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American Assets Trust Inc (NYSE:AAT)
Q1 2021 Earnings Call
Apr 28, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Q1 2021 American Assets Trust, Inc. Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Adam Wyll, EVP and COO. Please go ahead.

Adam Wyll -- Executive Vice President and Chief Operating Officer

Thank you, operator. Good morning, everyone. Welcome to American Assets Trust first quarter 2021 earnings call. Yesterday afternoon our earnings release and supplemental information were furnished to the SEC on Form 8-K. Both are now available on the Investors section of our website, americanassetstrust.com. A telephonic replay and on-demand webcast will also be available for this call over the next week.

During this call we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our earnings release and supplemental information. We will also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings. You are cautioned not to place undue reliance on these forward-looking statements. Actual events could arise -- could cause our results to differ materially from these forward-looking statements for a number of reasons, including uncertainty related to the scope, severity and duration of the COVID-19 pandemic on us and on our tenants.

And with that, I'll turn the call over to Ernest Rady, our Chairman and CEO, to begin the discussion of our first quarter 2021 results. Ernest?

Ernest Rady -- Chairman, President and Chief Executive Officer

Thank you, Adam. First and foremost, once again we hope that this letter finds you and your loved ones safe. Thankfully, as several vaccines have been broadly administered and as we begin to reach herd immunity, we are very optimistic that the pandemic is nearing the sand and our lives will soon return to normalcy. And our financial results will continue to improve into 2021.

Over the past year the COVID-19 pandemic severely affected most industries, commercial real estate being no exception. We knew at the onset of the pandemic that American Assets Trust would not be impervious to this economic impact, but we were confident that the high quality, irreplaceable properties and asset class diversity of our portfolio combined with the strength of our balance sheet and ample liquidity would pull us through this.

As we've worked our way through these past 12 months, however, we realized that it is the resiliency of our properties and our company's employees that has enabled us to weather this storm. And fortunately, to embark on the path to recovery. We are proud of our response to the challenges presented to us in 2020 and our ability to successfully operate for our company, while keeping our employees and customers as safe as possible. We've been through hard times before and each time we have emerged stronger, which is our expectation now.

As we celebrate our 10th anniversary of being a New York Stock Exchange listed company, we are reminded that our commitment to our stockholders has always remained front and center. We will continue to do our best to accretively grew our asset base and shareholder wealth, focusing on both organic growth and development opportunities as they present themselves within our existing portfolios as well as acquisitions in our targeted coastal West Coast markets with a primary focus on the office sector going forward at this time.

Finally, I want to mention that the Board of Directors has approved a quarterly dividend of $0.28 a share for the first quarter, consistent with our previous dividend, which is, we believe is supported by our collection efforts in the first quarter. The border is -- Board is looking for the rebound in Waikiki which impacts our Embassy Suites and our -- and retail on Waikiki Beach Walk. Once the mandatory quarantine has been eliminated we [Indecipherable] see the beginning of a recovery in Waikiki which will about -- allow the Board to consider an increase in the dividend. We are hopeful that this will recur in the third quarter and hopefully sooner.

Adam, Bob and Steve will go into more detail on our various asset segments, collections and financial results. And I will be available for any questions you may have at the conclusion of prepared remarks. On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage your company and for your continued support. Now more than ever. I'm going to turn the call back over to Adam.

Adam Wyll -- Executive Vice President and Chief Operating Officer

Thanks, Ernest. We are feeling more bullish than at any time over the past 12 months, now that the vaccine is widely available, the COVID 19 governmental restrictions in our coastal markets have lightened considerably and we are seeing firsthand the consumer behavior has begun reverting closer to pre-pandemic levels. Perhaps most significantly in California Governor Newsom announced recently that the state will fully reopen its economy on June 15th, lifting substantially all the restrictions that have guided daily life for more than a year in California, where currently two-thirds of our annualized base rent is derived. We would expect our other coastal markets to follow similarly in the months to come.

Meanwhile, we are encouraged and seeing our shopping center parking lots full, our office tenants returning or scheduling their return to office, tourism ramping up in Hawaii and public schools in our markets are starting to open back up, allowing parents to return to work, shopping and the like. Our collections have continued to improve each quarter since the pandemic began and improved each month in Q1 with the collection rate north of 93% for the first quarter. We expect this collection trend to continue to improve going forward with April at approximately 90% to date. Furthermore, we had approximately $800,000 of deferred rent due from about 100 tenants in Q1 based on COVID-19 related lease modifications entered into in 2020 and we have collected approximately 88% of those deferred amount, we believe this further validates our strategy of supporting our struggling retailers through the government mandated closure.

