American Assets Trust Inc (AAT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 American Assets Trust Inc. Earnings Conference Call. My name is Tahisha and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Adam Wyll, Senior Vice President and General Counsel. Please proceed.

Thank you. Good morning. I'd like to thank everyone for joining us today for American Assets Trust third quarter 2011 earnings conference call. Joining me on the call are Ernest Rady, John Chamberlain and Bob Barton. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

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

Risks and inherent 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 that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents providing 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 being our discussion of third quarter results. Ernest.

Thanks Adam, and good morning, everyone. Thank you for joining American Assets Trust Third Quarter Earnings Call. We continue to be pleased with our operating and financial performance thus far in 2011. We expect sustained positive results for the balance of this year and even better performance in 2012, as John and Bob will address in a moment.

As I said before, we believe our disciplined, focused and steadfast business strategy produces long-term consistent solid results. We believe that we have met or exceeded the growth, investment and positioning strategies described in our S-11, especially notable in this is our first year in the public domain.

Despite the volatility of the global financial markets and the lagging economy of the US, we have seen improvement across all our asset classes. As you may know, our model is a history of success, a future of opportunity. We see a lot of opportunity on the horizon and appreciate our shareholders trusting us with the responsibility to maximize shareholder value. This is our charge and we take your trust very seriously. 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, our portfolio as well as an update on our investment activity. Bob will follow with a review of our third quarter financial results and then Ernest will offer a few closing remarks.

First to our office portfolio. Our properties continue to outperform their competitive set in each of their respective sub-markets. Portfolio wide, not including Valencia and the Lloyd properties, third quarter net absorption totaled approximately 11,000 square feet and overall leased building area rose slightly to 94.1%.

San Francisco is continuing to experience aggressive rent growth, particularly in the south market area fueled by demand from the tech sector. Our financial district and SOMA assets, One Market and King Street properties are now both 100% leased.

In Portland, Oregon, on July 1, 2011, we complete the acquisition of the Lloyd District portfolio which consists of six buildings totaling approximately 800,000 rentable square feet of which 600,000 square feet is owned. The Lloyd properties generated approximately $1.9 million of NOI on a cash basis for the third quarter.

As we've mentioned before, we are particularly enthusiastic about the development opportunity that exists at this property. As a result of years of planning, the portfolio has been designated for additional development rights to encourage high density, transit oriented, mixed-use, urban village design with the potential to be in excess of several million square feet. The planning and design effort is now well under way.

With the Lloyd portfolio as our second major Portland acquisition, we believe this market offers significant additional potential for American Assets Trust. With a total of 21.9 million square feet of office space in the downtown area, Portland has the lowest class A vacancy of all major markets nationwide. According to Grubb & Ellis, overall vacancy is holding at 6.5% and rents are trending upward as there is no new spec office space under construction. We are big believers in this market.

Now to our retail properties. Portfolio wide, third quarter rents continue to trend upward as net absorption was negative approximately 42,000 square feet due primarily to Borders and Blockbuster, premises we've anticipated recapturing. The portfolio, not including Beach Walk, was 92.6% leased as of the end of the third quarter.

On November 8, Seattle based Nordstrom, Inc. announced plans to open a new Nordstrom Rack in the fall of 2012 at our Carmel Mountain Plaza Shopping Center in San Diego. The new Nordstrom Rack will join anchor tenants Barnes and Noble, Marshall's, Michael's, Ross and Sprouts. This will be the fourth Nordstrom Rack in San Diego. Nordstrom also operates four full-line stores in the area.

In a quote from Geevy Thomas, President of Nordstrom Rack, he states - - San Diego has been our home for over 30 years and we hope our new store at Carmel Mountain Plaza will help us better serve the many customers we are fortunate to have in the area. We at American Assets Trust are thrilled to welcome Nordstrom Rack to our property. Nordstrom Rack is the perfect addition to this center. In closing, on retail, our San Antonio and Monterrey retail properties continue to operate very well as expected. We expect both recaptured Borders locations to be leased in the first quarter of 2012.

