American Assets Trust Inc (AAT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 American Assets Trust's earnings conference call. My name is Derek, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the conference over to Mr. Adam Wyll, Senior Vice President and General Counsel of American Assets Trust. Please proceed.

Thank you, Derek. Thank you and good morning. I'd like to thank everyone for joining us today for American Assets' first-quarter 2011 earnings conference call.

Our first 2011 supplemental disclosure package provides a significant amount of valuable information with respect to the Company's operating and financial performance. That document is currently available on our website.

Certain matters discussed on this call maybe deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results.

Although American Assets believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, American Assets' future operations and its actual performance may differ materially from the information contained in our forward-looking statements, and we can give no assurance that these expectations will be attained.

Risks inherent in these assumptions include, but are not limited to, future economic conditions including interest rates, real estate conditions, and the risks and cost of construction.

The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K, and other financial disclosure documents, provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations.

I'll now turn the call over to our Executive Chairman, Ernest Rady, to begin our discussion of first-quarter results. Ernest?

Thank you, Adam, and good morning, everybody, and thank you for joining American Assets Trust very, very first earnings conference call. It's not even a first quarter earnings conference call; it's like a 70 odd days conference call.

Joining me on the call today are John Chamberlain, our President and CEO; and Bob Barton, our Executive Vice President and Chief Financial Officer. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

First of all, I want to say that it is good to be back in the public space. And thanks to all of you, all of our investors, for their strong support since our IPO, with the share price up approximately 7.3% since initial pricing.

As most of you are aware, the IPO was approximately 6 times oversubscribed and priced at close to the upper end up of the range at $20.50 per share, which we believe was a bargain considering the institutional quality of the portfolio.

I continue to hold approximately 36% in the Company. I tell investors that I look at the success of the IPO as if I had just given birth or my wife had just given birth to beautiful twins after being in labor for 11 months. But now, I along with John and Bob and the rest of the management team, have the responsibility to grow and nurture these twins -- one of which I have named NAV and the other which I have named FFO.

Based on our 40-year history at American Assets, I'm confident that we can grow these twins successfully, one asset at a time, paying close attention to internal growth, net asset value, and the long-term creation of wealth.

As John and Bob will discuss in more detail, our first-quarter highlights include strong operating results of adjusted funds from operations of $0.28 per diluted share, deploying capital in the acquisition of First & Main in Portland, Oregon, our first acquisition since the Company went public.

The continuation of our strategy of West Coast focus, focused on 3 asset classes -- retail, office and multi-family, and owning irreplaceable assets, pursuing value-added opportunities and focusing on NAV. We believe this strategy will create long-term wealth for our stockholders.

Now, I would like to turn it over to our President and CEO, John Chamberlain. John, would you please take it from here.

Good morning and thank you, Ernest.

I will provide an update on our markets and an overview of how our portfolio performed during the quarter as well as an update on our investment activity. Bob will follow with the review of our first-quarter financial results, and then Ernest will offer a few closing remarks.

First to our office portfolio. Our properties continued to outperform their competitive set in each of their respective submarkets. Portfolio wise, first quarter net building absorption totaled approximately 3,000 square feet, and overall occupancy rose slightly to 93.4%.

In San Diego, the Del Mar Heights submarket posted its 6th consecutive quarter of positive absorption and continues to be the leading mid-city market.

According to Cushman & Wakefield, overall Class A vacancy is approximately 17.9%, while our properties averaged 9.9% vacancy.

Average asking rents in the first quarter were $2.92 per square foot per month on a net of utility basis, up $0.09 from the end of 2010. Most activity was a large volume small to mid-size deals, ranging from 1,000 to 7,000 square feet. Our remaining vacancy is ideally suited for this demand.

The San Francisco office market started 2011 with a bang driven by real job growth. The market is showing clear signs that it has turned the corner with rents on pace to grow double-digits in 2011. For example, the South of Market area, or SOMA, saw asking rents rise over 5% in the first quarter, a clear sign that technology companies are leading the spike in commercial real estate rents and activity.

The 2 submarkets we are invested in, the Financial District and SOMA, averaged approximately 14% and 19% vacant, respectively. Our Financial District asset, the Landmark at One Market, remains 100% occupied; and in SOMA, our King Street property, is 95.2% occupied. Notably, at King Street, we recently executed a letter of intent for approximately 57,000 square feet, all of the 8th and 9th floors that will commence nearly immediately upon the expiration of the Piper DLA lease. The terms of this pending transaction will exceed our registration statement projection.

