American Assets Trust Inc (AAT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 American Assets Trust earnings conference call. My name is Anne and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. (Operator Instructions). We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Adam Wyll, Senior Vice President and General Counsel. Please proceed, sir.

Good morning, I'd like to thank everyone for joining us today for American Assets Trust's first-quarter 2012 earnings conference call. Joining me on the call or 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 first-quarter 2012 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 we believe the expectations reflected in such forward-looking statements are based on reasonable assumption, our future operations and our actual performance may differ materially from the information contained in our forward-looking statements and we can give no assurance that these expectations will be attained.

Risks inherent in these assumptions include, but are not limited to, future economic conditions including interest rates, real estate conditions and the risks and 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 provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations.

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

Thanks, Adam, and good morning, everyone. And thank you all for joining American Assets Trust's first-quarter 2012 earnings call. Our West Coast and Hawaii and diversified focused investment strategy continue to prove solid, providing consistent and reliable returns both today and, we believe, going forward.

As we passed the first year anniversary of January 19, 2012, the year we became a public entity, we could not help but reflect upon the course and commitment we outlined in our IPO presentations. We exceeded every one of our expectations. As a result our balance sheet remains strong and we are well positioned to continue to execute our strategy.

We have stated repeatedly that our properties are irreplaceable assets in irreplaceable locations. We are not just a bricks and mortar company; we create vibrant environments for shopping, the workplace and home. These destinations serve our communities and provide prosperity for our retailers, employers and tenants.

For nearly 45 years American Assets has been acquiring, improving, developing and managing premier retail office and residential properties. We have built a team of seasoned experts adept at adding value to real estate through increased occupancy, merchandising and renovation.

American Assets Trust is a company whose growth is guided by unwavering principles, a company where success is measured over the long term and prosperous business relationships are built on enduring foundations of trust and opportunity. We believe the disciplined approach toward everything we do will over the long term avoid setbacks, errors and disappointments creating a welcome stability.

As I have mentioned before, what I find frustrating to say the least is if you look at recent market comps for assets which we think are, of similar class and location as our own, we believe that our existing retail and office portfolio should be similarly valued in the marketplace at a sub cap rate for our multi--- as a sub cap rate for our office assets and a five sub cap rate for our multi-family assets.

However, based on our internal calculations for net asset value, we consider our discount approximately 20% to our current share price. By way of example, several office properties in San Francisco have traded or are soon to trade north of $700 per square foot. We believe all of these properties are inferior to our One Market Street property, The Landmark.

On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage your company and we look forward to your continued support. I would now like to turn it over to our President and CEO, John Chamberlain. John, would you please take it from here? Thank you.

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 first-quarter or financial results and then Ernest will offer a few closing remarks.

First to our office portfolio. Our properties continue to operate with outstanding performance. Portfolio wide first-quarter net absorption was positive and the overall leased building area was 94.7% as of March 31 compared to 94.4% at year-end 2011.

The Company completed the acquisition of One Beach Street on January 24, 2012. One Beach Street is an approximate 97,000 square foot fully renovated historic office building located immediately fronting the Embarcadero in San Francisco's North Waterfront district. San Francisco continues to experience aggressive rent growth both in the SOMA and the Financial District areas fueled by demand from the tech sector.

Our Landmark at One Market and One Beach Street properties were both 100% leased and 160 King Street was 97.9% leased at the end of the quarter. Our San Francisco office holdings total approximately 687,000 square feet.

Now to our retail properties. As anticipated, the portfolio leased building area decreased slightly to 94.8% as did same-store net operating income due primarily to the closure of three Borders locations and increased property taxes. We have already re-leased two of the three spaces representing 86% of the combined space at an average cash basis contractual rent increase of 24% for the first year of the new leases compared to the last year of the Borders leases.

