AMERICAN ASSETS TRUST, INC. Q2 2026 Earnings Call

Good morning. Welcome to the American Assets Trust Incorporated's second quarter 2026 earnings call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. I would now like to turn the call over to Meleana Leaverton, Associate General Counsel of American Assets Trust. Please go ahead. Thank you.

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 earnings release and supplemental 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.

Good morning, everyone. Thank you for joining us today. At American Assets Trust, we manage our business with patience, discipline, and a long-term focus regardless of where we are in the economic cycle, letting the quality of our assets and our platform do the heavy lifting. That consistency has served us well through the first half of 2026, even as economic conditions and capital markets are still uneven. For the second quarter, we generated $0.51 of FFO per diluted share ahead of our internal expectations. Portfolio-wide same-store cash NOI increased 0.3% or 1.3%, excluding a one-time reserve for an office tenant receivable. At midyear, our current outlook supports the midpoint of our full year FFO guidance range, with potential to move into the upper half if several operating variables develop favorably. Bob will discuss those factors and the key moving pieces shortly.

The broader economy presents a mixed, generally resilient picture. Growth is solid. Unemployment remains low, while hiring has moderated. Inflation, although still above target, eased in the latest reading. For commercial real estate, that backdrop supports tenant demand, while transaction activity has become more constructive. Retail and multifamily assets are commanding strong pricing, a favorable read-through to the value of what we own. Office transaction activity is picking up, providing greater visibility into the value of our office portfolio. Public real estate markets have strengthened as well, with listed REITs outperforming the broader equity market this year on growing investor recognition of durable cash flows, limited new supply, and high replacement costs. Still, performance is highly differentiated. Our job is to keep executing, translating leasing progress into commenced rent, cash flow growth, and ultimately a valuation that better reflects the quality of our portfolio.

Our balance sheet supports that execution with ample liquidity and no debt maturities until March 2027, which we have multiple avenues to address. Today that is leasing-related investment at our newer and repositioned office assets. At the same time, we continue to evaluate external opportunities selectively and have no need to force activity. Turning to portfolio updates. In office, the flight to quality continues to define the market. Nationally, trophy leasing is running above pre-pandemic averages. The supply side is quietly repairing itself, with availability down for eight consecutive quarters, sublease space burning off in our markets, obsolete buildings being converted or demolished, and new construction at generational lows. Tenants are concentrating demand in well-located, amenitized buildings backed by well-capitalized owners. San Diego's headline absorption remains soft but masks meaningful submarket dispersion.

UTC and Del Mar Heights remain among the region's most desirable office submarkets, capturing the majority of leasing activity this quarter, with no new speculative office construction underway. San Francisco leasing has approached pre-pandemic levels, supported by strong demand from AI and other technology companies. On the east side of Seattle just posted one of its strongest quarters of the post-COVID era, with availability falling meaningfully year-over-year led by downtown Bellevue, while demand in the surrounding submarkets is building more gradually. Portland remains a challenged market. Activity is consolidating into the best buildings. We are capturing an outsized share of it. New office construction has largely stopped. Our office portfolio ended the quarter 84.4% leased. During the quarter, we executed approximately 110,000 square feet of office leases, with comparable cash spreads of 9% and straight line spreads of 10%.

Year-to-date, we've signed 14 spec suite leases totaling approximately 76,000 square feet. The program is helping shorten downtime, attract new tenants, and steadily build occupancy. We entered the third quarter with approximately 200,000 square feet of signed office leases that have not yet commenced paying cash rent, representing more than $10 million of annualized base rent. We have another 73,000 square feet in lease documentation and proposals outstanding on nearly 150,000 square feet of new and expansion space. Activity is healthy, although timing can be uneven and larger leases require patience. At La Jolla Commons Tower 3, the building is currently 49% leased, with proposals representing another 33% of the building. With large blocks of quality space scarce in UTC and the campus amenity offering now complete, Tower 3 increasingly stands apart. We are actively engaged with several large prospective tenants.

