American Assets Trust Inc (AAT) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the third-quarter 2012 American Assets Trust earnings conference call. My name is Chris and I will be your conference moderator for today. Presently all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions).

And at this time I would now like to turn the conference over to your presenter for today, Mr. Adam Wyll, Senior Vice President and General Counsel. Sir, you may proceed.

Good morning. I would like to thank everyone for joining us today for American Assets Trust's third-quarter 2012 earnings conference call. Joining me on the call are Ernest Rady and Bob Barton. Unfortunately, John Chamberlain is home with the flu today so Ernest will read John's prepared remarks. Get well soon, John.

These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

Our third-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 assumptions, our future operations and our actual performance may differ materially from the information contained in our forward-looking statements and we can give you 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.

Additionally, this call will contain non-GAAP financial information including funds from operations or FFO, adjusted FFO, earnings before interest, taxes, depreciation and amortization, or EBITDA, and net operating income or NOI. American Assets is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data for the third quarter of 2012, furnished to the Securities and Exchange Commission. This information is available on the Company's website at www.americanassetstrust.com.

I will now turn the call over to our Executive Chairman Ernest Rady to begin our discussion of third-quarter results. Ernest.

Thanks, Adam, and good morning, everyone, and welcome to our call this morning. Thank you for joining American Assets Trust third-quarter 2012 earnings call. Our coastal West Coast investment strategy continues to be solid, rewarding and providing consistent and increasing returns today and, we believe, going forward.

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 longer term and prosperous business relationships are built on enduring foundations of trust and opportunity.

We believe that the disciplined approach toward everything we do will over the long term avoid setbacks, errors, and disappointment and create a welcome but growing stability.

This quarter we completed the acquisition of City Center Bellevue, entered into a binding contract to acquire another high-quality coastal retail property in Walnut Creek, California, and entered into a contract after quarter's end to sell our 160 King Street office building in San Francisco. This demonstrates our ongoing ability to capitalize on the markets we are in and recycle capital, creating increased value for our shareholders.

John will talk -- Bob will talk more about these and other items in the prepared comments. 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 am going to continue now with the prepared portion for John since, as Adam pointed out, he is home with the flu.

Overall conditions in our core market continued to show signs of strengthening in our three asset classes. We expect this to continue into the foreseeable future. Our office properties continue to perform extremely well, relative to the respective submarket competitors. Overall, portfolio percentage leased for our office portfolio was 94%, down 1% from the second quarter. This decrease is mostly attributed to a full floor tenant vacating a floor at Lloyd 700.

Our San Francisco portfolio was 99.5% leased and the market continues to experience positive rent growth. As disclosed in our press release, we have entered into an agreement to sell our San Francisco building, known as 160 King Street, for approximately $94 million and the acquisition is expected to close in the fourth quarter of 2012, subsequent to customary closing conditions. We consider the sale of 160 King Street to be a reallocation of capital and we plan to use the sale proceeds to pay down debt and to pay for our new retail acquisition, Geary Marketplace.

Geary Marketplace is a newly constructed 35,000 square foot, 100% leased grocery anchored shopping center in Walnut Creek, California. The purchase price is approximately $21 million and the acquisition is expected to close early in the first quarter of 2013, again, subject to customary closing conditions.

We are pleased to report that Torrey Reserve in San Diego, our own home office, has broken ground and is under construction. This expansion will include three buildings totaling approximately 40,000 square feet. This first phase of the project is expected to be completed in the third quarter of 2013 and the following phase will deliver two buildings totaling approximately 40,000 square feet in the first quarter of 2014.

We continue to be very pleased with our new acquisition, Center City Bellevue, a nearly 500,000 square feet, LEED Gold, 27-story Class A office tower strategically located in the heart of the Bellevue's Central Business District. Major tenants include Caradigm, the healthcare IT joint venture of GE and Microsoft; HDR, a worldwide architecture engineering firm; and Sucker Punch Productions, a gaming software company wholly owned by Sony. The greater Seattle area, Bellevue in particular, has been a target investment region for the Company and its predecessor for many years. We are extremely pleased with our entry into this highly constrained market.

We expect our efforts will enable us to continue to expand our presence in the area. The building is currently 92.1% leased and we believe in place leases are approximately 20% to 25% below market. The wisdom of our acquisition was confirmed when the appraisal for the loan came in in excess of the amount that we had paid for the property.

