American Assets Trust's Q3 2025 Earnings Call: Contradictions Emerge on Office Stabilization Timelines, Leasing Outlook, and Same-Store Projections

Date of Call: Not specified in transcript

Financials Results

• Revenue: Highest ever total revenue, over 4% increase from 2022
• EPS: Q4 2023 net income per share $0.17; full year 2023 $0.84

Guidance:

• 2024 FFO per share guidance range of $2.19 to $2.33, midpoint $2.26, approximately a 5.8% decrease over 2023 actual of $2.40.
• Same-store cash NOI for all sectors combined expected to decrease less than 1% (~$0.01 FFO per share).
• Same-store office cash NOI expected to decrease ~2.3% ($0.04 FFO per share).
• Same-store retail cash NOI expected to increase ~2.3% ($0.02 FFO per share).
• Same-store multifamily cash NOI expected to increase ~1% ($0.005 FFO per share).
• Same-store mixed-use cash NOI expected to increase ~1% ($0.005 FFO per share).
• Embassy Suites Hotel Waikiki revenue expected to increase ~4.5%; operating expenses up 6.4%; occupancy up ~2.3%; ADR up ~2% to $381; RevPAR up ~5% to $334.
• Non-same-store properties (One Beach, Oregon Square, La Jolla Commons Tower III) expected to decrease FFO by ~$0.02 per share.
• Estimated bad debt expense reserves expected to decrease FFO by ~$0.07 per share.
• Interest expense expected to increase ~$3 million, decreasing FFO by $0.04 per share.
• GAAP adjustments (straight-line rents) decrease FFO by ~$0.05 per share.
• Litigation settlements increase FFO ~$0.05 per share.
• Operating capital expenditures estimated at ~$59 million.

Business Commentary:

• FFO and Financial Performance:
• American Assets Trust reported record FFO per share of $2.40 for 2023, marking a 3% increase from 2022 and a 7% compounded annual growth rate since the company's IPO in 2011.

• The growth was driven by strong operating fundamentals, capital improvements, and the resilience of the company's properties despite economic volatility.

• Office Leasing Activity:

• The office segment saw 86% occupancy at quarter-end, with 9 office leases executed in Q4 totaling 27,000 rentable square feet, and new leases signed year-to-date showing rent increases of 10.7% on a cash basis.

• Despite a slower leasing environment, the company achieved high occupancy rates and premium rents due to the quality and amenities of its properties.

• Retail Leasing and Performance:

• The retail segment reported 95% leasing, with 6% of retail GLA expiring in 2024, and notable leasing spreads of 7% increase on a cash basis for Q4 deals.

• The strong leasing environment post-COVID and the favorable demographics of the trade areas contributed to the retail segment's performance.

• Multifamily Segment Dynamics:

• The multifamily properties showed 5.5% same-store cash NOI growth in 2023, with 1% expected growth for 2024, despite decelerating rent growth in San Diego and Portland.

• The growth was supported by favorable demographics, strong income growth, and high ownership costs, although the market faces competition from new supply.

• Dividend and Financial Strategy:

• The Board of Directors approved a quarterly dividend increase to $0.335 per share, reflecting a 1.5% increase.
• The decision was supported by the company's financial results and its strategy to maintain a strong balance sheet, emphasizing liquidity and dividend growth.

Sentiment Analysis:

Overall Tone: Positive

• Management expressed pride in achieving highest FFO per share in over 13 years and highlighted resilient operating fundamentals. They noted a dividend increase, strong leasing activity in office and retail, and confidence in long-term growth despite near-term uncertainties, stating 'the flight to quality...of our office portfolio for new tenants and the stickiness created by those attributes for our existing customers'.

Q&A:

• Question from Todd Thomas (KeyBanc Capital Markets): Can you talk a little bit about the office leasing in a little bit more detail... address the 310,000 square feet of expirations and what assumptions you're making around retention and just talk a little bit more about the new lease pipeline?
  Response: Steve Center: New leasing in 2024 features longer lease terms (~96-99 months). About one-third of 2024 rollovers are already in play with renewals or backfill tenants. The portfolio is well-located and amenitized, supporting retention and rent premiums.

• Question from Todd Thomas (KeyBanc Capital Markets): Are the lease expirations in '24 in the office portfolio, are they sort of concentrated in certain assets or certain submarkets? And then...can you talk about the office occupancy expectation at year-end?
  Response: Steve Center: Rollover is evenly split across San Diego (37%), Portland (34%), Bellevue (24%), and San Francisco (1%). Office occupancy modeled at 86.5% for same-store portfolio. Robert Barton: The decrease from total portfolio occupancy (84.3%) reflects One Beach not leased up in 2024 guidance and pushing speculative office leasing to 2025.

