American Assets Trust Inc (AAT) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q4 2012 American Assets Trust earnings conference call. My name is Beverly and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will facilitate 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 presentation over to your host for today, Mr. Adam Wyll, Senior Vice President and General Counsel. Please proceed.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust's fourth-quarter 2012 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 fourth-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 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 fourth quarter of 2012 furnished to the Securities and Exchange Commission. And 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 fourth-quarter results. Ernest?

Thanks, Adam, and good morning, everyone. Thank you for joining American Assets Trust fourth-quarter 2012 earnings call. Our West Coast- and Hawaii-focused investment strategy continues to prove very solid and rewarding, providing consistent and reliable returns both today and, we believe, going forward.

In 2012 we reported FFO significantly in excess of the high end of the original range and increased 2013 guidance which Bob will discuss in additional detail. As we've passed our second year anniversary as a public company, on January 19, 2013, we could not help but reflect upon the course and commitment we continue to emphasize, outline and reaffirm to all of our investors on these earnings calls to many of you personally and on the numerous non-deal roadshows we have hosted over the past year. Our multi-asset class strategy and our focused West Coast and Hawaii market speaks for itself.

We have stated repeatedly that our properties are irreplaceable assets in irreplaceable locations. The evidence of the quality of our portfolio is reflected on our continuing strong results as you will hear from John and Bob. These results bolster a multi-asset class strategy of our Company and we believe our results will continue to prove we are right and that we have an excellent business model for going forward.

On behalf of us all at American 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?

Good morning and thank you, Ernest. Overall conditions in our core markets -- Seattle, Portland, San Francisco, San Diego, and Oahu -- continued to show significant signs of strengthening in all three of our asset classes. We expect this to continue into the foreseeable future.

Our Office Properties continued to perform well relative to their respective submarket competitors. Portfolio-wide, the overall leased building area was 93.3% as of December 31.

Our San Francisco portfolio is 100% leased and the market continues to experience positive rent growth. Notably, in the fourth quarter, we executed a lease for 19,000 square feet at Landmark for a term of five years with a starting rate of $74 per square foot, beating the previous high water mark of $72 per square foot.

In San Diego, we broke ground on Phase 3 of Torrey Reserve, a three building, approximate 40,000 square-foot expansion. Phase 4, an additional approximate 40,000 square-foot two-building expansion is anticipated to commence in July of this year.

The leased building area of our retail portfolio increased to 97%. Seattle-based Nordstrom Inc. opened the previously announced Nordstrom Rack locations, Carmel Mountain Plaza store in September and the Alamo Quarry Market store in November. At the time, the Carmel Mountain opening was the second highest single day opening in their history at over $750,000.

Leasing and repositioning activities continue in full swing with several significant executed LOIs in place. We successfully closed on the acquisition of Geary Marketplace, a just completed approximate 35,000 square-foot, grocery-anchored center located in the very affluent city of Walnut Creek, California, in the San Francisco Bay Area. It boasts a strong tenant roster and is 100% leased.

In closing on retail, our Monterey property, Del Monte Center, continues to operate very well finishing the fourth quarter at 98.9% leased. Our San Diego retail properties finished the quarter at 95.3% leased as compared to 94% leased at the end of 2011.

Our multifamily assets saw significant improvement in leasing levels at the end of Q4, compared to Q4 2011, primarily due to management changes. At the end of December our multifamily portfolio was 94.7% leased, up 2.9% over the prior year. This was accomplished with little to no rental concessions. We feel we are poised for a strong year in our multifamily portfolio.

The Hawaii economy continues to show positive growth in both spending and arrivals at the end of Q4. Total visitor arrivals in November grew approximately 651,000, a 14.5% year-over-year increase.

The following percentages are all year over year for the month of November. Expenditures by visitors increased 22.7% to $1.1 billion. Arrivals by air increased 14.9% to 838,397. Notably, service from Brisbane, Sydney and Auckland have the largest growth of visitors at 30.3%. Japan grew 21.6%, US West rose 13.8%, US East grew 24.6% with new daily service with -- excuse me, new daily nonstop service from New York and Washington, DC. And Canada grew 9%.

Waikiki Beach Walk was 95.5% leased at the end of the quarter. Retail, full service and quick service restaurants at Beach Walk continued to show strong upward sales trends. Our Shops at Kalakaua remain 100% leased. Overall our Hawaiian retail portfolio was 95% leased at the end of the quarter.