Today, we have avoided any material impact from retailer bankruptcy having lost only 13,000 square feet in the aggregate out of our over 3 million square foot retail portfolio, which we believe is a testament to us having superior locations at these restructured tenants want to remain in. As we mentioned before, we continue working with challenge retailers with a heavy focus currently on those in Waikiki, who historically have been solid operators to bridge them through to the recovery as tourism continues to ramp up, which is primarily from the US Mainland at this point as Asian countries have not yet relaxed COVID restrictions and their travel to Hawaii yet.

Additionally, we are seeing significant positive activity and engagement with new retailers for vacant or distressed spaces in our retail portfolio as we negotiate new retail leases and term sheets, which we will keep you posted on. On the multifamily front, we have hired a new community manager at our Hassalo on Eighth property who we -- who we expect will lead Hassalo to increased occupancy and better financial results over the remainder of the year. Furthermore, the 133 unit master lease with the private university in our San Diego multifamily portfolio expires at the end of May and our San Diego multifamily team led by Abigail Rex is fully engaged on additional marketing and advertising campaigns to entice students to remain in expiring units and to attract new prospects. To date we have leased approximately 20% of those expiring units and expect to have the majority of them released by the end of summer.

Finally, I want to mention that last week we issued our 2020 sustainability report which covers our 2020 operations and highlights our initiatives and commitments across a range of topics, including health and safety, environmental, social responsibility, corporate governor and was prepared entirely in-house at AAT. These initiatives were a massive collaborative effort from our employee base, led by our sustainability committee with representatives from virtually every department in our company and oversight from our executive management team and Board of Directors. We are proud of our efforts to-date, particularly our focus on human capital, but we know we have a lot more work to do going forward on all fronts. We welcome you to visit the sustainability page of our website to download our 2020 sustainability report for more details. Please reach out to any questions.

With that, I'll turn the call over to Bob to discuss Q1 financial results in more detail.

Robert Barton -- Executive Vice President and Chief Financial Officer

Good morning, and thank you, Ernest and Adam. Last night we reported first quarter 2021 FFO per share of $0.38, first quarter 2021 net income attributable to common stockholders per share of $0.02. I believe it is important to note that the FFO in the first quarter includes a charge of approximately $4.3 million for the early extinguishment of our $150 million Senior Guaranteed Notes, Series A, which were due on October 31, 2021. Without the charge for the early extinguishment of debt, our first quarter 2021 FFO per share would have been approximately $0.44.

From a financial perspective, it was a relatively quiet quarter. I'm not going to spend a lot of time on anything that is already either been discussed or is in the earnings release and save time for the follow-up questions.

We did end up close to our expectations. Based on the current environment same-store metrics are down in retail as expected and office was also lower for the quarter, but it is expected to end with 8% or greater same-store cash NOI for the year ended 2021.

I'll now turn the call over to Steve Center, our Vice President of Office Properties for a brief update on our office segment. Steve?

Steve Center -- Vice President of Office Properties

Thanks, Bob. At the end of the first quarter, net of One Beach, which is under redevelopment, our office portfolio stood at approximately 94% leased, with just 3.4% expiring through the end of 2021. Our top 10 office tenants represented 50.2% of our total office base rent. Given the quality of our assets and the strength of the markets in which they are located with technology and life science as the key market drivers. Our office portfolio has weathered the crisis well.

Current status by region are as follows: Bellevue is 96.5% leased; Portland is 97.1% leased; San Francisco is 100% leased, net of One Beach; and San Diego is 89.1% leased with two buildings under renovation at Torrey Reserve making up 5.8% of San Diego's vacancy and 2.6% of the office portfolio's vacancy. Our strategy of offering lease term flexibility while preserving pre-COVID rental rates produced 36 comparable new and renewal leases over the last 12 months, totaling 182,000 rentable square feet with a weighted average increase of 8.9% over prior rents on a cash basis and 16.9% on a straight-line basis. The weighted average lease term was 3.3 years with just $8.7 per rental square foot in TIs and incentives.

We experienced limited small tenant attrition due to COVID and other business challenges during the quarter resulting in a net loss of approximately 31,000 rentable square feet, none of which was lost to a competitor. However, smaller tenant activity has picked up significantly with tenants willing to commit to longer-term leases at favorable rental rate. Even more encouraging is the push to return to the office and the emerging large tenant activity and competition for quality larger blocks of space in select markets including San Diego and Bellevue. We continue to strategically invest in our current portfolio through renovation, redevelopment and ground-up development.