Now to our multi-family assets. Fundamentals continue to improve in San Diego County. Our active management of the properties resulted in a significant improvement in occupancy in the third quarter. We are currently operating at approximately 94.4% occupancy, an increase of approximately 4% year over year, have eliminated rental concession and incentives and are pushing rents at all properties up approximately 3% as turnover occurs.

Now on to Hawaii. The Hawaii economy continues to show remarkable resilience in the months following Japan's earthquake and tsunami. Total air arrivals dropped a modest 4.1% year over year. Canada's arrivals again increased 15.7% in the third quarter, marking 14 consecutive months of double digit growth. At Waikele Center, which was 90.9% leased at the end of the third quarter, our pursuit of a small collection of outlet retailers to replace Borders has been successful with the addition of Gap Outlets taking approximately two-thirds of their former premises and increasing the lease percentage to 93.3%. Discussions are well underway with one additional national brand to backfill the balance of the vacated space.

Waikiki Beach Walk was 99.2% leased and occupied at the end of September. Retail, full-service and quick service restaurants continued to show strong upward sales trends. Our Shops on Kalakaua remain 100% leased and occupied. Our Embassy Suites as Beach Walk again exceeded our competition in ADR and rev par measurements for the quarter. The property's ADR and rev par index were 242.12 and 214.9 on a year to date basis respectively. The occupancy index finished slightly behind our competitive set at 94%. The outlook for 2011 remains consistent with our expectations facing ahead of 2010. July and August were expected to exceed our budgets and did.

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 have selected one of the most prominent architectural firms in the northwest, GBD, which has the capabilities and expertise to pursue a project the size and scope of this anticipated opportunity. The complete design team is now in place and we are well into the design process. We expect approvals and permits by the third quarter of 2012. Market conditions, as always, will influence the actual start date.

We recently acquired a retail office and multi-family mixed use development site, Highway 101 in Solana Beach, not far from our other holdings there. The planning process is underway for a project totaling approximately 100,000 square feet. Approvals are expected within the next 24 months.

We are also in the process of securing building permits for the expansion of Torrey Reserve phases three and four. Collectively this project represents approximately 80,000 square feet of commercial space in five 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 December 9. If approved, and we believe it will be, we will move immediately to prepare construction documents and obtain building permits. Again, market conditions will dictate the actual start. We consider this the premiere office site in San Diego with views of the Pacific Ocean and Torrey Pine State Reserve while sitting with great prominence toward Interstate 5 in Del Mar.

Our acquisition pipeline remains in full swing. However, we continue to be very disciplined. While there are very high quality assets being brought to market, cap rates have continued their downward compression to all-time lows. The bulk of our efforts are focused on off-market opportunities. All are high quality located in our existing and targeted core markets and include all three of our asset classes.

On a final note, we will be hosting an investors' summit for our Hawaii properties January 18, 19 and 20 in 2012. This has been organized with the help of Paul Morgan and [Chris Kattan] of Morgan Stanley and will include property tours of several peers, including Douglas Emmitt, Simon Property Group and GGP, just to name a few. For more information, please feel free to contact me directly. I'd 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 third quarter FFO of $0.29 per share. Net income attributable to common stock holders was $0.08 per share. American Assets had a solid third quarter performance based on steady occupancy in retail, office and mixed-use combined with our results reflecting a full quarter of the Lloyd District acquisition.

The company's board of directors has declared a dividend on its common stock of $0.21 per share for the quarterly period ending December 31, 2011. The dividend will be paid on December 29 to stockholders of record on December 15.

Turning to our results, third quarter FFO increased approximately $2 million or 13% to $16.7 million compared to second quarter FFO. The primary drivers of this increase are attributable to the following nine items -- a full quarter of operations from the Lloyd District acquisition resulting in $1.9 million in GAAP NOI. Embassy Suites GAAP NOI increased by approximately $0.6 million. First and Main's GAAP NOI increased by approximately $0.1 million.