Our Embassy Suites at Beach Walk continues to exceed our competition in ADR and RevPAR measurements for the quarter. For the month of December the property's ADR and RevPAR index were 123.3 and 119.9 respectively. RevPAR of $248.46 surpass budget by $33.83 or 15.8% due to the favorable variance in ADR of $36.18 or 14.4%. Total suite revenue of $2,842,000 was ahead of budget by $386,700 or 15.7%. The outlook for the first quarter of 2013 remains consistent with our budget expectations pacing ahead of 2012.

Now a brief update on our development activities in Portland, Oregon. The schematic design phase of our Lloyd District development is completed. Our development program has been defined to include approximately 53,000 square feet of retail commercial area, 637 multifamily units, in addition to the 238,000 square-foot office tower. The project will also include approximately 1,200 stalls 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 in the Lloyd District submarket is slightly below 2%, the best in the Portland Metropolitan statistical area.

Regarding Sorrento Pointe and Solana Beach 101, our entitlement efforts continue. We're remain hopeful of a final approval for Sorrento Pointe in the first half of 2013 and an approval for Solana Beach in 2014. As you know, each of these potential development and redevelopment opportunities are subject to market conditions and may not ultimately come to fruition. We will certainly keep you updated.

Our acquisition efforts remain in full swing, however as always, we continue to be very disciplined. All opportunities are of high quality, located in our existing 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 exists.

I went out like to turn the presentation over to our Chief Financial Officer, Bob Barton. Bob.

Thank you, John, and good morning, everyone. The books are now closed for 2012. Last night we reported both fourth-quarter FFO and FFO as adjusted of $0.38 per share. Net income attributable to common stockholders was $0.73 per share for the fourth quarter and includes a gain on sale from 160 King Street in the fourth quarter.

Reported FFO and FFO as adjusted for the full year were $1.35 per diluted share. Net income attributable to common stockholders was $0.90 per share for the full year.

The Company's Board of Directors has declared a dividend on its common stock of $0.21 per share for the quarterly period ending March 31, 2013. The dividend will be paid on March 29, 2013, to stockholders of record on March 15, 2013.

American Assets have a solid fourth-quarter performance based on steady leasing and increased pricing power due to consistently strong occupancy and retail and office with retail occupancy at the end of the fourth quarter increasing 10 basis points to 97%, primarily due to the addition of Geary Marketplace late in the fourth quarter which is 100% leased.

Total office portfolio occupancy declined quarter over quarter by approximately 70 basis points primarily because of the sale of 160 King Street in Q4, which was approximately 98% leased at the time it was sold.

Our Lloyd District property ended the year at 85.3% and leasing activity appears to be on the upswing. But what is interesting to me is that even with an occupancy of approximately 85.3% for Lloyd, our unlevered cash on cash return for the Lloyd property is approximately 8.3%, based on a Q4 run rate for that property.

All of the other same-store 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 continued to have very impressive growth at 22.8% on a GAAP basis and reflects not only in-place contractual bumps on existing retail tenants, but also the addition of Nordstrom Rack leases at both Carmel Mountain Plaza and Alamo Quarry. It also reflects the reserves that we took in Q4 2011 on the Kmart straight-line receivable at Waikele. Absent this reserve our same-store retail NOI would have been 14.5% on a GAAP basis. Still very impressive.

As we have mentioned before, all three of our former Borders spaces that were empty a year ago have been released at contractual cash basis increases in excess of 25% over the former Borders leases.

We call it the hiccup business because every time a tenant's lease expires or goes out of business, i.e., the hiccup, it creates another opportunity to enhance our overall portfolio. And that is exactly what we did when Borders went out of business last year. You just can't do that if you don't have great real estate. Great real estate and great infill locations with strong demographics is the ingredient needed to create a long-term sustainable portfolio that will continue to deliver growth year over year. Even during the great recession of 2008 and 2009, our cash flows were flat to up.

On a cash basis, our same-store retail NOI was also very impressive at 13.8% as Nordstrom Rack opened in September and began paying rent. H&M at Del Monte Center also open in late June and began paying rent. Retail leasing spreads are also a testimony to the quality and location of the retail product available for lease as spreads of 13 comparable retail lease renewals increased at an average of 4.6% on a cash basis, and 12.3% on a GAAP basis as shown in the supplemental.

