with a midpoint of $1.94 per FFO share, which is approximately a 24% decrease in over 2024 actual of $2.58 per FFO share. In our supplemental document, which was furnished yesterday via eight K and is available on our website, we have provided a high level reconciliation of 2024 actual FFO to our 2025 forecasted FFO on our corporate guidance page. However, for those that would like a more detailed analysis of the 2024 to 2025 FFO reconciliation, I'm about to share that as well.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

So let's begin. Starting with 2024 ending FFO of $2.58 per share, there are 11 items combined that make up the decrease. They are: Number one, non recurring termination fees occurring in 2024 are not included in 2025 guidance. Combined, they are expected to decrease FFO by approximately $0.15 per FFO share in 2025. Number two, non recurring litigation income in 2024 is not included in 2025 guidance and is expected to decrease FFO by approximately $0.13 per FFO share in 2025.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Number three, same store cash NOI for all sectors combined, excluding reserves, which I will discuss in more detail in a few minutes, is expected to be flat to slightly positive in 2025. Broken out by each sector as compared to 2024 and excluding reserves in each case, same store office cash NOI is expected to decrease approximately 1% or $0.02 of FFO share. Same store retail cash NOI is expected to increase approximately 1.6% or $0.015 per FFO share. Same store multifamily cash NOI is expected to increase approximately 2.7% or $0.013 per FFO share in 2025. Same store mixed use cash NOI is expected to stay flat in 2025.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Our 2025 Embassy guidance is prepared by our partners at Outrigger in Waikiki that have boots on the ground and have an awareness in Waikiki from other hotels and retail properties that they own and or manage. Our 2025 guidance for the Embassy Suites Hotel in Waikiki is based on the following: revenue is expected to increase approximately 5% in 2025. Operating expenses are expected to increase 7% in 2025 due to the inflationary impact on operating expenses in Hawaii, such as food costs, labor and overhead. Average occupancy is expected to increase by approximately 2% in 2025. Average ADR is expected to increase approximately 4% from $371 in $24 to $384 in $25 Average RevPAR is expected to increase approximately 6% from $319 in 2024 to $337 in 2025.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Of note, our 2024 NOI for the Embassy Suites hotel increased by approximately 6% compared to 2019, even without the majority of our guests from Japan who remain slow to return to Oahu due primarily to continued weakness in the yen. Number four, non same store cash NOI is comprised of two office buildings that were recently completed. One is 1 Beach Street on the North Waterfront Of San Francisco overlooking the Golden Gate Bridge in Alcatraz. The other is La Jolla Commons 3, which is located in University Town Center, submarket of San Diego, and which was completed in Q2 twenty twenty four and is approximately 19% leased as of the year end. For 2025, we expect the operating expenses to exceed the operating revenue as we are in the lease upstage, which will decrease FFO by approximately $0.04 per FFO share.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Credit reserves is number five, are included separately and will decrease FFO by approximately $0.05 per FFO share.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Of the $0.05

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

of credit reserves, approximately $0.02 of the reserves are allocated to the office sector and $0.03 of the reserves are allocated to the retail sector. These reserves constitute under 1% of our total expected revenue in 2025, which we believe is a reasonable percentage. Similar to last year, we are taking a conservative view of the potential risk with certain tenants, particularly in this somewhat unpredictable economic environment and hope to reduce these amounts each quarter as rents are paid. Number six, G and A is budgeted to increase slightly in 2025 and decrease FFO per share by approximately $0.01 Number seven, interest expense is expected to increase in 2025, primarily due to the termination of capitalized interest expense related to La Jolla Commons III and the issuance of our 6.15 senior notes last fall, which combined is expected to decrease FFO per share by approximately $0.06 in 2025. Number eight, other income is expected to decrease FFO by approximately $0.04 per FFO share in 2025, resulting from the payoff of our maturing debt indebtedness subsequent to the issuance of our 6.15% senior notes last fall, the proceeds of which will no longer be earning interest income in the bank.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Number nine, 2025 GAAP adjustments are expected to decrease by approximately $5,500,000 which is expected to decrease FFO by approximately $0.07 per share. The majority of this GAAP adjustments relate to the net effect of straight line rents, but should have no effect on the overall rent income. Number 10, Tilmani disposition is expected to decrease FFO by $0.11 per FFO share $0.25 Number 11, multifamily acquisition is expected to increase FFO by $0.02 per FFO share $0.25 These adjustments when added together will be approximately $0.64 per FFO share and represent the net decrease in our 2025 midpoint over '20 '20 '4 FFO per share. While we believe the $20.25 guidance is our best estimate as of the date of this earnings call, we do believe that it is also possible that we could perform towards the upper end of this guidance range. In order to do that, among other things, number one, speculative office leasing needs to occur in the first half of the year number two, the office or retail tenants that we reserved for need to continue to pay rents through the year And number three, we need to have increasing rents and occupancy and or less expenses than budgeted in our multifamily portfolio.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Of note, as I previously mentioned, we have several hundred million dollars of invested capital in La Jolla Commons Three, One Beach Street development and renovation and our suburban office portfolio in Bellevue, Washington. All great properties and highly amenitized in great locations. Our focus is getting each of these properties leased as quickly as possible to high quality tenants over the ensuing years. At a 93 lease occupancy, we should be able to add over $0.3 of FFO per share, which will lower our net debt to EBITDA, increase our NAV and allow us to continue to grow the company. We are excited for the future ahead of us.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

