American Assets Trust Inc (AAT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 American Assets Trust earnings conference call. My name is Marissa, and I will be your coordinator for today. (Operator Instructions) I would now like to turn the call over to the host for today's call, Mr. Adam Wyll, Senior Vice President and General Counsel. Please go ahead.

Thank you, and good morning. I'd like to thank everyone for joining us today for American Assets Trust's second quarter 2011 earnings conference call. Our second quarter 2011 supplemental disclosure package provides a significant amount of valuable information with respect to the Company's operating and financial performance. The document is currently available on our website.

Certain matters discussed in this call may be 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 believes 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 of 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 costs of construction.

The earnings release and supplemental reporting package we issued yesterday, our annual report filed on form 10-K, and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations. I will now turn the call over to our Executive Chairman, Ernest Rady, to begin our discussion of second quarter results. Ernest?

Thanks, Adam, and good morning, everyone, and thank you for joining American Assets Trust second quarter earnings call. We are very pleased with our operating performance thus far in 2011. That will translate into continued positive results, as John and Bob will address in a moment. We live in tumultuous times, and that may be the understatement of the morning.

American Assets Trust, just like its predecessor, has sound and consistent business strategy that has enabled us to produce solid performance for over 40 years, which we will continue. We create vibrant environments for shopping, the working place, and home. These destination serve our communities, and provide prosperity for our retailers, employees, and tenants. Now that the economic ground has shifted once again, the wisdom of our steadfast strategy continues to be tested and proven, provided strong returns for our investors. American Assets Trust is a company whose growth is guided by unwavering principles, a company whose success is measured over the long-term, and prosperous business relationships are built on enduring foundations of trust and opportunity.

This disciplined approach toward everything we do will over the long-term avoid setbacks, errors, and disappointment, creating a welcome stability. We are continuing our strategy of West Coast focus, pursuing our three asset classes with irreplaceable investments, value-added opportunity, and the deliberate attention to net asset value. Now I'd 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. I will provide a general overview of our markets, portfolio and investment activity. Bob will follow with a review of our second quarter financial. After questions, Ernest will offer a few closing remarks.

First, to our office portfolio. Our properties continue to perform -- excuse me -- continue to outperform their competitive set in each of the repetitive sub-markets. Portfolio-wide, second quarter net building absorption was slightly negative at minus 3,322 square feet, and overall occupancy declined slightly to 93.2%. In San Diego, the Delmar Heights sub-market posted its seventh consecutive quarter of positive absorption. Our Torrey Reserve and Solana Beach Corporate Center properties averaged a 9.9% vacancy at compared with according to Cushman & Wakefield, an overall sub-market vacancy of 18.3%. Asking rents and leasing volume continued to trend upward.

San Francisco, as you've all heard, is experiencing explosive rent growth, particularly in the South of Market or SoMa area, primarily fueled by demand from the tech center. Our financial district assets, the Landmark at One Market, and our SoMa asset, the King Street property, are now both 100% occupied. Notably, at King Street, the LOI mentioned in our first quarter call as resulted in an executed lease for approximately 57,000 square feet of space with Ancestry.com. This lease commences nearly immediately upon the expiration of the Piper DLA lease. The terms of this transaction significantly exceeded our internal projections.

In Portland, Oregon, we completed the acquisition of the Lloyd District portfolio. The property is located in Portland's Lloyd District, which is a major transportation hub for the region and includes more than 2.5 million square feet of office, the approximate 1.4 million square-foot Lloyd Center Mall, the Portland Convention Center, and the Rose Garden Arena, home of the Portland Trailblazers. Based on preceding, un-audited six month financials, the Lloyd portfolio generated approximately $7.8 million of cash NOI on an annual basis. However, we are particularly excited about the development opportunity at this property. As a result of years of planning, the Lloyd District has been designated for additional development rights that promote high density, transit-oriented, mixed use urban village design. The entitlement for this development opportunity specific to our property allows for a 12 to one floor area ratio and provides for retail office in multifamily development.

As you know, the portfolio represents the second major acquisition for us in the Portland market. A market that we believe offers significant potential for American Assets. With a total of 21.1 million square feet of space in the downtown area, which includes the CBD, Lloyd District, and Northwest sub-markets, Portland has the lowest office vacancy of all major markets nationwide. According to Colliers, overall vacancy has decreased to approximately 6.8% and is continuing to trend downward, as there is very little new office space under construction.