Same-store office NOIs for the quarter increased 21.1% on a cash basis and reflects the strong SalesForce.com rent being received at our Landmark property in San Francisco compared with last year's free rent period. On a GAAP basis same-store office NOI increased 1.5%, reflecting the straight-line rent from SalesForce.com at Landmark and the lower occupancy at Lloyd. Office leasing spreads of 12 comparable office lease renewals rose at an average of 19.6% on a cash basis and 20.3% on a GAAP basis as shown in the supplemental.

Same-store multi-family NOI which comprises approximately 6% of our total NOI increased 13.6% on both a GAAP and cash basis, primarily reflecting strong occupancy gains combined with increased rents in 2012.

Multi-family occupancy remains strong at 94.7% leased overall at the end of the fourth quarter. I would also invite you to take a look at our new multi-family leasing summary on page 26 of the supplemental. Looking at this sheet, you can see how we continue to adjust rents upward at each of our multi-family properties quarter by quarter throughout 2012.

Waikiki Beach Walk, our mixed-use property which represents 11% of our NOI, continues to outperform with strong same-store growth of 8.6% on a cash basis and 10.8% on a GAAP basis. The Embassy Suites just by itself had 20% same store NOI growth Q4 '12 over two Q4 '11 and 35% year over year. It really demonstrates the high quality of this asset with the right product and an extremely high barrier to entry location that is favored by tourist. We expect this mixed use asset to only get better over time.

Turning to our results, 2012 fourth-quarter FFO increased approximately $1 million or approximately 5% to $0.38 per FFO share compared to 2012 third-quarter FFO of $0.36 per FFO share. The best way to describe the increase over Q3 is the following six items -

First, City Center Bellevue or CCB contributed an additional $0.015 per FFO share. This was our first full quarter of City Center Bellevue in our portfolio and includes the interest expense on the 3.98% interest-only loan that closed on October 10.

Second, the expected seasonality of the Embassy Suites Hotel reduced FFO by approximately $0.024.

Third, the sale of 160 King Street and reallocation to discontinued operations reduced FFO by approximately $0.01 per FFO share in the fourth quarter.

Fourth, we received approximately $0.01 of nonrecurring income comprised of lease settlement income, termination fee income, and income related to an energy tax credit at First & Main.

Fifth, we also received approximately $0.01 per FFO share of percentage rents during Q4 from Dell Monte, Alamo Quarry, Waikiki Beach Walk retail. These are percentage rents that come in at the end of the fourth quarter once the tenant exceeds their breakpoint.

Sixth, and the remain -- and the last item is the remaining increase of approximately $0.017 per FFO share came from the overall positive performance of the portfolio with no one particular item or property worth noting, but collectively making a positive impact to FFO.

I might also point out that G&A remained relatively flat over Q3 at $4.0 million. That still is less than our expected quarterly run rate of $4.2 million.

Let's talk about CAPEX for a moment. Our CAPEX has been running a little bit on the high side in the last two quarters. I mentioned in the last quarter's call that we paid a $6.1 million TI in Q3 to SalesForce.com at our landmark property in San Francisco related to a lease we signed in 2010 and that was originally earmarked as a use of proceeds from the IPO. This quarter our retail CAPEX is higher due to mostly TIs and costs related to the Nordstrom Racks that we leased at our Alamo Quarry and Carmel Mountain Plaza shopping centers. This tenant will greatly enhance both retail shopping centers for years to come.

The majority of our office CAPEX this quarter relates to the TIs and leasing costs that were assumed by us in connection with the City Center Bellevue acquisition. We anticipate 2013 to be a more normalized year for operational CAPEX with a AFFO or FAD payout ratio in the 85% range.

Now as we look at our balance sheet and liquidity at the end of the fourth quarter, we are well-positioned to continue to execute on a strategy of selectively acquiring or developing accretive high-quality assets in our core West Coast markets. At the end of the fourth quarter we had approximately $268 million in liquidity comprised of $42 million of cash and cash equivalents and $226 million of availability on our line of credit.