Landmark's GAAP NOI increased by approximately $1 million from a full quarter of sales force rental income versus one month of rental income in the second quarter. Loma Palisades GAAP NOI increased by approximately $0.3 million over the second quarter. The sale of Valencia reduced GAAP NOI by approximately $0.2 million. Retail same store GAAP NOI decreased by approximately $0.4 million, the majority of which is attributable to Borders. An increase in First and Main's interest expense for a full quarter resulted in $0.7 million increase over Q2.

Other income net decreased by approximately $0.6 million due to a lower unrealized gain in marketable securities and higher income tax expense accrual relating to higher revenues and taxable income from the Embassy Suites during the third quarter which impacted the taxes payable by the taxable rate subsidiary.

Although we did not provide any formal guidance for the third quarter, my Bloomberg screen shows a consensus mean estimate of $0.29 of FFO per share, consistent with what we have reported for the third quarter.

Moving forward, as I look to the fourth quarter, and without providing any formal guidance, I believe we will experience the following two significant differences from Q3. First, we are projecting a decrease in FFO by approximately $0.02 per share from the Embassy Suites due to the typical seasonality of the hotel in the fourth quarter. While the occupancy remains fairly consistent throughout the year, the average daily rate will change based on demand from seasonality.

Using this year as an example, FFO from the hotel has been as follows during 2011. Q1 it was $1.3 million. Q2, $1.7 million. Q3, $2.3 million. We believe that Q4 will approximate Q1 FFO for the hotel. Q1 and Q4 are typically impacted by the seasonality. Q3 is considered to be the high season. As you can imagine, July, August and September are usually the strongest months of the year when people take their vacations. Secondly, we are projecting a decrease of FFO by approximately $0.01 per share due to the sale of Valencia Corporate Center in August.

Now as we look at our balance sheet and liquidity at the end of the third quarter, we are well positioned to continue to execute on our strategy. At quarter end we have approximately $350 million in liquidity comprised of $153 million of cash and cash equivalents to marketable securities. And $197 million of availability under line of credit. We have a well laddered maturity schedule over the next decade providing a hedge against rising interest rates that will most likely occur at some point in the future with a weighted average fixed rate of interest of 5.45%. We have no variable rate secured debt.

Net debt to adjusted EBITDA at September 30 decreased from 7.5 to 7.0 times and reflects the contribution to adjusted EBITDA from the Lloyd District Portfolio acquisition. I should point out that our calculation of adjusted EBITDA and the supplemental is based on the nine months year to date EBITDA annualized. Accordingly, it doesn't include a full 9 months for First and Main or the Lloyd acquisition. Had we annualized those two acquisitions, our net debt to adjusted EBITDA would be approximately 6.5 times.

Our leverage goal continues to be less than 45%. Our net debt to total enterprise value at the end of the third quarter remains within our range at approximately 43%. Our fixed charge coverage ratio remained at 2.2 times at June 30 reflecting the interest expense from the First and Main mortgage upset by increased EBITDA from the Lloyd District Portfolio acquisition.

Our focus continues to be on long-term NAV growth for our shareholders. We are also focused on positive same store NOI growth on a relative basis, which we believe will ultimately translate into organic FFO growth.

Our same store results for the three and nine months ended September 30 are set forth in detail in our earnings release. I don't believe those same store NOI results show the true quality of our portfolio because a large part of our portfolio is excluded in same store NOI during the first year. As disclosed in supplemental, same store retail NOI does not include the results of Solana Beach Town Center 1 through 4. However, when I look at same store NOI comparing Q3 to Q2, we are down only 3.5%. This would include all retail properties in our portfolio.

This change is primarily due to the Borders closures. Set another way, excluding Borders, the same store retail NOI is flat Q3 over Q2. We anticipate that the three former Borders spaces will be released at the same or increased in the aggregate and we have already released the majority of one space consistent with that expectation, as John has eluded to.