Now to our retail properties. Portfolio wide, second quarter rents continued to trend upward, and occupancy hovered at approximately 94%. Net building absorption was slightly negative, minus 9,318 square feet primarily attributable to a Borders that vacated our Waikele property. Approximately one half of the portfolio's vacancy is attributable to a vacant 80,000 square foot Carmel Mountain Plaza Mervyn's building. Here, negotiations are being finalized with two national ready-to-wear retailers. Occupancy of the building is expected by the third quarter 2012.

With the addition of two pad buildings, the overall rentable area will increase to approximately 540,000 square feet. South Bay Market Place and Carmel Country Plaza continues to boast 100% occupancies. In Solana Beach, we continued the pre-leasing effort of the approved expansion of Loma Santa Fe Plaza, have commenced facade improvement at the Solana Beach Towne Centre, and we are completing construction documents for building five. Our Solana Beach properties have a combined occupancy of 97.6%. Additionally, our San Antonio and Monterey retail properties continue to stay well leased, and the repositioning of the two Borders spaces is nearing lease execution.

Now to our multifamily assets. Fundamentals continue to improve in San Diego County. Our active management of the properties resulted in significant improvement and occupancy in the second quarter. We are currently operating at approximately 97.7% occupancy, an increase of over 10% since December of 2010. And have eliminated rental concessions and incentives and are pushing rents at our Imperial Beach properties up approximately 3% as turnover occurs.

Now onto Hawaii. The Hawaii economy showed remarkable resilience in the months following Japan's earthquake and tsunami. Overall air arrivals rose 0.3%, even with arrivals from Japan off minus 17.1%. Total visitors increased 5.9% year-over-year in May of 2011. At Waikele Center, which was 90.9% leased -- excuse me, occupied, at the end of the second quarter, our pursuit of a small collection of outlet retailers to replace Borders continues. We are in lease negotiations with a national retailer to replace approximately two-thirds of the 21,000 square-foot space. Discussions are well underway with other national brands for the balance of the vacated space.

Waikiki Beach Walk, one of our crown jewels, was 97.6% occupied at the end of June. Retail sales for May 2011 rose 11.6% over May 2010. Full service and quick service restaurants continue to show strong sales strengths. Our Shops at Kalakaua remain 100% leased and occupied. Our Embassy Suites at Beach Walk, again, exceeded our competition in average daily rate or ADR, and revenue per available room, or RevPAR, measurements for the quarter.

The property achieved an 80R in RevPAR index of 136.6 and 139.3 respectively. The occupancy index also finished ahead of our competitive set at 102%. RevPAR of $219.35 finished ahead of budget by $4.43 or 2.1%, in addition to the increase in occupancy of 1%. ADR continues to run ahead of 2010 at an average favorable variance of $17 to $20. The outlook for 2011 continues to remain strong, and has been pacing ahead of 2010. July and August are expected to exceed our expectations.

Now I'd like to spend a few moments discussing our development and redevelopment activities. As mentioned earlier, the Lloyd District property has a substantial additional development component. We are in the process of selecting an architectural firm capable of pursuing a project the size and scope of the anticipated opportunity. We expect a decision to be made and a complete design team to be identified by the end of September. It is estimated the approval of the project and the issue of the building permits will take approximately 18 to 24 months. Construction of the first phase of the project would, subject to market conditions, commence immediately thereafter.

We are also in the process of securing building permits for the expansion of two existing office properties, the Solana Beach Corporate Center Building Five, and Torrey Reserve Phases Three and Four. Collectively, these projects represent approximately 90,000 square feet of commercial space in six buildings. Additionally, our pending development application for our Sorrento Point office complex is anticipated to be brought before the city of San Diego planning commission on September 9. Construction documents will be prepared immediately following the hearings, and building permits are expected by the end of the first quarter of 2012. Subject to market conditions, construction will commence on the issuance of the permits.

Our acquisition efforts remain in full swing, however, we continue to be very disciplined. As a result, the majority of acquisitions in our growth pipeline are off-market opportunities. All are high quality and located in our existing and targeted core markets. I would now like to turn the presentation over to Chief Financial Officer, Bob Barton. Bob?

Thank you, John, and good morning, everyone. Last night we reported both second quarter FFO and adjusted FFO of $0.26 per share. Net income attributable to common stock was $0.01 per share. American Assets had a solid quarter performance based on steady occupancy at retail, office and mixed use. In addition, as John mentioned, we continue to see strong occupancy gains in multifamily during the second quarter of 2011. The Company's Board of Directors has declared a dividend on its common stock of $0.21 per share for the quarterly period ending September 30, 2011. The dividend will be paid on September 30, 2011 to stockholders of record on September 15, 2011.

