Good morning, and welcome to the American Assets Trust First Quarter 2023 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. As a reminder, today's conference call 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. It is now my pleasure to introduce your host, Mr. Adam Wyll, President and COO for American Assets Trust.

Welcome to American Assets Trust First Quarter 2023 Earnings Call. Yesterday afternoon, our earnings release and supplemental information were furnished to the SEC on our Form 8-K. Both are now available on the Investors Section of our website, americanassetstrust.com. With that quick intro, I'll turn the call over to Ernest Rady, our Chairman and CEO, to begin the discussion of our first quarter 2023 results. Ernest.

As we are all acutely aware, the market has become quite pessimistic about most public REITs over the past year, particularly those with any significant office exposure. American Assets Trust, along with virtually all of our peers continues to be faced with many macroeconomic headwinds, including volatility in the capital markets, rising interest rates, tech industry layoffs and the disruption caused by regional bank failures. However, a silver lining for us is that because we have been cycle tested many times over our 55-year plus history, we believe we have proven that we are prepared for almost any future scenario we may face, whether it be inflation, recession, depression, expansion or most likely the unexpected. We attribute our resilience to several factors, including the strength of our irreplaceable portfolio and its asset class diversity, our conservative balance sheet and ample liquidity. Our efficient operating platform and our talented people, each of which guides us as we exercise business prudence and discipline in every decision we make. As you know, our thoughtfully assembled portfolio is comprised of a combination of very high-quality office, retail, multifamily and mixed-use properties and desirable high barrier to markets in the path of growth, education, innovation and mass transportation. Since the founding of our company over 55 years ago, we have seen firsthand that asset class diversity makes our portfolio more resistant to volatility as each sector has a different times enjoyed periods of growth and weathered periods of adversity. Adam, Bob and Steve will go into more detail on our various asset segments, financial results and guidance. But first, I want to mention that the Board of Directors has approved and maintained a quarterly dividend of $0.33 per share for the second quarter, which we believe is supported by our financial results and is an expression of our Board's confidence in the embedded growth of our portfolio this year and beyond. The dividend will be paid on June 22nd to shareholders of record on June 8th. Again, on behalf of all of us at American Assets Trust, we thank you for your confidence and continued support in allowing us to manage your company. And in order to express our appreciation to those of you who are able to attend and assist in planning our Hawaii Investor Tour last month, showing our trophy properties in Waikiki Beach Walk, Waikele Centre on the island of Oahu. I'm now going to turn the call back to Adam.

We are pleased to report that despite the macroeconomic challenges mentioned by Ernest, we have continued to generate solid operating results from our diversified portfolio of high-quality office, retail and multifamily properties. Our best-in-class retail properties, which reside in supply-constrained intensely populated markets with favorable demographics have remained well leased with high foot traffic and are dominant in their trade areas. Our comparable retail leasing spreads continued their strong trajectory over the past year with a 9.5% increase on a cash basis and 28% increase on a straight-line basis for Q1 deals and a 9.7% increase on a cash basis and 21% increase on a straight-line basis for the trailing four quarters. Additionally, we expect to backfill the remaining 25,000 feet of our former Bed Bath & Beyond space at Alamo Quarry this quarter, which would bring that property to 99% leased. We also have recently signed amendments with Regal Cinema at our Alamo Quarry and Party City at our Gateway Marketplace, each stronger performers in their respective portfolios. Both are pending court approval and successful exits from bankruptcy, which appear on track for later in Q2 or Q3. Meanwhile, our multifamily communities, which reside among strong demographics with fairly low unemployment rates, strong income growth and high homeownership costs post results much better than our expectations in Q1. Despite some softening of rate increases, we saw our San Diego multifamily percentage leased, excluding our RV resort increased from 92% to 94% over the past quarter. And our same-store multifamily portfolio realized same-store cash NOI growth of 13% in Q1 2023 as compared to Q1 2022. Furthermore, in Q1 and San Diego, we saw leases on vacant units rent at an average of approximately 2% over the prior rates, while rates on renewed units increased on average of 11% over…

Last night, we reported first quarter 2023 FFO per share of $0.66 at first quarter 2023 net income attributable to common stockholders per share of $0.27. First quarter 2023 FFO increased by approximately $0.10 to $0.66 per FFO per share compared to the fourth quarter of '22, primarily from the following three items: First, $0.08 of the increase in FFO is related to the previously disclosed nonrecurring litigation settlement in January 2023 related to certain building systems at our Hassalo on Eighth important. Second, our multifamily portfolio performed approximately $0.01 per FFO share better than the fourth quarter of 2022. Third, our mixed-use portfolio performed approximately $0.01 per FFO share better than the fourth quarter of 2022 due to the outperformance of our Embassy Waikiki Beach Walk. Combined, these three items reconcile our results from Q1 2023 back to Q4 2022 of approximately $0.56 per FFO share. Looking at it from a different perspective, Q1 results came in approximately $0.045 higher than our own internal forecast. That's $0.615 per FFO share, which is primarily comprised of the following three items. First, our multifamily portfolio outperformed by approximately $0.02 per FFO share better than originally projected. Second, our retail portfolio outperformed by approximately $0.015 per FFO share better than originally projected. And third, our Embassy Suites Waikiki Beach Walk outperformed by approximately $0.01 per FFO share better than originally projected. Same-store cash NOI in Q1 2023 ended at approximately 6.5% growth year-over-year for the first quarter. Same-store office grew at approximately 3.2% in Q1 because of the remaining lease abatements burning off for one of our large tenants at our Landmark at One Market Street in San Francisco. The retail sector had a 6% increase in same-store cash NOI in Q1 as a result of leases starting at our Carmel Mountain…