Our recent 364,000 square foot Class A office acquisition in Portland, Oregon, what we refer to as First & Main, marks the beginning of what we believe to be a very promising new core market for us. The Portland market has many of the same characteristics as do our other core markets -- high barriers to entry; strong demographics, both in terms of density and income; a diverse and expanding employment base; and overall, a very supply-constrained market.

Portland has the second lowest CBD vacancy in all major markets nationwide and the lowest overall vacancy of all West Coast cities. According to Grubb & Ellis, Class A vacancy in the CBD has decreased to approximately 7%, and is continuing to trend downward as there is no new CBD office space under construction. CBD net absorption for 2010 was over 550,000 square feet.

Portland's employment base is broad and diverse, ranking at 4th in the US for semiconductor jobs, and 7th in the US in exports per capita. The largest employer in Portland is Intel with over 15,000 employees. Intel also recently announced its plans to build a $4 billion R&D manufacturing facility, considered to be one of the largest capital improvement projects in the history of the state.

First & Main is one of the premier office assets in Portland, enjoying 96% occupancy, with only 2 remaining ground floor retail restaurant suites available for lease. It is the only LEED Platinum certified building in Portland. The opportunity to acquire this irreplaceable asset was secured by our ability to move quickly and definitively. This allowed us to put raised IPO capital to work almost immediately. As we made clear on our road show, we will continue to investigate other opportunities in the Pacific Northwest as well as our previously established core markets.

As indicated in our press release, addressing the Portland acquisition, the transaction was structured to accommodate a reverse tax deferred exchange. If executed, this would allow us to recycle capital from other less productive assets.

Our office complex in Santa Clarita, the Valencia Corporate Center has been identified as our exchange property. The property has been actively marketed over the past 60 days and we expect the call for offer shortly. Other than Valencia, we have no current plans to sell any other assets or exit any of our markets.

Now to our retail properties. Portfolio wide, first-quarter rents continue to trend upward even as net absorption was negative approximately 10,600 square feet. Additionally, 2 temporary seasonal Christmas tenants vacated Del Monte Center totaling approximately 7,400 square feet.

Overall the portfolio was 94% occupied as of the end of the first quarter. Approximately one-half of the portfolio's vacancy is attributable to the vacant Mervyn's building 80,000 square feet we acquired in November of 2010.

According to CBRE, the San Diego retail vacancy county-wide was 7.1% at the end of first quarter, with net positive absorption of approximately 174,000 square feet during the quarter.

Our Solana Beach properties totaling approximately 456,000 square feet continue to dominate their trade area with a combined occupancy of 96.3%.

We are actively pre-leasing the planned expansion of Lomas Santa Fe Plaza and are assumed to commence a facade improvement at the Solana Beach Towne Centre.

Carmel Mountain Plaza, where we acquired the vacant Mervyn's building, negotiations are being finalized with 2 national ready-to-wear retailers, and plans have been approved to add 2 additional freestanding pad buildings by the City of San Diego. All tenant improvement in pad construction will occur concurrently. This will increase the overall rentable area to approximately 540,000 square feet. South Bay Marketplace and Carmel Country Plaza, each boast 100% occupancies.

The San Antonio retail market did not experience much change in market conditions in the first quarter of 2011. The Alamo Quarry and Crossing markets had approximately 589,000 square feet. It's the most prominent shopping center in the San Antonio area due to its unique architecture and freeway orientation. It remains at 98% leased, with 4 leases pending for approximately all of the remaining vacant space.

One of our 3 Borders is located at Alamo Quarry. They occupy approximately 30,000 square feet in 1 of the most freeway visible locations within the center. They have neither accepted nor rejected this lease. We are actively in discussions with replacement retailers at similar rent metrics should they choose to vacate.

Del Monte Center at 97% leased continues to be the dominant shopping center for Monterey County. Recent leasing activity includes the grand opening of Forever 21 in 60,000 square feet of what was a vacant Mervyn's building, where we are the ground lessor. We are informed by the owner of the building, Lubert-Adler, that a lease is pending for the balance of the space approximately 20,000 square feet with a national home bath retailer.