The leased building area of our retail portfolio increased to 96.9%, an increase of 0.7% over the second-quarter results. We believe that Nordstrom Rack's grand opening was very successful at Carmel Mountain Plaza with customer turnout, far exceeding our expectations. Nordstrom Rack at Alamo also own -- opened successfully in October. A strong holiday season is expected at both locations.

In closing on retail, our Monterey property, Del Monte Center continues to operate very well finishing the third quarter at 98.9% leased.

San Diego retail properties finished the quarter at 95.3% leased, as compared to 94.6% leased last quarter.

Our multifamily assets saw significant improvement in leasing levels at the end of Q2, primarily due to management changes and seasonality. At the end of September, our multifamily portfolio was 96.2% leased, and occupancy has remained strong into November. We are -- we believe we are poised for a strong fourth quarter and full-year 2013 in our multifamily portfolio.

The Hawaiian economy continued to show positive growth in both spending and arrivals at the end of Q3. Total visitor arrivals grew to approximately 750,000, an 11% increase year over year basis for the month of August. Expenditures by visitors increased 14.6%, also on a year-over-year basis for August.

In July, arrivals to Hawaii increased from the US West by 7.6%. US East grew by 9.6% and the Mountain region increased by 8.5%.

For the third quarter, Waikiki Beach Walk was 97.4% leased, an increase of 3.5% over the previous quarter. Retail, full service and quick service restaurants at Beach Walk continued to show strong upward sales trends. Our shops on Kalakaua remain 100% leased and occupied. Our Hawaiian retail portfolio was 95.3% leased at the end of Q3. Our Embassy Suites at Beach Walk continues to exceed our competition in ADR and RevPAR measurements for the quarter.

For the month of September, the properties' ADR and RevPAR index were $125.2 and $117.7, respectively, compared to our competitors. RevPAR of $226.92 surpassed budget by $22.83 or 11.2% and total suite revenue of $2,514,000 was ahead of budget by $254,000 or 11.2% for the month of September. Bob will comment more on the performance of Embassy Suites in regards to our revised 2012 and full year 2013 corporate guidance.

Now, a brief update on our development opportunities in activities in Portland, Oregon. The schematic design phase is underway at our Lloyd District property. We believe that our development program will include approximately 60,000 square feet of retail commercial space and 637 multifamily units in addition to the existing 238,000 square-foot office tower. The project will also include 1,027 stalls of current -- of underground parking. We currently anticipate securing the necessary permits and approvals in the second half of 2013. Construction is expected to take 26 to 28 months. Currently, the apartment vacancy for the Lloyd District submarket is slightly below 2%, an attractive market to build into.

Regarding Sorrento Pointe, the habitat issues concerning the California Coastal Commission have been identified and resolved with the local staff. We expect to be scheduled for a hearing shortly. Once approved by the California Coastal Commission, we will move immediately to prepare construction documents and obtain building permits. This process will take approximately 12 months.

As you know, each of these potential developments and redevelopment opportunities are subject to market conditions and may not ultimately come to fruition. We will certainly keep you updated. Our acquisition efforts continue to be very disciplined. All opportunities are of the highest quality locating in our existing and targeted core markets and include all three of our asset classes.

Concurrently, we continue to evaluate opportunities to recycle capital where the probability to increase internal growth rate exists.

I would now like to turn the presentation over to our Chief Financial officer, Bob Barton. Bob.

Thank you, Ernest, and good morning everyone. Last night we reported both third-quarter 2012 FFO and FFO as adjusted of $0.36 per share. Net income attributable to common stockholders was $0.08 per share for the third quarter.

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, 2012. The dividend will be paid on December 28, 2012, to stockholders of record on December 14, 2012.

American Assets had a solid third-quarter performance based on steady leasing and increased pricing power, due to strong occupancy in retail and office with retail occupancy at the end of the third quarter increasing 70 basis points to 96.9%. Same-store office occupancy declined quarter over quarter by approximately 228 basis points, primarily because the Lloyd District buildings in Oregon were included in same-store office statistics for the first time in Q3.

The decline is solely due to one full floor tenant that moved out of the Lloyd's 700 building because the tenant acquired its own building. That is what makes up the decline in the same-store office occupancy for the quarter.

All of the other office buildings in our portfolio continued to maintain strong occupancy statistics as shown in the supplemental.