On April 16, Seattle-based Nordstrom announced plans to open a new Nordstrom Rack in the summer of 2012 at our Alamo Quarry Market Center in San Antonio Texas. The new Nordstrom Rack will join anchor tenants Whole Foods, Regal Cinemas, Bed Bath & Beyond, Restoration Hardware and Gap to name a few. This brings the occupancy up to approximately 99.2% leased, an impressive figure considering the project is almost 600,000 square feet in size.

In closing on retail, our Monterey property, Del Monte Center, continues to operate very well finishing the quarter at 97.7% leased. We expect to recapture Borders location at Del Monte to be re-leased by the end of Q2, 2012. Our San Diego retail properties finished the quarter at 94.2% leased.

Now to our multi-family assets. Fundamentals appeared mixed during Q1 in San Diego County. At the end of March the average monthly base rent per leased unit was $1,390 compared to $1,318 at March 31, 2011. Same-store operating income increased 4.5% year over year. Vacancy ticked up slightly due to some seasonality and from continued competition from single-family home product with our larger units.

Now on to Hawaii. The Hawaii economy continued to show remarkable growth in both spending and arrivals at the end of Q1. Total air arrivals grew to approximately 626,000, a 2.5% year-over-year increase and expenditures rose 8.5% with daily visitor spending increasing from $179 per person to $183. Canada's arrivals increased 9.6%, Japan grew 4.7%, the US East increased 1.8% and the US West rose 3%.

At Waikele Center with the addition of Gap Outlets and Brooks Brothers, which was signed on April 3, 2012, taking all of the vacated Borders space we increased the leased percentage to 94.7% up from 93.3% at the end of Q1. Waikiki Beach Walk was 98.8% leased and 96.5% occupied at the end of Q1. Retail full service and quick service restaurants at Beach Walk continue to show strong upward sales trends. Our shops in Kalakaua remain 100% leased and occupied.

Our Embassy Suites at Beach Walk again exceeded our competition in ADR and RevPAR measurements for the quarter. For the month of March the property's ADR and RevPAR index were $128.3 million and $125.4 million respectively. RevPAR of $228.96 surpassed budget by $21.70 or 10.5% and the total suite revenue of $2.620 million was ahead of budget by $248,000 or, again, 10.5%.

The outlook for 2012 remains consistent with our expectations pacing ahead of 2011. This performance represents the best first-quarter results since the hotel opened in December of 2006.

Now I'd like to spend a few moments discussing our acquisition, development and redevelopment activities. In Portland, Oregon the expansion design of the first of four blocks of our Lloyd District Portfolio property is taking shape. While still subject to change, this approximately 925,000 square-foot expansion is now in the schematic design phase.

We currently anticipate securing the necessary permits and approvals by 2013. Construction is expected to take 26 to 28 months. Currently the apartment vacancy for the Lloyd District sub market is slightly below 2%, the best in the Portland metropolitan statistical area.

A recently acquired mixed use development site on Highway 101 in Solana Beach is well underway with its planning and permitting process. It will be a mixed-use project including retail, office and apartments totaling approximately 100,000 square feet.

We are also currently in the process of security building permits for the expansion of Torrey Reserve phases three and four. Collectively this project represents approximately 82,000 square feet of commercial space in five buildings. Ground breaking is expected in August 2012.

Regarding our 90,000 square foot Sorrento Pointe office complex, we are working closely with the California Coastal Commission staff to address several questions they've raised, which we expect to accomplish shortly. Once resolved we will move immediately to prepare construction documents and obtain building permits. We consider this a premier office site in San Diego with views of the Pacific and Torrey Pines State Reserve while sitting with great prominence toward interstate five in Del Mar.

As you know, each of these potential development and redevelopment opportunities are subject to market conditions that may not ultimately come to fruition; we will certainly keep you updated. Our acquisition efforts remain 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. I would now like to turn to presentation over to our Chief Financial Officer, Bob Barton. Bob.