Borders continue to lease and occupy an approximate 6,800 square foot unit through January of 2013. This lease has also neither been accepted nor rejected. We are in discussions with a salon tenant to replace them should they chose to terminate. Borders' lease, at this location, is below market.

Now to our multifamily assets. Lack of new supplies, strong demographics, and a general increase in the desire to rent versus own continue to support strong multifamily fundamentals in San Diego County. The driver that will have the greatest influence on future performance will be, without question, job growth.

Our properties have experienced a significant improvement in occupancy since our road show. From an overall portfolio occupancy of approximately 87% in December of 2010, we are currently operating at approximately 92% occupancy, and are now beginning to shed previous rental concessions and incentives. This result was a combination of property level of management changes, unique rental programs, and an increase in property exposure through a variety of social media and print marketing.

Now Hawaii. The Hawaii retail market also experienced little change in the first quarter, with vacancy near 3% according to CBRE.

Waikele Center, at approximately 538,000 square feet, was 95% occupied at the end of the quarter. Here, Borders has rejected their lease and will close the store sometime this month. Borders currently pays $29.50 per square foot annually on 21,000 square feet. Replacement tenant rent will be slightly higher. It is our intent to pursue a small collection of outlet retailers to replace Borders. This will create even more synergy with the outlet center immediately across the street from Waikele.

Waikiki Beach Walk, one of our crown jewels, was at 97.8% occupied with only one 1,400 square foot unit vacant.

Retail sales for February 2011 rose 8.4% over February 2010. Full-service and quick-service restaurants continue to show strong sales trends with 14.8% and 49.8% increases respectively from the same month in 2010.

Our Shops at Kalakaua remain a 100% leased and occupied. We are currently evaluating several additional retail acquisitions on the islands of Oahu and Hawaii.

Our Embassy Suites at Beach Walk exceeded our competition in average daily rate or ADR and RevPAR measurements for the month. The property achieved an ADR and RevPAR index of 127.6 and 139, respectively.

The occupancy index also finished ahead of our competitive set at 108.9. The outlook for 2011 continues to remain strong and it's been pacing ahead of 2010. June and July continue to fill in ahead of 2010 space, primarily in ADR and revenue. We continue to closely monitor the effects of the Japan earthquake and tsunami with anticipated canceled bookings in the second quarter for eastbound travel.

Now I'd like to spend a few moments discussing our development and redevelopment activities. In light of the strong prospects at several of our assets, we are selectively pursuing a handful of internal development and expansion opportunities. As previously mentioned, our approved expansion of Lomas Santa Fe Plaza is in the process of being pre-leased prior to the commencement of construction.

At our Solana Beach Towne Centre, a facade renovation is also scheduled to begin this summer.

We're in the process of securing building permits for the expansion of 2 existing office properties, the Solana Beach Corporate Center Building 5, and Torrey Reserve Phases 3 and 4. Selectively, this represents approximately 90,000 square feet of commercial space in 6 buildings. Additionally, our pending development application for our Sorrento Pointe office complex is anticipated to be brought before the City of San Diego Planning Commission in September this year, following their summer recess.

Our acquisition pipeline remains full. We have underwritten many potential investments and have narrowed our sites on just a few at the moment. All are located within our existing and targeted core markets.

With that, I would now like to turn the presentation over to our Chief Financial Officer, Bob Barton. Bob?

Thank you, John, and good morning, everyone. Last night, we reported first quarter adjusted FFO of $0.28 per share. Adjusted FFO adds back the impact of loan assumption fees, gain on the acquisition of noncontrolling interest in connection with our IPO, and loss on early extinguishment of debt.

FFO for the first quarter was $0.21 per share, and net loss attributable to common stockholders was negative $0.02 per share. American Assets had a solid first quarter performance based on steady occupancy in retail, office, and mixed-use. In addition, as John mentioned, we saw strong occupancy gains in multifamily during the first quarter of 2011.

We began our life as a public company with approximately $648 million in gross proceeds that were raised at the IPO. After IPO-related expenses and the pay-down of approximately $318 million in debt, we started our balance sheet with approximately $230 million of cash on hand, which reduced our net debt to enterprise value to approximately 28%, significantly less than the 43% we estimated during the road show.

As mentioned, in connection with the IPO, there were several accounting transactions that occurred during the first quarter. I'm going to highlight those events that occurred in Q1 to provide more transparency and share with you how I would view a more normalized quarter without formally giving you any guidance.

