American Assets Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 results featured GAAP diluted EPS of $0.70 driven by a $44.5M gain on sale (Del Monte Center), while FFO per diluted share was $0.52 and same-store cash NOI rose 3.1% YoY.
• Revenue of $108.6M missed Wall Street consensus ($112.0M)* and GAAP EPS of $0.70 beat consensus ($0.06)*, with the EPS beat largely non-recurring due to the asset sale gain.
• Management affirmed FY 2025 FFO guidance at $1.87–$2.01 (midpoint $1.94), and declared a Q2 2025 dividend of $0.340 per share, signaling confidence despite macro and tourism headwinds.
• Strategic capital recycling (Del Monte sale; Genesee Park acquisition) and debt repayments strengthened liquidity ($544M) and pushed maturities out to 2027, a key support for the stock’s medium-term setup.

What Went Well and What Went Wrong

What Went Well

• Office and retail leasing momentum: ~44k comparable office SF signed with +8% cash rent spreads and +15% straight-line; ~156k comparable retail SF with +13% cash and +21% straight-line spreads, supporting rent roll durability.
• Liquidity and leverage: ~$544M liquidity (cash ~$144M, undrawn $400M revolver) and no maturities until 2027 after repaying Term Loan B/C and Series C notes totaling $325M.
• Strategic recycling and multifamily upside: Sold Del Monte Center for $123.5M; acquired Genesee Park (192 units) for $67.9M, with vacant units leasing ~40% above in-place rents and renewals capped at ~8.5% per California law.

What Went Wrong

• Mixed-Use (Waikiki) softness: Q1 NOI declined ~11.6% YoY; hotel paid occupancy ~85% vs ~90% in prior year; RevPAR $298 down 7% YoY and ADR $353 down 1%, reflecting weaker domestic tourism and rate competition.
• Office pressure pockets: Lower occupancy from move-outs in the Lloyd Portfolio and Torrey Reserve weighed on results and contributed to YoY FFO decline, alongside higher interest expense.
• Revenue below consensus: Q1 revenue of $108.6M missed street ($112.0M)*, reflecting portfolio changes (disposition) and hotel headwinds, even as same-store cash NOI improved.

Transcript

Operator (participant)

Good morning and welcome to the American Assets Trust First Quarter 2025 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please email a conference specialist by pressing the star key followed by zero. I would now like to turn the call over to Meliana Leverton, Associate General Counsel of American Assets Trust. Please go ahead.

Meleana Leaverton (Associate General Counsel)

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 8-K. Both are now available on the investor section of its website, americanassetstrust.com. It is now my pleasure to turn the call over to Adam Wyll, President and CEO of American Assets Trust.

Adam Wyll (President and CEO)

Good morning and thank you for joining us today. I want to begin by expressing my appreciation for your continued engagement and support. We're operating in an increasingly complex and unpredictable environment, and your trust in our team and strategy means a great deal. We remain grounded in our long-term approach, one centered on thoughtful capital allocation, operational discipline, and an enduring commitment to shareholder value. While market volatility and macroeconomic uncertainty continue to shape the landscape, we view this period as one that also presents meaningful opportunity. Our portfolio, with its geographic concentration and high-growth, supply-constrained coastal markets, and its mix of office, retail, and multifamily assets, is built to weather cycles and emerge stronger through them. Let's acknowledge the current reality. The world is absorbing the new administration's policies. Inflation remains sticky. Interest rates are volatile.

Geopolitical uncertainty continues to affect sentiment, and the investment community is seeking clarity on the direction of the economy. In these moments, a steady hand and a long-term perspective are critical. We've taken deliberate steps to ensure we're positioned for resilience and growth, steps that include enhancing our assets, actively managing risk, and maintaining a balance sheet that allows us to be nimble in both offense and defense. Particularly as construction costs remain elevated and likely to continue to increase meaningfully, causing replacement costs to soar, we believe the relative value of our high-quality coastal assets will continue to appreciate, and this long-term positioning is central to how we allocate capital and manage risk. What sets American Assets Trust apart is not just the quality of our real estate, but also our ability to make measured, forward-looking decisions.