Thank you, John, and good morning, everyone. Last night we reported both first-quarter 2012 FFO and adjusted FFO of $0.31 per share. Net income attributable to common stockholders was $0.05 per share for the first quarter. American Assets had a solid first-quarter performance based on steady leasing in retail and office with occupancy at the end of the first quarter at 94.8% and 94.7% respectively.

Our mixed use property remained at a consistently high occupancy, as shown in the Earnings Release, while the Embassy Suites' Waikiki Beach Walk had its best first-quarter performance since the hotel opened in 2006. Our multi-family occupancy was down as expected primarily due to seasonality, but when you look at the same store data you can see that multi-family NOI was up even though ending occupancy was down. This reflects the increase in rates and reduction in concessions.

The Company's Board of Directors has declared a dividend on its common stock of $0.21 per share for the quarterly period ending June 30, 2012. The dividend will be paid on June 29, 2012 to stockholders of record on June 15, 2012.

Turning to our results. First-quarter FFO as adjusted increased approximately $1.7 million or approximately 11% or $0.03 per FFO share to $18.1 million compared to fourth-quarter 2011 FFO as adjusted.

The primary changes between Q4 2011 and Q1 2012 were the following four items. First, One Beach Street acquisition came online at January 24 and contributed approximately $576,000 or approximately $0.01 per FFO share.

Secondly, Embassy Suites' Waikiki Beach Walk contributed approximately an additional $900,000 in NOI or $619,000 in FFO, due to improved operating performance, which is roughly $0.01 per FFO share over the prior quarter.

Third, we did not have the $1.1 million bad debt reserve related to Waikele Center during the first quarter that we had recognized during the fourth quarter which reduced our operating expenses quarter over quarter by approximately $0.02 per FFO share.

And fourth, G&A was up approximately $636,000 or approximately $0.01 per FFO share during the first quarter compared to the fourth quarter, but still less than our expected quarterly run rate of $4.2 million. Although we did not provide any formal guidance for the first quarter, my Bloomberg screen shows a consensus mean estimate of $0.28 of FFO per share, $0.03 less than what we had reported.

Now as we look at our balance sheet and liquidity at the end of the first quarter we are well positioned to continue to execute on our strategy of selectively acquiring or developing accretive irreplaceable assets in our core West Coast markets. We have approximately $339 million in liquidity comprised of $127 million of cash and cash equivalents and marketable securities and $212 million of availability on our amended line of credit as of March 31, 2011.

Additionally, we amended our existing line of credit with our bank syndicate in January 2012, which significantly reduces our cost of borrowing and provides American Assets with greater flexibility. With our current leverage less than 45% our borrowing rate on the line is currently LIBOR plus 160 basis points or approximately 1.85% assuming a LIBOR rate of 25 basis points.

In addition, the maturity of the loan was extended from January 2014 to January 2016, plus an additional one-year extension option was added that would take us out to January 2017. The importance of this is that the line doesn't expire until after our secured debt maturities in 2014 and 2015, giving us additional flexibility.

We continue to have a well laddered maturity schedule over the next decade with no maturities until 2014. Our fixed rate secured debt provides a hedge against rising interest rates that will occur at some point in the future, with weighted average fixed rate of interest of 5.42%. We have no variable rate secured debt.

Our leverage goal continues to be less than 45% and our leverage metrics continue to improve as compared to the fourth quarter 2011. Net debt to adjusted EBITDA at the end of the first quarter decreased to 6.5 times from 7.0 times. Our net debt to total enterprise value at quarter end decreased to 39.3% from 40.9%. Our fixed charge -- our fixed charge coverage ratio at quarter end increased to 2.4 times from 2.2 times.

We are not only focused on long-term NAV growth for our shareholders, but also on positive same-store NOI growth on a relative basis which we believe will ultimately translate into organic FFO growth. Our same-store results are set forth in detail in our Earnings Release and Supplemental Disclosure Package.