As you look at the balance sheet and income statement, you will see big changes in most line items on a comparable basis quarter-over-quarter. In general, these changes reflect the merger of the previous noncontrolled entities into the predecessor entities.

In simple terms, Waikiki Beach Walk, the Embassy Suites Hotel, Solana Beach Towne Centre, and Solana Beach Corporate Centre, which comprised our noncontrolled entities at December 31, 2010, were 100% consolidated into the remaining predecessor portfolio as of January 19, 2011.

These noncontrolled entities were reflected as investments in real estate joint ventures for the first 19 days of the quarter, and our financial statements only pick up our respective equity interest in these properties for the first 19 days of the quarter.

Additionally, our 25% joint venture interest in the Fireman's Fund property in Novato, California, is also reflected in our income statement for the first 19 days of the quarter. The predecessors' interest in Fireman's Fund was not acquired, and instead, the ownership interest in this entity were distributed to its owners as part of the formation transactions.

Other material IPO related items on the income statement include -- $25.8 million in early extinguishment of debt related to the defeasance cost and write-off of deferred financing fees in connection with the pay down of secured debt at IPO, $9 million in loan transfer and consent fees in connection with transferring our remaining secured debt into the new public entity, and a $46.4 million gain on acquisition related to the noncontrolling entities that had to be marked to current value under the business combination rules.

On a normalized quarterly basis going forward, I would look to make the following adjustments -- first, our First & Main acquisition is expected to provide cash NOI of approximately $1.940 million on a quarterly basis during the first 12 months following the acquisition, net of approximately $0.7 million in absorption and rent abatements. GAAP NOI is estimated to be approximately $2 million on a quarterly basis during the second quarter. During the first quarter, First & Main contributed approximately $0.4 million to cash NOI and approximately $0.5 million to GAAP NOI.

Number 2 is, we anticipate putting a mortgage on First & Main in an approximate amount of $84.5 million at approximately 3.965% interest only in mid-June during the second quarter of 2011, although this transaction is subject to various closing conditions.

Number 3, the Salesforce lease in our Landmark building in San Francisco rolls down beginning June 1, 2011. The lease was signed in March 2010 for the renewal of their existing space and expansion into Del Monte space. The new lease includes 12 months of free rent and approximately $6 million of TIs, which have been reserved and previously identified as a use of IPO proceeds. Therefore, we do not expect to finance the TIs from operating cash flows. As a result of this lease, we expect cash NOI at the Landmark to roll down from approximately $15.9 million in 2010 to approximately $9.8 million in 2011. GAAP NOI for this building is expected to roll up from $13.4 million in 2010 to approximately $14 million in 2011.

Number 4, GAAP NOI for the noncontrolled entities that were merged into the Company on January 19 reflects 72 days at 100% consolidation for a total $5.9 million. Had we consolidated these noncontrolled entities as of January 1, GAAP NOI for these properties would have been $7.3 million for the entire quarter.

During the first quarter, we included $3.1 million of interest expense related to noncontrolled entities for the 72 days at 100% consolidation. Had we consolidated these noncontrolled entities as of January 1 for the entire quarter, interest expense for the noncontrolled entities would have been $3.8 million for the entire quarter.

During Q1, we picked up 25% of Fireman's Fund equity in earnings for 19 days, which amounted to approximately $28,000. This goes away in subsequent quarters.

During the first quarter, G&A was approximately $3.6 million. On a normalized basis, I expect G&A to increase, as we added several additional staff members, which is estimated to increase G&A by approximately $0.3 million per quarter. Additionally, non-cash compensation expense is expected to increase by approximately $0.3 million on a normalized basis. We expect G&A to increase to approximately $4.2 million in the second quarter on a normalized basis.

During the first quarter, FFO is calculated using weighted average shares and units outstanding of 45,734,618. During Q2, the actual fully diluted shares in OP units outstanding is expected to be 57,258,929.

As we look at our balance sheet and liquidity at the end of our first quarter, we are well positioned to continue to execute on our strategy. At quarter end, we have approximately $383 million in liquidity comprised of cash and cash equivalents of marketable securities of $133 million and $250 million of availability on our line of credit. Additional liquidity is expected from both recycling of the asset identified for potential reverse tax-deferred exchange in connection with the acquisition of First & Main, and the proceeds from placing a mortgage on First & Main.