These decisions take time. Nothing is certain until leases are signed, but the quality of the activity is encouraging. At One Beach Street, the building is currently 35% leased. Its waterfront location and distinctive character continue to resonate with the AI and technology companies driving San Francisco leasing activity. All remaining available space on the first and second floors is now under construction as spec suites, with completion expected over the next few months. Tour activity remains strong. Multiple prospects have shortlisted our second-floor vacancies. As the suites near completion and prospects can evaluate finished, move-in ready space, we expect that interest to translate into more proposal activity. Retail remains one of the tightest real estate sectors, with national availability near historic lows, limited new construction, and growing asking rents. Consumer spending is holding up, although higher prices and softer confidence are making shoppers more selective.

Our centers serve affluent, supply-constrained trade areas with productive tenants that view these locations as strategically important. Our retail portfolio ended the quarter 98% leased. During the quarter, we executed approximately 139,000 square feet of leases, with comparable cash spreads of 3% and straight line spreads of 20%. Tenant health across the portfolio is strong, and our watch list is short. While we monitor consumer health and retailer profitability carefully, the fundamental backdrop for our portfolio is favorable. In multifamily, 2026 is shaping up as a stabilization year rather than a meaningful rent growth year. In San Diego, the recent wave of deliveries has elevated market vacancy to levels not seen in many years, even as the market continues to absorb a meaningful amount of new product. Portland is also continuing to absorb its recent deliveries, while rent growth across both markets has remained modest.

Encouragingly, new development activity has slowed materially in both markets, which should gradually improve the supply-demand balance over the next few years. In the meantime, our teams are concentrating on occupancy, measured concessions, resident retention, and expense control. Excluding the RV park, the portfolio ended the quarter over 94% leased. In San Diego, our communities ended the quarter 96% leased, and renewal rents grew 5%, while new lease rents declined 2%, resulting in blended growth of 3%. Consistent with prior years, occupancy at Pacific Ridge dipped seasonally at the start of the summer due to student turnover, and we expect it to rebound above 90% as we move through the peak leasing season and into the fall semester. In Portland, Hassalo on Eighth ended the quarter 88% leased, and renewal rents grew 2%, while new lease rents grew 1%, resulting in blended growth of 2%.

The urban Portland market is competitive. Absorption has improved, and new deliveries are moderating. Our near-term priority is occupancy and retention as conditions normalize. Of note, during the quarter, each of our office, retail, and multifamily portfolios achieved record average base rents, underscoring the underlying strength of our assets. At Waikiki Beach Walk, retail strength and bad debt collections offset rate pressure at the hotel. The Hawaii tourism backdrop was mixed. Oahu visitor arrivals were lower year-over-year in the spring, and rate competition persisted, particularly for value conscious domestic travelers. Even so, our Embassy Suites again led its competitive set in both occupancy and RevPAR, and summer booking pace is running ahead of last year, aided in part by demand associated with the Rim of the Pacific, or RIMPAC, military exercise conducted on Oahu.

Our team remains focused on rate integrity, cost control, and performance across both components of this irreplaceable fee simple asset. Our board has declared a quarterly dividend of $0.34 per share, payable on September 17th to shareholders of record as of September 3rd. As we have discussed, we expect dividend coverage to improve over time as signed office leases commence and our leasing and redevelopment investments, including the office spec suite program, contribute more meaningfully to cash flow. As always, we will continue to evaluate the dividend and all capital allocation decisions prudently. We also recently published our 2025 sustainability report entitled "Committed to What Matters," now available on our website. Our approach to sustainability mirrors how we run the business. We pursue initiatives that strengthen resilience, support our stakeholders, and make economic sense over the long term.

Thank you to the many team members whose work made this report possible. In closing, at the midpoint of 2026, we are executing the plan we laid out entering the year. Advancing office leasing and converting it into commenced revenue, sustaining the cash flow from our retail and multifamily platforms, operating our hotel prudently through a choppy tourism environment, and remaining disciplined with our capital. Our results reflect the durability of irreplaceable coastal real estate operated through a vertically integrated platform and managed with a long-term perspective. With that, I will turn the call over to Bob, who will walk through the financial results and our outlook in more detail. Bob? Thanks, Adam. Good morning, everyone.