Although we continue to report same-store portfolio net operating income in our Earnings Release and Supplemental document, I would caution you that the same-store data really won't give an accurate picture of our same-store portfolio results until Q2 2012 due to two things.

First, there were non-controlling entities that were not acquired by us until the completion of our IPO on January 19, 2011, specifically Solana Beach Town Centre, Solana Beach Corporate Centre and Waikiki Beach Walk. Consequently these entities did not have a full quarter of operations included in our first-quarter results of operations for 2011.

And secondly, the increase in the real estate tax accruals for the estimated increase in California assessed valuations in connection with the IPO did not begin until Q2 2011. Accordingly, Q2 2012 will be the first quarter that we should have good same-store comparative data for the entire portfolio.

Lastly, we have updated our 2012 guidance to reflect the outperformance during the first quarter combined with the new leases that were signed during the first quarter that had not been included in our prior guidance.

Our prior 2012 FFO per share guidance was $1.09 to $1.17 per FFO share with a midpoint of $1.13 and excluded any future acquisitions, dispositions, equity issuances, repurchases, debt financings or repayments. We increased our annual guidance $0.05 per FFO share to a revised range of $1.14 to $1.22 with a midpoint of $1.18.

Probably the best way to share with you the change in our revised guidance is to reconcile the midpoint of our prior guidance to the updated guidance. Accordingly, if we start with the prior midpoint of $1.13 and add the following adjustments.

First, we have the first-quarter outperformance of approximately $0.03 per FFO share. And secondly, the Brooks Brothers lease at Waikele Center and the Nordstrom Rack lease at Alamo Quarry Market, both of which were signed in April and were not included in the previous guidance, will contribute an additional $0.015 per FFO share.

Incorporating these updates brings my new 2012 FFO per share midpoint guidance to $1.18 per FFO share. We believe that a 7% range on our annual guidance is still appropriate, which gives us our updated range of $1.14 to $1.22 per FFO share.

Finally I would like to remind you once again that our guidance excludes the impact of future acquisitions, dispositions, equity issuances and other items in the notes to our guidance in our Supplemental Disclosure Package.

We will continue our best 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.

(Operator Instructions). Paul Morgan, Morgan Stanley.

Good Morning. On the improvements in Beach Walk, you mentioned the upside it produced in the quarter. It doesn't sound like you really flowed through all of that into sort of a quarterly run rate for your boost to guidance. I mean it sounds like some of the improvements are sort of sustainable in terms of the boost from Asian tourism, etc. Is there any reason maybe you didn't want to incorporate the strength -- the full strength in the first quarter? Do you think some of it's just pure seasonality?

Paul that's a good question. We think it's too early to turn Q1 outperformance on the Embassy into a run rate. We're watching it closely. We're positive on what we're seeing, but we're not at that point yet to say that the outperformance in Q1 is consistent with all future quarters. But Q1, which is normally -- for a hotel, which is normally your worst quarter, I mean compared to a year ago we were at what, 6.8? And we came in much stronger in the first quarter, almost $1 million stronger.

Anything in the trends you've seen quarter to date that would suggest anything is changing or is it still strong?

Yes, we're slightly up over our budget in Q2, but nothing like we're seeing in Q1. So everything is positive, but we're not at a point where we want to push that trend through to the future quarters. We think we are -- we think that the guidance that we have provided is accurate and reflective of what we -- what our expectations are at this point in time.

Okay. And then as you sit with $100 million or so of cash and look at the acquisition landscape, maybe you can talk a little bit about -- you've reflected in terms of your frustration about where your NAV is, how low cap rates are. The flipside is you have money to put to work. How do you see pricing in terms of the opportunity set across your buckets regionally and property type basis?

Paul, this is Earnest. We really like the space we're in and the opportunities that are available to us. If we have the opportunity to make an acquisition that would be accretive we would love to do that. If we don't, and we don't intend to follow cap rates down to the low levels they are today, we have so many internal development opportunities, which John outlined.

