AAT - NYSE

Good morning, everyone, and welcome to the American Assets Trust, Inc.'s Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the floor over to Meleana Leaverton, Associate General Counsel of American Assets Trust. Please go ahead.

Thank you, and good morning. The statements made on this earnings call include forward-looking statements based on current expectations. These 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 Investors 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.

Thank you. Good morning, everyone, and thank you for joining us today. At American Assets Trust, we remain focused on executing with discipline and consistency. Our vertically integrated platform, high-quality coastal portfolio and thoughtful approach to capital allocation continue to provide resilience and opportunity. As always, we remain focused on creating long-term value for shareholders across cycles. For the third quarter, funds from operations came in at $0.49 per diluted share, just ahead of our internal projections, supported by continued leasing progress, disciplined expense management and minimal utilization of our bad debt reserve. Portfolio-wide same-store NOI was slightly down for Q3 and is up almost 1% year-to-date, which candidly is tracking with what we've characterized as a transition year. Collections remain strong, and our teams continue to execute to the best of our abilities across all asset classes. The broader economic backdrop remains mixed. Interest rates have shown signs of stabilizing after 2 years of volatility, inflation has moderated but remains above long-term targets and consumer confidence has softened, perhaps less than some had feared. At the same time, capital markets activity remains relatively subdued for commercial real estate. Against this backdrop, our strategy of owning irreplaceable coastal assets, maintaining a strong balance sheet and operating through a fully integrated platform continues to serve us well, underscoring the durability of our long-term approach. Turning to portfolio updates. The office sector remains selective, and we remain very part of that select set. Tenants are focused on well-located, amenitized and institutionally managed assets, and our portfolio is designed to meet those demands. Our office portfolio ended the quarter 82% leased with our same-store office portfolio 87% leased and 5% of the office portfolio includes signed leases that have not commenced paying cash rents. Same-store office NOI increased positively for the quarter, ahead of expectations despite almost 160,000 square feet of known move-outs at First & Main, Torrey Reserve and 14 Acres. We completed approximately 180,000 square feet of office leasing during the quarter with comparable rent spreads increasing 9% on a cash basis and 18% on a straight-line basis, reinforcing that our best-in-class buildings continue to attract tenants even in a competitive environment. Importantly, while the time it takes to finalize office leases has lengthened across our markets, we are not losing deals as a result. Tenants are simply being more deliberate. Along those lines, entering Q4, we have over 25,000 square feet of signed leases and another 56,000 square feet in lease documentation with proposal activity over several hundred thousand square feet. At our new La Jolla Commons Tower 3, following quarter end, we executed leases or have leases in documentation for another 8% of the space with proposals out on another 15%. Momentum is clearly building with increased tours and RFP activity, and we remain optimistic that additional leasing will follow. Meanwhile, the new Travis Swickard restaurant opening later this year will further enhance the already robust amenity package at the campus. Combined with the scarcity of large blocks of Class A space in UTC, we believe this positions us well to capture demand in one of the healthiest office submarkets in the country. At One Beach Street in San Francisco, we saw continued touring activity and are in active negotiations for portions of the building. While San Francisco continues to evolve through its recovery, there are encouraging signs of improved tenant engagement at the highest quality properties such as ours, and we are confident that selective demand will find its way to our assets. It's only a matter of time. Our retail portfolio continues to perform well, thanks