Similarly, same store office NOI does include the results of Solana Beach Corporate Center 1 through 4, Landmark or First and Main. However, when I look at same store office NOI comparing Q3 to Q2, we are up 12.4%. This would include all office properties except for Lloyd District and Valencia Corporate Center. The 12.4% increase in same store office NOI is primarily the result of a full quarter of sales force lease at Landmark and additional parking income at 160 King Street during the baseball season.

When I look at same store multi-family NOI comparing Q3 to Q2, we are up 16.9% due to higher average occupancy, 96.9% for Q3 compared to 96.0% for Q2 and lower operating expenses, largely real estate taxes.

Year to date hotel suite revenue is ahead of 2010 by approximately $1.5 million. As the economy rebounds in Hawaii we have been consciously been letting go of lower priced business, which has increased our ADR and rev par, impacting our results for the nine months period ending Q3 2011 and Q3 2010 as follows. Paid occupancy is 88.8% for the quarter ended Q3 2011 versus 87.6% at Q3 2010. Our average daily rate for Q3 2011 was $242.12 versus $225.27 for Q3 2010. Our revenue per available room, or rev par, was $214.90 for Q3 2011 versus $197.32 for Q3 2010, all with increase metrics.

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

Thank you.

(Operator Instructions)

And your first question comes from the line of Craig Smith from Bank of America. Please proceed.

Thank you. You mentioned in the call that you thought both Borders would be released by the first quarter. Do you have a sense of when they may be occupied?

The expectation is once the lease is signed and tentative improvements are completed we're probably looking at about nine months from lease execution.

And do you think the same store NOI and the retail will remain negative until those are occupied or could that happen sooner?

Same store NOI we think will be coming down from where it is now. We think overall it's going to be flat on the portfolio. In terms of the Borders transactions, we think that the rent will be equal if not up to where we are now.

Thank you.

Thanks, Craig. Any other questions?

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

Hi. I was hoping that, John, could you talk a little bit more about the redevelopment portfolio? You talked about you know moving closer in terms of pulling permits and getting approvals, but always subject to market condition. Can you talk about those market conditions or are there anywhere across the handful of projects you described where market conditions already justify it? And you may, if you had the permits today or if you're all set you'd start right away?

Well, if we had permits for the project up in Portland, the Lloyd District project, we would proceed with that immediately. With Torrey Reserve, we anticipate once we have permits starting that project as well. The Sorrento Point project, being a larger spec office project, you know we're going to be careful and calculated in when we start that. Those are the primary projects that are in the very near term that we could begin, and we expect to, short of the US economy taking another dive.

And, John, could you just frame the opportunity in Oregon, order of magnitude, unit count, construction costs? What do you expect your capital commitment in the general way, can you frame that for us?

Sure. The entitlement for the property far exceeds what is commercially practical to develop. If you run a calculation based on the 12 to 1 FAR, it results in something like 8.5 million square feet of space. We expect a project overall to be somewhere at the end of the day between 3 million and 4 million. The first phase of the project, what is in design right now, is coming in around 1.2 million to 1.4 million square feet. That would result, if just doing rough math, approximately 1,200 apartment units and some retail.

Because we had no land base in the property, we expect the returns to be better than typical. By that, I think we've discussed in the past, that our benchmark for a development project is approximately 11%. We think this will be at or slightly above that number.

Cost wise, the apartments that we're planning to build up there are coming in at approximately [$125,000] a unit. That number is supported by current market rents in the area. And that's, as I said, that's a project we would proceed with immediately.

This is Ernest, but we do intend to proceed in a phased way and examine our alternatives as we go forward and maximize the returns and the opportunities from that portfolio.

Yes, as Ernest mentioned, in a phased way the first block that we're planning, this 1.2 to 1.4 square feet is actually going to be constructed in four separate independent phases. They're all standalone, so it's not going to be a big chunk. So if you take a quarter of that total and that would represent the first phase of the project.