Turning to results. Second quarter FFO as adjusted, increased approximately $1.866 million or 15% to $14.643 million, compared to first quarter FFO as adjusted. The primary drivers of this increase are attributable to the following six items. Number one, $2 million of FFO relates to 18 days of net investment in the predecessor entities that were included in the second quarter, but excluded from the first quarter since it was pre-IPO.

Number two, we had a $1.2 million increase in GAAP NOI before a property tax accrual that was made in Q2. This increase is primarily the result of the following. First & Main's GAAP NOI increased $1.323 million to $1.845 million for Q2. Landmark's GAAP NOI decreased $1.745 million to $2.345 million, as we expected, due to the two months of downtime in April and May before the Salesforce.com lease commenced on June 1. The balance of the increase in the GAAP NOI of approximately $1.622 million, was due primarily to the increase in the NOI from the additional 18 days of the previously non-controlled entities, including Solana Beach Towne Centre, Solana Beach Corporate Centers, one through four, and Waikiki Beach Walk, mixed use.

Number three, we experienced a negative impact of $0.6 million in net property tax accruals during the second quarter. During the second quarter, the Company received notification from the Board of Equalization that they had concluded a change of ownership occurred at the IPO, and would send their findings on to the respective county assessors offices. Accordingly, during the second quarter we determined that it was probable that we would incur an increase of thirteen related property taxes in the state of California. This accrual recorded in Q2 reflects two quarters. Going forward, this accrual is expected to be approximately $375,000 per quarter. This accrual does not reflect any property tax reductions that we also expect. Until that time, we will be booking the accrual, but not receiving the benefit of expected reductions from our Northern California properties.

Number four, we had a $0.6 million increase in G&A expenses, which now reflects a full quarter of non-cash compensation expense and staff additions during the first quarter. Fifth, we had a $1 million increase in interest expense, which is primarily the result of the additional 18 days not included during the first quarter, plus the First & Main mortgage. Sixth, we have $0.9 million increase investment in interest income, which is primarily the result of both unrealized gains and interest income on our Ginny Mae portfolio. This also comprises the majority of other income on our financial statement. Although we did not provide any formal guidance for Q2, my Bloomberg screen shows a consensus of $0.28 of FFO per share, $0.02 per share higher than we actually reported.

First of all, my hat is off to all of you that have tried to maintain an accurate earnings model, especially just following an IPO. Reflecting on the difference between consensus and actual, I believe the $0.02 per share difference may primarily be the result of Landmark. In my prepared remarks for Q1, I stated that GAAP NOI of Landmark is estimated to be approximately $14 million in 2011, possibly a little less, which we don't expect to change. If you annualize that on a quarterly basis, that's approximately $3.5 million per quarter. However, Q2 actual GAAP NOI for Landmark was $2.3 million, which equated to an approximately $0.02 per share difference in FFO of approximately $1.1 million. Q2 GAAP NOI for Landmark dips because of the two months of downtime before the sales lease commences on June 1, 2011, at which time the straight line rent commences. I hope that helps clarify the situation at Landmark.

Moving forward. As I look to Q3, and without providing any formal guidance, I believe we will experience the following significant difference from Q2. First, First & Main which had a GAAP NOI of $1.845 million in Q2 is expected to be approximately $1.9 in Q3, slightly up. Landmark, which had GAAP NOI of $2.345 million in Q2 of a full quarter of straight line rent from Salesforce.com in Q3, with GAAP NOI expected to increase to approximately $3.7 million. The Lloyd portfolio that closed on July 1 is expected to have a full quarter of cash NOI of a range from $1.840 million to $1.950 million in Q3. We are still in the process of confirming the straight line leases in above and below market rents. Until we complete that, I won't have a final GAAP NOI number for the line acquisition.

On a normalized basis, we believe $4.2 million continues to be a good number for quarterly G&A. Although we are watching the purse strings closely, and monitoring the G&A evolution. Interest expense is expected to increase to approximately $14.6 million, reflecting a full quarter that includes the new First & Main mortgage. As I previously mentioned, the real estate tax accrual in Q2 of approximately $600,000, is expected to be approximately $375,000 per quarter going forward.

Now let me try to quantify the impact on the Borders liquidations to our FFO going for it. As John mentioned, we have three Borders stores. 30,000 square feet in Alamo, Cory, and San Antonio, approximately 8,600 square feet in Del Monte, in the Monterey Peninsula, and 21,000 square feet in Waikele on the Oahu Island. The Borders at Waikele paid their last rent for April. Accordingly, only one month of the Waikele Borders rent is included in Q2. As a result, Q3 will be impacted by an additional lost month of combined rent and CAM of approximately $67,000. We have an executed LOI with a well-known national clothing and accessory retailer, and are currently negotiating the details of the lease. Expected delivery of the space is spring 2012. There is no assurance the lease will be signed.