to strong consumer spending across our centers. Nationally, retail availability remains near record lows. New construction is virtually non-existent and asking rents have continued to rise. At quarter end, our retail portfolio was 98% leased with 2% signed but not commenced paying cash rents. We executed over 125,000 square feet of new and renewal leases in Q3, with spreads increasing over 4% on a cash basis and 21% on a straight-line basis. Same-store NOI was about $400,000 less than the comparable period, largely reflecting the amount and timing of expense reimbursements as well as lost rents from Party City and reduced rent from at home due to their bankruptcies. Nevertheless, tenant sales and foot traffic remained solid, supported by favorable demographics, resilient employment and limited new supply in our markets. Our focus remains on securing best-in-class retailers, maintaining high occupancy and continuing to drive rent growth over time. In multifamily, performance in San Diego reflected the dynamics of a market working through new supply. Rent growth has decelerated, yet our blended average rents remain positive and occupancy improved as we exited the quarter higher than a year ago, even as we enter the seasonally slower leasing period. At quarter end, our San Diego communities, excluding our RV park, were 94% leased, which is closer to 95% leased today based on recent leasing momentum. Same-store performance was notably impacted by higher concessions, military-related deployments and move-outs impacting almost 30 units in our South Bay assets. A reduction in international student occupancy at Pacific Ridge tied to recent administration policies and the timing of certain property expenditures. We achieved rent increases of 5% on renewals and 2% on new leases for a blended increase of 4%. Excluding our new Genesee Park acquisition, rent increases were a 3% blended increase. In Portland, Hassalo on Eight ended the quarter 91% leased and delivered slightly positive blended rent growth of 1%. Although the market continues to absorb new deliveries and faces affordability challenges, we are encouraged by steady leasing activity and strong retention. Looking ahead, the 4,000-seat live music venue under construction across the street from Hassalo scheduled to open in 2027 will add vibrancy and help drive continued demand. We recognize there is still room for improvement in multifamily lease percentages and rent levels, and our teams remain focused on driving occupancy and capturing long-term rent growth. At Waikiki Beach Walk, our retail component continues to perform in line with expectations, while our Embassy Suites lagged due to softer tourism and heightened rate competition in Oahu. Arrivals have been below prior year levels, reflecting both the stronger dollar and increased competition from other destinations. In addition, the hotel has been further impacted by labor and utility cost pressures and our guest base, which is more cost conscious, has felt the effects of economic uncertainty more acutely. Of note, in the past 3 months, more than $0.5 billion of leased fee interest beneath major Hawaii hotels have changed hands at yields of 4% or lower. This activity underscores the long-term strength and scarcity value of owning the fee simple under all of our Hawaii assets. We remain confident in the long-term appeal of this irreplaceable property and are managing costs and revenue opportunities carefully in the interim. Our priorities are unchanged: to convert leasing momentum across our office portfolio, including La Jolla Commons and One Beach into signed leases, sustain positive leasing spreads in office and retail leasing and support stable occupancy and rent growth in our multifamily portfolio as supply is absorbed. At the same time, we are managing expenses tightly and preserving flexibility to capitalize on future opportunities. All of this reflects our disciplined resilient approach to creating long-term value for our shareholders. Finally, I am pleased to share that the Board approved a quarterly dividend of $0.34 per share for Q4 payable on December 18 to shareholders of record as of December 4. In closing, I want to thank our teams across the company for their dedication and execution. Their hard work continues to position American Assets Trust to execute across cycles. With that, I'll now turn the call over to Bob.