The renovation at two of the 14 buildings at Torrey Reserve should be complete this summer. In the process, we are enhancing the campus amenities and aggregating large -- large blocks of space in the Del Mar Heights submarket to meet demand and take advantage of pricing power. Construction has commenced on the redevelopment of One Beach Street in San Francisco with delivery in the first half of 2022 and construction is nearly complete on the redevelopment of 710 Oregon Square in the Lloyd sub-market of Portland. One Beach will grow to over 102,000 square feet and 710 Oregon Square will add more than 33,000 square feet to our office portfolio.

Construction is also commenced on Tower 3 at La Jolla Commons, a 213,000 square foot, 11 story Class A plus office tower in the UTC submarket of San Diego with expected completion in Q2 or Q3 of 2023. We are encouraged by the emerging large tenant activity and competition for quality large blocks of space in UTC. We are optimistic about our office portfolio as we move forward into the rest of 2021 and beyond.

Operator, I'll now turn the call over to you for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Craig Schmidt with Bank of America. Your line is now open.

Craig Schmidt -- Bank of America -- Analyst

Thank you.

Ernest Rady -- Chairman, President and Chief Executive Officer

Good morning, Craig.

Craig Schmidt -- Bank of America -- Analyst

Hey, how are you? I wonder [Speech Overlap] Good. How has the retail leasing environment been since the end of March? So the first four weeks or so of April. Can you describe where [Indecipherable] is? What's -- I guess much of California [Indecipherable].

Ernest Rady -- Chairman, President and Chief Executive Officer

I think -- I mean, we're going to ask Chris Sullivan to answer that. He has been in the midst of it and he us our internal expert and external as well.

Chris Sullivan -- Vice President of Retail Properties

Good morning, Craig. Leasing has definitely picked up, exactly picked up since the 4th March in respect to the -- more phone calls [Indecipherable] of our retailers starting to look for space, starting to show a step up. It's -- now it like obviously in 2019. It is starting to pick up toward and starting to go on. So I'm way more optimistic now than I was a year ago. Does that help answer your question.

Craig Schmidt -- Bank of America -- Analyst

Right. So I mean, it still sounds like it's generally improved since the beginning of the year.

Chris Sullivan -- Vice President of Retail Properties

Yeah. It's generally improving. It really got focused back California didn't pop open with indoor dining. And if you look at so many of the shopping centers throughout the country now, quite a bit of dining, you can almost consider that category at anchor tenant. But in California that didn't pop back open to indoor until middle of March. So if that's opened up the registers are starting to [Indecipherable]. Especially here in San Diego, you see a lot of weekend tourism. So you see --- you're starting to see the more aggressive retailers or the savvy retailers and restaurant tours are now on around looking for space. And I think the results of that when you actually see that getting maybe four to six months from now. But the graph to starting to sprout back up on the deals [Indecipherable] I describe it.

Craig Schmidt -- Bank of America -- Analyst

Great. And then, I was wondering if you're experiencing much in terms of cost increases on your development and redevelopment projects. Are they possibly impacting the yield.

Ernest Rady -- Chairman, President and Chief Executive Officer

I'm going to ask Jerry Gammieri to handle that. He handles our construction and he is involved on a day-to-day basis with [Indecipherable].

Jerry Gammieri -- Vice President of Construction and Development

Sure. Craig, thank you for the question. We're seeing cost increases in the construction industry as a whole. Year-over-year it has gone up, we were very successful in the buys that we made in our three major projects with the 710 Oregon Square building, the One Beach project and La Jolla Commons. I think Ernest had asked me a question yesterday that, if I had to go out and buy La Jolla Commons today in today's dollars. How much more would it cost us to build it versus when we started negotiating those fees a year ago during the pandemic. And I would venture to say that it would probably be as much as about 15% above what we have bought today. So I hope that answers your question.

Chris Sullivan -- Vice President of Retail Properties

Great. And then just finally on the Asian lifting tourism, is that -- it really what required to return Hawaii to help or can an increase in the domestic travel somewhat mitigate the disruption?

Ernest Rady -- Chairman, President and Chief Executive Officer

Domestic travel would help for sure. But I've -- that's the cake, the [Indecipherable] on the cake is the Asian travel.

Chris Sullivan -- Vice President of Retail Properties

Okay, great. Thank you.

Ernest Rady -- Chairman, President and Chief Executive Officer

Thank you, Greg. Thanks for your interest.

Operator

Thank you. Our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is now open.

Ernest Rady -- Chairman, President and Chief Executive Officer

Good morning, Todd.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good morning. Just first question on the multifamily segment. You saw a nice increase in occupancy in Portland. Has that continued into April? And can you comment on the decrease in rents and the use of concessions to drive traffic there?