The Borders at both Alamo Quarry and Del Monte have paid their rent for August. We have received a notice of assumption and assignment of unexpired leases for both of these leases, and they are considered round two leases that will be heard by the judge on September 15, 2011. We have a fifty-fifty chance of receiving the rent on these units for September due to the mid-month hearing. Once these units have liquidated, the combined base rent and CAMs for these two spaces is approximately $72,000 per month. We have an executed LOI with a large natural beauty supply chain for the Del Monte Borders which is located in between Banana Republic and Apple. It is expected to get final approval from the tenants board in September. Expected delivery is in spring 2012. Again, there is no assurance that this lease will be signed.

Finally, Alamo. We are in discussions with a couple national retailers for the entire space. Overall, once we re-lease the Borders space, we believe we will be flat to up, with positive momentum from the existing spaces. The only impact will be the downtime of approximately two to three quarters while the spaces are built out, assuming the leases are signed. I also want to bring to your attention that one of our top ten office tenants, McDermott, Will & Emery, an international law firm in our Torrey Reserve project, moved out in Q2. McDermott is a prestigious international law firm that was founded in 1934 and is the thirty-third largest law firm globally. They opened their office in Torrey Reserve with the intent of building their San Diego practice. During Q2, a decision was made by the firm to handle their San Diego clients from their Orange County office.

Originally a ten year lease expiring in November 2018, the lease also contains a kick out right in November 2014, which we now expect them to exercise. They occupy 25,044 square feet on the third and fourth floors of Torrey Reserve North Court, and have sub-let most of their space to Troutman Sanders, an Atlanta based law firm growing their West Cost practice. McDermott is expected to continue to pay their rent through the kick out date in November 2014. The space is beautifully furnished with approximately $111 per square foot in TI's, $60 per square foot that was paid by the landlord, and the balance was paid by McDermott. If McDermott exercises their kick out right in November 2014, as we expect, the early termination fee will be approximately $1.6 million for un-amortized TI's and leasing commissions and downtime to re-tenant the space. The termination fee is secured by a $1.6 million irrevocable letter of credit from McDermott. We don't expect any near term financial impact from this event.

Now as we look to our balance sheet and liquidity at the end of our second quarter, we are well positioned to continue to execute on our strategy. At quarter end, we have approximately $373 million in liquidity, comprised of cash and cash equivalents and marketable securities of $123 million and $250 million of availability on our line of credit. Additional liquidity may come from the recycling of the assets previously identified for potential reverse tax deferred exchange, in connection with the acquisition of First & Main. Our leverage goal continues to be less than 45%.

The net debt to total enterprise value at June 30 has increased from 37.8% to 39.3% resulting from the First & Main mortgage. Net debt to EBITDA June 30 has increased from 6.7 times to 7.5, and reflects the increase of the First & Main mortgage, but only includes EBITDA on First & Main from its acquisition date of March 11 through June 30, instead of the full six months. I also expect this ratio to come down as the Lloyd acquisition comes online during Q3. The fixed charge coverage ratio has similarly decreased from 2.3 times, to 2.2 at June 30, reflecting additional interest expense from the First & Main mortgage. I also expect this ratio to increase as the Lloyd acquisition comes online during Q3.

We are not only focused on long term NAV growth for shareholders, but also on positive same store growth under a relative basis. This will ultimately translate into organic FFO growth. Our same-store results are set forth in detail in our earnings release. In addition, as stated in our earnings release, absent to property tax accrual recorded in Q2, same-store property operating income growth for the six months ended June 30 increased 3.1%. Same-store office property operating income growth for the six months ended June 30 increased 3.2%. Same-store multifamily property operating income growth for the six months ended June 30, decreased 8.9%.

This was primarily the result of aggressive leasing efforts to drive occupancy from a weighted average of 87% at December 31, 2010 to 97.2% at June 30, 2011. In order to accomplish that, we gave some concessions on specific apartments that we are not re-leasing quickly. In fact, on Imperial Gardens, as John has previously mentioned, we have now begun to push rents approximately $30 per month, and have not seen any price resistance so far. Year-to-date hotel suite revenue is ahead of 2010 by approximately $1.3 million. As the economy rebounds in Hawaii, we have been consciously letting go of lower priced business, and it's actually working to increase our ADR and RevPAR.

Lastly, I want to give you an update regarding guidance. It continues to be our expectation to begin providing annual guidance in 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. We believe that the worst of times are also the best of times. We believe opportunity will be graded by the volatility that we are seeing in the markets. We are well prepared with a strong balance sheet to capitalize and execute on the opportunities that we believe will present themselves over the coming quarters. Operator, I will now turn the call over to you for questions.