Last night we reported second quarter 2026 FFO of $0.51 per diluted share and net income attributable to common stockholders of $0.09 per diluted share. FFO increased modestly from the first quarter, primarily driven by incremental rental income from recently commenced office leases at City Center Bellevue and One Beach. As Adam mentioned, portfolio-wide same store cash NOI increased 0.3%, or 1.3% excluding a one-time reserve for an office tenant receivable, in line with our expectations. This also impacted our quarter-over-quarter results. We expect it to grow in the back half of the year as previously signed leases start paying cash rents. Breaking that down by segment compared to the second quarter of 2025.

Office same store NOI increased 0.4%, primarily due to higher base rent from recently commenced leases at La Jolla Commons Tower 3, partially offset by scheduled tenant expirations at 14ACRES, formerly known as Eastgate. Excluding the one-time reserve, office same store cash NOI would've been 2.4%. Our retail same store NOI declined 0.4%, reflecting the absence of a one-time real estate tax refund received during the second quarter of 2025. Our multifamily same store NOI increased 0.9% or 1.6% excluding the RV park, driven by stronger rental income, particularly at Hassalo on Eighth and Genesee Park, partially offset by higher real estate tax expense at Pacific Ridge. Our mixed-use same store NOI increased 0.6% as a 14% increase in retail NOI resulting from a bad debt collection, which was offset by lower ADR and higher operating expenses at Embassy Suites Waikiki.

During the quarter, occupancy increased to 90.5% compared to 86% last year. RevPAR increased 0.9% to $308. ADR decreased 0.4% to $340. Our hotel NOI was approximately $2.5 million compared to $2.9 million in the prior year quarter. Turning to our balance sheet and liquidity, we ended the quarter with approximately $610 million of total liquidity, including $110 million of cash and $500 million available under our revolving credit facility. As discussed during our first quarter earnings call, we successfully completed the recast and upsize of our credit facility on April 1st, extending the maturities of both our $500 million revolving credit facility and our $100 million term loan to April 2030. Net debt to EBITDA was 6.7 times on a quarterly annualized basis and 6.9 times on a trailing 12-month basis.

Our long-term target remains five and a half times or below, while both our interest coverage ratio and fixed charge coverage ratio were 3.0 times. Stepping back, we believe the key takeaway this quarter is that our portfolio continues to perform as expected while maintaining meaningful embedded earnings potential. The most significant opportunity to improve both earnings and leverage remains the lease-up of our existing office portfolio. Specifically, La Jolla Commons Tower 3 represents approximately $0.15 per share of FFO. One Beach Street represents approximately $0.08 per share of FFO. Suburban Bellevue represents approximately $0.06 per share of FFO. Once stabilized, these properties are expected to generate approximately $0.29 of incremental FFO. Of that total, roughly $0.14 will come from leases already signed, with the remaining $0.15 dependent on speculative leasing.

Through the first half of 2026, we have recognized $0.03 of the signed lease contribution, with the remaining $0.11 expected to be realized as tenants take occupancy and rent commences. As these recently signed leases commence and additional vacancy is absorbed, we expect meaningful improvement in both FFO and our leverage metrics. Beyond leasing, our liquidity gives us the flexibility to fund that lease, and to act on capital allocation opportunities as they arise. Turning to our guidance, we are reaffirming our full year FFO guidance range of $1.96-$2.10 per diluted share, with a midpoint of $2.03. This guidance reflects the continued stability of our diversified portfolio, supported by leasing momentum, contractual rent growth, and disciplined expense management.

Based on our current outlook, we believe we are well positioned to achieve the midpoint of our guidance range, with the potential to move further into the upper half of our guidance range should several operating trends continue to develop favorably, including retail tenants currently reserved for bad debt continuing to satisfy their rental obligations, office lease commencements occurring earlier than currently anticipated, multifamily occupancy and rental rate growth exceeding our current expectations, and continued improvement in tourism demand supporting performance at Embassy Suites Waikiki. As a reminder, our guidance excludes the impact of future acquisitions, dispositions, capital markets activity, or debt refinancings that have not yet been announced. We believe the portfolio today contains meaningful embedded earnings growth. As such, leasing continues to convert signed leases into cash flow. We expect earnings, EBITDA, and leverage to improve through execution.