So we will be able to employ the cash, I believe, at cap rates in development that will be higher than cap rates in an acquisition at the current level that cap rates currently are. And that's our strategy. So we have all kinds of opportunities, we have all kinds of strategies available to us, we have all kinds of flexibility and we keep looking at all the opportunities that are available to us both in development and acquisitions.

I mean is it leaning one towards one property type right now or is it just mostly opportunistic?

I would say it's opportunistic. But -- I would say it's opportunistic. We would like -- yes, it's opportunistic.

Okay, great. My last question just on -- did you have -- sales growth for Alamo, Del Monte and the mall peers have been reporting very strong year-over-year sales growth for some time now. And I know it's a couple of assets for you, but they're certainly mall like. Have you been seeing those -- that type of sales improvement?

We'll turn that over to Chris who handles that for us.

Chris Sullivan is our Vice President of Retail Leasing and can probably best answer that question.

Hi, Paul. Yes, at Del Monte we're getting some pretty favorable sales increases over last year, I'd say pretty favorable, you know a point or 2 here and, as you know, it's spread across the board based on tenants. But we are seeing on that and Alamo some positive sales increases which is very favorable.

Is there any way to quantify that, Chris, or is that just an (multiple speakers)?

I'd have to literally go pull reports and really quantify it. And I can do that for you, Paul.

I'll come back off-line, thanks.

Good, thank you.

Paul, this is Bob. Just from a same-store standpoint, two metrics. If you look at our same-store retail cash NOI 2011 actual versus 2012 budget we're looking at a 2% to 2.25% increase. On a GAAP basis -- that's on a cash basis. On a GAAP basis we're looking at about a 5% increase.

Is that for all retail or --?

That's for all retail, not just Alamo.

Great, thanks.

Craig Schmidt, Bank of America.

Yes, I just wanted to put a little more focus on the multi-family. One of the reasons you had suggested was seasonality, but looking at it on a year-over-year, it dropped 370 bps and it's pretty significantly below the average occupancy for San Diego multi-family (inaudible) metrics. Was there a significant push on rents that caused that or what was the -- any other color on the drop of that occupancy?

There were a couple of factors. One, yes, as we reported in our last call, we had been pushing rents. We were pushing rents approximately 3% with every renewal and that caused some strain. But what we're really seeing is it's more of a macro issue with the housing market in San Diego.

Our larger units at both Imperial Beach Gardens and Loma Palisades compete directly with single-family homes in the same areas, in the same market areas. So when given a choice what we have found is most tenants prefer to be in their own home as opposed to being in an apartment complex.

So until the housing market picks up and gains some momentum and creates a wider spread between what our apartment rents are and what single-family home rents are, we're going to continue to have a fair amount of competition. Ernest, do you want to add to that?

Yes. And this is the short run situation, in the long term I'd sooner have the spacious apartments that will accommodate a family or more occupants than small spaces. But small spaces -- small rent, small apartments seem to be more in demand now and we have to (technical difficulty) housing. In the long run I wouldn't trade where we are for any other space.

Okay, thank you.

[Blaine Hecht], Wells Fargo.

Just starting on the retail side, you guys did a great job replacing the Borders leases. When -- I don't think that was included in your updated guidance. When should we expect those leases to take occupancy and start flowing through?

Actually -- this is Bob. Actually those two new leases were included in our updated guidance.

Okay, okay. And then I think you mentioned on the Del Monte space you expect that to be leased by the end of Q2, is that correct?

That's correct. And that's -- just in comparison, that was a small space, only approximately 8,000 feet. The others were in the 30s.

Okay.

And we're very hopeful that the acquisition of Nordstrom's of the shopping centers that they're coming to be a very positive factor for the entire center and will result in better results in the coming years for that entire property -- those entire properties.

Right, okay. And then staying on the retail portfolio, is there any change in the status of the Kmart lease that you guys took off -- took the write-off on last quarter?