(Operator Instructions) Your first question comes from the line of Laura Clark from Green Street Advisors. Please proceed.

Hello, good morning.

Good morning, Laura.

Going back to your comments on development, John, do you see yourself becoming a much more active developer than acquirer over the next couple of years? If so, are you looking for land opportunities out there today?

Primarily, the opportunities we are seeking are what I would put into a category of value add, not pure development place. What was attractive about the Lloyd District portfolio to us is, we were acquiring a very stable, very well maintained office project, a base, if you will, that had a substantial additional development component to it. We will continue to get great cash flow from the existing asset, and be able to pursue a very organized expansion of that project over the years to come. We have looked at some land opportunities, both in the multifamily and office arena, but that's really not a priority for us.

I think it's safe, this is Ernest, -- I think it's safe to say, Laura, that the plans that John outlined for development are all on properties that we presently own. So it's enhancing our income from those existing properties rather than the acquisition of properties and the development.

Okay. That's helpful. How many other properties in the portfolio would you say that there's additional opportunities for redevelopment or development?

That would include the Torrey Reserve property I just discussed, the Solana Beach Corporate Center property, the Lomas Santa Fe Plaza, our Sorrento Point property, Carmel Mountain Plaza, we are adding the 2 pads out there, and then Lloyd District.

Okay. Looking at the supplemental on page 20, where you have your development, redevelopment opportunities listed. Are rent levels where they need to be for these developments to pencil, or do you need to see rent growth in these markets?

We believe that the rental levels for the type of product that we are contemplating in Portland is perfect timing for us right now.

Okay. And what about these other projects mostly concentrated in San Diego?

All of them are ready to go. The one project that I've mentioned several times that we will require pre-leasing on is the Lomas Santa Fe project, because the building is pretty specific to a large box retail.

Okay, great. Thanks so much.

Thanks, Laura.

Your next question comes from the line of Chris Caton from Morgan Stanley. Please proceed.

Hello, just to follow up on that. If rent level is already there, how are you seeing them trend as you may be marketing some of these opportunities? Specifically, I suppose San Diego office with the projects you have planned.

Well, the buildings we have planned for Torrey Reserve are a collection of commercial buildings. They are not necessarily just office. There will be a bank branch, there will be restaurant space, there will be some office space. There will be some medical space. So it's not 80,000 feet of office. It is really a further development of the amenities that are available on the site. Up in Solana Beach, it is a small retail building that we are building. It will be probably one half restaurant and the other half retailers. So we are not -- we are building into markets. We already own the land, so we are building into markets where we expect pretty substantial returns on those investments.

I guess I was looking at Sorrento Point also, that would give you kind of a cluster of commercial properties. Are rents just at an appropriate level that you like the yields, or are rents moving in a favorable direction as well?

Rents are beginning. We are just starting to see rents beginning to move. Sorrento Point is a very, very unique project. It sits right on Interstate 5, and has views of the ocean and Torrey Pines golf course. We believe it will achieve higher rent than our Torrey Reserve project.

But you said the only building you would go build to suit is not including Sorrento Point.

That is correct.

The last question would be for Bob. You talked about property tax accruals which were up in the quarter. Can you shed a little more light on any savings you might see in Northern California? I think you alluded to it in your prepared remarks. I wonder if you could hang additional details and numbers on that.

Yes. You know, we've gone through some preliminary numbers. Obviously, it's going to take a couple years just to go through the filing process and fight with the assessor on that, but we think that we could achieve savings of up to half a million dollars on our Northern California properties between 160 and Landmark.

And that's on an annual basis?

Right.

Thanks for much.

Obviously, we are not booking that because that is a gain contingency. Until we know what actually happens.

Understood. So, the $375,000 increase you announced today is before any savings which could be on the order of $125,000.

Yes.

Thank you.

Your next question comes from the line of Brendan Maiorana from Wells Fargo. Please proceed.

Thanks. Good morning out there. Bob, just to follow up, the Prop 13 issue, to me, I think just going back to the IPO and the process there, I think the expectation was that you guys weren't likely to have a major issue for Prop 13. Is there something that changed over the past 6 months that is now causing this to be a little bit more of a --

No actually, on the road show, we estimated about a $1.3 million net increase. But when we filed the Board of Equalization statement, our in-house counsel thought that there was a way that, or they thought that we had some basis on which a transfer of ownership would not be recognized from a legal perspective. So we hung our hat on that. Our expectation was always that the Northern California properties would come down and our Southern California properties would go up. So it's really consistent with our expectation that everything we had mentioned on the road show.