At the end of the fourth quarter, our total debt to total capitalization was 39.6% and our net debt to EBITDA was approximately 6.7 times. We are focused on keeping our leverage ratio at 45% or less and positioning our balance sheet so we have the ability to approach the investment grade market in 2015.

As I have mentioned before, we do have an internal roadmap to approach the investment grade debt market in 2015. In order to do so, we recognize that we need to get a secured debt ratio less than 30%. Part of our plan is to refinance our fixed rate CMBS maturities in 2014 with unsecured debt 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 maintain 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 positive same-store NOI growth on a relative basis which we believe will ultimately translate into organic FFO growth and increasing shareholder value.

Lastly, we are increasing our full-year 2013 guidance to $1.38 -- to a range of $1.38 to $1.46 per FFO share with a midpoint of $1.42 from our initial guidance of $1.35 to $1.44 per FFO share with the midpoint of $1.40. The primary driver for the updated guidance is that our initial guidance was based on our expectation that the Reading Cinema at Carmel Mountain Plaza was expected to not renew their lease in 2013 and we would be transitioning to a new theater concept that was close to moving forward. The transition of the theater would have still resulted in downtime for most of 2012 which would approximate approximately $0.02 per FFO share.

On the very last day to exercise the option, we received the existing tenant's notice to exercise their option to their lease pursuant to the existing terms of their lease. This will actually be a win for both parties because they will be making an internal capital commitment to update the movie theater to one of the newer concepts which should be well received in the marketplace.

Our updated 2013 guidance midpoint of $1.42 per FFO share is approximately a 5% growth rate over our 2012 actual of $1.35 FFO per share and is based on the following assumptions.

Number one, the entire combined portfolio is anticipated to increase 3% on a same-store cash NOI basis. Broken down by segment, we expect retail to increase 3% in same-store cash NOI which is expected to add $0.03 per share of FFO. Office is anticipated to be flat for the year primarily because we sold 160 King Street where the free rent on Ancestry would have burned off as of year end 2012 and ultimately increase 2013 same-store numbers.

We anticipate lower occupancy at Lloyd in 2013 versus 2012. We are anticipating the move out of the Tax and Treasury Department from First & Main in Q3 2013 although we do have strong interest in this space, but won't know for sure until they actually move out. This was actually incorporated into our original underwriting of First & Main at the time of acquisition.

Multi-family is expected to increase 5% in same-store cash NOI, which is expected to add $0.01 per share of FFO. Mixed use is also expected to increase 5% in same-store cash NOI which is expected to add $0.01 per share of FFO. The acquisition at Geary Marketplace is expected to add $0.02 per share of 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 $0.11.2 per share. G&A is budgeted to be $16.8 million in 2013 which is expected to reduce 2013 FFO by $0.02 per share.

We are also anticipating a large reduction in straight line rents due to the burn-off of free rent abatements related to Landmark and City Center Bellevue in 2012. The non-cash GAAP adjustments are expected to reduce FFO by approximately $0.04.2 per share. Our guidance excludes any impact from additional acquisitions, dispositions, equity issuances or repurchases, debt financings 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.

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

(Operator Instructions). Jason White, Green Street Advisors.

Good morning. I have a couple of quick questions for you. Initially I wanted to look at the office and retail leasing staff. It looks like lease terms were between three and four years. I was curious. Are those temporary tenants or what caused the lower lease term?

Well, why don't we start with retail? Chris Sullivan is here in charge of retail leasing and he can answer that question.

Any particular one specifically?

Just on average, they looked quite a bit shorter than we would expect for renewals and new leases in general.

It bounces around typically. I will keep them all shorter if we are in a better market so I can improve them down the line. I won't lock them in too long. Everyone is a little different situation.

So there is no temporary tenants or anything --?

Temporary tenants are usually less than a year, six months.

Okay, that's fair. Second question relates to when you I think you were talking about your FFOs of $0.01.7 related to portfolio outperformance. What were the moving pieces there that weren't known in 3Q that caused that outperformance? Didn't seem like there were any leases coming online or any timing issues. I am just trying to figure out what was the X factor that caused the outperformance.

Nothing particularly comes to the front of my mind on that. It is just the strong performance of the portfolio.

I think probably you will have to say suites was a factor in that.

Yes he is asking about office though. Right, Jason?