But over the near and medium term, it represents a very exciting and potentially very profitable opportunity for American Assets Trust.

And these are right on the light rail there at Lloyd Center to take you into downtown for free, right?

That's correct. It's at the convergence of actually two different light rail lines. One is the street car system that's brand new. Construction is just nearing completion right now. And the other is the commuter rail line, which runs east and west through Portland.

Not to say anything of it being across the street from a regional shopping center. I think that this opportunity is as good as it gets.

Thank you.

Thanks, Chris.

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

Hi. Good morning. Jordan Sadler is on with me as well. First question, in terms of acquisitions, you mentioned that you're looking at small market deals that are within all of the asset classes that you own. Can you just shed some light on what you're seeing, what kind of deals you're looking at, maybe what kind of dollar volume in your expected timeline to deploy capital?

That's a good question...

And it's a very difficult one to answer, very difficult one to answer.

We have, as I mentioned, we're looking in all of the core markets that we're in currently. We have a number of different opportunities that involve potential joint ventures, that involve existing projects that could be redeveloped or additional development added to them, but I would not describe those as things I can give you some hard numbers on at this point.

I think it's safe to say we see lots of things that we would like to acquire, were the price more sensible for our stock holders. But whether or not we'll be able to agree on a price with a seller that would be satisfactory to our stockholders is highly, highly uncertain, but we continue to make ourselves available to look at those opportunities.

On pricing, where is pricing today for some of the retail assets, you know existing stabilized properties that you're looking at that you would like to own?

Well, in San Diego you're probably aware of a couple of transactions that have taken place recently and those are at what I would consider to be all-time low cap rates for retail properties. I wouldn't even put the properties into the category of being in the same league as what we own and one, in particular, in Carlsbad sold for approximately 4.8 cap and another one in Encinitas sold for a 5.4 cap rate and these are properties that I would consider A minus locations.

It certainly speaks of the market as being a difficult one to acquire in, but it certainly is assuring to know that our assets are of superior quality and were they ever to trade, would be valued at a price that would be quite satisfactory.

And one of the other factors influencing our thought process in Portland is we've looked at a number of stabilized multi-family assets in the Portland area, both in the CBD or the area called the Pearl District as well as some outlying areas and those transactions have all started with a 4 for the cap rate. So we think we're going to be much better off developing in that market as opposed to acquiring.

But it has given us a sense of the marketplace and the values that are possible to create if the projects we develop are successful.

Okay. That's helpful. And then going forward, as you make some acquisitions, I was just wondering whether we should expect to see you continue to utilize low interest rate mortgage to fund these deals or do you plan on utilizing your cash balance? And maybe you could just talk a little bit about how you view leverage today and plan to manage your balance sheet going forward.

You know, we're a new public company and we have had a discussion at the board level about leverage and what level of leverage is appropriate to our circumstance. At the moment we would not borrow and leave cash sitting idle at the magnificent rates or lack of magnificent rates that we're earning today. So this will be an ongoing discussion. It's going to be a major item at the next board discussion. Bob, do you have something to add to that?

Yes. I mean, our view is to continue to keep our leverage at 45% or less. We're very conservative. When we use debt we want to match long-term financing with long-term assets. If we use a line of credit, we don't want to keep it out very long so we have a very conservative approach on that. We understand that there's many arrows in our quiver regarding the opportunities of being a public company and there's lots of access to capital in various forms. We understand about the investment grade market. We don't have any looming maturities until 2014.

And every time we've refinanced one of our loans we've had 20 to 30 lenders at the door wanting to refinance because of the quality of the property. But going forward, there is many opportunities on how to finance that. We can do investment grade as we get closer to 2014, 2015. If secured rates, CMBS or life insurance money is the cheapest product out there, we'll consider that. We just take it one opportunity at a time and we see what's the best way to go, what's best for the shareholders and then we make a decision to go forward.

And, of course, if interest rates do stay low, 2014 will be a fantastic opportunity to refinance.