So the legal justification of not having a transfer of ownership, the authorities or, however it worked out, that basis doesn't stand any more? Now you do have to accrue this?

Correct. So during Q1 when the Board of Equalization form was filed after the IPO, we were waiting to see what their conclusion would be, whether there was a -- especially since we had all the predecessor entities just rolling right into the IPO. We thought that there may have been some basis, legal basis for not considering that a formal transfer of ownership. Once the conclusion came back in Q2 from the Board of Equalization, we said, okay, now it is probable. We can reasonably estimate it. As a result, we are going to accrue both Q1 and Q2 in the second quarter.

Okay. Understood. In the $1.4 million or so annualized number, that is net of any pass throughs that you guys can get? Do you have mechanisms to be able to recapture some of that from your tenant base?

We do. Actually, that is net of the CAMs. CAM reimbursements.

Okay.

On a grossed up basis, we would expect the taxes to go up approximately $2.8 million, and we would get reimbursements bringing us down form the tenants, down to $1.4 million.

Okay. That's helpful. And if I look out and I hear the comments about still being active with acquisitions, you have a development pipeline on page 20 per your estimates is $88 million. I'm not sure if there's an update on the potential sale of Valencia, but when I look at your balance sheet after the Lloyd acquisition, that takes care of your cash and it moves your leverage numbers up to -- fairly close to the target 45%. Your stock, given the volatile market, it's down.

I think even last quarter you mentioned that you were unlikely to want to issue more equity at the levels where you were, even in the low 20's. How do you think about funding your growth plans as you look out over the next couple of quarters and years? Is it sale of assets, or do you think there's some other way to be able fund the growth initiatives that still keep leverage reasonable?

I think being a public company, we have various ways to access capital. I think right now, we are well set with $300 million -- you have the $250 million plus the $123 million of cash on hand in marketable securities.

Plus the possible sale of Valencia.

Plus a possible sale of Valencia, which could bring in another low $30 million, possibly. Right now we have what we need to execute our strategy. If John brings in a big fish, and we need to access more capital, there will be opportunities on how we approach that.

But we are very aware of not enhancing our leverage to the point where we are uncomfortable or our new stockholders are uncomfortable. We are going to be very cautious with our program.

Understood. But Ernest, when we spoke last, maybe at NAREIT, is it fair to say that you would be pretty reluctant to issue equity in the high teens where your stock is today?

Very reluctant.

Okay. Thank you.

Your next question comes from the line of Todd Thomas from Keybanc Capital Markets. Please proceed.

Hello, good morning.

Good morning.

Sticking with that, I was just wondering if you could give us a little more detail about the pipeline of investment opportunities that you are looking at today, maybe how that compares to what you were seeing last quarter.

Well, we are seeing quite a bit. I mention that we are maintaining a certain level of discipline. Unfortunately, most of what we are seeing, assets that are of a quality in a location that we would consider, prices are being driven to 4 and 5 cap rates. That just doesn't make any sense for us. We continue to look.

We feel very fortunate to have come across and executed the Lloyd District portfolio, but in light of where pricing is and where it's being driven to by primarily insurance companies and pension funds, we have begun a process of talking to people about assets that are off market and potentially pursuing some exchanges with some of the property we own. So it's just taking on a little different face, but the efforts continue.

Just to re-emphasize, our objective is to use the resources we have to produce the maximum returns for our stockholders, and not to take on opportunities that would in any way make you or us uncomfortable.

Okay. And then as you are engaged in these discussions with sellers and lenders, I guess in the last couple weeks, I was just wondering if there has been any change in those conversations at all.

I don't think so.

No. I think we've been very disciplined. I think we walked away from so many opportunities that it's mind boggling. We just are very disciplined. We are going to make the most of what we have. We have great opportunities within our portfolio. We have the resources to pursue them, and that's where we are at this time.

Okay. And then, John, you mentioned the Ancestry.com lease that is going into the DLA Piper space. You mentioned the rent lease came in well ahead of expectations. Can you just give us a sense of where the new rent is relative to the DLA Piper?

John, you want that or you want me to take that?

Yes. On the Ancestry.com, DLA Piper was actually $60 per square foot, and it is through January 31 of 2012. On the Ancestry.com lease, it's rolling down to $42, increasing to $50 plus over the 7-year term. There is 13 months free rent, 6 months of that is in the first year and then the rest is spread out over the next 6 years.

Okay. That's helpful. And then just last --

One other comment on that. There is zero TI's, so what we did was traded the TI's for some free rent.