Our team continues to pursue organic growth through leasing, value-add improvements, and development, while actively recycling capital into assets with stronger long-term upside. We are doing so with continued focus on reducing our leverage and maintaining strong liquidity, a combination we believe is essential in today's environment. During Q1, our performance was in line with our initial guidance, with FFO per diluted share of $0.52 and same-store cash NOI in Hawaii of 3% over the same period last year. This performance reflects the continued strength of our operating portfolio and validates the proactive measures we have taken over the past year to improve asset quality and align our capital structure for long-term stability. Bob will go into more details in a few minutes.

Turning to segment updates, with respect to our office portfolio, we're cautiously optimistic about the ongoing shift in office dynamics, albeit economic uncertainty remains a headwind, particularly with job and wage growth being crucial drivers for the office sector. Nevertheless, as companies continue to evolve their in-office strategies, we're seeing increased touring and proposal activity for our high-quality space. In fact, the return to office momentum has continued at steady improvement, according to analyst reports, with average days in the office for Fortune 100 companies improving incrementally to 3.7 days in Q1 compared to 3.4 days in Q4. Our office portfolio ended Q1 at 85.5% leased, or 87.6% leased, excluding One Beach, and another quarter where we've hit our all-time high for average base rents across our office portfolio.

Office leasing activity totaled approximately 140,000 sq ft, with spreads on comparable spaces increasing 8% on a cash basis and 15% on a straight-line basis, evidence that rents for modern, well located, best in class space will garner an outsized share of demand. Among the quarter's office highlights, we signed a 16,000 sq ft lease for the top-floor penthouse of La Jolla Commons 3, with rents in line with our development pro forma, and a 29,000 sq ft lease at Timber Ridge in suburban Bellevue, bringing Timber Ridge to 97% leased. We've entered Q2 with momentum, including 27,000 sq ft of executed leases and another 88,000 sq ft in documentation. Additionally, we are seeing an uptick in touring and prospect interest, not just at La Jolla Commons 3, but also from multiple potential users at One Beach Street in San Francisco.

While still early, this activity is an encouraging step toward potential lease discussions. In any case, our office strategy remains focused on optimizing occupancy, enhancing the tenant experience, including their employees' well-being and productivity, and also capturing upside through incremental increases in office utilization rates. We continue to believe that the Class A office market is well-positioned for a multi-year recovery, particularly in high-barrier coastal markets where demand is returning. As employers seek to attract and retain talent, the role of the office continues to evolve as a tool for collaboration, culture, and productivity. Turning to retail, our portfolio has continued to perform well. Representing approximately 26% of our NOI, this segment has demonstrated notable durability. The portfolio ended the quarter 97% leased, and similar to our office portfolio, our retail portfolio reached an all-time high average base rent in Q1.

We executed over 158,000 sq ft of new and renewal leases in Q1, with spreads on comparable spaces, excluding Del Monte Center, which we sold in Q1, increasing by 13% on a cash basis and 21% on a straight-line basis. Collections remain strong, and the retail tenants on our reserve list have all paid in full through Q1. Meanwhile, though there may be some cracks in consumer spending in light of the ever-changing macro environment and the likely higher price of goods, we continue to believe the demographics surrounding our retail assets allow for a more resilient consumer spending base, relatively speaking, supported by healthy employment levels and continued strength in the housing markets. To the extent consumer spending impacts our percentage rents, I just wanted to point out that our budgeted percentage rents comprise less than 1% of our total retail revenue.

Meanwhile, our multifamily portfolio also continues to perform, supported by favorable fundamentals and our focus on supply-constrained coastal submarkets. In San Diego, our communities ended the quarter approximately 95% leased, with a blended rent increase of 2% and minimal concessions. Same-store cash NOI for our San Diego multifamily increased 3.5% year-over-year, with net effective rents in Q1 coming in almost 2% above Q1 2024 levels. In San Diego, affordability constraints continue to limit homeownership, supporting sustained rental demand and expectations of continued rent growth over the years to come. In Portland, Haslow on 8th ended Q1 at approximately 90% leased, with blended rent growth of 3% and net effective rents about flat year-over-year.