Okay. Great. Thank you.

Thank you.

Your next question comes from the line of Sheila McGrath from KBW. Please proceed.

Yes. Good morning. Bob, the quarter was on track with our expectations and I think you did a good job highlighting the impact of both Borders and lease roll down last quarter. It looks like we'll have these headline same store numbers to be negative or dragged down by these items for the next couple quarters. I was just wondering if you could walk us through any items that we should continue to expect will impact you know whether it's real estate taxes or Borders. And when will your whole portfolio, excluding recent acquisitions, be actually included in the same store portfolio?

Good questions. Starting January 2012, that's when the same store will have all the properties included on a same store basis. It's just during the first year out because when we went public on January 19, we had several entities that we did not have control from an accounting standpoint, so they were excluded from the predecessor entities and were not included until January 19. So from a same store basis, you can't use those in 2010. So going forward in 2012, all the properties will be included and we can compare those to a 2011 from that perspective.

In terms of the major items to focus on, we talked about in-depth on Q2 about the accrual property taxes. I don't think I have to go any more into detail on that, but we had continued the accrual property taxes for the remainder of 2011.

I think the key items that I stated in my prepared remarks that will impact Q4 is really going to be the seasonality of the hotel. We think that our FFO will be down by about $0.02 per share just from the hotel, as expected. Overall we're in line with our revenues from last year, but Q3 is high, Q4 goes down. It's just a typical seasonality.

And then, of course, with the sale of ICW Valencia during the third quarter, you're not going to have the inclusion of that FFO. What that means it that we have additional $30 million of cash on the balance sheet and when we redeploy that we will then pick up that FFO once again. So I think those are the primary items.

And can you remind us which properties, starting in January, will be added to the same store portfolio?

Well, it's the one that we didn't have control on. So on the retail side, it's Solana Beach Town Center. On the office side it's going to be Landmark, Solana Beach Corporate Center, what's the other one? They're all disclosed in the supplemental.

Okay.

You have to go cheat in there on that.

Okay. And could you also discuss the land acquisition that was in the press release, the plans for that parcel and your thoughts on the pricing of the parcel?

John, you want to?

Sure. What it is, it's a property located literally one block from the beach, right on Coast Highway. Great, great visibility. The real estate in Solana Beach is very expensive. Rents are very high as we are well aware of. And the opportunity in the location is such that we expect to command rents even higher than what we obtained and see in our two shopping centers.

So the zoning for the property provides for retail, office and residential. It's not a very large project. It will end up being about 100,000 square feet. Our all-in costs for the project will be about $350 per square foot and rental rates on Coast Highway are between $4 and $4.50 a foot, triple net. So we are excited about it. From a residential standpoint it's idea. It's a one block walk to the beach. From a commercial standpoint it's idea because of its frontage on Highway 101. So it's a property we're pretty excited about.

And just a comment on the pricing, I think we were fortunate to get it at the price we got it. It's just a jewel.

And the $350 includes the land cost?

Yes.

Okay. And so that project will be mixed-use and what do you expect timing on that?

Well, we have to go through the entitlement process. We have a great relationship with the city of Solana Beach because of our existing holdings. The city is very excited about the fact that we were the ones that were able to acquire the property and we expect that approval process to run fairly smoothly and quickly. As I mentioned in my prepared remarks, we expect to be through that process in about 24 months.

Okay. Thank you.

Thank you.

24 months sounds like a lot under normal circumstances, but in San Diego that's lightening speed.

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

Thanks. Good morning. Hi, guys. So just a question, John. Maybe I was a little bit surprised to say that you think pricing hasn't at least evaded a little bit for some of the acquisitions because it seems like some of your peers are saying that maybe not deals that are closing right now that got signed a couple of months ago, but things that have come to the market over the past couple of months, if there's any sort of risk associated with them, whether it be vacancy or near-term role. Maybe they're seeing a little bit of less frothiness from buyers, but are you guys seeing any of that in the target properties that you're looking for?