Okay. And then just lastly, you gave a little bit of color on some of your expectations for Borders, perhaps, but with regard to your retail leasing spreads in general, I know it's a small sample of leases every quarter, but I'm just wondering when you think that we may start to see some positive leasing spreads or do you think that we continue to see some roll downs from here?

I think generally the retail we are seeing probably flat to upwards. On the retail leasing summary in the supplemental, we have seen a small number of leases that have some roll down. If you look at the new lease on the retail leasing summary in the second quarter, the prior rent is $30, the contractual rent is $30 going forward. That's only for leases. So we are looking -- this portfolio, my expectation is it is going to be flat to up.

I think our expectations on the Borders roll is that there will be positive result with the new leases.

In terms of the tenants that we are working with on the Borders space, just because we are still in lease negotiations, we don't want to name a tenant or the terms of the lease, but as Ernest mentioned, we were pleased. Our expectation is positive.

Okay. Actually, I have one more quick last question. Just a quick vacation related to the increased tax accrual. I guess I wasn't clear. You said that the gross increase in real estate taxes that you are expecting out is $2.8 million, net of reimbursement is $1.4 million. I was just wondering though, I thought on the change of control, the tenant's leases typically stipulate that they would be protected from reassessment. I was just wondering if you can talk about what those mechanisms are for your recapture, some of that increase and what's happening there.

Yes, when we came up with that number, we went through the leases. We have very few with any Prop 13 protection, and or do we have anything -- I think we have very few that relate to the change in control clause. So based on our analysis, we believe that we will have a reimbursement. We think that the number of $1.4 million is still our best expectation at this point in time.

Okay. Thank you.

Thank you.

Your next question comes from the line of Mitch Germain from JMP Securities. Please proceed.

Good afternoon.

Hello, Mitch.

How are you doing, Mitch?

I am great, thanks. Bob, would you have what the cash rent decline was if you remove the impact of the Salesforce lease on the office sector?

I don't think I have that with me, in front of me. You are talking about the cash rent on Landmark?

No. Just for the quarter. If you remove the impact of the Salesforce lease spreads.

You are talking on the office leasing summary.

Exactly.

You want to get back.

Let me get back to you. I don't have that readily available in front of me, but it won't take much to compute that.

John, with regards, I appreciate the commentary on the acquisition pipeline. Could you give us an idea -- I know you said it's mostly off marketed transactions. Where do we stand, is it mostly value add, or is there a mix of both value add and core assets in the pipeline?

I would describe what we are contemplating as far as trading into would fall in the category of value add.

Are you guys actively marketing the Valencia asset right now, or is that just something that you are just considering to sell?

It is being actively marketed.

And how would you characterize the discussion so far?

Well, what we are seeing in Valencia as we are seeing really all over, any office markets that are not in the core are experiencing some difficulty. So we have a full-blown marketing effort underway, and we are getting a fair amount of interest. We are just waiting to see how much we can push the price.

And if the transaction will close or not. These are uncertain times as we begin the discussion. If we sell it at a decent price, we sell it, if not, we don't.

Are you anticipating providing any financing? Is that something that you have thought about?

No.

Okay. Thanks.

Your next question comes from the line of Rich Moore from RBC Capital Markets. Please proceed.

Hello, guys. Good morning. While we are on dispositions, is there anything else, given the current pricing levels you are seeing out there, that you'd like to push out the door?

Well, we've contemplated the potential of selling something, but that's really -- the decision to do that is being driven primarily by what we could buy in its place. So I think if we were to decide to sell, let's just say the asset that comes up quite a bit, Alamo Quarry, because it's a little bit out of our core market area, what would we -- we'd have to find something of equal or better quality than that property to trigger us to sell it. So we are looking. It is certainly a possibility, but we have not identified anything that we feel would be inappropriate trade.

John, let me add to that too. You know, Rich, when we look at those dispositions or those trades, it needs to be accretive. So to just trade an asset to get -- for instance, to sell an asset at 4.5 to turn around and buy another asset at 4.5 doesn't make any sense. You are just trading dollars, and you just incurred transaction costs. But if I can sell something that is not part of our core, or something that does not make -- where we don't see the continuing growth in at a 4.5, and I can buy something at a 5, 5.5, 6, maybe 7, that's accretive and that makes sense for the shareholders.

From my perspective is the portfolio we have is excellent. And so my father, who was a gynecologist, used to say, when you are buying, you've got to be right once, when you are switching, you've got to be right twice. If we are so delighted with what we have, there is some risk in selling what we believe to be excellent, and finding something, as Bob pointed out, would be accretive. So it's a tough trade.

Okay. That's good color. Thank you, guys. Then on Lloyd, is there any chance you would put a mortgage on any of those assets? Correct me if I'm wrong, I'm guessing you could get a mortgage on any of the individual buildings, is that right? You don't have to do something in aggregate.