As previously mentioned, while the Portland market is still digesting recent supply, we are hopeful for a pickup in activity this spring and for vacancy to decline later in 2025, setting the stage for stronger long-term rent growth. Lastly, on portfolio updates, our mixed-use portfolio at Waikiki Beachwalk recorded an 11% decrease in NOI compared to the same quarter last year, primarily attributable to our Embassy Suites, with average paid occupancy of 85%, about 6% lower than budget, and RevPAR about 11% lower than budget due to a decrease in domestic tourism and rate competition in Waikiki. Nevertheless, in Q1, our hotel performed at the top of its comp set in Waikiki in terms of occupancy, RevPAR, and ADR. Naturally, near-term economic uncertainty may impact leasing activity across our portfolio.

We're closely monitoring whether businesses will reassess their plans this year and how retailers will respond, either pausing or moving forward with strategic initiatives given the current environment of low vacancy and limited new supply in our markets. Now, turning to strategic initiatives, we have recently recycled capital in a manner consistent with our long-term strategy. In February, we closed on the sale of Del Monte Center in Monterey. As previously mentioned, this transaction aligns with our long-term strategy to concentrate capital in core markets where we benefit from operational scale and long-term growth prospects. Just days later, we closed on the acquisition of Genesee Parks Apartments, a nearly 200-unit multifamily community in San Diego. This property offers a rare opportunity to unlock substantial value through both operational improvements and long-term redevelopment potential.

With rents well below market, we've already begun to realize upside with vacant units leasing at or above our projected pro forma rents, generally a 40% increase on vacant units from average in-place rents, and renewals capped at an approximate 8.5% increase per California law, all of which reinforces our underwriting, and the property is currently at 97% leased. The property's location and fundamentals make it an ideal fit for our platform. Finally, I'm pleased to share that the board has approved a quarterly dividend of $0.34 per share for Q2. This reflects our confidence in the company's outlook and reinforces our commitment to delivering long-term returns to our shareholders. The dividend will be paid on June 19th to shareholders of record as of June 5th.

In closing, I want to reiterate that while these are complex times, our strategy is clear, our portfolio is well-positioned, and our team remains focused and forward-thinking. We'll continue to operate with discipline, flexibility, and a deep commitment to delivering sustainable value. With that, I'll turn it over to Bob to walk through our financial results and guidance in more detail.

Bob Barton (CFO)

Thanks, Adam. Good morning, everyone. Last night, we reported first quarter 2025 FFO per share of $0.52. First quarter 2025 net income attributable to common stockholders per share was $0.70. First quarter 2025 FFO decreased by approximately $0.03 to $0.52 per share compared to Q4 2024, primarily due to the impact of the Del Monte Center disposition on February 25, 2025, which contributed to a reduction of approximately $0.03 per FFO share. Same-store cash NOI for all sectors combined increased by 3.1% year-over-year in the first quarter of 2025 compared to the same period in 2024. All sectors reported positive same-store cash NOI growth during the quarter, with the exception of the mixed-use sector, as we'll discuss in a moment.

Breaking it out by segment, our same-store office portfolio's NOI increased by 5.4% in Q1 2025, primarily due to the expiration of a contractual rent abatement related to a lease renewal at our Landmark at One Market Street property. Our same-store retail portfolio's NOI increased by 5.4% in Q1 2025, primarily driven by the expiration of a contractual rent abatement for a new tenant at Carmel Mountain Plaza, the commencement of new leases and contractual rent escalations at both Alamo Quarry and Carmel Mountain Plaza. Additionally, the year-over-year comparison benefited from a one-time write-off of construction and progress expenses recorded in Q1 2024, which did not reoccur in Q1 2025. Our same-store multifamily portfolio's NOI was flat in Q1 2025 compared to the prior year period, primarily due to lower rental income at our Haslow on 8th property in Portland, offsetting our same-store growth from our San Diego multifamily properties.

