Welcome to American Assets Trust Inc.'s Second Quarter 2024 Earnings Call. As a reminder, today's conference is being recorded. Please note that statements made on this conference 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 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's now my pleasure to turn the call over to Ernest Rady, Chairman and CEO of American Assets Trust.

Good morning, everyone. At American Assets Trust, I can assure you every strategic and operational decision is driven by our commitment to maximize, both long and short-term value. This dedication is reflected in our efforts to maintain a robust balance sheet and our continuous investment in enhancing our irreplaceable properties, ensuring they remain optimistic in the respective markets. In Q2 2024, our operating fundamentals once again exceeded expectations, even amidst much of the pessimistic market sentiment surrounding commercial real estate, particularly in the office sector. Very upsetting to me, frankly. Our strong performance has prompted us to raise our full-year guidance once more, underscoring our confidence in our earnings trajectory for the remainder of 2024. This success highlights the exceptional quality of our properties, the exceptional ability of our people, and the expertise of our team who drive our long-term growth and shareholder wealth creation. On that note, I am pleased to announce that Adam Wyll, who's been with us now for 20 years, right?

Correct.

You joined us when you were three, right Adam? We have a young President. Our current President and CEO will be stepping into the role of CEO on January 1, 2025. Adam has been an integral part of our team, contributing at all levels of organization for two decades. His leadership, expertise, executional skills and deep understanding of the real estate industry in our portfolio has been invaluable to our success. Thank you, Adam. Adam's promotion to CEO is a natural progression for both him and American Assets Trust, reflecting the confidence of our Board and I have in his ability to steer our company toward continued success. Congratulations and again, thanks, Adam. To our investors and stakeholders, I want to assure you that this transition will be seamless. I'm in good health, thank goodness, and will assume the role of Executive Chairman on January 1, 2025, continuing to lead our Board Meetings and strategy. Additionally, our incredibly talented, dedicated, long-term, long-tenured executive management team will remain intact, including our CFO, Bob Barton, who suggests he has another decade on him at AAT at least. He joined when he was four. I am continually impressed by this team's cohesion, collaborative spirit, and experience, which fosters a strong sense of trust and mutual respect, enabling them to tackle challenges effectively and drive innovation. My colleagues Adam, Bob, Steve, Chris, and Abigail will cover our various asset segments, financial results and update guidance shortly. But first, I am pleased to announce the Board of Directors has approved a quarterly dividend of $0.335 per share for the third quarter. This decision highlights our strong financial performance and emphasize the Board's belief in our continued success. The dividend will be paid on September 19th to shareholders of record September 5th. I'd like to express our sincere confidence and gratitude for your support and allowing us to steward your company. Now I'll hand the call over to Adam to commence a deeper dive into our quarterly performance and future outlook.

Thanks, Ernest. I am honored to take on the CEO role at the start of 2025. Ernest, your entrepreneurial spirit, visionary leadership, business acumen, and mentorship have been pivotal, not only for my development, but also for the entire management team for which we are immensely grateful. I sincerely appreciate the trust you and our Board have placed in my leadership. I'm also thankful for Bob's support as well as all of my colleagues on our exceptional management team. Our daily collaboration has fostered a true sense of family among us as we've navigated numerous challenges and celebrated many successes over the years. Teamwork and resilience thrive at American Assets Trust thanks to the tone Ernest has set at the top. Turning to our results, as Ernest mentioned, we have once again delivered strong operating performance across all segments of our diversified portfolio, including the highest quality office, retail, multifamily, and mixed-use properties. In times of economic and business unpredictability, it is crucial for us to focus on what we can control. This means adapting to and meeting evolving market demands in a volatile economy, particularly in commercial real estate. We have a proven track record of overcoming challenges with resilience, and we are confident that our high-quality operating platform and real estate portfolio will remain steadfast despite the volatile financial markets. Moving forward, we will continue to base our strategy and decision-making on actions we believe will drive long-term financial outperformance. On the office utilization front, our estimates and those of our tenants indicate that office usage has remained relatively stable from Q1 to Q2. Specifically, San Diego and San Francisco are experiencing utilization rates between 70% and 80%, with San Francisco largely driven by our two anchor tenants at Landmark, while Bellevue and Portland are at about 60%…