As previously discussed, the Company has entered into negotiations for an $84.5 million 5-year non-recourse interest-only loan at a fixed rate of 3.965% to be secured by First & Main that we expect to close during the second quarter of 2011, although we can't make any assurances that either of these events will actually occur.

Now finally, I noticed some of you are going to ask about guidance, so I might as well address it. Just coming off the IPO, we do not believe that it makes sense for the Company to provide formal guidance at this time. Our current expectations are consistent with the pro forma in the most recent 10-K before acquisitions. It is our current expectation to begin providing annual guidance on an annual basis for 2012. Until such time, we will attempt to be as transparent as possible and share with you how we are thinking about our quarterly numbers.

Operator, I'll now turn the call over to you for questions.

(Operator Instructions). Brendan Maiorana, Wells Fargo.

Thanks. Good morning, guys. Just probably for John or Ernest, just a question -- can you guys maybe provide a little bit more color on the pipeline of opportunities that you're looking at in terms of what you would expect on initial return cap rates and then longer term returns that you think across the office and retail assets that you're looking at, and then maybe contrast that with what your expected disposition metrics are going to be on Valencia?

Okay. John is going to take it first, and then I'll give you my color. Thanks, Brendan, for the question.

Brendan, as we've shared with you previously, acquisitions are becoming more and more difficult in the current market that we're in. We're seeing many deals granted high-quality real estate, but many deals that have cap rates starting at 4s and 5, and that's something that we're just not going to participate in.

What we are focused on are value-add opportunities, both in office and retail. And we're looking to achieve benchmarks consistent with what we have stated in the past. We're looking to get for the value-add opportunities returns in the 7 to 8 range, and we are confident that those opportunities exist.

As far as another core investment, I do not believe that we are going to pursue something similar to First & Main as cap rates for that type of property have continued to drop even further. I would describe the investment environment today to be consistent with what we saw in 2007, and it's just something we're not going to participate in. Ernest?

I think just to add to that -- that was a great answer, John. Thank you.

I think just to add to that, the quality of the portfolio we have is a challenge to duplicate. If I had to do all over again that we've done, I would do exactly the same thing with the -- almost exactly the same thing with the proceeds of the IPO.

Given that, John and I and the Company has been able to look at a plethora of opportunities and we're able to select, because of our liquidity, the best opportunities that are available. The only thing I can assure you of is that the same strategy that has been in place for decades will continue and we do not want to do anything silly. We think that the liquidity we have is a great opportunity and we want to make sure that opportunity is deployed in a very productive way.

One has to consider in looking at opportunities today, not only the cap rate, but the low cost of money. If you look at the mortgage that we have indicated for First & Main, in my career in real estate, I have not seen mortgage rates below 4. So, we consider all these factors and going forward we hope to create value for the stockholders.

Yes, that's helpful. And then can you just -- selling Valencia, which is one that -- where the occupancy isn't as high, is it fair to assume that you guys feel like you're going to get a good amount of credit for the vacant space there as opposed to leasing it up and then selling it when it's more stabilized?

I think the answer to that is we just don't know.

The market environment now is willing to pay for vacancy. We won't know to what extent until we actually begin to receive offers. So, it's our anticipation that, yes, we are going to be compensated for the vacant space. I can't really comment on at what level.

But if we don't get a fair price, there is no pressure on us to sell. So we want to do the right thing and not act out of any haste. My father used to say, act in haste, repent at leisure. So we're going to look at the offers as they come in.

Sure. That's helpful. And just one last one for me and then I'll yield the floor. Bob, you gave a lot of great color on where you, guys, are from a financial perspective. But just had a question on -- if we look at the financial statements, the NOI on that appears to be a little bit lower than the NOI that's detailed on the asset specific on pages 11 and 12. What's the difference between the base of the financials and then pages 11 and 12?

Page 11 is cash or cash numbers. And on the financial statement, you know you're dealing with more GAAP. So on page 11, as noted in the footnotes, it excludes any abatements.

Okay. I think I was adjusting for that. Maybe I'll just follow-up offline and then try to get the difference, but thanks.

Laura Clark, Green Street Advisors.

Hi, good morning. Hi, John, going back to your comments on value-add opportunities that you're looking at, are these opportunities within your current core markets and are you looking outside of these markets because of the highly competitive nature of acquisitions in your core markets?