Our mixed-use portfolio's NOI declined by approximately 11.6% in Q1 2025 compared to the same period in 2024, primarily driven by lower than anticipated occupancy at the Embassy Suites Waikiki. Specifically, number one, paid occupancy for Q1 2025 was approximately 85% compared to 90% in Q1 2024. Number two, RevPAR for Q1 2025 was $298, down 7% from Q1 2024. Our ADR for Q1 2025 was $353, down 1% from Q1 2024. Lastly, net operating income for Q1 2025 was approximately $2.6 million compared to $3.4 million in Q1 2024. It is our understanding that virtually all hotels in Oahu are having similar results. However, as Adam mentioned earlier, we continue to outperform our comp set in Waikiki by both occupancy, ADR, and RevPAR. We are also seeing that domestic mainland travelers are rethinking travel to Hawaii due to rising costs in airfare and hotel rates.

Many travelers are opting for international vacations due to the strong U.S. currency, and more are taking all-inclusive cruises. Regardless of the near-term economic uncertainty, the charm, aloha spirit, and safety and security in Oahu and other Hawaiian islands are not going away. We believe this is just a moment in time. Let's talk about liquidity. At the end of the first quarter, we had liquidity of approximately $544 million, comprised of approximately $144 million in cash and cash equivalents, and $400 million of availability on a revolving line of credit. Additionally, as of the end of the first quarter, our leverage, which we measure in terms of net debt to EBITDA, was 6.2 times on a trailing 12-month basis and 6.7 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 million in the aggregate without penalty or premium, utilizing cash on hand, and now we have no debt maturities until 2027. Our objective is to achieve and maintain long-term net debt to EBITDA of five and a half times or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.2 times on a trailing 12-month basis. Let's talk about our 2025 guidance. We are reaffirming our full year 2025 guidance range of $1.87-$2.01 per FFO share, with a midpoint of $1.94 per FFO share, underscoring our confidence in the strength and stability of our diversified portfolio. This outlook reflects the continued momentum across our core sectors, supported by steady leasing activity, contractual rent increases, and disciplined operational execution.

Our guidance assumptions continue to reflect a relatively healthy operating environment, sustained tenant demand, and thoughtful risk management. Based on our first quarter results and our current visibility into the balance of the year, we believe we are reasonably positioned to achieve our full year objectives. Moreover, while the reaffirmed guidance reflects our best estimate as of today's call, we acknowledge the potential to perform towards the upper end of the range. To achieve that, several factors would need to align favorably. First, the majority of the office and retail tenants for whom we have established credit reserves must continue to meet their rent obligations through the year. As of Q1 2025, we have approximately $0.04 per share of FFO reserved for tenants deemed at risk based on a probability-weighted approach. On that amount, approximately $0.01 per FFO share relates to office tenants and $0.03 to retail.

Second, our multifamily segment would need to exceed expectations driven by improved occupancy, continued rent growth, or better than forecasted expense management. Third, a meaningful recovery in tourism would support stronger performance at our Embassy Suites property. We remain cautiously optimistic that both domestic and international travel will improve either later this year or in the years ahead. Together, these levers represent upside potential, and we will continue to monitor each closely as the year progresses. As a reminder, our guidance and these prepared remarks exclude the impact of any future acquisitions, dispositions, equity issuances or repurchases, and debt refinancings or repayments, except for those already disclosed. We remain committed to transparency and will continue to provide clear insights into our quarterly results and the key assumptions that inform our outlook.

Additionally, please note that any non-GAAP financial metrics discussed today, such as net operating income or NOI, are reconciled to the most directly comparable GAAP measures in our earnings release and supplemental materials. I'll now turn the call back over to the operator for Q&A.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Rennie Pire with Green Street Advisors. Please go ahead.

Rennie Pire (Equity Research Associate)

Hey, good morning, everyone. Thanks for taking the question. Quick call on your Bellevue assets. I know you all just went through a pretty significant renovation program there. If you could provide some color on maybe what the pipeline's looking for those assets and any probability that they see an uptick in occupancy sometime this year, that'd be helpful. Thanks.

Adam Wyll (President and CEO)

Sure, Rennie. We'll have Steve Center, our head of office, respond to that.

Steve Center (Head of Office Properties)

Sure. Adam mentioned in his remarks, we just did a 29,000 sq ft lease at Timber Ridge, which takes that property on the I-520 corridor to 97% leased. In addition, we've got a deal we're close to letter of intent on for another 16,000 sq ft at Bell Springs, which would take the I-520 corridor, those 253,000 sq ft of assets, to 11.6% vacancy, which is well below the current market of 20% for the east side. There's additional velocity there as well at what's now called 14ACRES or Eastgate. We're in leases on a 17,000 sq ft deal and another 5,900 sq ft deal. We have several other prospects. That project was just completed in terms of the renovation. We're seeing leasing momentum pick up there as well.