• Question from Todd Thomas (KeyBanc Capital Markets): ...just to be clear, so the litigation payment that you received in January, that was about $10 million. ...you'll recognize $0.13 that you'll recognize in guidance or in 1Q '24 results, is that right?
  Response: Robert Barton: Correct. The $10 million received in January 2024 will be recognized in Q1 2024 results, contributing $0.13 per FFO share for the year.

• Question from Adam Kramer (Morgan Stanley): I just wanted to ask about the guidance... what could cause kind of the high end to come true versus the low end?
  Response: Robert Barton: High end achievable if speculative office leasing (317k sq ft) occurs in Q1/Q2, interest expense on refinancing is lower than modeled 7.5%, and multifamily outperforms. Ernest Rady: Also if reserves are collected and La Jolla Commons III successfully leased.

• Question from Adam Kramer (Morgan Stanley): ...just walk us through if you were to do an offering today and what rate do you think you would get?... where net debt to EBITDA will trend?
  Response: Robert Barton: For $100M bond due July 2024, using line of credit at ~6% for 8 months is an option. Public debt market in Q1 2025 likely mid-6s. Net debt to EBITDA (~6.5x) key to reducing to 5.5x depends on leasing up La Jolla Commons III.

• Question from Adam Kramer (Morgan Stanley): ...on Hawaii and tourism. What's kind of the view on when you could see kind of a full recovery there?
  Response: Robert Barton & Ernest Rady: Recovery timing uncertain, dependent on Japanese yen (currently ~148 vs pre-COVID 105-108). Domestic market has filled some void but not at same revenue level. Management is optimistic it is 'a matter of time'.

• Question from Ravi Vaidya (Mizuho): Just a question about the office same-store portfolio. How long do you think this will remain negative? And do you expect an inflection in the back half of the year into 2025?
  Response: Steve Center: Negative same-store office guidance due to pushing speculative leasing (317k sq ft) to 2025 if not leased by Q1. However, smaller, ready suites could lease more quickly. Markets are performing well.

• Question from Ravi Vaidya (Mizuho): ...within your multi portfolio, the occupancy increased pretty dramatically sequentially, but the average rent per unit decreased a bit... Is that kind of what's happening here?
  Response: Abigail Rex & Adam Wyll: In San Diego, rents softened due to ~3,000 new units competing and property managers offering concessions. Q4 is seasonally slower, affecting occupancy. Management continues to push rents and reposition properties.

• Question from Ravi Vaidya (Mizuho): Within your retail portfolio, can you talk about retailer demand for more space... and maybe your tenant credit risks and many... what are some of your watchlist tenants at the moment?
  Response: Adam Wyll: Retail portfolio performing well with high demand due to dominant locations. Only one large tenant (>10k sq ft) expiring (Old Navy). Reserves maintained for tenants like [indiscernible] (3 locations) and one [indiscernible] location, as a conservative measure; tenants are current on rent.

Contradiction Point 1

Timeline for Stabilizing Office Assets & Leasing Outlook

This is a substantial contradiction regarding the expected timeline for completing speculative office leasing and stabilizing key assets, which directly impacts financial forecasts for same-store NOI and FFO. The shift from a conservative 2025 completion date to an expectation of stabilization "potentially sooner" alters near-term performance expectations.

What is driving - Ravi Vaidya (Mizuho) for Haendel St.

2023Q4: The negative projection is primarily due to a conservative approach: speculative office leasing that isn't signed by Q1 2024... is pushed out to 2025. - Steve Center(SVP of Office Properties)

What’s the updated timeline for stabilizing La Jolla Commons 3 and One Beach Street assets? - Unknown Analyst (on behalf of Todd Thomas, KeyBanc Capital Markets)

2025Q3: Momentum is building for both assets, with increased activity leading to stabilization potentially sooner than previously expected. - Adam Wyll(President and COO)

Contradiction Point 2

Office Leasing Outlook and Performance Drivers

This is a substantial contradiction concerning the primary driver behind the office segment's performance relative to guidance. The Q4 2023 outlook was framed as a recovery from a difficult period, while the Q2 2025 update reveals that the initial conservative guidance was actually outperformed, with strength coming from assets previously excluded from the same-store calculation. This indicates a material change in the underlying performance narrative.