As always, our guidance, our NOI bridge in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we've already discussed. 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 back over to the operator for Q and A.

[Operator]

We will now begin the question and answer session. The first question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

[Todd Thomas, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Hi, thanks. Good morning. Bob, I just wanted to touch on the $0.3 of upside, which you reiterated again in your comments from La Jolla, One Beach and the three office assets in Bellevue. Appreciate the detail in the guidance with some of the moving pieces there. But can you just talk a little bit more about what you might expect in terms of that beginning to be recognized, whether there's any contribution anticipated to be realized in 2025 during the year from some of those assets in aggregate or will cash flow not really start to improve at all during the year with the cap interest and real estate taxes burning off, I guess, primarily at La Jolla?

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Yes. Thanks, Tom, for the question. Yes, I mean, the 93%, first of all, is based on our underwriting for these properties. And we've underwritten them. We know that the renovation would take place in suburban Bellevue and that process is just being finished in the first quarter.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

So I think the future is bright on that. I'll Steve talk more in terms of what the activity is on there. And La Jolla comments three, when we underwrote that, the future looks bright. It's what we've seen is it takes longer to sign leases. But I think it'd be better to have Steve really speak to what the current environment is on each of these properties.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Steve?

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

Sure.

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

Up in Bellevue, Todd, it's what we now call Timber Ridge. We have a we're in lease documentation with a 29,000 foot full building lease that will take that property to 97% leased. And we have an existing tenant that needs to expand and that will perhaps take our last vacancy there. So that project could reach 100%. At Timber Springs, which is formerly Bellsprings 520, we're in negotiations with a full floor deal for the majority of the vacancy in that project as well.

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

So activity is good. And now in terms of timing of seeing the rent come in for those days, it will be later this year. December 1 is the commencement date of the deal up at Timber Ridge. And the full floor deal at Timber Springs will likely commence in 2026. In terms of La Jolla Commons, we've got our Third Floor tent that will commence in September.

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

The spec suite tenants are ones in place and already paying rents. We've got we're in negotiations with another for 9,000 feet that we commence later this year to spec suites so they can move in within months. And then the deal we're negotiating on the Top Floor

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

of the

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

penthouse, their goal is to move in, in November, December. So that's kind of the timing of that activity. In terms of proposals that are active right now, they require full build outs. Those are really likely hitting 26.

[Todd Thomas, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Okay. I guess if we're thinking about sort of the cadence of FFO during the year, thinking about '26 a little bit, '27, right, is there a point in the model where you have confidence that FFO will potentially bottom or inflect? It sounds like late twenty twenty five might sort of mark the bottom with some of the commencements that might be scheduled at these assets late in the year and into early twenty twenty six. Is that sort of a fair assessment?

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Yes. I would say that mid to late year because it takes time. I mean, once you sign the lease, you got to get the permits, you got to get things going. It's just I think in Adam's commentary too is that we're not expecting anything in the first two quarters.