Thanks, Adam, and good morning, everyone. First of all, I want to congratulate Adam on his promotion to CEO. Well-deserved and it's been a pleasure working with Adam over the years. I look forward to many more years working with Adam, Ernest, and this great group of professionals at American Assets Trust, which is a tight-knit family focused on creating wealth for all of our shareholders and having fun while we do it. Last night, we reported second-quarter '24 FFO of $0.60 per share. Second quarter 2024 net income attributable to common stockholders was $0.20 per share. Second quarter 2024 FFO decreased by approximately $0.11 to $0.60 per FFO share compared to the first quarter of 2024, primarily due to three things. First, as you may recall, we previously received a one-time $10 million litigation settlement in Q1 '24, which was approximately $0.13 of FFO per share, reducing the FFO by approximately $0.13 per FFO share in the second quarter. Second, our multifamily properties contributed to approximately $0.01 per FFO share of outperformance in Q2 '24 that was not previously included in our updated '24 guidance. And third, our retail properties contributed approximately $0.01 per FFO share of outperformance in Q2 '24, that was not previously included in our updated '24 guidance. These three items taken together reduced the FFO from $0.71 per FFO share in Q1 '24 to $0.60 in Q2 '24. Same-store cash NOI for all sectors combined was 2.1% growth year over year for the second quarter. Breaking it out by segment and each compared to Q2 2023 is as follows. Our same-store office portfolio's NOI was flat in Q2, primarily due to contractual rent abatements related to office lease renewals at our Solana Crossing in San Diego and Corporate Campus East III in Bellevue. Our same-store…

Thanks, Bob. At the end of the second quarter, our office portfolio was 86.6% leased, an increase of 20 basis points over the prior quarter. While we continue to experience some rightsizing of existing tenants and a few small office closings, they were more than offset by Q2 leasing activity as follows. In the second quarter, we executed 18 leases totaling approximately 96,000 rentable square feet, comprised of two comparable new leases for approximately 21,000 rentable square feet, with rent increases of 4% on a cash basis and 26% on a straight line basis, including a 20,000 rentable square foot office tenant at First & Main and Portland. 10 comparable renewal leases for approximately 32,000 rentable square feet, with rent increases of 6% on a cash basis and 10% on a straight line basis, including an 11,000 rental square foot office lease at the Coastal Collection, Torrey Reserve in San Diego and six non-comparable leases totaling approximately 43,000 rentable square feet, including two leases totaling 23,000 rentable square feet at City Center Bellevue, three leases totaling 16,000 rentable square feet at the Coastal Collection, Torrey Reserve in San Diego and a 5,000 rentable square foot lease at first in mainland Portland. And the leasing momentum has continued into Q3 as follows. We've executed seven leases today totaling approximately 57,000 rentable square feet. We have nine deals in lease documentation totaling approximately 79,000 rentable square feet, approximately 62,000 rentable square feet of which is new leasing. Including deals and lease documentation, approximately 55% of the rentable square feet is new leasing, which is the first time since 2019 that our new leasing has outpaced renewables on a rentable square foot basis. Our lease expiration exposure is modest through 2025. We're down to approximately 4% rolling in 2024 given deals signed year…

Good job, Steve, Adam, and Bob.

[Operator Instructions] Today's first question comes from Haendel St. Juste with Mizuho. Please go ahead.

Hi. Good morning and my congratulations to Adam and the team. I had a question I guess for you, Adam, first on, I guess maybe a two-parter. I guess first, more broadly, any G&A impact we should expect from the announcement in this year's guide. And second, I guess I'm curious, I know it's early, but if there's any short, medium term goals or strategic priorities that you might have in mind as you transition to the CEO role?

I don't think -- thanks, first and foremost, Haendel. I appreciate it. Don't anticipate any G&A impact this year. It's all going to be effective as of January next year. So you can rely on Bob's modeling going forward through this year. And in terms of change of what we're looking at, I mean, I think in a lot of respects, it's the same team, the same group of folks, we have the same strategy and not a lot will change on that front. But we'll continue to brainstorm and look for ways to create value. Same thing you've heard from us for the past 10 years.