At City Center Bellevue, we're sitting at about 91% leased, and we've got multiple prospects that would take that even higher. In fact, we're in proposals that would take two of the vacancies. We'd be about 95% leased with a pending proposal. So we're looking pretty good in Bellevue.

Rennie Pire (Equity Research Associate)

Maybe one follow-up. I know downtown Seattle passed the Proposition 1A earlier this year. Has that caused an increase in inbound interest from tenants, or has that been an immaterial event?

Steve Center (Head of Office Properties)

That's a good question. It actually came up in our—we had leasing calls for both of our Bellevue teams yesterday, and it did come up. We're seeing increased inbound tenant tour and inquiry activity in part because of issues like that. Bellevue is outperforming. Yeah, it's valid, and it's driving tenants to consider Bellevue.

Rennie Pire (Equity Research Associate)

Great. Thanks for the time.

Operator (participant)

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Antara Nag-Chaudhuri (Research Analyst)

Hi, good morning. This is Antara Nag-Chaudhuri on for Todd Thomas. Just a quick one for me. I know the company sold Del Monte Center for around $124 million and reinvested the proceeds into the Genesee Parks Apartments for about $68 million. Are you pursuing additional acquisitions to redeploy the remaining proceeds from Del Monte? Is there anything else on the acquisition side that you could talk about?

Adam Wyll (President and CEO)

Hi, Antara. Good question. We are keeping our eyes on what's being marketed in our various markets and the asset classes that we are looking at, primarily multifamily and retail. At the same time, having that cash on the balance sheet, the leftovers, if you will, from Del Monte in this kind of market environment gives us a little bit more comfort on the balance sheet and liquidity side. Though we're still actively looking at deals and underwriting them, we're also comfortable keeping that cash on the balance sheet right now as we kind of navigate through this economic uncertainty. To speak of any other acquisitions right now, there's nothing to chat about at this point.

Antara Nag-Chaudhuri (Research Analyst)

Okay. Got it. Just another one. I saw that you pushed back the timeframe for stabilization at La Jolla. Could you give us any additional update on the leasing pipeline, any color on the market?

Adam Wyll (President and CEO)

Sure, Steve.

Steve Center (Head of Office Properties)

Sure. The submarket, the UTC or University Town Center submarket, remains tight. Class A direct vacancy is 7.4%. If you net out Tower 3 from that, the remainder is 4.6% direct vacant. That being said, it's not a big tenant market at this point. It's a smaller tenant market, full floor and below, except for a few examples, one of which we're in proposals on a two-floor deal. We're competing with a renewal where the renewing space would be 68,400 sq ft, and our lease would be 41,000 sq ft. Our places are highly efficient. It's a law firm. They've been in their space 10 years, and they'd be going from partners having bigger offices, such as having smaller offices, to a one-size-office-fits-all, which is the initiative that's being put forth on the West Coast for this major law firm. We're competing for it. We're more efficient.

We offer building top signage that they don't. We have podium parking directly under the building versus a parking structure. We have better amenities. We'll see if we can overcome the inertia that goes with renewals, and we'll see how that plays out. In addition, we are building spec suites on the entire fourth floor. Those will be completed in November, and we will see leasing activity pick up with completion of those suites. Plus, we've got amenities under construction. We've got a 7,000 sq ft conference center under construction. We've got the restaurant, the white-table restaurant, under construction. We've got the cafe under construction. When those amenities are complete, spec suites are done, we expect leasing to accelerate.

Antara Nag-Chaudhuri (Research Analyst)

Got it. Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Adam Wyll for any closing remarks.

Adam Wyll (President and CEO)

Thank you for taking the time to join us today. While we're encouraged by our progress this quarter, we remain mindful of the broader operating environment and continue to manage the business with discipline and a long-term perspective. We appreciate your continued support and look forward to updating you again next quarter. Thank you.

Operator (participant)

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