Not at the level of quality that we look for, not at all.

I think that's the key. We want to maintain the high quality of our portfolio. If we were to sacrifice that, there might be some opportunities, but quality is still solid gold and we want more gold.

And that's something that's just our strategy here. We're not going to stray from absolute high quality irreplaceable assets.

I apologize. I haven't added up kind of all the costs of the various development projects that you guys are entertaining, but as you think about that and the projects that are likely over the next few years, how do the costs stack up relative to the 150 million of cash that you have on the balance sheet now?

Well, relative to the cash on the balance sheet of $150 million, the construction costs are going to be more than that. But the developments are going to be phased. They're going to be thoughtfully thought out. We're not going to start anything until we understand how they're going to be financed or capitalized. And a lot of the developments, you know we're still going through the process in terms of what's going to be built on there, what the costs are going to be, so we don't have that information.

What we'll do in the supplemental in future quarters, as we know that information, we will break that out for you to show specifically what we think an estimated start date will be, what we think in terms of approximate costs will be and what we think our return on invested cash will be. But until we know that information, we won't provide it in the supplemental. It's just more of an educated guess.

So we're doing the due diligence now and we're going to be thoughtful. We're not going to get over our skis, as John would say, but we're looking to make accretive, thoughtful decisions in terms of the deployment of capital.

And of course there always is the opportunity to finance some of these developments in the debt market now, which is at historically low-cost levels. One of the things that's most important to us is to maintain our absolutely pristine financial integrity and that will be a hallmark of what we are today and what we will be going forward.

Sure. That's helpful. And then I wanted to just go back to the Lloyd District development opportunity there for a minute. How do you guys think about the competitor that's got a land site that I think can do probably more in terms of multi-family development? How does that impact the timing that you guys are thinking about with phase one for your multi-family development? And can you give us a sense of how far along they are in the approval process, if you guys know that?

Well, we do. They are not very far along and they actually are considering more retail, not multi-family. They have a plan to build a very large theater as one of the anchor tenants of the site and replace the theater that's sitting on a site adjacent to their block. So we are well into the pipeline of pursuing an approval and obtaining permits and we've had several conversations with our neighbors and there is no active planning process taking place at this time.

One of the things you might consider is that additional development in the area would enhance the opportunity that we have and our development would enhance the opportunity they have. So we don't look upon it as competition actually. We look upon it as additive to both our plans.

Do you have a sense of how much in terms of either retail or multi-family that they may be looking to develop and how that could be complimentary to what you guys are doing?

We think you should ask them that question because their plans are privy to them only and we have a very cordial relationship with them, but I don't think it's our lot in life to disclose their thought process.

And Brendan, just so you know, there are several properties in the area adjacent to our site that have additional development potential. Kaiser's headquarters for the Oregon area are across the street from the Lloyd District. They have very large parking areas that can be redeveloped as well. And it seems to be the preference of the property owner as to what type of development they may consider. There are proposals for hotels. There are proposals for some multi-family. There are proposals for retail, as we mentioned. There is a proposal right now from Nike to build a very large entertainment facility. So there's a lot going on in the area. It's not just the mall property.

We're very focused on the meal on our plate and we think it could be a very tasty deal. We're going to work very hard to make sure that it's the best that we can create and that the other activity in the area ought to be enhancing it and accretive.

Sure.

The actual station of the light rail and street car station is literally in the middle of our property. So we see that as really being, for lack of a better term, call it made in main. And that will be the point of synergy that we are going to work off of. You know the mall has different ideas. Kaiser has different ideas. The Ashforth people have ideas. They are in line to develop the convention center/hotel. So there's a lot of moving parts up there, but we think from a location standpoint we have the best property out there.

Sure. And sorry for my ignorance on this one, but the street car is not operational today to your site and that's going to be next year or is it operational?

It is planned to be operational in September of 2012.