Ernest Rady -- Chairman, President and Chief Executive Officer

That's been very tough, frankly, in Portland. And we had a management issue, which we solved immediately when it came to our attention. We are now having to give concessions, which are painful. But the biggest cost of operating real estate is vacancy and we'd sooner have somebody in there, then have it vacant. But we hope that Portland will return to normal, but if you read the newspapers, you'll see turbulence Portland has been subject to and we have not been an exception.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Should we expect to see the concessions burn off in the second and third quarters and drive the face rents higher? And is the occupancy increase, is that continuing?

Ernest Rady -- Chairman, President and Chief Executive Officer

Todd, I'd like to tell you, I know, but I really don't know I've ever been through a circumstance like Portland before. I'll tell you this though, we'll do as well as anybody in the market. We have a team in place, they are who have been with us for a number of years, we've just hired a new project manager, she comes very, very experienced, and we will do as well as anybody. And Portland will have to return to normal before our rental income returns to more normal levels. That's what I believe.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And then --

Ernest Rady -- Chairman, President and Chief Executive Officer

[Indecipherable] disagree. Go ahead.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. I also -- I wanted to ask about the retail segment and the 2022 NOI bridge that you provided in your latest corporate presentation. The retail cash NOI in the quarter was a little over $60 million, so $65 million annualized, I think, and that's ahead of the 2022 projection for retail cash NOI, which was $63 million. I don't know if there is some deferred rent that was collected in the quarter, which I think was referenced in the prepared remarks. But Bob, can you help us sort of unpack the retail NOI in the quarter a little bit and maybe help us understand how that's tracking relative to prior projections?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yeah. I mean, I think we're pretty close to what our presentation is -- our quarterly presentation, Todd. And I think really what it points to is that and the way we look at it is that, '22 is really the recovery year, because in '22 you continue to outperform and the growth of the office cash NOI plus the mixed-use, which we think is going to be strong in '22. Which should take you from a total cash NOI of around $211 million increasing up to a total of around $250 million plus. So we think '22 is recovery year. But in terms of unpacking '21 or this quarter, I think we're still on track. I think, if not, even more so.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Right. Okay. Because it seems like the retail this quarter is already ahead on an annualized basis of where you expect it to be in '22. So I didn't know if you're anticipating some move-outs or a decrease in cash NOI for retail that might take some time to recover than -- over the next several quarters.

Robert Barton -- Executive Vice President and Chief Financial Officer

No, we're just going to have to play that out, but I think we're still on track with the unofficial guidance in Q4 that we issued. If you go back and take a look at that, but there's nothing that really stuff that points to anything different than that. Obviously, some of the collection like Adam had mentioned on his script, that 88% of the deferred rent has been collected, which is positive. So that's starting to come in as well, which I think is additive to that.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. All right, great. Just one last question if I could. I'll hop off. I was just wondering if there was an update at Landmark related to the Autodesk expirations that occur later in '22 and '23. Not sure if it's too early, but if there is any update there that would be great.

Ernest Rady -- Chairman, President and Chief Executive Officer

No update at this time, except they just gone through extensive renovation at their second and fourth floor. The second floor is a space that expires at the end of next year, with the remainder in '23. And what was the investment there...

Robert Barton -- Executive Vice President and Chief Financial Officer

We are investing upwards of $450 a foot.

Steve Center -- Vice President of Office Properties

Like $15 million,

Ernest Rady -- Chairman, President and Chief Executive Officer

And we just toured it on last Tuesday and site. So they're investing in their space, which I think is a good indicator of their commitment to the building. Because of Landmark and One Market and we wanted to see what our tenants are spending. And one of the task there is spending almost a $100 million, their own money on the building and the other one is spending over $15 million. So we're pretty happy with that investment in the short run and the long run. I wish we had five of them.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

All right, thank you.

Adam Wyll -- Executive Vice President and Chief Operating Officer

It's a great building. Thanks for the questions. Thank you, Todd.

Operator

Thank you. Our next question comes from Richard Hill with Morgan Stanley, your line is now open.

Ernest Rady -- Chairman, President and Chief Executive Officer

Good morning, Richard.

Ron Kamdem -- Morgan Stanley -- Analyst

Hey, you got Ron Kamdem on for Richard Hill. Okay.

Ernest Rady -- Chairman, President and Chief Executive Officer

Well, tell, Richard, we think we're better off with you than him.

Ron Kamdem -- Morgan Stanley -- Analyst

That's right. Just -- the first question was just going to the office portfolio. Maybe could you touch on the same store NOI this quarter. I saw it was down maybe what happened there? And actually just a bigger picture question, which is, just what are you hearing from sort of the office tenants and return to the office?