Yes, that is a possibility. That's something that we have not spent a lot of time evaluating yet. We want to get our arms around the additional development potential and make sure that we don't do something that would in any way prohibit the further development of that property.

Okay. So part of this is dependent on what you decide to do with the development over the next few months.

But in addition to that, I think it's a decision where we take all of the facts that are available at that point in time and try to make the best decision for the shareholders. For instance, we also want to take a look in terms of becoming investment grade down the road. I need to make sure that, from that perspective, I want to make sure that I'm around 25%. I want to keep a maximum of 25% unsecured debt, but if things have changed where the cost of money is very cheap in the mortgage market. So we just take all these variables into consideration, and we try to make the best decision at the time. Right now it is too soon to be making that decision until we know more about the development of the Lloyd District.

Okay. Thank you. When do you think you will need cash exactly on the $88 million of re-developments that you are starting? When will you start -- I assume you use your cash or maybe your line of credit to fund some of that. I mean, how will that draw down, do you think, over the next 6 or 8 months?

I think that over the next -- Bob, do you want to say something? I think over the next 6 or 8 months, as John pointed out, the permits are still in process. The requirement for cash then is minimal. We have more than adequate cash on hand. Many of these development possibilities are down the track, and as Bob pointed out, we have all kinds of alternatives and opportunities, but we are very cognizant of the fact that these are tumultuous times and we want to be on the soundest possible footing, regardless of the actions that we take to increase our investments in real estate.

Rich, I think the key is when John pulls the permit, at that point in time we will provide transparency to our shareholders as to the future expectation of capital requirements for that 88,000 square feet.

But we do believe that the Lloyd portfolio does offer some opportunity on the existing properties to mortgage them if we deem that advisable, but we do want to study the whole portfolio to make sure that we don't take a wrong turn by putting a mortgage on something, and then we have to defease it. So we are being very thorough, and very cautious, and very complete in our investigations and our consideration.

Okay. Thank you, guys. And on the apartment side, for just a second, you mentioned in the press release that you are giving some concessions to fill in the space. Can you characterize those a bit? I mean, what is the significance of what you are doing there.

Yes, Rich. On the apartments, like Loma Palisades, at the beginning of the year, we were approximately 88%, 87% occupied there. That is a 400 -- 500 --

550.

548 unit apartment complex. We looked at our one-side management system and we started tracking the apartments that were not re-leasing quickly. And with any apartment site, there will be some that will lease quickly, more quickly than others, based on location, based on many variables. And so those that were not re-leasing quickly, what we did is we offered an incentive of a couple hundred dollars, I think it was like $200 to $300. By keeping the rack rate the same, we would offer a $200 to $300 credit to some of the tenants on specific spaces that were not being re-let quickly. That drove the occupancy up in the second quarter. So we have given a little bit back, but now it's basically full, and we are at the point where we can start reducing those credits and drive income.

In the case of Loma Palisades, we had a manager who's been with us 25 years. She moved out of town, she came back, took over management, handled the situation beautifully. It's also a project that tends to have more vacancy in the winter and less in the summer, so our objective now is to make sure that leasing we do in the summer carries us through the winter. It's a management thing that we've dealt with for all the years we've owned project. We think we've got it well in hand.

Okay, all right. Good. Thank you, guys. The last thing from me, on the same store pool, is there anything -- any of those assets that are not in same store pool that will make their way in 3Q or 4Q?

In the supplemental?

I'm looking, Bob, at that package, page 34 has the non same store assets. I think a couple of those by the first of the year will be in the same store pool, right?

Right.

Anything from 3Q, 4Q that goes in there?

Yes. We've got to take a look at it, but Landmark may be included in there in Q3. Keep in mind, that was purchased on June 30 of 2010. So we are considering putting that back in Q3.

Okay. So is your rule that you have to have had it for a year, is that the idea?

Correct.

Okay. Good. Thank you guys.

Thanks, Rich.

I show no more questions at this time. I would like to turn the call back to Mr. Ernest Rady for closing remarks.

First of all, I want to thank you all for bearing with us as we transition into a public company. We are delighted to be public, and have all the opportunities that we have available to us, and for all of our stockholders. While these are tumultuous times, as Bob pointed out in his opening remarks, the best of times are the worst of times. We are looking forward to taking advantage of the opportunities that are presented to us. We think we are in an excellent position with the best quality properties that we can possibly manage, and we look forward to serving our stockholders very well over the future.

And with that, thank you very much for attending. We look forward to talking to you next quarter, if not sooner. Thank you.

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