Interested in general on your headline FFO you said $0.01.7 related to the overall portfolio and I just didn't know if there was anything timing wise that hit. It just seemed like everything was known in 3Q and I was just curious on why there was that couple of things that seemed like a pretty material outperformance, but it didn't seem like there were any moving pieces that were unknown in 3Q. So I was just wondering what was it that popped up that caught you guys offguard that led to the outperformance.

Well, the Embassy had a seasonal rolldown.

Compared to the prior year and the price in same quarters.

I don't have an answer to that. I think it is just the general outperformance. In my prepared remarks we reconciled the difference between Q3 and Q4. And I think a lot of it was City Center Bellevue, which we were anticipating, and the other thing that I mentioned in my prepared remarks is that we outperformed on our percentage rents that came in. We never -- we can't accrue that during the year because it is all contingent. We don't know what their breakpoint is and it's not until the fourth quarter. So those came in stronger than the prior year on our retail side.

Okay, that helps. I appreciate it. Thanks.

Paul Morgan, Morgan Stanley.

Good morning. Starting with the big picture, how are you seeing the acquisition market in your pipeline right now and then, in the context also of, obviously, your valuation has improved. I know at one point you thought you were somewhat equity constrained. You didn't want to take the leverage up too high.

What is your thought process now in terms of weighing opportunities versus where you see your balance sheet positioned for growth?

I'll answer the acquisition pipeline part of your question and Bob can answer the balance. We continue to search in all three classes as I mentioned. The focus, I would say, is primarily on retail assets. The multi-family market is in our opinion so overheated it makes more sense to develop than it does to acquire. So our focus at the moment is getting the Lloyd District property out of the ground and that will significantly increase the size of our portfolio. We will be adding 637 units to the 900 unit existing portfolio. We are looking at other development opportunities in the multi-family area as well.

But in terms of significant growth, external growth, I think it's likely to occur in retail. As we have mentioned before, we are keeping office, we want to keep office about where it is right now unless we find something that is just absolutely exceptional. So those efforts continue, and when we have something more to report, we will. Bob, terms of --.

Yes, you asked about the -- if we are going to grow is our balance sheet prepared. And the answer is yes. We have a very strong balance sheet. We have lots of liquidity. I think we have $260 million plus of liquidity between a line of credit and cash on the balance sheet.

And as John mentioned he is looking at over $1 billion worth of deals a week. But we are just very disciplined. And if we find an accretive deal there will be many ways to raise -- whether we raise equity or financing or whatever the tool we use in our toolbox that is available to acquire that, we do not see any limitation in terms of growth.

If you look at where our stock price is today, the stock price is basically saying move forward with acquisitions. But we are very disciplined as you continue to hear Ernest, John, and myself say is that we are not interested in acquiring for the sake of acquiring. We don't want to be big for the sake of being big. We are looking at increasing shareholder value on an accretive basis and that is our mantra.

Great. And then, John, you said your focus is on retail for acquisitions. Could you maybe put that -- put the Walnut Creek deal in context there and is that representative? Was that sort of a one off? Would we see bigger? Should we expect larger format, community power centers, or would you even buy a mall if it were a potential redevelopment or anything like that?

We are not in the mall business so a mall is unlikely. If we had the opportunity to add another Del Monte to the portfolio we would love to. But it would have to meet all of our criteria. It would have to be in a very high barrier to entry market. It would have to have an absolute rock-solid tenant roster and as Bob said it would have to be accretive. So Geary was an exceptional or is an exceptional property located in a market that is almost impossible to develop in because the entire city is built out. So we saw that as really a piece of gold.

The properties we are looking at I would characterize as the most part of being significantly larger than Geary. Properties that are in the range of the balance of our portfolio, Carmel Mountain Plaza, Del Monte, those types of centers. And there are several that we are looking at so we'll see how that pans out and we'll go from there.

Stay tuned.

Thanks. Just a last question on Waikele. You have got -- we are sort of a year away now from the Foodland expiration and then it might be interesting to think about what OfficeMax might do given the merger there with the lease expiration around the same time. Are you thinking anything particular about that end of the center and what you might do looking at 2014?

We continue to evaluate a number of opportunities. Obviously the OfficeMax, Office Depot, potential merger was just announced. We do not expect any movement from Office Depot. The store there does very well, OfficeMax.