Ernest Rady -- Chairman, President and Chief Executive Officer

Well, to answer your first question, that negative was due to one deal, and it was a business decision to keep us a law firm in 17,000 feet. There are 24,000 foot full floor law firm, they had subleased about 7000 feet of their space to somebody else, and that's subtenant have moved out, so there lease was coming up and they went to the market and found a competing space about the same size for $3.10 a foot. We looked at the price -- comments was false. We looked at the prospect of losing a 17,000 foot law firm and we decided to keep them where they are, not put in the corridor, no TIs and the competing space was a $3.10 a foot, they agreed to stay at $5 a square foot. So that was a victory for us. We had to take a hit on square footage. That's what happened.

Now just to add to that, they're paying 35.6% more in rental rate than they were at lease expiration. So we think it's a good business decision for full building to keep 17,000 foot law firm.

Chris Sullivan -- Vice President of Retail Properties

Excuse me. Ron, in terms of your question on the same store cash NOI for the office. That's primarily because of our government tenants up in 1st in May, we still had through Q1 abatements that were incurred there. So that reduce your cash NOI by close to $1 million bucks. To answer your question on back to work. We've got a number of firms coming back. We have a life science firm right across from us here that they came back this past Monday. And others are making plans to come back in the next few months. So we're encouraged by that. And then you can read what Google is doing and other big technology firms are doing. Sure what we're hearing is that there is a big push to get back to the office.

Ron Kamdem -- Morgan Stanley -- Analyst

Great. That's helpful. And then if I could sort of -- the second question was just on sort of the mixed used assets and Hawaii and so forth. Obviously, the NOI is still sort of flat to slightly negative in the quarter. I remember, I think three months ago, you sort of felt that there was a decent shot at a recovery in the second half of the year, just curious how you guys are feeling or thinking about Waikiki and the recovery there on the mixed-use.

Ernest Rady -- Chairman, President and Chief Executive Officer

You know, Ron, everybody I talk to is looking forward to the end of this pandemic and getting back to a normal life. And particularly people feel deprived that they can't travel. Now if you're going to travel, you're going to go to someplace safe and Hawaii is safe. So I'm as confident as I can be that Hawaii is going to return to pre-pandemic levels. I just don't know exactly when, but it's going to happen. If I had the opportunity I'd buy everything in Hawaii all over again. It's a great property in a great location and I'm looking forward to the recovery.

Chris Sullivan -- Vice President of Retail Properties

Yeah. Ron, just to add to Earnest comments. We are -- in terms of our estimation, it's not the timing, but we do believe that the back half of '21 we're going to see an increase over the first half. I know that when I look at the Embassy Suites, our booking pace, when I take a look at that, our expectation is that, we will be 79% or higher in June. People are ready to travel.

Ernest Rady -- Chairman, President and Chief Executive Officer

Ourselves included.

Chris Sullivan -- Vice President of Retail Properties

Yeah.

Ron Kamdem -- Morgan Stanley -- Analyst

Great, that's helpful. That's all my questions. Thank you.

Ernest Rady -- Chairman, President and Chief Executive Officer

Great. Thanks, Ron. Say a word to Richard.

Operator

I'm not showing any further questions at this time. I would now like to turn the call back over to Ernest Rady, Chairman and CEO for closing remarks.

Ernest Rady -- Chairman, President and Chief Executive Officer

To sum it all up, we've come through this terrible [Indecipherable] in excellent shape, everything considered. And I know that you're all familiar with the fact that we used to borrow money on a private placement basis and private placements became more expensive than public issuance. So we thought we'd try the public issuance market. We offered $500 million of 10-year bonds and we were 4.5 times oversubscribed. And so we now have the proceeds of that issue and after paying off some debt and earmarking some of that proceeds for the improvement of the properties which we've discussed. We're looking forward to investing that money in additional assets, which we are going to do our best to make sure they're accretive for our stockholders. So I know that you can count on it, but one thing you can count on. We'll do our best for you and we appreciate your confidence. And thank you for your interest.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Adam Wyll -- Executive Vice President and Chief Operating Officer

Ernest Rady -- Chairman, President and Chief Executive Officer

Robert Barton -- Executive Vice President and Chief Financial Officer

Steve Center -- Vice President of Office Properties

Chris Sullivan -- Vice President of Retail Properties

Jerry Gammieri -- Vice President of Construction and Development

Craig Schmidt -- Bank of America -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Ron Kamdem -- Morgan Stanley -- Analyst

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