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

One of the

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

things, Todd, we're doing to accelerate that is an extensive spec we're continuing our specs we program. We've been doing it since 2018, but we've got a big program this year to deliver suites in the second half of the year. As Adam mentioned, our average deal size is about 7,000 feet. We're seeing less than full floor demand throughout all of our markets. So we're going to meet that demand and the suites are going to be ready to go.

[Steve Center, Senior Vice President of Office Properties at American Assets Trust]

We've had really good success with it. A good example of that is we built the 4,200 foot spec suite four years ago, leased it to a pharma company and now they're taking another spec suite that's 9,200 feet and they're moving in, in July. So, we're going to continue that program, deliver ready to go spaces, which should accelerate much of that cash flow.

[Todd Thomas, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Okay. And then if I could switch over to the disposition and acquisition to DelMonte Center. Can you just better help us understand the FFO dilution there? It's $0.11 so that's $8,500,000 I'm just curious if you can provide some additional detail around the expected value of that sale and some of the proceeds are earmarked for the multifamily acquisition and a lower initial yield you mentioned, but what are you assuming you do with the remainder of the proceeds?

[Adam Wyll, President & CEO at American Assets Trust]

Todd, this is Adam. We're not in a position really to go into too many details on either of the transactions considering they're both in escrow. So we're trying to limit our comments other than to say this is what we feel like is better positioning for us for long term growth. I would just point out what we're selling Del Monte for relative to what we're buying the apartment community. That apartment community is maybe a little over half the proceeds from Del Monte.

[Adam Wyll, President & CEO at American Assets Trust]

So we continue to look for other opportunities out there and otherwise keep that excess cash invested in the bank account and get some interest income off it while we continue to look forward and source transactions. But we'll have more color on those deals, Todd, once they're closed on our next call or maybe on an interim update we'd give the public. But for now, we don't want to jeopardize anything with these deals considering where they are in the escrow process.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Todd, just to add to Adam's comment is that we want to be respectful to the buyer and the seller on both those transactions. We're happy to give you more information once these transactions are closed.

[Todd Thomas, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Okay. All right. Thank you.

[Ernest Rady, Executive Chairman at American Assets Trust]

Thank you, Todd.

[Operator]

The next question comes from Haendel St. Juste with Mizuno. Please go ahead.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

Hi there. I think Mizuno makes baseball gloves. Mizuno. Hey, guys. So wanted to follow-up on the Del Monte question.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

I get it you're in a position where you can't say much, but I guess I'm more curious just high level, the decision to sell the asset here, it's your largest retail asset. It sounds like it's more of a decision around perhaps the asset maybe having less growth prospects long term and not necessarily maybe a view on wanting to cut back on retail. So maybe a bit more on that and just the strategic rationale here. And it sounds like multifamily is the intended use of proceeds here, an asset class you guys have talked about in the past and wanting to get into, but the pricing there is a bit tight, sounds like you're willing to incur a bit of dilution, but what type of multifamily assets could we see you go after? I mean smaller, perhaps adjacent to existing properties, assets perhaps that are maybe under construction or maybe offer some operational outside.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

Just curious kind of how you're broadly thinking about not just the decision to sell, but the reinvestment and what type of profile assets in multifamily you're looking at?

[Adam Wyll, President & CEO at American Assets Trust]

It's quite a mouthful, Haendel. Just to start with your question on growth prospects for Del Monte Center, obviously, you're not going to comment on that. The buyer of that can comment on that when we close on it. But like I mentioned in my remarks, it's really about focusing on the operational efficiencies and synergies we have in other markets. Monterey for us is, of course, kind of often an island of sorts.

[Adam Wyll, President & CEO at American Assets Trust]

And it's a lot more difficult for us to manage and not having all the economies of scale like we do in our other markets. And that's kind of something that's been driving that decision and we've been looking for a right entry point to list it and see what we could get for that property. And in the same vein, we've continued to look for multifamily opportunities. As you know, we like to find some with a little bit of hair on it, where we can add value and come in, fix them up, get the rents up and make the residents and our shareholders proud of what we own. So that's kind of what we've been looking for on the multifamily side, generally in the markets we're already in.

[Adam Wyll, President & CEO at American Assets Trust]

There's not a ton trading that hit the kind of hit those qualifications that we're looking for. So when we saw this one come through and we'll give Ernest credit because he had a bull's eye on this one once he saw it, it just made a ton of sense for us and it's exactly what American Assets is built to do.