Let's talk about same-store NOI for a moment. Same-store retail NOI for the quarter had impressive growth at 8.9% on a GAAP basis and reflects not only in place contractual bonds on existing retail tenants, but also the addition of Nordstrom Rack leases at both Carmel Mountain Plaza and Alamo Quarry. All three of our former Borders spaces that were empty a year ago have been released on contractual cash basis increases in excess of 25% over the former Borders leases.

Same-store retail NOI on a cash basis was also strong at 4.5% as Nordstrom Rack opened in September and began paying rent. H&M at Del Monte Center also opened in late June and began paying rent.

Retail leasing spreads are a testimony to the quality and location of the retail product available for lease, as spreads on 14 comparable retail lease renewals increased at an average of 5.2% on a cash basis and 10.5% on a GAAP basis as shown in the supplemental.

Same-store office NOI for the quarter increased 2.3% on a GAAP basis and 4.8% on a cash basis reflecting the first full quarter of rent received from Salesforce in the landmark building since their lease commencement and partially offset by the free rent from Ancestry.com at our 160 King Street building.

Office leasing spreads on 12 comparable office lease renewals rose at an average 5.1% on a cash basis and 12.9% on a GAAP basis. Same-store multifamily NOI, which comprises approximately 6% of our total NOI, was down 2.8% on both a GAAP and a cash basis, primarily reflecting high real estate taxes in 2012. Multifamily occupancy remained strong at 96.2% leased at the end of the third quarter.

Waikiki Beach Walk, our mixed-use property, which represents 14% of our NOI, continues to outperform with robust same-store growth of 18.6% on a cash basis and 16.9% on a GAAP basis. The Embassy Suites just by itself had 59% same-store NOI growth quarter over quarter and 35.2% year over year. The large outperformance was primarily due to four things.

Increased air seats to Oahu, Hawaii, as a result of increased demand to the Hawaiian Islands. Secondly, increased arrivals into Oahu, Hawaii, which has led to growth amongst all the Hawaiian Islands for the last five consecutive quarters. And our revenue composition has increased to over 50% coming from our Japanese guests which enjoys strong purchasing power with the higher yen relative to the dollar.

Historically, only 30% to 40% of revenue has come from our Japanese guests. We are also seeing a very strong growth from Seoul, Korea.

And last, our focus on RevPAR management where we continue to push rates and focus on bottom-line growth.

It really demonstrates the quality of this asset, with the right product in an irreplaceable location that is favored by all tourists. We expect this mixed-use asset to only get better over time.

Turning to our results, third-quarter FFO increased approximately $3.4 million or approximately 20% to $0.36 per FFO share compared to second-quarter 2012 FFO share of $0.30. The best way to describe the increase over Q2 is the following three items. One, City Center Bellevue or CCB contributed $0.028 per FFO share. Embassy Suites contributed $0.02 of incremental FFO per share relative to the second quarter. And the remaining $0.012 per FFO share came from the remaining overall strong portfolio performance.

I might also point out that G&A remained relatively flat over Q2 at $3.9 million but still is less than our expected quarterly run rate of $4.2 million. I also should point out that CAPEX was unusually high for the third quarter as the office portfolio included a $6.1 million TI reimbursement to Salesforce.com in our Landmark office building. This related to the Salesforce lease that was signed in June of 2010 and they didn't complete their improvements until just recently.

Absent this, our nonrecurring -- absent this nonrecurring CAPEX item, our dividend payout ratio from FAD is approximately 84%.

Let's switch gears and spend a minute on City Center Bellevue. CCB contributed approximately $1.6 million or $0.028 per FFO share in the third quarter and is comprised of $900,000 in cash NOI, plus $900,000 in straight line and below-market rent adjustments, less approximately $213,000 in interest expense which totals approximately $1.6 million in FFO or $0.028 per FFO share.

For those that are updating your models, my expectation for a CCB Q4 run rate is approximately $2.4 million or $0.04 per FFO share comprised of approximately $1.8 million in cash NOI plus $1.7 million in straight line and below-market rent adjustments, less $1.1 million in interest expense which gets me to my $2.4 million in Q4 FFO or $[0.0414] for FFO share.

The contribution from cash rent will increase considerably in 2013 as rent abatements burn off in the fourth quarter. My expectation is that CCB will end 2013 with approximately $12.4 million in cash NOI, plus $2.4 million in straight line and below-market rent adjustments, for a total GAAP NOI of $14.8 million. Deducting $4.4 million in interest expense related to CCB equals approximately $10.3 million contribution in FFO from CCB in 2013.