Got it. Got it. Okay. And then maybe one on the lease termination fee in the quarter. I'm curious what you can tell us perhaps about the tenant, maybe why they terminated? Sounds like you're optimistic on backfilling here in the next couple years, I think Bob mentioned. And then any read-through here for office or are you hearing or expecting any more -- or having any more similar conversations?

Well, on this situation specifically, this tenant was actually one we had on our reserve list that we had mentioned with guidance earlier this year, Haendel. And it was a life science tenant whose FDA approvals were not going in the right direction. And they had a fair amount of cash on the balance sheet. So with their cash burn and their situation going forward, we engaged with them to come up with a mutually acceptable deal. And so, we were pleased with the outcome. I think they were as well. They're also a public company, but as Bob mentioned in his script, this is space at our old headquarters that is -- they did a great build-out. It's a turnkey space. Steve can chime in on the leasing prospects for that space and in general. But net-net, that was a deal where we could have seen this tenant run out of money within 12 months and not seeing the fruits of the lease. And so, it turned out to be a great situation, we think, for both sides.

Yes. The lease rates in place, Haendel, are about $12 annually below market. So we've got a below-market situation. We've got really well built out space and it's a -- it's 45,000 contiguous square feet on one floor, which is unique in the marketplace. So we're encouraged by our prospects there.

Got it. Got it. Steven, while I have you maybe some color. I think you mentioned that new leasing in your office segment outpaced renewals for the first time in years. So I guess I'm curious what the prospects for the near term look like, the level of tours and interest that you're seeing? And then I guess I assume with more new leasing going on than renewals, that should result in a uptick in leasing CapEx. So any color on that would be appreciated. Thanks.

It's interesting. Our CapEx, hitting on that last point, is actually at the historic average over the last seven years. So it hasn't ticked up, although costs are up. So it just speaks to, we're very judicious about what we build out and we're conscientious about what we get back. So we've had numerous instances where we had spaces rolled that we built out in the last seven years that are not expensive to re-tenant. And many renewals are as is. So you'll see that our costs on a weighted average basis are pretty muted. What was your first question in terms of activity? Activity is up. I mean, Q3 or Q2 is 96,000 feet. We're on pace to do much higher than that in Q3. And if this trend continues, it'll be our third-best year from a leasing volume perspective. And keep in mind, 2018 was the Google year and Autodesk year, which was a monster year, so leasing activity is up. And furthermore, the average deal size from a dollar-per-deal perspective is the highest ever in the last seven years. So we're bullish. Our investments in our properties are paying off. Our margins remain good. We are the property of choice. And even with tenants that are rightsizing and we still experience that, they're staying with us. So they may downsize, but they renew their leases at higher rental rates, so we are excited about the prospects.

The property of choice is a very important strategy. We maintain our properties well and we look after our tenant. Steve has introduced a culture of they are not tenants, their customers, which serves as well.

Thank you. I'll yield.

Thank you. And our next question comes from Antara Nag-Chaudhuri with KeyBanc Capital Markets. Please go ahead.

Hi, this is Antara on the line for Todd Thomas. First, just wanted to say congrats on the promotion, Adam, and good luck on retirement, Ernest. I just had a couple...

Wait a minute, I ain't retiring. I've got a lot -- millions of reasons why this company is so important to me. I'm glad Adam has got the job and congratulations, but do not think of me as retiring. God help me if I do.

You knew better, Antara.

All right, got it. But just regarding the balance sheet, I know you paid down the Series F notes using the line and you have a couple of maturities in 2025 that are around $425 million. So do you have any updated thoughts given the move in the debt markets? And are you looking to permanently refinance some of that in advance?