And in terms of the Foodland we are looking at a number of different uses of the property. Everything from replacing them with another grocery store to repositioning the property into an entertainment venue or possibly even a multi-family opportunity. So we are looking at everything. We still haven't received word from Foodland as to whether or not they intend on giving us back the space.

So until they do, we really can't start taking steps forward to figure out which direction we are going to go.

Great. Thank you.

Todd Thomas, KeyBanc Capital Markets.

Good morning. This is Grant on for Todd actually. I had a question just about guidance just to clarify. The 0.02 increase that's completely stemming from the Cinema at Carmel Mountain.

Correct.

And then can you just touch on the leasing efforts with the Lloyd District and then as well, the City Center Bellevue just top two floors of that?

This is Jim Durfey. We have significantly increased activity in the first quarter that we are seeing both in the Portland and the Seattle markets. By way of example, in the City Center Bellevue, let's talk about that first, we have got five active prospects to that 17,000 foot block of space. As you know from previous conversations it is not subdivisible because you have got 11,000 foot 26th floor and 6,000 foot 27th floor. And there is stairwell access between him.

So as we work through those processes, we are confident that we are going to pick off one of those five perspective tenants sometime in the second quarter.

As we relate to Portland, we are seeing activity there increase also. We have several deals with existing tenants for expansion that are on the table. And we expect to see a nice pickup in the Portland Lloyd market here also in the second quarter. So things are on the upswing in both markets.

Bob, for same-store -- I'm sorry for guidance, you said that City Center Bellevue you are expecting an 11.2% increase or a contribution, I guess. What does that take into account in terms of occupancy?

That debt -- the debt assumes that we will lease the remaining two floors in 2013. It also builds in a vacancy factor of approximately 4% into our model. And it includes -- it is based on FFO. The 11.2% contribution is over -- the increase over what we received in 2012. So in my prepared remarks, what I was doing is reconciling where we ended up in 2012 and if you follow my prepared remarks, you will get to our guidance.

Okay. Thank you.

Craig Schmidt, Bank of America Merrill Lynch.

With regards to the two OfficeMaxes you have, I mean assuming that following the merger there are store closings. Do you think you could repeat the 25% list that you got from Borders on those OfficeMax properties?

Who wants to take that?

This is Chris Sullivan. At Alamo, OfficeMax renewed or exercised their option last year. That store is pretty stable there's not a lot of competitors around. And could you -- I missed the last half of your question.

You got an impressive lift off of the exiting Borders, I think it was 25%. I was just wondering possibly at the Waikele Center could you get that same lift? If it closed. Obviously --.

Yes, the lift off Nordstrom Rack was based off Borders rent. That was just -- is that what he's asking? Yes we are not -- we wouldn't get that same lift.

There's no way we can tell what we'll get. But I can tell you is that our experience has been every time a tenant has gone down not every time but if you look at Carmel Mountain Plaza we lost Circuit City we've brought in Sprouts for significantly more rent. Borders went down and those that replaced it higher. But it happens to great locations and great real estate. So all I can say is stay tuned and let's hope we see the -- continue to see that positive performance.

I think you did indicate that one of them had just renewed their exercised their option and.

Also and so we are not expecting any type of change there.

It's already in the system, in the Alamo.

So there's no way to comment on that. But we're hopeful.

Sure. And then are you considering any dispositions on your retail portfolio? Or do you think --?

It's the history of 40 years where we have traded and we are always looking to improve. Dispositions per se without the opportunity to improve the quality of the portfolio are not under consideration.

Yes as we said, previously, a disposition is driven by an acquisition and that was the case with the acquisition of Bellevue and the disposition of King Street. We were able to recycle capital and put it to better work in doing so and the Geary Street property.

We have, as we have mentioned before, a couple of properties that are candidates for recycling. But until we find an asset to reinvest that capital in, we are not going to consider it.

And have you got a cap rate for the Geary Marketplace acquisition?

I think we stated on a prior call that it was it is the low 5's on that. It is a steady low 5, but it is and irreplaceable location and we think over time that is going to be accretive to our investors.

Great. Thanks a lot.

Brendan Maiorana, Wells Fargo.