Thanks, Adam, and good morning, everyone. For the third quarter, FFO was $0.49 per diluted share. Net income attributable to common stockholders was $0.07 per diluted share, and total revenue was $110 million for the quarter. Results were generally stable sequentially with modest variability by segment, largely reflecting known office move-outs, expenses, timing and softer tourism trends in Hawaii. Specifically, the $0.03 decline in FFO from Q2 to Q3 reflects 5 things: First, slightly lower office contribution due to a previously disclosed lease expiration at First & Main and the tenant termination at City Center Bellevue, which despite being cash positive with an immediate backfill resulted in a GAAP impact from writing off remaining straight-line rent. Second, retail results reflected timing of property tax refunds recognized in Q2 that did not repeat in Q3. Third, lower family base rent at Pacific Ridge from summer student move-outs and at Hassalo from Portland oversupply, along with higher operating expenses portfolio-wide. Fourth, softer tourism and rate pressure in Oahu; and fifth, partially offset by a $1.1 million lease termination fee recognized in the quarter. Let's talk about same-store cash NOI. For all sectors, same-store cash NOI combined decreased by 0. 8% in the third quarter of 2025 compared to the same period in 2024, which was generally in line with our expectations for a transition year. Breaking Q3 out by segment and each as compared to Q3 2024, our same-store office portfolio's NOI increased by 3.6%, benefiting from rent commencements and higher rents at our City Center Bellevue property and the expiration of rent abatements at Torrey Reserve. Our same-store retail portfolio's NOI declined by 2.6%, driven by credit-related loss of rents mentioned by Adam as well as timing of expense reimbursements. Our same-store multifamily portfolio's NOI declined by 8.3%, reflecting supply headwinds in San Diego and expense pressure at select properties. Our same-store mixed-use portfolio's NOI declined by 10%, primarily driven by lower-than-anticipated occupancy and average daily rate at Embassy Suites Waikiki. Specifically and compared to Q3 2024, paid occupancy for Q3 2025 was lower by 5.5%. RevPAR for Q3 '25 was $298, down 11.7%. ADR for Q3 '25 was $381, down 5.4% and net operating income for Q3 '25 was approximately $2.7 million, down $0.9 million. These results are similar to other hotels in our comp set in Waikiki, Hawaii. We view these macroeconomic pressures as near term and not reflective of long-term fundamentals, and we remain confident in the long-term performance of our Hawaii hotel. In fact, according to preliminary figures from the Japan National Tourism Organization, the number of Japanese nationals traveling overseas in August '25 reached 1.6 million, up 14% year-over-year. This was the highest monthly outbound volume so far this year. Compared to pre-pandemic August 2019 levels of 2.1 million. Outbound traffic has now recovered to nearly 80%. The trajectory of outbound travel is clearly upward. August strong performance reflects pent-up leisure demand during the summer holiday season, following fuel surcharges and increasing seat capacity by Japan's 2 national carriers. Hawaii continues to be one of the most aspirational overseas destinations for Japanese travelers and recovery trends in the outbound market directly benefit our property as well as the other properties in Waikiki and surrounding islands. Forward-looking trends from JAL and ANA Airlines suggest sustained demand for Q4, and we anticipate this momentum to carry into winter and spring 2026. As outbound volume nears pre-pandemic levels, Hawaii is well positioned to capture an outsized share of the recovery given its strong brand equity, culture affinity and increasing promotional activity. Let's talk about liquidity now. Turning to the balance sheet. As of the end of the third quarter, we had total liquidity of approximately $539 million, consisting of roughly $139 million in cash and cash equivalents and $400 million of availability under our revolving line of credit. Our net debt-to-EBITDA ratio was 6.7x on a trailing 12-month basis and 6.9x on a quarter annualized basis. And we remain committed to reducing leverage toward our long-term target of 5.5x or lower. Our interest coverage and fixed charge coverage ratios were both approximately 3.0x on a trailing 12-month basis. Let's talk about 2025 guidance. We are raising our full year 2025 guidance range to $1.93 to $2.01 per FFO share with a midpoint of $0.197 per share. This represents a $0.02 increase from our prior guidance midpoint of $1.95 issued in the second quarter of 2025. The upward revision largely reflects year-to-date performance. Outperformance towards the high end of the range would depend on consistent rent collections from tenants currently reserved for credit exposure, increased demand and continued expense discipline in multifamily, strengthening near-term travel trends at our Embassy Suites Waikiki. Together, these levers represent upside potential, and we will continue to monitor each closely as the year progresses. As a reminder, our guidance in these prepared remarks include 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 we'll 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 Instructions] And our first question today comes from Todd Thomas from KeyBanc Capital Markets.