No, there's been no new developments. We continue to monitor it closely. We've had no discussions with the tenant -- nothing new to report.

So they're still current and expected to be for the remainder of 2012?

And I think they just announced the results and they were in the black, so there was some encouragement.

Good news. Okay, and then on the office side, can you guys remind me when we should be expecting normalized cash NOI from that portfolio given the -- Salesforce.com?

Well, in 2012 -- 2012 is really the remainder of the roll down in our office portfolio. So we had the Salesforce which you're familiar with, the free rent on Salesforce ends at the end of May. And then we have the roll down on DLA Piper in the 160 King Street space which we have Ancestry coming in, in June 1 and they have 13 months free rent of which six months would be free in the first year and then the remaining seven is sporadic over the remaining seven years.

So once we get through 2012 we are good to go on the roll downs. In fact, if you look at what our in-place rents are compared to where the market is -- on the entire office portfolio we look at our in-place rents at approximately $32, our annualized base rent. And the market that we have in our Argus models is approximately $34. So we are below market if everything rolled today.

Got you. Okay and then last question, on the Torrey Reserve development, is the yield that you are guys are quoting in the subs based on today's market rents or expected rents kind of at stabilization.

Today's market rents, that's not an inflated number.

Okay, great. Thanks, guys.

Cedrik Lachance, Green Street Advisors.

Just in regards to, Ernest, your comments in regards with being more (inaudible) stake in your acquisitions, you've talked about wanting to remain in all your current property types. How about from a market perspective? How far are you willing to go and how many new markets could you potentially contemplate as you look for acquisitions?

We are sticking to the marketplaces that we've always told the investors that we would stick to, which is the West Coast. We've found entry into the Los Angeles market very difficult because there's so much competition there, but we would consider something in Los Angeles if something entrepreneurial were to present itself.

Other than that, we continue to look in the markets we're in, including with a particular focus on Seattle, and we just keep examining all the opportunities that are available to us. But we're going to stick to the strategy that we have outlined from day one and I think it's proved to be a very good strategy as per the results that we presented this morning.

Okay. And in regards to the expansion -- the office space expansion at Torrey Reserve, what's the pre-leasing there that you've been able to accomplish so far?

We're not going to pre-lease anything. We're building five small buildings, commercial buildings, one for instance will be a bank branch, we'll have a couple of restaurants, we're actually expanding a building next to our existing medical facility.

So these are tenants that don't enter the marketplace until six months or so before they need the space. Therefore pre-leasing, what we have found in the past, you end up giving up -- giving too much away to pre-lease space and then build the building as opposed to spec building the space and holding an auction to get higher rent.

It's safe to say that over the years we've had discussions with a number of these tenants and they always say when you're ready call us, while we've got to prove we're ready. Plus we've been in this location now for I guess more than a decade and the amount of traffic on El Camino Real, the street that runs through this parallel to the freeway, has increased dramatically. So this location is getting better and better every year.

Yes, we've been talking about this expansion for many -- unfortunately for many years. And finally it got to the point where we didn't want to waste anyone's time with giving them target move-in dates and we said when we start, when we break ground we'll give you a call.

Okay, thank you.

Todd Thomas, KeyBanc.

Back to the office same store NOI. We can do the math with regard to Salesforce.com and Ancestry.com for the most part. But, Bob, would you be able to provide us with a sense for GAAP and cash same-store NOI in the office segment, what that should look like for the full year? I think you mentioned the retail, I was just wondering if we could get that for office as well given some of the volatility.

Yes, Todd, thanks for the question. On the office same store cash NOI I'm down approximately $3 million or 11% and that's primarily from the DLA Piper, the free rent. Remember DLA Piper was at $60 -- approximately $60 all in, we're rolling down to Ancestry about $42 and when they start in June they have the first six months free rent. And then we're just finishing up with Salesforce. Their free rent ends, what, May 31. On a GAAP basis, Todd, --.