As you can see from the numbers that I have shared with you, and consistent with my comments on our last earnings call, our going in unlevered cash on cash yield is slightly north of 5.5% based on the $221.8 million net purchase price, and is expected to increase to over 7% within four years on contractual rent bumps and lease up of the remaining space in the building.

Additionally, the 3.98% 10-year interest-only loan with 50% leverage against CCB produces a levered cash on cash yield of approximately 7.2% in the first year.

I have already talked about the Embassy Suites, but for modeling purposes as we look at the fourth quarter, I want to remind you that these are what we refer to as the shoulder months in the hotel sector. Our expectation is that we will be down $0.02 per FFO share at the Embassy Suites in the fourth quarter, which is consistent with prior years due to the seasonality.

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 of selectively acquiring or developing accretive irreplaceable assets in our core West Coast coastal markets. At the end of the third quarter, we had approximately $113 million in liquidity comprised of $35 million in cash and cash equivalents and $78 million of availability on our line of credit. With the $111 million refinancing of CCB that closed on October 10, and the expected disposition of 160 King Street before the end of the fourth quarter, our liquidity is expected to increase to approximately $290 million in the fourth quarter, consisting of approximately $71 million in cash and cash equivalents and approximately $219 million of availability on our line of credit.

At the end of the third quarter, our total debt to total capitalization using a 9/30/12 share price of $26.79 was 42%. Adjusting for the sale of 160 King Street and payoff of the current outstanding corporate line of credit balance of $30 million, this ratio is expected to be close to 40% in the fourth quarter. We are focused on keeping our leverage ratio at 45% or less, and positioning our balance sheet so we have the ability to approach investment grade market in 2015.

As I have mentioned before, we do have an internal roadmap to approach investment-grade debt market in 2015. In order to do so, we recognize that we need to get our secured debt ratio less than 30% by 2015. Part of our plan is to refinance our fixed-rate CMBS maturities in 2014 with senior unsecured notes, subject to economic market conditions at that time, and then approach the investment grade market in 2015 to refinance our fixed-rate CMBS 2015 maturities.

We always have several ways to go and are focused on conservative and disciplined balance sheet management. 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.

Lastly, we have updated our 2012 guidance and introduced our initial 2013 guidance. Let's talk about 2012 guidance first.

We are increasing our full year 2012 FFO per share guidance to a range of $1.30 to $1.33 per share with a midpoint of $1.315, from our most recent guidance of $1.17 to $1.22 per FFO share with a midpoint of $1.20.

The 10% increase in the midpoint of approximately $0.115 per FFO share equals approximately $6.5 million in additional FFO for 2012, and equates to approximately $0.068 per FFO share related to the CCB acquisition, and $0.02 per FFO share related to the continuing outperformance of the Embassy Suites hotel and $0.027 for continuing outperformance of our remaining operating portfolio including higher than anticipated lease -- higher than anticipated percentage lease for retail and operating properties, higher than anticipated percentage rents, higher than anticipated parking income from 160 King Street, and lower than anticipated G&A expense.

We have also made the assumption that the disposition of 160 King Street will have been closed in early December.

Now, let's talk about our 2013 guidance. We are introducing our 2013 guidance range of $1.35 to $1.44 per FFO share with a midpoint of $1.40 which is $0.085 per FFO share over our updated 2012 FFO guidance midpoint of $1.315 per FFO share and is based on the following assumptions.

One, we are anticipating a 3% increase in same-store retail cash NOI which is expected to add $0.03 per share to FFO. Secondly, the acquisition of Geary Marketplace is expected to close early in the first quarter of 2013 and is expected to add $0.02 per share of FFO. Thirdly, we are anticipating a 2% increase in same-store office cash NOI, excluding 160 King Street, which is expected to add $0.015 per share to FFO. The sale of 160 King Street is anticipated to reduce 2013 FFO by $0.05 per share.

City Center Bellevue acquisition should increase 2013 FFO over 2012 by $0.112 per share. We are anticipating a 5% increase in same-store multi-family cash NOI which is expected to add $0.01 per share to FFO. We are anticipating a 3% increase in same-store mixed use NOI, which is expected to add another $0.01 per share to FFO.

G&A is expected to hit $16.8 million in 2013 which is expected to reduce 2013 FFO by $0.02 per share.

And lastly, we are anticipating a large reduction in straight-line rents due to the burn-off of free rent abatements related to Landmark, King Street, and City Center Bellevue in 2012. The non-cash GAAP adjustments are expected to reduce FFO by approximately $0.042 per FFO share.