Okay. Great. And then just last one for me for Bob, maintenance cap ex kind of picked up a lot in the quarter relative to the first half of the year. Was that just seasonality or what do you think is a reasonable kind of run rate for that line item per quarter or per year?

You know I would probably average it out for the three quarters. We had some roofing expenses at Alamo. We had some parking lot additions or renovations up at Del Monte. So they were a little bit higher than Q1, Q2, but with a portfolio our size you're going to see the ups and downs from quarter to quarter. I would probably average it out over the three quarters.

Okay. Great. Thank you.

Thanks, Brendan.

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

Hi. Good afternoon, everyone.

Afternoon to you.

How are you doing, Mitch?

Good morning. Sorry. Are you guys managing, John, the Portland property or if I recall I think you're partnering with the previous landlord. Is that correct?

Not partnering. We have retained the previous landlord to manage the existing assets up there, property management only. They are being paid a fee. They do not have an ownership interest. We are managing the development process.

Great.

We work very closely with them on the managing of the existing asset. They integrated with our own folks who supervise it very closely.

Great. And then just quickly, some of the multi-family landlords were referencing some slowing trends and I'm curious what you're seeing in that portfolio.

I think our apartments are doing very well and we think the locations are irreplaceable. There will be some variation by season, but we've had these assets in our portfolio for many years. Their outcome is predictable and certain and we're very pleased with them going forward. So I don't know how fine we can tune it other than to say over the long run they will be significant cash generators.

Yes. Our properties are continuing an upward trend at this point.

Okay. Great. And you had talked about some JVs on the deployment side. Are those one-off joint ventures, potential portfolios?

One-off. And there's only a couple of them and obviously we haven't done joint ventures. We've almost purposely stayed away from them, but if the right opportunity presents itself and the property and the opportunity meet all of our standards, we may pursue a joint venture where we have a 51% controlling interest in it. But that is, I would say at this point, very preliminary.

Joint ventures is obviously another way of financing. So you've got to look at each opportunity and see what the merits of that are. From an accounting standpoint, as John mentioned, we're looking for 51%. Our preference is to consolidate that joint venture on our balance sheet so we can see it flow all the way down to the bottom line.

That's from an accounting point of view, but from an operational point of view we are very focused on retaining control over whatever position we take in any development.

Great. Thanks.

Thanks, Mitch.

And you have a follow-up question from the line of Chris Kattan from Morgan Stanley. Please proceed.

Hi. Just a short one on Nordstrom Rack at Carmel Mountain. What's the economic impact of that late next year? What are the ramps and what space are they taking?

Chris, we specifically cannot discuss the terms of that lease. That's an agreement we have with Nordstrom. But I can tell you we're very pleased. We have a lease pending for the balance of the space at Carmel Mountain, so that old Mervyn's that we acquired will be 100% leased and occupied here. We expect that lease for the other half of that building to be executed in the first quarter of next year. And as you may recall, we also, in acquiring the property, were able to include 2 additional outparcels, pad buildings, that we plan on developing as well. So all in all, I think the best way to summarize it is we exceeded what we expected at that property.

Yes. Part of what I was driving at was that was vacant space.

That's right. That was a vacant building we acquired. We do have the one lease signed. We are hopeful of the additional leases to be signed, that John referred to. There is no assurance that they will be signed. We are hopeful that they will be signed and as soon as they are signed we will notify all our investors of that outcome.

That's what, by the way, let me just add to that, that's part of the growth in 2012 because we acquired that pad in November prior to the IPO, November 2010. So once that is completed and filled ...

If it's completed and filled.

-- that will be part of the growth story in 2012.

Are there any more questions?

No. That concludes the Q&A session. I would now like to turn the conference over to Mr. Ernest Rady for any closing remarks.

Thank you all for your interest. We're flattered and honored to have you interested in our company. As I said at the opening, that we're very, very satisfied with the way our properties are performing, our management is doing - your management is doing an excellent job. We think we have a great future and we hope that you continue to bestow your confidence in us and we can live up to that trust and confidence. So thank you all and a good day.

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