This is A.J. on for Todd. Adam, maybe starting with you. I appreciate your comments just in the opening remarks around the leasing pipeline. But just maybe pulling on that thread a little more. Would you just provide an update with regards to the anticipated time line to stabilize the La Jolla Commons 3 and One Beach Street assets?

Yes, sure. I'll have Steve offer a little bit more insight. But what we are seeing lately, as I mentioned, is a lot more activity. And so though it's really difficult to pin actual stabilization date, we feel the momentum is carrying us to that date a little quicker than it had been in the past quarters. But Steve, maybe you can add a little bit more color on both of those.

Sure. As Adam mentioned, we signed a lease with an international bank just last week, and then we have 2 others in lease documentation. One is a technology company in the legal field and the other is a very high-end insurance company. And then we've got 2 other proposals totaling actually 17,000 feet. And we've got 2 other competitors for this one 9,000-foot spec suite. So -- and then along those lines, we're building out more spec suites. We've got another several spec suites under construction and delivering spaces that are ready to go has really borne fruit. The bank that we signed went into a spec suite with minor modifications and the other tenants that are prospects are largely tenants that need the space sooner than later. So building the space out, having it ready to go with minor modifications is really playing out well. And the tenants that are signing leases are paying the rents. They want the best, and they're paying up for it. So we're hitting our numbers on the rent side. So we're very encouraged by that. And as Adam said, the activity is picking up. And with the completion of the restaurant and a major conference center that we're adding to the campus, we think the momentum in '26 is going to be really solid. As it relates to One Beach, we're excited. We just converted our first deal to lease documentation yesterday. We're getting that lease out today, and we hope to sign it gosh, by the end of the quarter, we expect to. We've got another prospect for the same space actually. And so we're playing that out. And we've got robust tour activity. Really, it's turning into an AI hub at the North Waterfront is in Jackson Square. There's one pivotal tenant that signed a lease 2 blocks away that really is creating some gravity in that location. And it's interesting being -- we talk to the CEOs of the 2 firms competing for the same space. They both live in the neighborhood. They can walk to work. So it really is turning out to be this new hub, and it's a great location. They love it. Furthermore, both firms looked at a bunch of space. They looked at competing projects, and they consider that all to be commodity space. And when they got to One Beach, they said, this is different. This is the first one we've been willing to step up and make an offer on. So we're encouraged by that feedback. And so as Adam said, we're more positive about stabilization of both. We can't predict exactly when, but it's sooner than we would have said last time we talked.

Understood. I appreciate that color, Steve. Well, I guess sticking with leasing, you guys are speaking about leases in the quarter. Any known move-outs, I guess, as we look to '26 that we should be aware of?

Sure. There's -- well, they're not known yet. We've got some that we're forecasting. It's about 180,000 feet of those tenants that are up in the area. One case is -- let's see, Genentech. They're in 3 floors currently. They're considering getting back a floor, although we question whether that happens. So that will play out in the next 6 months or so. We've got a full floor health care clinic at Lloyd 700 that we know is coming back. So we've got 108,000 feet that's up in the air. We don't know for certain how that's going to play out. But we've got really strong leasing activity behind it. And so we've been able to really fight really well against those tides where we're swimming upstream, so to speak, but we only went backwards 10 basis points this quarter after losing 70,000 feet of known givebacks this quarter. So our new leasing activity is accelerating and the known givebacks this quarter are down to about 23,000 or 24,000 feet. So we think that's going to flip in our favor from an occupancy standpoint next year.

Perfect. I appreciate that. And then maybe, Bob, switching to you just real quick on the balance sheet. Just with leverage ticking up in the quarter, would you just provide some thoughts on the company's current leverage profile and perhaps plans and a time line to get back to under 6x on a Net Debt-to-EBITDA basis, closer to your long-term 5.5x long-term target?

Yes. From our perspective, we have a plan on how to get there. And the plan really is leasing up One Beach and La Jolla Commons 3. And with that, we'll have approximately $0.30 of additional FFO. We'll be back in the game and all the debt ratios will get closer to 6, if not below 6 by then. So we feel pretty confident about it. We've met with all 3 of the rating agencies, and they continue to give us a stable outlook. They understand. And even the rating agencies, all 3 of them have commented in their own information that they share with the public is that it's generally the expectation from their standpoint is it's generally 18 months out on leasing up office, high-quality office. If it's commodity, forget it. But if it's high-quality office like our portfolio, we have a good shot of even beating that. So we'll see. We'll take one step at a time. We feel positive about it. It's just a timing thing that's all it comes down to.

And our next question comes from Rene Pire from Green Street Advisors.

So I know you mentioned the multifamily portfolio having been weighed on by higher deliveries in San Diego in addition to higher concessions. Just trying to get a sense of where you think that segment finishes out the year? Are you expecting some relief on the concessions front? I believe you've mentioned some stronger leasing recently in the portfolio. So trying to get a sense of where same-store NOI might finish the year out.

Yes. I mean, well, just to start, the San Diego multifamily, we think that market remains fundamentally resilient. But as I mentioned, the near-term NOI is impacted by the higher operating expenses and some of the elevated supply. We have had some incremental leasing success. Maybe Abigail can share that with you high level. I'm not sure that we've modeled that in year-end NOI projections yet. So we just want to be careful about what we say on that front. But Abigail, do you have commentary perhaps on the incremental leasing we've seen over the past few weeks in our San Diego multifamily?