Other than the disposition of 160 King Street and the acquisition of Geary marketplace, our guidance excludes any impact from additional acquisitions, dispositions, equity issuances, or repurchases, debt refinancings or repayments.

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.

And now, operator, I will turn the call over to you for questions.

(Operator Instructions). Todd Thomas, KeyBanc Capital Markets.

Good morning. This is Grant Keeney on for Todd. So maybe you could provide just a little more color on the sale process of 160 King Street. Just what drove the decision to sell that particular asset. And not sure if you mentioned it, but what was the cap rate on the sale?

Good morning. Good question. We do a full vetting process, but what we are going to do is we are going to hold back on any further comments on 160 King Street and be respectful of the buyer in the process until the transaction is closed. I can tell you that the Board -- John, Ernest, the Board and I -- we go through each transaction whether it is a disposition or acquisition and we make sure that it's accretive to our shareholders and accretive to our NAV in the long term.

We look at 160 King Street as a recycling of capital. Additionally when we acquired CCB, as John often mentions is that acquisitions drive dispositions. And so, we looked at the future growth of 160 King Street and we thought it was the right asset to recycle at the present time. Ernest?

And by the way, it is not Todd on the phone, it's Todd's (multiple speakers).

It's Grant. No problem.

We thought that we had made the commitment to keep our office percentage to 35%, and so it was appropriate to that decision as rendered by the Board that some disposition to bring our office percentage income back to what guidelines the Board had set. So it was the best choice we could make for the recycling that John referred to.

And in light of the recycling then, could you just provide maybe some more detail on Geary Marketplace? Were there any opportunities for expansion or retenanting or it's 100% leased, but what's attractive about that asset?

We haven't closed it yet, so I think it is best we not make any comment on it other than we are very excited about the asset. It is a fantastic location. It is 100% leased and so we will be doing everything we can to maximize our return from that asset going forward.

And lastly, could you provide an update on leasing efforts at Torrey Pines now that you've broken ground? And also leasing efforts on the top floors of City Center Bellevue?

Well, as far as the leasing effort at Torrey Pines goes, those have not begun yet. Because it is still a year or two away. And as John has said on many occasions, we promised perspective tenants so many times that we are going to have this property available and somehow or other, we have been held up in the process. So this time we have not begun -- or we've not completed any leasing, but the process has begun. And I think it is safe to say that we are very optimistic on the possibility of leasing this out at attractive rates.

As far as the top two floors of Seattle -- you want to cover that, Jim, you are working with it.

Absolutely.

This is Jim Durfey, who is in charge of leasing. Our Vice President in charge of leasing for office.

We currently have several proposals out to the top floors 26th and 27th floors of CCB. And I can't comment further on that, but there are --

Can you hear him?

Yes.

But there are a couple of active prospects we are working on for that space. And we continue to look favorably upon that marketplace. The number of large blocks of space in downtown Bellevue has diminished significantly since we purchased this asset, so I think there's going to be a very nice transaction when we do complete it. And other than that I really can't comment on who we are dealing with.

Well, thank you, gentlemen, and see you next week.

And those are good questions and thanks very much for your interest.

Brendan Maiorana, Wells Fargo.

Good morning out there. Same, Bob. So, Ernest or Bob, wanted to drill into the acquisition pipeline as you guys see it a little bit more announcing the Geary deal. Are you seeing in the multifamily sector and in the retail sector that opportunities are -- are you confident that you will be able to get some additional deals done as you look out over the next several quarters or is it still very competitive out there and pretty challenged to get deals across the finish line?

I would say that it is still very competitive. We -- I think one thing that you should look at is that with the portfolio we have, we don't have to make acquisitions in order to produce very significant returns for our stockholders. So when we look at acquisitions, if they are accretive and if they are compelling, we'll do it. And if they are not, we won't.

So we continue to look, but we certainly don't feel under any pressure to do anything just for the sake of doing something. We are, as Bob said, we are focused on being accretive but it is still competitive.

That's helpful. So, Ernest, can I take those comments to mean that you're unlikely to issue equity at these levels? I mean, your share prices had a nice movement up, but if you think you have got very good returns from the existing portfolio, it is probably less likely that you would issue equity to go out and acquire assets. Is that fair?