No. We are sticking to our core markets. The acquisitions we're looking at are all in our core markets and I can add to that our recently added core market. And we are finding opportunities where we have in the past -- that is to find something that has a problem or something that requires significant hands-on management and an area that we have experienced a lot of success in the past. So we're sticking to our markets. We're still finding opportunities. They're a little harder to come by, but we're staying away from highly stabilized core investments because of where cap rates have gone.

Okay, thanks. Bob, in regards to the mortgage that you're putting on the First & Main office building, what is the range of financing options that you looked at and how did you determine that a 5-year mortgage was the right route there?

Good question, Laura. When we approached the mortgage market, when we first bought it with cash and then we took a look at where rates were going. They were dropping significantly. So what we did is we looked at both the 10-year term and a 5-year term. The 10-year term, obviously, we had no additional maturities in the new 10-year. But then we looked at the 5-year -- 5-year only had $28 million maturing in that year. So we thought that that fit perfectly from a bucket standpoint that we could put in another $84 million. So that would bring us to about $100 million 5 years out in maturity. 3.95 -- we rate locked at 3.965, and that is significantly better than some of the investment grade money that we have seen out there in other news releases. And in addition to that, we don't believe that that precludes us from going down the investment grade market down the road. So we thought that was the right strategy for the right asset at the right time.

Laura, it's Ernest. We could have had a longer maturity, and we could have had more proceeds, but we thought this was the sweet spot for both the amount of proceeds and the maturity.

And with this mortgage, our net debt to enterprise value goes up to like 39%, 37% -- 37% to 39%. So we're still within our targets of our leverage policy that we're targeting and trying to be less than 45%.

Okay. Great. Thank you so much.

Thank you.

Craig Schmidt, Bank of America.

You gave us some insight on the multifamily in terms of occupancy increase and selling some of the concessions. What do you think the trend for same store NOI will be in the latter quarters of the year?

Craig, this is Bob. Thanks for the question. On same store NOI, I have it broken down. When I think of it, I think of it as in terms of my retail and my office portfolios. Historically, same store NOI was I want to say 3.5%, 4%.

Going forward, it's going to be flat for the next couple of years. My estimate on retail is probably 0.3%, 0.5% down and that would include total retail, including Waikiki Beach Walk. For 2012, I think it's probably going to be less than 1% growth. And then I think we'll see some growth in 2013, approximately 3%. That's just based on our own internal targets and where we think things are going.

Our office properties in terms of our office portfolio -- historically, we were probably 5% to 6% same store NOI growth. Going forward, we're going to see a drop in the first year, and it depends how we do it. On a total basis, it's probably negative 3% for 2011 is what we think, and then we'll start seeing it grow 2% to 3% for '12, '13 and then increasing thereafter.

But keep in mind that if you take out -- that's on a total office portfolio, those numbers that I gave you. If I take out -- and that included First & Main, so now that's not same store. So if I look at it on a same store basis without First & Main, I'm down to 18% to first year. And that's really already reflected with Salesforce.

Where you asking about the multifamily portfolio or for all the portfolios, Craig?

I would be glad to get all, but I was asking specifically on the multifamily.

The multifamily, we had this just situation. In the first quarter, we had a management change. The market was difficult and I think going forward that property will return to its historical returns that we've enjoyed in the past.

So it's the biggest property there. It's a great piece of property. And we just had a temporary first-quarter hiccup.

Pat, how many leases have we signed since the beginning of the year?

Right now we're up to 96% occupied. I don't know the exact number.

Yes, but it's several hundreds.

It's a couple hundred.

So the situation has -- we rectified the situation.

Great. And then on -- just given the more challenging acquisition market, may we see you be more aggressive on redevelopments as an alternative for external growth?

We're looking at our -- what I would characterize as expansion opportunities both within the portfolio and at several of the acquisitions that we're looking at. So it's buying something that's there and adding to it in the short term.

One thing you can rest assured, Craig, is that we're going to do our very best, both on redevelopment and acquisition, and we examine every opportunity on a very thorough and complete basis. So after 70 days in our new skin and our new clothes, we're just enjoying the -- being able to look at all these opportunities and say, which is the best of the best and do they meet our hurdle rates.

Well, thank you.

Thank you. Thank you for your interest, Craig.

Chris Caton, Morgan Stanley.

Hi, Chris.

Hi and good morning. I was hoping you could spend a little more time just following up on that question on the value-added that, John, you've been talking about. How big are projects? Are you evaluating and, I guess, what's the duration of implementing the business plan that you'd be creating for some of these value-added acquisitions or projects?