Combined with our diversified portfolio and strong liquidity position, we believe we are well positioned to create meaningful long-term shareholder value.

With that, I'll turn the call back over to the operator for questions.

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 speakerphone, 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 Todd Thomas of KeyBanc. Go ahead, please. Hi, good morning.

This is Sean Glass on for Todd. I wanted to start on office leasing. Coming into the year, I think you laid out a path from around 83% lease, expecting 300-400 basis points of occupancy from no move-outs, then back up to the mid-80s by year-end. Could you update us on where you expect office occupancy to be at by year-end now, and specifically, what level of occupancy is contemplated in guidance?

Hey, Sean, it's Adam. Let me kick that off, I'll let Steve kind of give a little bit more details. What I would tell you is the goal hasn't really changed, but the outcome is a bit more binary than it was earlier this year. We mentioned on earlier calls that we got a Genentech give-back space, now that's in our planning. Separate from that, we have several large requirements sitting in proposal right now that are a bit too close to call. Those deals are really the difference. If we land a couple of them on that timeline we're working towards, we're inside of the range. If they push into next year, we could finish slightly below it. We'd rather let you know honestly now than manage you to a number and have to explain it later.

What I'd also say is that we're not going to chase a lease percentage at the expense of rate, term, or credit. A deal that signs next year at the right economics to us is worth a bit more to this company than a deal we force into December. Look, we got the right product, the right team, the right brokers, and the demand in these markets is real, and we think we'll win our share of it. The question for us is a bit more of timing. Maybe Steve can layer on a little bit more.

I'll say now you covered it all. We do have several large prospects, especially in UTC. Large tenant demand is increasing, including an RFP that we expect to get for 100,000 to 120,000 feet, which could figure not into Tower 3, but actually Tower 1 activity. Binary is a good term for it. We've got multiple proposals on the same space, and we just don't know how those are going to play out. We're at the finish line on one in particular, and we'll see how that goes. Behind it, we've got additional tenant demand that we know is coming. Another two-floor prospect that we'll be touring the market in the next few months. It's a wait and see, and we just can't predict it at this time.

Okay. That's helpful. Following up, could you talk a little about the tenant at Torrey Reserve? Maybe when does the lease expire, and what might be anticipated there in the near term?

Are you talking about the reserve we mentioned?

Correct. I'll take a stab at this, and Bob can chime in.

This was an office tenant we had on our watch list last year in 2025, Sean. We did not include any revenue from that tenant in our 2026 guidance. In the second quarter of this year, we reserved about $1.1 million, $1.2 million, and that's cash receivables and straight-line rent that we had previously accrued in prior years. We'll continue to pursue recovery of that, but no recovery is assumed in our outlook for this year. Most importantly, we've already backfilled that space, so the forward operating impact is limited. It was kind of an accounting adjustment. Did I get that right, Bob?

Yeah. You sound like you're the CFO. That's exactly correct. We just wrote off the bad debt expense and the straight-line receivable that was on the books. We'll see what happens. Got it.

That makes sense. Turning to the developments, it sounds like there's a lot of activity at La Jolla and One Beach. Could you give us some color on the leasing pipeline there? Are there any additional leases out for signature or in documentation? Where you might expect each asset to be by year-end.

Great question. We just touched on that and some big activity that will come to conclusion in the next, could be days for one of them. There are several out there. Hard to predict. I'll tell you, at La Jolla Commons, we spec'd out the second and fourth floors. We have one suite on each floor remaining out of that spec suite effort, and we have proposals out on one of those, and we have another spec suite on seven that we're building in relation to having to build the corridor on the seventh floor for Baker Tilly, and we have proposals on that space. The rest of the activity is on the full floors on eight, nine, and 10.