I don't think it's appropriate for me to answer that question in a definitive way. Let me say that that I have expressed myself several times that it is humiliating to see the price of our stock trade at less than our net asset value when many of our peers who don't have near the same quality portfolio we have trade at a premium. So while we are trading at this evaluation, we would be very, very reluctant to issue shares that would not be accretive or even dilutive to the net asset value and cash flow of our existing stockholders.

Sure, okay, that's helpful.

And if you guys do a good job, you can get rid of my humiliation.

We are trying. Question for Bob. Is it, can I simply take the $0.02 of accretion that you provided from Geary and use that to infer what the cap rate is on that? Because I don't think there's debt on that asset.

Correct. Yes, that's pretty close.

Okay. And then, last one, I know you mentioned that you had the Salesforce CAPEX which depressed the AFFO number and increased the payout ratio. Even if I strip that number out, it looked like the numbers were a little bit higher, but your CAPEX, your leasing cost on a per square feet per year basis seemed pretty average in both the office and the retail portfolio.

Is it more just a timing issue of what happened in the quarter? Or do you think that CAPEX levels actually stay a bit elevated as you go out into next year?

No, I think -- well, first of all, yes, you are right. The Salesforce.com we had even mentioned that in the S-11 two years ago as a use of proceeds. So that is not part of the run rate going forward. And I think my recollection is that in our Q2 earnings call, that I had mentioned to you that our expectation was in 2012 that we would do somewhere between $18 million to $20 million in CAPEX. We are probably ending up a little bit higher than that due to the Nordstrom Rack leases that were signed and the H&M that we opened. So we had some big tenant -- TIs in 2012. But as you apply it looking forward into 2013, I think that we will probably be somewhere between $25 million to $27 million and that will still keep us in line with an 85% dividend payout ratio relative to our FAD.

And you are talking about both TIs and the maintenance CAPEX, right?

Correct, yes.

One thing you should consider when you look at our portfolio, is because of the quality of the portfolio and its locations, we always look for ways to reposition, to improve our cash flow. So that's something that you ought to consider going forward. We are always looking for ways to increase the returns for our stockholders.

Sure. All right. Thanks.

Mitch Germain, JMP Securities.

Good morning. Great quarter, guys. Ernest, just curious, you had mentioned the sale of 160 King Street, you wanted to cap your office exposure at 35%. Does that suggest that you are going to deemphasize growth within the office sector over the next couple of quarters?

No, what it does suggest is the Board has said that they want to keep the office income to 35% of the total. If we can grow the total, the office will grow. And the 35% is not set in concrete. It is an approximate level that the Board has indicated they would like us to achieve. So I don't think you can take anything out of that other than we -- 35% is our objective and, hopefully, as the total portfolio grows, the office portfolio may grow proportionately, depending on the opportunities that are available to us going forward.

And I know Brendan asked maybe if I can ask it a different way in terms of when you look at your acquisition pipeline today and the assets that you are currently underwriting, how do you feel in terms of your ability to potentially close on some of these deals? Clearly we are seeing a lot of capital chasing assets on the West Coast and clearly that has resulted in significant cap rate compression.

So are these mostly one-off deals? Are these mostly off-market transactions? Maybe if we can just flush some additional details about what you are seeing out there?

Well, I think that we see darn near everything that comes to market. So when you talk about our acquisition pipeline it's a significant -- as what is available in the entire marketplace. The question is, are we able to and will we be successful at differentiating between the things that trade at a compressed cap rate and provide opportunity in the future or not. I think we will. I think we have done this for 45 years.

So when you talk about a pipeline, the pipeline is really nonexistent. It is a question of just looking at the entire marketplace. The position we are in we have an opportunity to look at everything that is available. We will continue to do that to see if we can't improve our portfolio which is the strategy we have had for decades.

Let me just add to Ernest's comments is that John sees probably $1 billion a week in deals. We see everything that comes to the market on the West Coast and in our Coastal West Coast markets. And but we are very disciplined in our underwriting. We don't mind reaching for a lower cap rate as long as there is growth. And that's really important to us.

So, like on Bellevue, although it is an office asset, we went in at north of 5.5, but we know we can get to over 7 with a relatively reasonable time. So we are looking at everything. We are not going to do anything that is stupid or that's destructive to the net asset value of our shareholders.

And you may have mentioned it last quarter, Bellevue rents versus market in place ramps versus market. I mean, how much are they below?

Our due diligence going through it indicated that they were 22% below market. And after doing the purchase price accounting and after third-party evaluation, that was confirmed.

Thank you, guys.