Some are -- it's quite a range actually. Size wise, these properties are consistent with our existing portfolio. The benchmark we're holding ourselves to is to hit initial returns based on the existing space, whether it would be retail or office that's on the property and then be able to build without any undue pressure as we see fit from a market standpoint. So we're looking -- the cost of the expansion opportunity we're baking into the initial acquisition price and looking at our returns based on what happens if nothing moves forward. So we're taking a very conservative approach on some of these.

To answer the question on the duration, some would be shorter and some much longer because of the additional development potential that exists on the site. So the range would be anywhere from 2 to 3 years to as long as 5 to 7.

And when you said -- I think you said 7% to 8%, is that a cash yield?

Yes.

And then follow-up question, separate topic. Thanks for the color on Hawaiian market. I think it sounded like your latest [asset] was in February. What anecdotally has the disaster in Japan had, and are you seeing any effects in your retail or hotel properties?

No. As a matter of fact, the immediate effect of it caused a spike in occupancy of the hotel because a lot of people couldn't get back to Japan or didn't want to go back to Japan. So we actually ran the hotel at 100% occupancy for the following couple of weeks.

We are now back to the occupancy levels that we like to operate the hotel at -- in the high 80s. And things are -- from a retail standpoint, the sales at Beach Walk, which is a real indication of tourism continue to increase. So we're not seeing an impact yet. What we're keeping an eye on are cancellations for people coming from Japan to Hawaii. And we're being very proactive to make sure that we're replacing those reservations with primarily travelers from Canada and the Western United States.

Then last question from me, Bob. We're talking about pages 11 and 12 and how that might vary from the income statement. Does 11 and 12, is that a full quarter for all properties, whereas income statement doesn't include that?

Yes. Page 11 and 12 is a full quarter. It's for the 3 months ended March 31, but what we tried to do is present it on a cash basis and -- in terms of how we look at things.

Thanks, Bob.

Yes.

Rich Moore, RBC Capital Markets.

Yes. Hi, good morning, guys. Thanks for the great disclosure. That's a terrific supplemental coming right out of the gate, I'll tell you.

On the redevelopment page, I don't notice any yields. Do you guys have any thoughts on yields and might you add those to the supplemental?

The properties or the projects listed on the development page are basically expansions of existing projects. So the yields are considerably higher than any outside acquisition. I think, at this point, we're in the process of actually preparing construction documents. So we'll have a much better handle on exactly what our costs are, but I believe these will end up in the mid-teens return wise.

Well, we hope. It's too early because we don't have construction costs and we don't have leasing. So it would be premature to give you an indication.

Okay. That's a --

So, Rich, when we look at that, we look at on our cost going forward basis because the land is already essentially paid for, right?

Sure. And that sounds good and if you have a chance, you can put those in the supplemental so we could see how they might change over time; perhaps that would be helpful.

On the disposition front, did I understand you guys are only marketing a single asset? I was under the assumption that you might look at the RV Park, the apartments, and maybe handful of other assets. Maybe I misunderstood, but I thought it was just 1 office property.

I think you did misunderstand. The RV Park is a great piece of property. And if we find something better that we should own instead of that, that would be something we would consider. It's one other property we're considering, but at the moment the best opportunity for us is the property that has been identified as a possible trade, and we don't know if we will see offers or we'll see offers that are adequate. But if we do, then we will make the trade.

Yes. We've spent a fair amount of time investigating where the RV Park. We've looked at Rancho Carmel Plaza where that might trade. But in terms of moving forward with reverse tax deferred exchanges, the best fit for us was the Santa Clarita property into First & Main.

With our next acquisition, assuming that there is one, we will again revisit the opportunity to exchange some of the other assets in the portfolio.

Okay. So you would carefully coordinate the sale of 1 asset with purchase of another, I guess the way to look at it?

Exactly.

Okay. That sounds great. Thanks. And then on the retail portfolio, it looked like -- I think the spreads were negative and you didn't sound terribly bullish on same store NOI for the retail portfolio over the next couple of years. What are you thinking in terms of spreads or maybe what is causing your lack of bullishness for the retail same store NOI?

Well, if you look at where we are today on our retail portfolio, Rich, we got about $25 today on an average basis. The market is probably $24 when you take a look at the entire portfolio. So I think if anything, I think we're just trying to be conservative. People are still having a difficult time out there in some of the small shops. So I'd say it's probably flat to slightly up.