Two of the deals that we're in proposals on are for 9 and 10, then we have a third that's in proposals for 8, 9, and 10. That's where we are with that. In terms of One Beach, tour activity has been excellent in spite of the construction that Jerry's people are doing. It's difficult to tour construction on every space in the building except for Suite 300, which is occupied now. That being said, we think we've sent out a final proposal, hopefully, on Suite 250, with a prospective tenant, then we've been shortlisted for Suite 200 by two others. We don't have the RFPs or proposals in yet, but we expect those to come.

The second floor is in play, then we've got some prospects for our smaller first-floor suite. In that marketplace, until you're within about 60 days of delivering a space ready for occupancy, the tenant activity is hesitant to commit to it. We're nearing completion in the next, what, 60 days, Jerry?

Yep. With that completion, we expect to convert tours to proposals to deals.

Okay. Thank you. That's great color. If I could slip one more in, just switching gears, as you mentioned, you're prepared to mark. We've seen transaction activity pick up pretty meaningfully. You guys sold Del Monte Center last year. Are you considering any capital recycling in the current environment?

That's a good question, Sean. We're looking at every asset in our portfolio through the same lens, which is whether the capital is better deployed somewhere else on a risk-adjusted basis. Two things have to be right for us to transact. First, the pricing would have to be compelling, and we would need line of sight on a replacement that maintains or improves the overall portfolio quality. Second, the basis in what we're selling is likely fairly low, so the tax consequences are real. Any transaction would need to be structured in a way that is efficient for AAT and the shareholders. The exchange matters as much as the exit. It's kind of a long-winded way of saying we're looking, but we're not going to force anything. We have been actively pursuing things here and there that we think make sense.

Nothing to announce at this point.

Okay. Thank you. The next question comes from Haendel St. Juste of Mizuho.

Go ahead, please. Hey, guys.

Good morning. Thanks for taking my question. I wanted to follow up on the question around the office reserves. Adam, you mentioned you have someone lined up to take the space. Can you give us a sense of the timing there, when that new tenant would be taking the space? When would cash flow start? Ballpark level of rents you're expecting?

May 1st commencement, lease is signed. I think the rent was $63, $64.

Okay. I'm assuming there's some free rent period before you get to the cash flow.

Give you the details. Let me find it here.

Yep. Bear with me. Okay.

Stratos. May 1st commencement, 84 months, seven months free, 3% bumps.

I was right, it's a $63 start rate.

Got it. Appreciate that. We also saw a nice uptick in the office cash spreads from last quarter, 4.8% to now over 9% this quarter. Is that lease mix driven? Do you think it's durable? Curious kind of how you see that trend line over the next, I don't know, foreseeable future, couple quarters.

Well, if you look back over years, we've been managing to thread the needle of working on occupancy while delivering positive cash spreads pretty consistently. They may vary from quarter to quarter, but I think the spreads are a testament to the quality of the assets, especially as we've improved them even further with the addition of amenities and some renovations. Incidentally, we're down to our last lobby renovation on our office portfolio, which is happening at Southport One. It's a Coastal Collection, Torrey Reserve. That's where this newest lease to backfill the troubled tenant is, along with We're close to letter of intent on a second floor, and then an early renewal of the top two floors, which is a major law firm. That's the last big lift in terms of capital in this office portfolio.

Couple that with completing our spec suite initiative, our capital demands are going to drop pretty significantly going forward because the heavy lifting has been done, and it's all about execution. The great news about the spec suite program is quickly getting people in and paying rent. We typically spec suites below 10,000 feet, and of the 207,000 feet of new leasing, below 10,000 feet, 12 of the 17 deals were 71% by deal, 62% by square footage were done as a result of that spec suite initiative. Even above 10,000 feet, we did 130,000 feet of new deals. Two of those were spec suites. It's working. We don't even have to build it necessarily to lease it. We've leased many of these suites when they're in the design phase.

If you look at the spec suite program we've got in place, it represents 7.1% of the portfolio. That's a good path to 90% plus leased, and we're going to get there most quickly by having those suites ready to go.

Haendel, spreads in any given quarter are largely a function of which leases happen to roll recently. With our quarterly denominator being relatively small, one or two leases can move that number pretty easily. We expect the portfolio to continue producing positive spreads over the long term, but we're not going to guide to a number, and we'd expect variability quarter to quarter. We'd say look back four quarters at a time, and you can see the trend.