It was a pleasant surprise with the appraisal for the loan came in at an amount in excess of our purchase price. That's quite (multiple speakers).

I am sure about that. Thank you.

In this crazy marketplace.

Jason White, Green Street Advisors.

Quick question on Geary. I know you didn't want to opine on your strategy there, but can you at least give us a rundown of the tenants so we get an idea of what the property looks like?

It is a grocery anchored shopping center. And I think since we haven't closed on it yet we should wait until we close on it and then we will be happy to provide that information. Do you feel differently, Bob?

Yes I don't mind mentioning the tenants there. I mean, a lot of the tenants are the same tennis we have seen in other of our existing retail centers. We have a Sprouts, is a grocery anchored. We have got Habit Burger, the Coffee Bean, Tea Leaf. So we have got a -- once you see it, it is just a beautiful center. But we don't expect to close on that until probably early in the first quarter.

And its location, that -- of course in real estate, as you all know, it is location, location, location. And this location is the best of the best.

Great. Thanks. And another question when we look at 160 King Street and the disposition, was it more that there was an office property you needed to identify to sell, or is there something there that speaks to your guys' expectation that 160 King Street was kind of peaking and it might be time to recycle that capital into something that might have more growth prospects?

I think it was important for management to comply with the request of the Board that we keep the percentage of office at the percentage that they had indicated that they prefer. And when we looked at our opportunities of what to dispose of or sell, that was the one that perhaps offered the best opportunity to upgrade the future of that capital.

Okay, so as you somewhat have transitioned that capital to City Center Bellevue and the 1031, do you see an opportunity for more growth in City Center or was it -- was partially a trade to some extent?

Yes, it was a trade and we do see a better opportunity with what we acquired versus what we sold or obviously we wouldn't have done the transaction.

Thanks, and one final question. When you look at Alamo Quarry, malls [or] the strip centers are traded at different cap rates quite a bit. Do you view Alamo Quarry as more of a mall type transaction if it were to sell or do you view it more of a large power center?

Well, I don't know what you would categorize it. We categorize it as an exceptional property with a great long-term future and an irreplaceable location. 60 acres, 600,000 square feet fully leased came through the downturn in flying colors; and so however you categorize it you know it is, again, the best of the best. And I think I told the story that when we first backed that property I contracted some of my friends in Texas who were in the development business and I asked them what they thought about Alamo Quarry. And to a man they said it's the best piece of property in Texas. So how you label it is not as important as the fact it is a great income producer and a great long-term grower and almost 100% occupied.

I appreciate that. I think my question is more toward cap rates because cap rates for malls and strip centers vary quite a bit and so I was wondering what kind of cap rates you think that would garner if it was put on the market?

That is really a hypothetical, so I don't know if I can answer that. But if we ever did decide that we wanted to sell it, it would probably command a premium cap rate to anything comparable, certainly in Texas.

I mean, Jason, where do you find 600,000 square feet, 100% leased? It's a dominant regional power center if you will. Chris, Chris Sullivan is our head of our leasing and retail. Chris, how would you characterize it?

The balance you have of those, you do have quite a few mall tenants that have good production and they are very stable tenants. You do have some big box and you do have some grocery elements in it. So where you put it I would say you would be able to -- that the value of that center is probably based on the lowest cap rate (inaudible) you've got the best of both.

Thanks, guys. Appreciate it.

Wes Golladay, RBC Capital Markets.

Good morning. Nice quarter. Going to the acquisitions with the Board mandate should we start modeling retail acquisitions and if so, what size properties are you looking at? Will it be more of the smaller properties like you just bought or do you have any larger stuff in the pipeline?

First of all it is not a Board mandate. It is Board guidance.

Second of all, we would like to acquire both retail properties and multi-family. And we are able to assess the opportunities available in those two asset classes in a broad geographic region. So that is our objectives, to balance the office out with either apartments, multifamily or retail. So that's not necessarily the mandates, it is the guidance we are adhering to.

I got you. And turning to the Lloyd's District development, how will that phase? Do you have any idea if it'll be retail first or the multifamily?

Jerry is here who is handling it, but I think the plan is to do it all at once. Yes because the economies of doing it all at once overcome the disadvantages. So and again, it is such a great piece of property. Right next to a regional mall, right from the middle of all of the transportation, the public transportation. So it is a very low risk property that I think we will offer an adequate, if not an excellent return. Jerry, do you want to add something to that?