We are currently 95% leased. And at the end of the quarter, specifically over at Pacific Ridge, we have seen a recent uptick with USD students securing tenant fees for their upcoming winter and spring semesters, which is really encouraging for us because going into what's traditionally a slower leasing season, we're finding that people are securing their units earlier sooner rather than later. And then also at our other communities, we're finding that leasing is moving forward strongly, specifically over at Loma Palisades and at Genesee Park, leasing over there has picked up, and we're upwards of 96%, 97% leased, again, in what's usually a historically slow leasing period for us. We really attribute that, as Adam mentioned, to well-maintained communities. Our properties are in the best

Yes, Rene, we expect stability to improve as supply is absorbed and expenses normalize. So that's the expectation looking out.

Yes. One last question, Rene. You have all 3 of us talking here on this, is that in San Diego, remember that you have the Pacific Ridge, which is right across from USD. So we do take a dip on the move out of tenants from July, August -- June, July, August. So that's our dip every year, and then we generally come back strong after that. But it's -- Abigail is doing a great job keeping the occupancy up. We're as competitive as anybody in San Diego when it comes to rate. But I think overall, I think people are feeling that there is pressure on the operating expenses. It's not just us, it's other multifamily as well. And I think with the competition, especially with -- compared to Mission Valley, there are concessions. So we're doing the best we can, and I don't think we're dissimilar from any other multifamily out there.

Great. I appreciate all that color. And then maybe a question for Steve primarily. Good quarter on the office leasing front. I was hoping you could give some detail around which tenant industries you're seeing the most active in market, that would be very helpful.

Well, San Francisco, it's AI. And there's an emergence of new co-working operators in AI. So -- but it's really AI-driven for the most part there. We're seeing some of that in Bellevue as well. But we're also seeing a broad base of other types of tenants. So we've got a technology firm that's in the legal industry that's in leases at Tower 3. We've got an insurance company I mentioned earlier in Tower 3, that's ultra-high-end net worth people that they cater to. Let's see. We've got finance. We've got a company that's for a 4.5 and it's -- at First & Main in Portland, and they just did a valuation of a dental practice that we're doing an assignment on. So it's interesting. It's just a broad swath of really good quality tenants...

Law firms.

Law firms.

[Operator Instructions] Our next question comes from Ronald Kamdem from Morgan Stanley.

This is Matt on for Ron. I was just curious, you guys talked a little bit about the tenant types that are interested in leasing space. Could you talk about the leasing trends between the different submarkets? Would you say there's any markets that are seeing more concentrated interest or if it's just kind of widespread?

It's a flight to quality. So I wouldn't talk about it market to market. It's really -- every market is mixed. Not all ships are rising. So it's really the activity is gravitating towards to the best properties, but also space that's ready to go. That's the biggest trend I'm seeing is tenants don't want to wait for TIs. Every tenant rep broker we talk to, we tell them our strategy of spec suites and having spaces ready to go, said we're spot on. And the results speak for themselves. We've got about, I think, 38% of the deals we've done year-to-date have been in spec suites. We're doing about 40% of our vacancy in spec suites. And these are smaller spaces. Our average space is 3,000 to 4,000 feet. So it's low risk. We build them out. They're ready to go with minor modifications at most. And that design will last longer than the tenancy. And if you look at our TIs on our renewals, they're very low because we've built out the spaces and they don't require a whole lot of working to relet them.

Got it. And then just as a follow-up to that, could you just talk a little bit about how we could think about the office occupancy trajectory over the coming quarters? You guys are seeing momentum in leasing and just kind of wondering how that actually builds into the occupancy as we get into '26.

New leasing is about 70% of our activity right now. So that bodes well for making up any known givebacks that are coming. Q3 is a light known good back quarter, so we should make good ground up. And we've now recognized -- we're no longer looking at same store. It's really that 82% is the whole portfolio, including Tower 3 and including One Beach. So it is what it is. One Beach alone will really put a big dent in that. Tower 3, as I said, the momentum is building, and I think '26 is going to be a real strong year. So I think we'll go positive. We'll go positive in 2026. I can't tell you how far. We'll see how those known givebacks play out. But the new leasing is strong. If you -- Adam mentioned several hundred thousand feet of proposals, that's the biggest number we've had that I can remember. And our current leasing activity for the year, if we finish out the quarter as expected, it will be our second best quarter -- second best year since I've been here since 2018. Matt, we'll have more visibility into that with our next call in terms of occupancy expectations in the office sector. So we'll have dug in a little deeper on that through year-end.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Adam for any closing remarks.

Thank you for your continued support. We hope you enjoyed the call as much as we did, and hope you have a great day. Thanks, everybody.