[Ernest Rady, Executive Chairman at American Assets Trust]

And I think that, Adam, as you said earlier, after it closes, we'll explain the rationale. But I think there is a compelling rationale for the transactions.

[Adam Wyll, President & CEO at American Assets Trust]

Right. And so we continue to look for multifamily handout, but we're not just solely focused on that. We would look for retail opportunities as well. But for now, we're not just seeing a ton of stuff that really pencils for us and gives us that IRR we're looking for. So in the meantime, we're focused on what we've got in front of us.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

Got it, got it. Appreciate that color. And maybe a bit more on the decision to raise the dividend. I know it wasn't a big increase here, but it comes at a time when you're making a meaningful kind of reduction in the AFFO expectation for this year. And so now kind of looking at where your coverage ratio is, at least on our estimates, around 100% suggests the more limited financial flexibility to a degree.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

So curious on why the decision to raise the dividend here now when you're cutting kind of earnings expectations? And when do we think you can get back to your long term AFFO ratio target of around 80%, eighty five %?

[Ernest Rady, Executive Chairman at American Assets Trust]

Ford decided by increasing the dividend in a token amount that he wanted to assure investors that they had the highest confidence in the quality of the portfolio. And that was their way of saying you guys are doing the right thing for the stockholders in the long run. In the short run, obviously, the questions have been raised. As far as the last part of the question, I have no way of answering that because we'll just have to see how successful we are in leasing the great properties we have.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Hey, Haendel, let me add to Ernest's comments. Historically, since we did the IPO back in 2011, our internal structure or internal point was 85% dividend payout ratio. And we've generally been there or less. This time, we're still under 100. So anytime you're over 100% on a ratio, you're paying more than your free cash flow, which is not what we want to do.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

What we did is we've increased it $0.5 per quarter, which is about $480,000 per quarter or less than $1,500,000 a year. From the bigger picture of the balance sheet, we can afford that. We're still under or somewhere from a high 80s to low 90s percent on the payout ratio. I saw your number of 99% that's we don't believe that is correct. But it is either low 90s or high 80s and we don't think that's going to make a material impact one way or the other considering we have over $100,000,000 of cash on the bank.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

Okay. And on that last point, what's your estimated annual free cash flow post dividend and CapEx?

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

I don't have that right in front of me. I mean, we can pull up the supplemental.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

Okay. We can come back to that one. Maybe last one on credit reserve. I think the $0.05 maybe some color on the $0.05 credit reserve and what's some of the driving factors here. It feels a little elevated.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

And so I guess, are these in relation to previously known move outs or any new tenants involved there? Thanks.

[Adam Wyll, President & CEO at American Assets Trust]

I mean, I think it's less elevated than it was a year ago when we had a $0.09 or $0.1 reserve handout. There's two office tenants that we're keeping an eye on that are having some challenging business situations right now. And I'm not going to name those names. But on the retail side, like I mentioned, we're just keeping an eye on Petco, Michaels and we've got Angelica Theater in Carmel Mountain Plaza. And those are the ones that we have our eyes on right now.

[Adam Wyll, President & CEO at American Assets Trust]

But so far, they're all current and we're hopeful that we'll be able to collect on them all. But as you know, we prefer to be conservative over under promise, over deliver.

[Ernest Rady, Executive Chairman at American Assets Trust]

And also let the investor decide the likelihood of their pain rather than us imposing our judgment.

[Adam Wyll, President & CEO at American Assets Trust]

Yes. But just know that the Party City vacancies have been reflected in Bob's guidance. So there's no reserves on those obviously and there's interest already percolating in those sites. So we're hopeful to have news on those later this year.

[Haendel St. Juste, Managing Director at Mizuho Financial Group]

Got it. Thank you guys.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Thank you.

[Adam Wyll, President & CEO at American Assets Trust]

Thank you, Andale.

[Operator]

The next question comes from Dylan Berzynski with Green Street. Please go ahead.

[Dylan Burzinski, Senior Analyst, Office at Green Street Advisors, LLC]

Hi, guys.