The retail portion of it will be integrated into the ground floors of the building, but the project will all go at the same time. Because as Ernest mentioned earlier it is all over structured parking. So that element will go in first and, then, everything will come up vertically.

When we get to that point we want to have -- give you guys the opportunity to see what we have in Portland. It is quite exceptional.

Yes, as we get closer to pulling permits on that, Wes, what we'll do is we'll have an Investor Tour Day that you can walk the property and see our vision and how we are going to approach it and how it is going to be capitalized and the whole show.

That will be great. See you next week.

Thank you. Looking forward to seeing you.

Chris Caton, Morgan Stanley.

Morning. Couple of questions. You talked about growing the Company and you've also been delivering --

By the way, thank goodness I am feeling better than poor John. John caught a terrible case of the flu and if he is listening, we are all hoping that he gets better quickly. John, get better.

Okay, Chris, shoot.

You talk about growing the Company and also that you have been delivering G&A lower than your prior guidance. So, two questions. Why have you been managing to beat your guidance? Is it just conservatism and are you really more running at $4 million? And then, the second question is if you were to grow the portfolio by a percent, say 10% or 15%, what do you think would happen to G&A? Is it scalable at this level? Or as you expand in Seattle and Portland, do you expect to build out that office and see [for to or] a potentially higher run rate in G&A?

Bob, do you want to cover that or should I?

Yes, no, as we grew the portfolio by 15% at the executive level, we are -- it's going to remain the same. At the property level you will add more people on a property by property basis. But really, we've -- the $16.8 million that we have used for guidance, that is what our best expectation was. The -- we have a slow ramp-up in terms of the hiring of the people. Ernest often refers to American Assets Trust no longer has a real estate company, but more of an accounting company. So we slowly added financial reporting, all the disciplines that we need to support a world-class company. But we didn't bring them all on in the first quarter. So we have just been slowly getting to that point. I think that $16.8 million is going to be a reasonable number for 2013.

I think, just some additional color, Chris, that Bob has done a great job of bringing us into this public sector in a very -- a good way where our information is reliable. And I think there is some economy of scale, I don't know how dramatic it is. We were able to grow the Company in an agreed way to the stockholders. But -- and that's something -- an opportunity that we always continue to look at.

Great. Thanks for your comments. One last question on 160 King Street. I think that has a secured loan on it and so is the asset sales subject to lender approval and is there any doubt about that in the timeline?

No. There's no doubt about it but it is subject to customary closing conditions. We expect it to close early in the fourth quarter.

And is that a CMBS loan? I don't recall.

It is a life insurance company.

And last question on Portland, you lost a floor at Lloyd Center. Can you just talk about the office leasing environment in that local submarket there?

Actually we have Jim Durfey with us, our -- heads up our office leasing. Jim, you want to share a few comments?

Sure. I think we found in the Lloyd District that the office market is stable, but not rising rapidly. We are seeing some activity. We are seeing some internal possible growth from existing tenants. So we still look favorably upon that market or submarket, if you will, but don't see huge rent growth in the next 12 to 18 months.

And so you are -- I think you have about 10% to 20% vacancy at that asset. What is the state of the vacancy? Will you need to spend capital to bring that up to current market spec?

I think we will have to spend capital from the perspective of -- depending on the type of tenant whether it be open floor plan or whether it be an office intensive environment. We expect that we are going to have some TIs once we backfill some of that space, yes.

And from my perspective, I think that when we build the multifamily it will improve the quality of the office as well. It will make it into more of a community. People in Portland don't like to commute. They like to live in the environment that they work. And so once we create that work/live environment, I think it will add to the value of the office as well. But, the next year may be more difficult than we wish it were.

Understood. Thanks very much for your comments.

Okay, thanks.

Any more questions?

We have no further questions at this time.

Let me wrap it up. As we visit with our portfolio over this last 18 months, we have come to a couple of realizations. First of all many of our properties are so special, some of them have not traded or traded once in the last 50 or 100 years. It is just an irreplaceable portfolio which would not come to market under any circumstances quickly or going forward.

Second of all, we talk about ourselves as a West Coast REIT, but we are really we are a Coastal REIT. If you look at our almost all of our properties, they are within a few miles of the ocean, which makes them even more difficult to replace. So what we think we have is a gift of quality in our portfolio that will keep on giving. And we hope that you all agree with that and continue to have confidence in what we can do on behalf of all of our stockholders.

So thank you very much for attending this morning and giving us the opportunity to talk about our American Assets Trust.

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