Yes, Antara, this is Bob here. We -- as I mentioned in the script, we paid off $100 million that was due July 19. We have the ability to either write a check for it, we have cash on the balance sheet, or draw on the line of credit. We decide to draw on the line of credit. We keep the cash on the balance sheet, which is earning 5% plus return on that. In terms of the remaining $425 million, that's coming due in 2025, we're on it. We've been monitoring the market since probably early '24 just to see where we are and what's the right time to lock in a swap contract, possibly. We've noticed that the market continues to fall, fall a little bit. We noticed it came down, I think it was like 10 basis points this morning on the treasury. So we have a good team as part of our banking syndicate that we're working with and we're just looking for the right entry point. But if you look at our past experience, we've been very successful at the transactions that we've done. So we're engaged, we're hopeful and hopefully, we put something to bed before the end of this year, hopefully sooner.

Okay, perfect. And are there any other known move-outs in the office segment that we should be aware of as we're thinking about the end of 2024 and just 2025.

What's the question?

Known move-outs. So 2024, no, we're in good shape. 2025, we know the clear result will be vacating four floors. There are actually tenant in five floors and we've already leased one of those floors to an existing subtenant. So we've got four floors to go. We're in negotiations with a portion of one of those floors with an existing subtenant as well.

That's First & Main.

First & Main, yes. And it's a best-in-class building. We're just completing by the end of the year amenities program there as well. And so, we're well positioned to backfill that space. It's beautiful space. It's top of the stack. Building top signage is available, so we're optimistic there.

Office has this aura about it, which is concerning. But there's office and then there's office. First of all, Steve does a great job. Second of all, we've got properties that are very well located. Third of all, we maintain them in first-class shape. Second of all, we treat -- third of all, we treat our tenants as customers and really look after them as best we can. Fourth of all, a lot of the competition is not blessed with the advantages we have. The liquidity we have assures our tenants, A, that we'll maintain the quality of our properties and B, that we'll do the tenant improvements and pay the leasing commissions. So there's office and then there's office. We're not the office that bears the black mark that the market seems to lay on it. We're the best in class. We're proud of what we do and we think that the team does very well of at it and the property speak for themselves.

Okay, got it. Makes sense. And if I could just sneak one more in? What is the progress on leasing at One Beach and La Jolla? I was wondering if you have any additional updates that you could provide on leasing.

Steve, you want to cover that?

You're asking about La Jolla Commons III?

And One Beach.

And One Beach.

Yes.

One beach, I'll just be candid. San Francisco is a small tenant market right now. This building is either a single tenant or three tenants. So it's going to take some time for this average size requirement in San Francisco to get there. Our prospects at Tower III at La Jolla Commons in UTC are excellent.

And I think you covered that earlier.

Yes. We've got a lot of activity there.

If you look at the transcript, I think you covered it very well.

Yes. We're very busy at tower three and as I mentioned, the direct vacancy in that submarket for Class A space is just 4.5%. So it's got to be the healthiest submarket, I think, in the country. So we think our prospects are really good.

And for One Beach, the problem is not ours, the problem is San Francisco's. We have a great property in a great location that's completely repositioned, but the market is the market.

Got it. Thank you.

Thank you for the question.

And our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hi, first, congrats, Adam, and obviously congrats Ernest too on your continued role and engagement, not a retirement. So congrats to everyone. Really, really well deserved. So just on -- just switching gears to office just a little bit here. I think the opening comments seems like there's been sort of a lot of activity in the portfolio and so forth. We're just hoping you can give a little bit of color sort of the broader trends in the market. And do you think that your activity is sort of just more of a reflection of like the quality or are we actually trying to see some signs that the broader market is starting to see better trends?

You know, it's interesting and our -- one of our strongest markets is San Diego. And yet when you read CBRE's account of the market, it's not strong, it's challenging. So I think in large part, it's a flight to quality. And I've said it before, even in a negative net absorption market, which many of our submarkets are, I don't need positive net absorption on the market to succeed, I need people to pick our properties, and we've been fortunate to have that happen. So much of the new leasing is tenants that are -- many of them are downsizing, but when they downsize they're looking for the best environment to get their people back in the office. So they want all of the amenities we've talked about. They want really nice properties. So that's how we're winning. So I would say, our activity is more indicative of a flight to quality than it is the strength of the market. I will say though that up in Bellevue in particular, that market's recovering. Our City Center Bellevue property continues to really do well and then the suburbs are picking up. So I'm encouraged there. We've got 281,000ft in the I-90 corridor. We've got multiple tours and proposals going on there, which is a big chunk of our vacancy in our overall portfolio. And then our two properties up on the 520 corridor are active as well. So Bellevue is improving.