By the way, I don't like to interrupt. But Jim Durfey just interrupted me by saying that with the Ancestry.com lease there was free rent but no TIs. So it was a good financial transaction.

And on the same-store GAAP NOI it's really a push. We're down less than $200,000. So we're already -- from a GAAP standpoint we're already -- Ancestry's free rent -- or I'm sorry Ancestry's GAAP rent, straight-line rent well commence shortly. Salesforce is already in place.

Okay, that's helpful. And then if we look at the office leasing, there's about 200,000 square feet of expiring space in 2012, the average rent is about $38. And I think you just mentioned that average rent is around $32, maybe in your Argus model you're seeing market rents around $34. I mean does that mean that we should expect to continue seeing some rent roll downs throughout the balance of this year in the office portfolio?

I think it's mixed by building. Overall -- I mean overall our in place is $32, we're seeing the market $34. You mentioned that you're seeing about $38 rolling down in 2012. There will be some roll down, but basically we're done with it for the most part.

Jim, would you agree with that? Jim Durfey who handles office leasing.

I'm seeing an up market in the San Diego rolls; Portland is probably flat but I think as a broad average it's going to be even to slightly up.

Okay. Then just lastly, interested in the Portland market. It seems like that's going to become a larger portion of your portfolio in NOI. Does this market ultimately comprise 20%, 25% of your portfolio? I mean how should we sort of think about Portland long-term?

Well, the opportunity we're pursuing is quite a number of years off. We have at least another year of processing and then, as I mentioned, 26 to 28 months of construction and then you've got a year of stabilization. So we're talking about something that's quite a ways in the future.

Right now Portland represents less than 10% of the Company's assets. I don't expect Portland to grow any faster than any of the other markets we're in. And as Ernest mentioned, we're spending a great deal of time looking at opportunities in Seattle. Well, I would actually see an investment in Seattle occur before we spend more money of any size in Portland.

From a macro point of view we have a balanced portfolio in all the markets we're in. We would not like to become concentrated in any one particular market. And so, we will keep an eye on that concentration, but also that means we'll also keep an eye on the opportunities that are available to us.

The opportunities available to us may not only be construction, development and acquisitions, but it may be at some point disposition of a property if it makes sense and we can improve our position. So that's what the Board pays us to do and we'll continue to do as well as we can. Thanks for the good question.

Mitch Germain, JMP Securities.

How long were you guys working on Beech Street? I know it was off market you said, right? I mean was it a year in the making? Two years in the making?

Oh, it was actually a very quick transaction. The previous owner had an arrangement with its financial partner that was triggered and they needed to transact quickly. They approached Eastdil and set, who should we talk to? And Eastdil picked up the phone and called me and we had a deal done in less than a month.

Great, that's good color. And then I guess, Ernest, I was curious given your comments regarding the NAV discount. Would you guys be open to possibly selling some properties here?

We're always open to the opportunities that are available to us if they make sense. And we continue to look at the properties that are available to us. And we consider exchanging one for the other as if we can improve our position. But we have such great properties that it would take another lifetime to accumulate a portfolio of the same quality we have. But you know, we're open, we keep looking and asking ourselves, are we doing the right thing?

Yes, I would add to that dispositions for us have always been driven by acquisitions. So if we find something that we believe is a flight to quality or, as Ernest says, we can improve the performance of deployed capital, there are no sacred cows here. We will look at what property would make the most sense to transact into a new acquisition.

My father who was a gynecologist, but John doesn't like me to say it, when you're buying you've got to be right once, when you're switching you've got to be right twice. So we keep looking at the metrics of switching and it's something we do consider on a regular basis.

Excellent. Then last question. Ernest, anything looking back over the last year -- I guess this year fifth or maybe fourth earning report -- anything you would have done differently along the way?

No, I don't think so. I think we're very pleased with the way it's gone. We're delighted with the way our properties are performing, we're delighted with the way management is performing. Our Board is working together in a very cohesive and constructive fashion and we're very excited about the future.