And uncertain. I think over the last couple of years the economy has been through a difficult period as we all know. And during that time, we've done our best to maintain our lease rates at -- as close as possible upon on renewal. We have more confidence now. So we're more insistent on keeping those lease rates at least constant. And hopefully, if the economy continues to pick up, we will be able to be more forceful when it comes to getting better lease renewal rates. So a lot of it is dependent on the world we live in.

And I forgot to ask you, guys, would there be any sign of any additional apartment, multifamily expansion in your mind -- any new projects -- not so much expanding what you have, but new projects?

Yes. Some of the opportunities we're looking at are in-fill mixed use projects that have multifamily components. We're also investigating ground up multifamily development here specifically in San Diego. So that is a strong likelihood that that portion of the portfolio will increase.

Okay, good. Thank you. And then the last thing from me is -- I think Wes had a question as well. But the last thing is, when we model an acquisition, is the general plan that you guys have to use your cash, use your credit line to buy the asset, and then go back and encumber it with a mortgage or would you leave some of those unencumbered as you look toward an investment grade sort of situation, a bond issuance kind of thing?

That's a good question, Rich. On the First & Main, a brand new asset that was just completed in the fourth quarter, virtually 97% leased, strong predictable cash flow, it made a lot of sense to put a very cheap cost of debt against that asset. That will not always be our strategy. We do want to leave some assets unencumbered going forward and continue to develop a borrowing base, whether it be for the line of credit or for the investment grade market.

So, I think it's on a -- on each opportunity, we're going to evaluate what makes the most sense for this portfolio, but we definitely never want to preclude ourselves from approaching that investment grade market down the road.

Okay, good. Thanks, guys. And Wes has a question as well.

Hi. Good morning, guys. For the new lease at 160 King Street, was this with a new tenant or one of the subletting tenants?

This was with a new tenant.

Do you, guys, have a range for TIs for that?

We don't have a signed lease yet, do we?

(multiple speakers)

We're under a signed letter of intent and the lease documentation is being prepared and negotiated right now. And I think that's the kind of information that I think we'll provide after it's executed.

Fair enough, guys. Thank you.

I think we have one more question.

Mitch Germain, JMP Securities.

Hi, guys. What's up?

How are doing, Mitch?

I'm great. What's the average term of the leases in the First & Main property?

Most are 10-year leases. There's one lease with the IRS that has a termination right after 3 years. We underwrote the asset with the expectation that they would terminate and move back into a building the federal government owns across the street. I'm not sure if you know the history of this building and why there's such a concentration of federal tenants, but it's because they all vacated a building literally directly across the street from ours. And the government is redeveloping the building to meet LEED Platinum certification, and then they plan on moving a bunch of these tenants back into the building.

The IRS was identified as one of the potential tenants to be relocated back into the other building. What we're hearing on the street, however, is that the -- there may not be enough room for them because the federal government is looking to consolidate quite a few other offices in the Portland area, back into this building they own once its completed.

So to answer your question, the average term is 10, except for this 1 lease which has a kind of a question mark on it. But, again, when we underwrote the asset, we assumed that they would vacate.

Okay. That's good color. And how would you characterize the activity level on the Valencia sale?

I understand Eastville received over 40 confidentiality agreements. They have been conducting quite a few tours and we expect a call for offers probably within the next week or 10 days.

Great. Thanks. And last question, the multifamily pick up, you discussed it being a staffing issue. Was there any additional concessions added to the package or a decline in rents or is it just really related to an increase in activity from change in management?

The root problem was management. It's important in this market to get your occupancies up in the fall of the year, and that carries you through the winter. And unfortunately, the manager we had on site wasn't keeping her eye on the ball and that was compounded by the departure of the USS Nimitz. So between management and some changes in the military personnel in San Diego, the ball got dropped. It has been completely corrected. We are now eliminating all of our rent concessions and look to start pushing rents as we move closer to the summer.

(multiple speakers)

And that's it for me, guys. Thanks a lot for your time.

There's no more questions? Thank you all very much for your interest. You have witnessed the first 72-day conference call. We're very proud of what we've accomplished. We're very excited about the future. Keep track of us. We hope we have some good news coming forth and we hope to retain your interest. Thank you so much.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect. Have a great day.