How long will the negative performance in the office same-store portfolio persist, and will there be an inflection in the back half of 2024 into 2025? What factors are driving the negative projection, particularly regarding the timing of speculative leasing? - Ravi Vaidya (Mizuho)

2023Q4: The negative projection is primarily due to a conservative approach: speculative office leasing that isn't signed by Q1 2024... is pushed out to 2025. - Steve Center(SVP)

Can you provide an update on the leasing pipeline and interest levels for La Jolla Commons III and One Beach properties? Do you have any year-end leasing goals for these properties? - Unidentified Analyst (KeyBanc Capital Markets, on for Todd Thomas)

2025Q2: The office segment seems to be trending better than the guidance we provided back in Q4 2024... Specifically, the office segment seems to be trending better. - Adam Wyll(CEO)

Contradiction Point 3

Office Portfolio Leasing Performance and Same-Store Projections

This is a substantial contradiction regarding the expected timeline for the office portfolio's same-store performance to turn positive. The Q4 2023 projection explicitly linked negativity to speculative leasing pushing into 2025, while the Q1 2025 update highlights specific leasing signings and market activity, suggesting the negative timeline may have been overly conservative and impacting the credibility of forward guidance.

Regarding the office same-store portfolio: How long will the negative trend persist? Do you anticipate an inflection in H2 2024 or 2025? What factors are driving the negative projection, particularly speculative leasing timing? - Ravi Vaidya (Mizuho) for Haendel St.

2023Q4: The negative projection is primarily due to a conservative approach: speculative office leasing that isn't signed by Q1 2024... is pushed out to 2025. This affects the 2024 same-store calculation. - Steve Center(SVP of Office)

What is the status of the leasing pipeline for your Bellevue assets after the major renovation? - Reny Pire (Green Street Advisors)

2025Q1: At Timber Ridge, a 29,000 sq ft lease was signed, bringing it to 97% leased. A Letter of Intent was signed for an additional 16,000 sq ft at Bell Springs... The submarket is seeing increased tenant interest... - Steve Center(SVP of Office)

Contradiction Point 4

Office Leasing Market Demand & Tenant Focus

This is a substantial contradiction in the characterization of office leasing market demand. The Q4 2023 description of a light quarter with ongoing activity contrasts sharply with the Q3 2025 portrayal of "strong, broad-based activity" with a specific, high-value focus on AI-driven tenants. This indicates a material change in market dynamics and the quality of the leasing pipeline, which affects future cash flow expectations.

Can you provide more detail on office leasing, including year-to-date signed leases, net absorption, handling of the 310,000 sq ft expirations, assumptions regarding retention rates, and the status of the new lease pipeline? - Todd Thomas (KeyBanc Capital Markets)

2023Q4: Q4 2023 was light, but 2024 has started strong... New leasing activity is ongoing, and retention efforts are in play... - Steve Center(SVP of Office Properties)

Which tenant industries are most active in the office leasing market? - Reynolds Pire (Green Street Advisors)

2025Q3: Activity is broad-based but includes a strong focus on AI-driven tenants in San Francisco and Bellevue... The trend is a 'flight to quality.' Activity is gravitating towards... space that is already built out and ready to go (spec suites). This strategy is highly valued by tenants, with about 40% of current vacancy being in spec suites. - Steve Center(SVP of Office Properties), Adam Wyll(President and COO)

Contradiction Point 5

Primary Drivers for Office Performance and Guidance

This is a substantial contradiction in the explanation of office performance relative to initial guidance. In Q4 2023, the guidance was described as conservative due to speculative leasing timing. In Q2 2025, the discussion clarifies that the initial guidance was actually outperformed, not just "trending better," and that the performance driver was assets previously excluded from the same-store calculation. This reveals a significant initial underestimation of performance.

What factors are driving the negative office same-store portfolio performance? How long will this trend persist? Do you anticipate a turnaround in the second half of the year into 2025? Is speculative leasing timing a factor? - Ravi Vaidya (Mizuho)

2023Q4: The negative projection is primarily due to a conservative approach: speculative office leasing that isn't signed by Q1 2024... is pushed out to 2025. - Steve Center(SVP)

Can you provide an update on the leasing progress for La Jolla Commons III and One Beach? Are there any year-end leasing targets? - Unidentified Analyst (KeyBanc Capital Markets, on for Todd Thomas)

2025Q2: The office segment seems to be trending better than the guidance we provided back in Q4 2024... Specifically, the office segment seems to be trending better. - Adam Wyll(CEO)