[Dylan Burzinski, Equity Research Analyst at Green Street Advisors, LLC]

Just quick one on the Party City boxes. I mean, is it your expectation that

[Dylan Burzinski, Senior Analyst, Office at Green Street Advisors, LLC]

you'll sort

[Dylan Burzinski, Equity Research Analyst at Green Street Advisors, LLC]

of break these boxes up? Or do you think you'll be able to get a tenant to sort of backfill it in its entirety?

[Adam Wyll, President & CEO at American Assets Trust]

We'll let Chris Sullivan answer that one for you, Dylan.

[Chris Sullivan, Senior Vice President of Retail Properties at American Assets Trust]

Hey, Dylan. So keep in mind, we have two party cities, but one is not a traditional party city. The one in Hawaii is a 5,000 foot space that was their only franchisee as it was located out in Hawaii, so it's a much smaller space. So that will be leased as a 5,000 foot space.

[Chris Sullivan, Senior Vice President of Retail Properties at American Assets Trust]

The other is in our gateway center down in National City, that's a 14,000 foot space and we're seeking users that will be in the 14,000 foot range that won't be split.

[Dylan Burzinski, Equity Research Analyst at Green Street Advisors, LLC]

Great. Appreciate that detail. And I guess just sort of going back to office leasing activity, I know Paul, over the last year or so, large tenant activity has sort of been slow. But I mean, are you starting to see any greed shoots on this front as it relates to larger tenants coming back to the market and looking to lease base?

[Adam Wyll, President & CEO at American Assets Trust]

Larger tenants in Bellevue, there have been some monster tenants that have shown up, which are great for the market. San Francisco, you're seeing the tenant size increase. It's still not quite full floor, but it's gotten better than the two Zs, four Zs that you're seeing when AI was just on it still is active, but all the startups. So the size is increasing in San Francisco, which is good for us because one beach has big floor plates and it's not going to demise down to 5,000 foot increments. So that's heading in the right direction, but it's still overall, it's smaller tenants, it's rightsizing tenants and the winners are going to be the properties that have the best amenities and the best offering, best location and that's what we have.

[Adam Wyll, President & CEO at American Assets Trust]

So and in terms of current activity, we're seeing a number of tenants growing. So I think Adam mentioned, we've got 105,000 feet of new deals and lease documentation and 53,000 feet is net absorption. So and the other thing that you're seeing is our weighted average lease term of the deals that are up in negotiation is over ten years. So, we're seeing people go long, we're seeing them commit to space. So, that's very encouraging.

[Operator]

The next question comes from Ronald Camdon with Morgan Stanley. Please go ahead.

[Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley]

Hey, just a couple of quick ones. Just circling back to sort of the office leasing fundamentals and so forth. Just I appreciate the comments on the pipeline and all the leasing that's been sort of done. Just was just curious if you could just comment more on the types of tenants, what they're looking at, sort of incentives and so forth. And it sounds like you're maybe seeing signs of inflection is what I'm hearing from the sort of opening comments.

[Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley]

And I'm wondering if that's the messaging. Thanks.

[Adam Wyll, President & CEO at American Assets Trust]

Sure. It's a broad spectrum of tenants from construction to wealth management to life insurance to all kinds of there's really no one tenant type that's driving it. In terms of what we're seeing, tenants don't want to spend capital upfront. So having spaces that are already completed or being willing to commit to longer term to build up the space for them and you're seeing that, like I said, the weighted average term of ten years, they're getting spaces that are accustomed to them, but we always ensure that what we're building is going to have long term utility beyond that lease. So really the capital piece on the front end is probably the biggest thing I'm seeing is tenants don't want to write checks for their TIs.

[Ernest Rady, Executive Chairman at American Assets Trust]

It's just a competitive, not edge, but what keeps us in the ballgame with the ETS.

[Adam Wyll, President & CEO at American Assets Trust]

It keeps us in the ballgame. Well, first of all, customer service, right, you've instilled the strategy that we treat these people as customers. Well, the term customer, we refer to them as customers rather than tenants. It's interesting, you hear it in the language when we talk to Autodesk, for example, we talk to Google, the language they use is partnership. And that comes through where we treat them as partners, we collaborate and you'll see we've downsized or right sized a number of tenants and we flexed with them, but we don't lose tenants to competitors.