I think, Steve, you paraphrased it which is flight to quality from the landlord's point of view, from the building's point of view, from the financial ability of the landlord to perform from the ability of the landlord to work with the leasing agents. So it's a multi-tier market, and we're, I believe, in the top tier, and that's really significant top tier in all those categories.

Really good point, Ernest. It's not just the real estate itself, it is our balance sheet, Bob's -- our balance sheet is our strength as well as our customer service, also our flexibility. You'll see, actually, our weighted average lease term is shorter this quarter than the previous quarters, in part because we flex with our customers. Some need shorter term solutions that we don't jam them for -- we work with them. And so, that goes a long way, too. We've got a law firm that just expanded into a 4,000-foot spec suite and the principal called me up and said, hey, here's the term I need. I know we're going to revisit our deal 2.5 years from now, but I need this short term expansion. I'll contribute free rent to pay for the tenant improvements and will you work with me? And the answer was yes. So it's all those things. So it's a good point, Ernest, great.

That's great. And then -

…paint it with the same brush that everybody in that part of the real estate market is really disappointing. We are not the average office landlord. We are, I believe, very qualified and do an excellent job.

Great. And then, look, my second question was just sort of on a capital allocation. I mean, clearly, the priorities are leasing capital and rounding out developments that you're working through. But when does sort of acquisitions come back into the picture? And how do you sort of balance that with trying to get leverage below 5 times? So just how you guys think about capital allocation, protecting that balance sheet, but also potentially looking to play offense on the acquisition or is that even the thinking right now?

First of all, we are not looking at acquisitions at the moment. Bob Barton who is, can be violent on occasion once that net debt to EBITDA fall into a range that maintains and perhaps even enhances our credit rating. The secret to that is La Jolla Commons III. And Steve went through that. So at the moment, we're sitting back watching and waiting for the success of La Jolla Commons III to come about and then we'll see what we can do. But I think that at the moment, office is kind of off our wish list because of the reputation it seems to have, even though we continue to perform in a top-tier fashion.

Yes. Let me just add to what Ernest just said, Ron, is that, yes, the capital allocation is really important and we do want to protect the balance sheet. We think it's prudent, like Ernest mentioned, is to let's finish the leasing in La Jolla Commons III. You know, with La Jolla Commons III, we have about $215 million invested over there with a great, great property in the market. And, you know, that's you know -- we need to get a return on that. So let's lease that up first. We are continuing to look at assets, but one thing that we've told many is that we're not looking to buy any more office. We love what we got. We got great assets. Steve is overseeing all that, and we got great returns. We'd like to pivot to multifamily and probably throw in a sprinkle of retail along the way. But if you look at the history of this company, we have dedicated ourselves to creating value for each of our investors. And I got -- I'm a big believer that we will continue to do that from here on out as well.

You know, while we're not acquiring, we are investing daily in improving our properties. So, Jerry, who handles construction, how many projects do you have going now to approve what we have?

We have well over 100 projects going on right now.

We're not sitting back on, you know what. We are waiting for something to happen. We're improving and making it better, and that's an investment without the risk of acquisition.

Great. Super helpful. Congrats again. That's it for me. Thanks so much.

Thanks, Ron.

Thank you. And our next question comes from Dylan Burzinski with Green Street. Please go ahead.

Hi guys. All my questions have been asked, but just wanted to say congrats to Adam. Well deserved.

Thanks, Dylan. Great questions.

See what, he's not only good-looking, he's not only intelligent, he has a great sense of humor.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Rady for any closing remarks.

Thanks to all of you for your interest in our company. We continue to do our best on your behalf. We hope at some point the market will recognize the difference between us and the average real estate company are significant, and the results will prove it. So thank you all for your interest and your good questions.

Thank you. Ladies and gentlemen, this concludes our conference call. You may now disconnect your lines and have a wonderful rest of the day.