Good morning. Bob, listening to the prepared remarks, I think I would agree that the fourth quarter came in probably better than certainly what our expectations were. But I guess I was a little bit surprised that the guidance uptick only includes the improvement or the reletting of the Cinema and maybe not some of the flow-through from what seemed like better performance in Q4 into revised '13 expectations. Was outside of the percentage rents and maybe a couple of the other onetimers that hit Q4 was there nothing that was unexpected in terms of the overall portfolio improvement?

Yes. I mean, I think if you look at my prepared remarks and how we reconcile Q3 to Q4 or compared the differences, really it's we had $0.02. We had probably $0.01 relating to percentage rents and other income but we also had some nonrecurring income from lease terminations, lease settlement income. We had a business energy tax credit that came in. Things that we weren't anticipating.

So we had approximately $0.02 that we had not planned on. I don't think there was any way that we could have planned on that on those.

Yes sure. No, that is helpful. And what is, can you refresh my memory, how much is Tax and Treasury at First & Main and what is included in guidance for backfilling that space in the midyear move out that they are expecting to happen? And where do you think you are likely to do rents versus what Tax and Treasury is paying today?

First & Main Tax and Treasury is about 70,000 square feet and so we are expecting at First & Main where we are currently 98% occupied at year-end, we expect to end First & Main about 79%, 80% next year. Because we think they are going to be down for about nine months. Now that's what is built into our guidance.

And what's the -- where are their rents relative to market?

We believe that they are below market. And, Jim, maybe you can comment more on that in terms of what you're seeing in the marketplace.

But keep in mind that First & Main is the -- it is described just First & Main because it truly is an icon in downtown Portland. And it is in the Federal CBD or the Central Business District. It is surrounded by government buildings. And so we have just got to play it out. The tenants that are in there don't want to leave and the reason the Tax and Treasury is leaving -- that we think they are leaving, we haven't been notified -- is that the GSA, the government, wants to bring Tax and Treasury back into a refurbished building across the street. But it is our understanding that nobody wants to leave the building as beautiful as it is.

So we -- whether we backfill it in with an attorney or whether they stay or whether the government needs to put in another government tenant in there, we don't know what that outcome is. But I think overall we will be at or above where we are today.

Jim, do you want to comment further?

There are a handful of 40,000 to 100,000 square foot users out in that market currently as we speak and our quandary is being able to tell them definitively that the space becomes available at a certain date. But we are staying in touch with those particular perspective users and I think Bob is correct. That the expectations the rents are going to be similar. My expectation is that it is going to be a legal use or a tech use as the smoke clears as opposed to another government use. But we'll see as we get down the road.

And so they are in the soft term right now in terms of their lease and what is the notification period that they would need to give for move out? And when does their actual soft term on the rent or on their lease leave? I think that was maybe 2015 if memory serves?

They have an option to terminate beginning on September 1 of this year with three months prior written notice. And so any time after May 31 they can give us notice and then it is a 90 day clock. Our expectation is we will get that notice on or before May 31 for that 70,000 foot tranche. But until they deliver it, it's still conjecture at this point.

And if they choose not to, they signed a 10-year term.

So and is that the five-year firm term ends on September 1 and then they have another five soft term after that?

That piece actually rents through 2015 if they choose not to exercise than their other tranche is the 2020 et cetera on that GSA parcel. But I think there is a 90% chance that they are going to exercise and I expected to see it before May 31.

Okay, got it. And, Bob, the straight-line rent number. I think you said it would be a $0.04.2 impact for FFO going to AFFO. So that suggests that its $2.5 million give or take annually for the year, yet you were at I think $2.1 million or $2.2 million in the quarter. Is that right that it is going to drop that significantly? Is that just the Ancestry lease coming off the books in the fourth quarter?

That's a combination. It is also City Center Bellevue had quite a few. So we are going to have some change from City Center Bellevue on some of the abatements that happened in the fourth quarter. So, yes you are correct.

Great. And then this last one, Lloyd District on the office side, what do you think is a reasonable longer-term occupancy target there? I think you guys were a little above 90% a year ago. It is now in the 85% range. Is it 90% -- a reasonable run rate of where occupancy can be in that office portfolio? Or do you think it is a number that is materially different from that?

I would say low 90s. I wouldn't say 90%. I would say 92%, 93%.

And, John, what do you think you -- what's your target for this year to live up from where you are right now?

I think that is the target.

Of, by the end of the year? Okay.

Yes. Great.