Yeah. Yep. Fair enough, appreciate the color there, Steve.

Last one, if I may, for Bob. You quantified $0.29 of FFO upside potential, $0.14 from leases already signed. Curious if you could give us a little sense of timing on that $0.14, how much do you expect this year versus next year, maybe 2028, just ballpark, trying to get a sense for at least of the visibility you have, how that's going to lay out the next couple of years. Thanks. Well, of that $0.14, that's coming from leases already signed.

Steve, do you have any input on that in terms of the timing of that? Of the $0.14, we got $0.03 that's already on the books, but now we need the remaining.

I've got that one, actually.

You got that? Yeah. So far, we've recognized, Haendel, $0.03 this year.

There's going to be another $0.02 in the back half of the year. Five cents for this year that's in place, and then $0.09 next year based on in-place signed leases.

Got it. Great. Helpful. Thank you, guys. I'll yield. Thank you, Haendel.

The next question comes from Ronald Kamdem of Morgan Stanley. Go ahead, please. Hey, guys.

This is Matt on for Ron. Thanks for taking the time. I just wanted to ask about some of the top tenants in the office space. Just looking at the Smartsheet specifically, it looks like you guys took care of about 20-ish thousand square feet of the expiration. Could you guys just talk to the dynamics there, any other large expirations coming due, and if there's been any activity on the Genentech space?

With regard to Smartsheet, I think they've shed all the space they're going to shed. They remain committed to the second-floor space, which is roughly 35,000, 36,000 feet. We backfilled their third-floor space, which was coming back in October. It's already leased. The tenant, we got access to the space early so that the tenant could do improvements and occupy the space before that was ever going to expire. That building has consistently performed in that regard, where we've had churn or spaces coming back. They get backfilled quickly. We're sitting at 4.9% vacancy right now at City Center Bellevue. We're doing very well there. With regard to Genentech, no hits on Genentech yet. It's three floors, two of which are interconnected by a stair. It's beautifully built out. It's not, in our opinion, going to be a heavy lift to relet it, but it's a big chunk of space in a very challenged market.

That being said, we've had recent success at First & Main, where we just leased about 31,000 feet to an accounting firm that was just acquired by a bigger accounting firm. That lease will commence, I think, next August. It's going to be a big lift in terms of construction and tenant improvements. We've got other activity in that building as well as Lloyd. In spite of that being a very challenging market, I think Adam talked about the flight to quality and the results we're achieving are due to that flight to quality.

Got it. Just looking to Bellevue more generally, I know there's been a lot of leasing optimism from AI tenants. Would you guys say you guys are seeing signs on the ground that the tenant interest is broadening at all, or would you just say it's more still concentrated towards AI, and just more of the same there?

It's not all AI. It's broader. It's a whole spectrum of companies. I'm just looking at 14ACRES. I just look back over time. This year, we leased Kent Outdoors 10,000 feet. That's their corporate headquarters. They make kayaks and all kinds of outdoor equipment. They're owned by Goldman Sachs. Lydig Construction, Evergreen Law. Back to last year, MacDonald-Miller Facility Solutions, which is an engineering firm, Hensel Phelps Construction. We actually have become kind of a construction hub at 14ACRES. We've done multiple construction companies there. We're also seeing some healthcare-related uses because the neighborhood that it sits in, which is highly affluent, we're getting some traction in some spaces there. It's broader for us. Especially at City Center Bellevue, we've done AI deals in spec suites, where they're early stage.

When I say early stage, they have $100 million in funding, they need to be in space right away. We've done well there. Again, I've just outlined a bunch of other types of tenants that are leasing space as well.

Got it. Thank you, guys.

Thanks, Matt. This concludes our question and answer session.

I would like to turn the conference back over to Adam Wyll for any closing remarks.

Thanks again, everybody. We appreciate all your support and those who attended our call or listened to it on recorded line. Your support of AAT means a lot to us. We hope you enjoy the rest of your summer and stay safe, and go Padres.