[Adam Wyll, President & CEO at American Assets Trust]

We lose tenants to attrition, we lose them to rightsizing and those types of things that can't be controlled by us, but our tenants stick with us for the long term. And so, our people that operate our buildings do a wonderful job of taking care of people. Our construction teams are excellent. In fact, you come away from a TI experience and the tenants are very happy with the outcomes and the experience. So and we have the capital to pay

[Ernest Rady, Executive Chairman at American Assets Trust]

the leasing commissions and do the TI, which is a significant factor in what has become a divided market. That's really

[Adam Wyll, President & CEO at American Assets Trust]

a good point, Ernest, that confidence in our ability to perform. We had a tour two days ago where the tenant was touring our tower in Downtown Portland and the fact came up that we don't have any secured debt on the building, that that building doesn't have a loan against it. He was shocked and impressed and happy about that because so much of Portland is in distress. So our ability to execute is really a very important point in this environment.

[Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley]

Great. That's really helpful. My second question was just on one, just on the guidance. What are you assuming for same store for the office and the retail portfolio? And how does debt to EBITDA trend throughout the year?

[Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley]

Thanks so much.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

So Ron, your question is what's the impact on the same store?

[Adam Wyll, President & CEO at American Assets Trust]

What is the same store for office and retail this year?

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

Yes. So we're on the same store, we're saying there's a 1% decrease in same store office cash NOI. And really that's a big portion of that is, first of all, think about the tenant that we had the termination fee from in Q3. Well, that's going away. So Q4, it went down and then the remainder of '25 and until that gets leased, that goes away.

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

We've also had another big one is at First And Main. We've had a tenant in there since the IPO called CLEARESULT, kind of a quasi governmental organization utility. And they let us know during COVID that they are no longer working from the office, but they maintained their lease. So as of April 1, that goes away and that's going to be a significant decrease.

[Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley]

Great. And then the leverage levels?

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

I'm sorry, what? Leverage levels. Of debt?

[Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley]

Yes. How does like where is it trending throughout the year?

[Robert Barton, Executive VP, Treasurer & CFO at American Assets Trust]

That's in our supplemental. I mean, we're still net debt to EBITDA has a 6% range on it. So I think we're in pretty good shape.

[Adam Wyll, President & CEO at American Assets Trust]

Hey, Ron, just to supplement flip offset on the same store, cash NOI. If he said that office cash NOI would be down 1%, if that one termination deal hadn't happened, office NOI would be up 1%, but that deal made more sense for us because it got us four years of income. The retail is up almost 1.5%, maybe a little bit higher. If not for Party City, that would have probably been another 1% higher. And we have multifamily near three percent up.

[Adam Wyll, President & CEO at American Assets Trust]

So segment wise, they all seem to be trending fairly well. We just got to lease up the developments basically.

[Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley]

That makes a comment. Thanks so much. That's it for me. Thanks, Rob.

[Ernest Rady, Executive Chairman at American Assets Trust]

You have to look at us as if we hadn't had these two extraordinary items. And on that basis, we're doing better. And the two extraordinary items give us an opportunity to lease out the space that this company prepaid. So we're the same company we were before, only better.

[Operator]

Seeing

[Operator]

that there are no further questions in the queue, this concludes our question and answer session. I would like to turn the conference back over to Adam Weil for any closing remarks.

[Adam Wyll, President & CEO at American Assets Trust]

So we're excited about the opportunities ahead and the strong foundation we've built to drive future growth. And our team, all who's around the table with us today, we're focused on executing our strategy and delivering results for our shareholders and stakeholders. So, we really appreciate your time today and attention and all the questions and look forward to reporting good results going forward. Thank you, everybody.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Meliana Leverton, Associate General Counsel
• Adam Wyll, President & CEO
• Robert Barton, Executive VP, Treasurer & CFO
• Steve Center, Senior Vice President of Office Properties
• Ernest Rady, Executive Chairman
• Chris Sullivan, Senior Vice President of Retail Properties

Analysts

• Todd Thomas, Managing Director & Equity Research Analyst at KeyBanc Capital Markets
• Haendel St. Juste, Managing Director at Mizuho Financial Group
• Dylan Burzinski, Senior Analyst, Office at Green Street Advisors, LLC
• Dylan Burzinski, Equity Research Analyst at Green Street Advisors, LLC
• Ronald Kamdem, Managing Director & Head of US REITs and CRE Research at Morgan Stanley