You have to consider that when we build this new development in that Lloyd District it is going to improve the whole area. Because it is going to be lived and worked in a very, very attractive environment. So we are going to probably have to deal with some disruption during this period but, after that, I am really optimistic that that whole area is going to be upgraded and improve all the existing projects there.

For purposes of our guidance, we have included 89.1% as of 4Q '13 as percentage lease on Lloyd's.

Great. Thanks.

Mitch Germain, JMP Securities.

Good morning. Just a quick question maybe for Bob on your retail NOI assumption for growth assumption for 2013. It seems like you kept it the same 3% from what you had last quarter, but it seems like you have an uplift from the theater. So just curious as should we -- is there any other moving pieces that are impacting that?

No. That's -- you got it right.

And maybe, Ernest, maybe your thoughts on the dividend here?

The Board reviews the dividend every quarter and I think that their thoughts were that during the first year we should have a more stable situation going forward. We have lots of opportunities to reinvest.

Obviously, we intend to comply with the tax requirement to minimize our tax liability at the AAT level and that is something that we continue to review. What I would like to say and I think what they would like to see is a record of steadily increasing dividends over the years. And I hope that that begins at some point in this year. But it is up to the Board to make that decision.

So that is a very good question. Thank you for asking.

Thank you, guys. Great quarter.

Rich Moore, RBC Capital Markets.

Good morning. On the mixed use asset in Hawaii, it struck us that 3Q was actually stronger than 4Q which I didn't quite understand. We had modeled it to be a little bit different. And then we went back and looked and is that a typical seasonal sort of thing for that paired asset?

Yes. 3Q is always stronger than Q4. In the hotel industry, Rich, the -- November is what they refer to as the shoulder month. And we refer to that on our third-quarter earnings call. So you do have seasonality. So the fourth quarter is definitely a dip from the third quarter.

And it is all the hotel, Bob?

And although hotel may have its seasonality, it is Ernest. As Bob points out, I am really optimistic about the returns that we are going to generate from that asset over the next decade. It is a barnburner.

All right, good. Thanks. On the stuff you are looking at on the acquisition front, I think, Bob, you said $1 billion of stuff a week. I don't know if that was an exaggeration, but what is the makeup of that $1 billion you are looking at in terms of property types? I realize you are looking more for retail, but what are you seeing out there and what markets are you typically seeing the assets coming to market in?

Well, we are seeing all three of the asset classes in all of our markets. I would say the largest deal flow right now is in office properties. And as we've stated before, we want to keep our -- the percentage of our portfolio about where it is in terms of office. If something really unique presented itself, obviously we would consider acquiring it.

But there is no shortage of office properties. There is no shortage of institutional quality multifamily properties. We won't put our toe in the water at a forecast on multifamily.

So as we have said, we think the opportunity in multifamily is to develop to a higher return than to acquire at current returns.

Retail assets are the most scarce. However, there are plenty of retail properties outside of our core markets that you can acquire, but not within the core markets. And as I stated on the earlier question, we are not a mall operator. So Macerich has I think 12 or 14 malls on the market right now. That is not our bailiwick. We look for high-quality infill type properties and we are looking at a few right now. So, as we say, stay tuned and we will see what happens.

Okay. So you are seeing assets up in the Pacific Northwest as well.

We are seeing assets in every one of our markets. We are looking at stuff here in San Diego. We are looking at things in Seattle. We are looking at things in San Francisco.

Good. Thanks. And then, last thing, the drop in average base rents for the office portfolio. Bob, I assume it is just the sale of King Street, right?

That is correct.

Great. Thanks.

At this time we have no additional questions. I would now like to turn the presentation over to Mr. Ernest Rady for closing remarks.

Thanks very much, operator. And thank you all for your interest in American Assets Trust. We are really delighted that over the last year the valuation for our stockholders has approached a more normal level. Although I still feel that our valuation relative to the quality of our assets, and relative to our peers, still has a way to go we have a great portfolio which as you can see with the numbers that Bob has laid out this year has continued to return a significant and growing return for our stockholders. We think that this is what will continue.

And I would like to, on behalf of the folks who work at American Assets Trust for you and our directors, thank you for your interest in our Company. We are delighted to be able to work for you and we hope you continue to be able to reward you with increasing value for all of our stockholders. Thank you all for attending this morning.

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