At the end of the first quarter, our office portfolio was 88% leased with our same-store portfolio now at 91.4% leased, primarily due to rightsizing at City Center Bellevue as follows: Cisco Systems renewed in 10,508-rentable square feet and vacated 18,907 rental square feet. In Zenoti renewed 12,232 rental square feet in Q2 2022, letting 11,938 rentable square feet expire this quarter. Both of these leases were well below market. The Cisco Systems ending rate was approximately $48 full-service gross versus the renewal start rate at $65. Likewise, the Zenoti ending rate was approximately $32 triple net versus the renewal start rate of $35. Even with the headwinds of rightsizing and work from home, the quality of our office portfolio continues to yield strong rent growth. In the first quarter, we executed 15 leases totaling approximately 80,000 rentable square feet, including one comparable new lease for approximately 2,300 rentable square feet with increases over prior rent of 21% on a straight-line basis and seven comparable renewal leases totaling approximately 54,000 rentable square feet with increases over prior rent of 23% on a straight-line basis. Of note, we have agreed to terms to renew Autodesk in approximately 93,000 rental square feet at Landmark with lease amendments up for review. We intend to provide insight into those renewal terms once fully executed. And we are encouraged by our current tour and proposal activity across our portfolio, including the emergence of some larger users. We continue to believe that strategic investments in our portfolio will position us to continue to capture more than our fair share of net absorption at premium rents despite current market headwinds. Those strategic investments include exceptional new amenities such as fitness centers, bike hubs, conference centers, outdoor spaces and/or lounges at most of our office properties. While we are not immune to potential additional attrition due to current conditions, we believe that the flight to quality will continue to drive solid performance from our office portfolio. I'll now turn the call back over to the operator for Q&A.

[Operator Instructions]. Our first question is from Haendel St. Juste of Mizuho.

Can you comment on foot traffic and physical occupancy on your office assets, how has it trended over the last few quarters? And what have your tenants been communicating with you regarding badge swipes and physical occupancy?

I would say the trend is up. It's clearly up. And our tenants want their people back in the office. And so we want some new office leases for that reason where we amenitize the space, we've amenitized the buildings, and they made the choice that come to our property to take advantage of that so that people would come back to work. Things are trending positively. And even in San Francisco, with Google and Autodesk, both are ramping up the occupancy of the space.

Just one or two more here. Specific with office, your walls have hung around five years for a couple of quarters now. Is that a function of tenants requesting shorter deals? Or what should we expect that wall number to go looking forward on new leases, what do you guys forecasting on that?

And the weighted average lease term is largely determined by the size of the tenant. But what we are seeing, I mentioned in our comments that we are seeing larger tenants become active. And those larger tenants are doing 10-year deals. We just did a 10-year renewal with one of our existing customers has been with us for 24 years. And I've got another customer that's relocating and expanding at La Jolla Commons into 24,000 feet, and that's a 10-year commitment as well, plus any proposals that we're engaged with in terms of La Jolla Commons 3, are longer-term deals as well. We're seeing tenant step up, even smaller tenants, we just came to terms with a smaller accounting firm that was previously just kicking the can year-over-year. Now they're committing to a 5-year term. Just across the board, we're seeing longer commitments and tenants stepping up.

Are you targeting a biotech or pharma or anything like that less given recent issues with VC financing?

We're an office player. We do have some life science companies that are tenants of ours that aren't lab uses. We've got several, their headquarters is office space, and they have their labs elsewhere. But it's not a specific target. It's a function of where we are in terms of our location and that industry continuing to grow here.

The next question is from Michael Manos with Green Street.

Just quickly, and I know it kind of comes up on most of these calls, but on our numbers, you guys are kind of, call it a double-digit implied cap rate. Just curious as kind of the public market has presented this opportunity in your own stock, how you guys and the Board kind of way share repurchases in this environment?

Bob said earlier that our target is to reduce our net debt to EBITDA. We also are a midsized REIT, but on the small side, we'd like to get larger if we could, for the economies of scale. Stock repurchases are really not on our agenda.

And then one just quick follow-up. Kind of in the local media mileage tax has been proposed in San Diego. Curious if you guys have any insight to that? And then how that may potentially impact both your office, retail and multifamily portfolios?

I can answer that personally, and I think it's preposterous and probably won't get passed, but you never know. Government has done things that have surprised us all. And I would be surprised if that passed.

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

Thanks particularly to the management on this call, you're exceptional and your much appreciated and much admired. And for the questions of our investors, we appreciate your interest, and we hope you maintain that interest, and we hope we continue to satisfy you. Thank you all for your participation, and look forward to seeing you soon.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.