Thank you. Good quarter.

Rich Moore, RBC Capital.

I just had a chance to be actually in Honolulu and see your assets, it's a great, great collection of assets. And I'm curious on Waikele, it seemed like there was even more to do than the two boxes you just mentioned. Is there more to do there? I mean -- and if so what is the -- I guess what is the plan or the potential timing?

What do you mean by more to do?

In terms of lease up.

Well, we have one vacancy that used to be Steve & Barry's. That space we continue to show. We don't have any active prospects on it at the moment but short of that that is the only vacancy we have out there.

And of course one might point out then Hawaii, in addition to how attractive the property is, and the long range growth opportunity there, it's all [fee] simple, which in Hawaii is a significant, significant asset.

Sure, exactly. And given the popularity of assets there it seems like it's hard to even have one vacancy there's so much demand. Okay, that's good, thank you. And then also on San Diego, I've been reading that there are more ships coming to the naval yards there. Are you guys -- you always seem to have a pretty good feel for that. Is that what you're hearing too and is that going to you think drive some apartment demand maybe and some office demand?

There is a constant shuffling of military assets in and out of San Diego. The San Diego Port is an enormous facility for the Navy. And an aircraft carrier and all of its support team recently left for Seattle, they've brought in some of these missile ships recently. So it's really an evolving -- or revolving door. But we haven't seen anything major either up or down that brings any concern.

All right, good. Thanks, guys.

Sheila McGrath, KBW.

Bob, I apologize if I missed this. Can you let us know when the two Borders leases will impact? Will they have an impact in second-quarter results?

Yes, they will.

So for the full quarter or is it kind of mid-quarter?

It will be for the -- on the -- let's break them down. You have the Nordstrom Rack at Alamo Quarry, so that was signed in early to mid April, and so we'll have almost a full quarter in Q2 on that.

(Inaudible - microphone inaccessible).

No, but from a GAAP standpoint. Once you give control to the tenant then the GAAP straight line rent begins. So you'll have a -- almost a full quarter, Sheila.

Okay. And then the second store that you said was leased, is that in second quarter as well?

Yes.

And mid-quarter or full quarter?

Probably a mid-quarter.

Okay. And then were there -- did you have to invest much capital in those two leases, TI?

We had -- on Alamo, Chris, we had about 1.4?

Approximately.

Approximately.

Approximately, a lot of buildings, a lot of land (inaudible).

Okay, and last question. Ernest, I know you said that you're looking at various opportunities. I'm just wondering how does the pipeline of opportunities on the acquisition side look to you right now? Do you think that there's more opportunities than there was a quarter that your team is looking at, or --?

Sheila, I think John covered it very well in his presentation, so I'm going to ask him to answer to that question if you'll permit me to.

Sure.

Hi, Sheila. We're very active looking at opportunities, looking at acquisitions. We have been in the bidding process on many. But the money that is chasing deals right now are driving cap rates to levels that just we don't find sustainable. So while we continue to look and we continue to search both on- and off-market there's only just so far we'll go. So we have several opportunities we're looking at currently, but at the moment it's a very, very difficult investment environment.

Okay, thank you.

And of course the opportunity to acquire is difficult, but the opportunity to trade is still there. So that's something we look at. As John said earlier in his presentation, that we're always looking at how can we improve both performance and quality. And of course we have our cash available to invest in the same opportunities we presented earlier for development as well.

(Operator Instructions). And with no further questions, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Ernest Rady for closing remarks.

Again, thank you all for attending our conference call. We very much appreciate your interest. We've gotten to know many of you over the time we've been public and we've really enjoyed the association, your friendship and your interest.

We're very excited about where we are today both in the development opportunity, acquisition opportunity, the trading opportunity. Our liquidity and the quality of our properties continue to speak for themselves and we look forward to talking to you 90 days from now. Thank you very much for your interest today.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.