American Assets Trust (AAT) Q1 2023: Retail Leasing Spreads Jump 28% as Diversification Shields Against Office Headwinds
American Assets Trust’s diversified portfolio delivered above-guidance results, powered by double-digit retail leasing spreads and resilient multifamily growth. Operating momentum in retail and apartments offset ongoing office sector uncertainty, prompting management to lift full-year guidance. Investors should focus on segment-level resilience and capital allocation discipline as AAT navigates macro headwinds and sector skepticism.
Summary
- Retail Leasing Momentum: Leasing spreads surged, highlighting pricing power in core markets.
- Multifamily Outperformance: Apartments exceeded expectations, driving higher guidance.
- Office Stability Signals: Larger tenant renewals and amenity upgrades underpin office retention, despite market skepticism.
Business Overview
American Assets Trust (AAT) is a diversified real estate investment trust (REIT) operating a portfolio of office, retail, multifamily, and mixed-use properties across high-barrier, coastal U.S. markets. Revenue is generated from leasing space to tenants in these segments, with retail and multifamily providing counter-cyclical stability to office exposure. The company’s asset class diversity and geographic positioning are central to its risk management and growth strategy.
Performance Analysis
AAT’s first quarter results exceeded both internal and external expectations, with Funds From Operations (FFO) per share outperforming guidance due to robust retail and multifamily results and a non-recurring litigation settlement. Retail assets delivered a 9.5% cash leasing spread and 28% straight-line increase on new Q1 deals, with high occupancy and tenant demand in supply-constrained trade areas. The multifamily segment saw same-store cash NOI rise 13% year over year, driven by strong rent growth in San Diego and Portland, with new leases in San Diego now 30% above pre-pandemic levels.
Office remains challenged by hybrid work and tech layoffs, particularly in Bellevue, but AAT’s portfolio quality and amenity investments have supported 91.4% same-store occupancy and renewal activity at above-market rates. The mixed-use segment, anchored by Waikiki Beachwalk Embassy Suites, outperformed expectations with 19% NOI growth, though management remains cautious given short booking windows. Liquidity stood at $487 million, and leverage was 6.1x net debt to EBITDA, with a target to reduce further.
- Retail Leasing Strength: New and renewal deals delivered outsized spreads, validating asset positioning and tenant mix.
- Multifamily Rent Resilience: San Diego and Portland apartments posted double-digit rent growth, with minimal concessions.
- Office Retention Focus: Weighted average lease term stability underpinned by 10-year renewals, even as market headwinds persist.
The combination of retail and multifamily outperformance drove a 2.2% increase in midpoint FFO guidance, reflecting embedded growth and operational discipline. Capital allocation remains conservative, with no share repurchases planned as the company prioritizes scale and balance sheet strength.
Executive Commentary
"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."
Ernest Rady, Chairman and CEO
"Q1 results came in approximately 4.5 cents higher than our own internal forecast...primarily comprised of multifamily and retail portfolio outperformance."
Bob, CFO
Strategic Positioning
1. Asset Class Diversification as Volatility Buffer
AAT’s portfolio mix—spanning office, retail, multifamily, and mixed-use— is core to its ability to weather sector-specific downturns. Retail and apartments are acting as shock absorbers, offsetting office sector volatility and supporting consistent cash flow.
2. Retail Dominance in Supply-Constrained Markets
Retail assets are concentrated in high-barrier, densely populated areas, driving high occupancy and robust leasing spreads. Alamo Quarry’s near-full lease-up and strong tenant retention showcase the value of location and tenant mix in sustaining pricing power.
3. Multifamily Pricing Power and Demographic Tailwinds
San Diego and Portland apartment assets are benefiting from low unemployment and high homeownership costs, enabling rent increases well above inflation and minimal concessions. Net effective rents are now 30-50% above pre-pandemic levels, demonstrating strong embedded growth.
4. Office Portfolio: Flight to Quality and Amenity Investment
AAT is leveraging building upgrades—fitness centers, outdoor spaces, and lounges—to attract tenants seeking higher-quality space. The company reported tenants are signing longer-term leases, including several 10-year renewals, as larger users re-engage in the market.
5. Conservative Capital Allocation and Balance Sheet Discipline
Management is prioritizing leverage reduction and scale over share buybacks, reflecting a focus on long-term value and resilience. Liquidity remains robust, with $400 million undrawn on the revolver and a clear target to reduce net debt to EBITDA below 5.5x.
Key Considerations
This quarter’s results highlight the importance of asset class diversification and operational discipline in an uncertain macro and sector environment. Investors should weigh the following:
Key Considerations:
- Retail Leasing Outperformance: Sustained double-digit leasing spreads suggest AAT’s retail assets are gaining market share and pricing power.
- Multifamily Growth Sustainability: Rent growth is outpacing expectations, but future increases may moderate as markets normalize.
- Office Market Resilience: Amenity upgrades and longer lease terms are partially offsetting the impact of hybrid work, but Bellevue remains a watchpoint.
- Capital Allocation Caution: No share repurchases planned as management focuses on reducing leverage and pursuing scale.
Risks
Office sector headwinds remain material, especially in tech-heavy markets like Bellevue, where hybrid work and layoffs depress utilization. Short booking windows in the hotel segment add visibility risk, while retail and multifamily growth could moderate if economic conditions deteriorate. Rising rates and capital market volatility also challenge refinancing and acquisition economics, though AAT’s liquidity provides a buffer.
Forward Outlook
For Q2 2023, American Assets Trust guided to:
- Maintained quarterly dividend of $0.33 per share
- Continued high occupancy in retail and multifamily
For full-year 2023, management raised FFO per share guidance to a range of $2.23 to $2.33, with a midpoint of $2.28.
- NOI growth expected in all major segments, led by multifamily and retail
Management cited embedded growth, strong leasing pipelines, and disciplined expense management as drivers of the improved outlook, while cautioning that office and hotel visibility remains limited.
- Retail and multifamily expected to remain resilient
- Office segment guided for modest NOI growth, with focus on retention and amenity-driven leasing
Takeaways
AAT’s Q1 results reinforce the thesis that asset class diversification and operational discipline can offset sector-specific volatility.
- Retail and Multifamily Strength: Outperformance in these segments is driving guidance increases and providing a buffer against office uncertainty.
- Office Retention and Quality Focus: Longer-term renewals and amenity investments are supporting occupancy, but the sector remains a risk factor.
- Monitor Capital Allocation: Investors should watch for progress on leverage reduction and any shifts in acquisition or development strategy as market conditions evolve.
Conclusion
American Assets Trust’s Q1 highlights the value of a diversified, high-quality portfolio in navigating macro and sector headwinds. The company’s ability to drive leasing spreads and rent growth in retail and multifamily, while maintaining discipline in office and capital allocation, positions it for relative outperformance in a volatile REIT landscape.
Industry Read-Through
For the broader REIT sector, AAT’s results underscore the importance of asset mix and market selection. Retail and multifamily assets in supply-constrained, high-demand markets are demonstrating pricing power and occupancy resilience, even as office lags. Office landlords with high-quality, amenitized portfolios may outperform peers, but sector-wide skepticism is likely to persist until utilization and demand trends improve more broadly. Investors should favor REITs with diversified income streams and conservative balance sheets as macro and capital market volatility continues to test sector fundamentals.