American Assets Trust Inc (AAT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 American Assets Trust earnings conference call. My name is Gwen, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to your host today, Mr. Adam Wyll, SVP and General Counsel. Please proceed.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust's first-quarter 2013 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 first-quarter 2013 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, earnings before interest, tax 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 first quarter of 2013, 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 first-quarter results. Ernest.

Thanks, Adam, and good morning, everyone. Thank you for joining American Assets Trust first-quarter 2013 earnings call.

We have stated repeatedly that we own and operate a premier portfolio of retail, office and multifamily assets in the REIT sector. We believe that our integrated, low-risk operating and group strategy capitalizing on the infill nature and strong demographics of our properties will continue to allow us to take advantage of a stable of core portfolio assets that produce a continuous, growing stream of cash flows. It is our belief that our investment strategy should continue to demonstrate a strong platform of core operating property income that continues to provide consistent internal growth.

Our development and redevelopment pipelines appear full for the foreseeable future and should continue to demonstrate our ability to produce strong earnings and value creation. While we continually search, we are not dependent on external acquisitions to grow, and we anticipate that our internal activities will provide solid, risk-adjusted returns, value creation and are appropriately sized relative to our stabilized operating portfolio.

We use an abundance of common sense, or judgment. It is something that management emphasizes every day, both to ourselves, as well as to all of our associates. It is a very simple rule, but one that carries with it a guiding principle in the execution of our focused investment strategy, a strategy that produced common stock returns in excess of 40% in 2012. It is a rule that we will continue to live by now and over the decades to come.

Our strategy of operating this portfolio has been proven to be the right one based on the returns that we've produced over the last year. On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage your Company, and we look forward to your continued support.

I would now like to turn it over to our President and CEO, John Chamberlain. John, would you please take it from here?

Good morning, and thank you, Ernest. Overall conditions in our core markets, Seattle, Portland, San Francisco, San Diego and Oahu, continue 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 continue to perform extremely well relative to their respective submarket competitors. Portfolio-wide, the overall leased building area was 95% as of March 31. Our San Francisco portfolio is 100% leased, and the market, while slowing somewhat, continues to experience positive rent growth.

In San Diego, construction continues on Phase 3 of Torrey Reserve, a three-building, approximate 40,000 square-foot expansion. Phase 4, an additional approximate 40,000 two-building expansion, is on schedule to commence in July 2013.

In Bellevue, Washington, we renewed an approximate 29,000-square-foot lease with Cisco Systems at $36.75 per square foot, an approximate 24% increase over their previous rental rate.

The leased building area of our retail portfolio decreased to 96.1% from 97% last quarter. The decrease was due to Ross leaving Lomas Santa Fe Plaza, which was anticipated. We believe this space will be released by the end of Q3.

Other leasing and repositioning activities continue in full swing, with several significant executed letters of intent in place. Our Monterrey, California property, the Del Monte Shopping Center, continues to operate very well, finishing the first quarter at 99.2% leased.

Our multifamily assets saw significant improvement in leasing levels at the end of Q1 as compared to Q1 2012. Our portfolio was 94.3% leased, up 5.9% 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 Q1. Total visitor arrivals in February grew to approximately 675,517, a 7.8% increase year-over-year. The following percentages are all year-over-year for the month of February.

Expenditures by visitors increased 9.9% to $1.22 billion. Arrivals by air increased 10% to 844,874. Notably, arrivals from China nearly tripled in growth to 14,188. Japan grew 3.5%, US West rose 7.7% and US East grew 3.7% with new daily service from New York and Washington, DC.

Waikiki Beach Walk was 95.5% leased at the end of March. Retail, full service and quick service restaurants at Beach Walk continue to show strong upward sales trends. Our Shops on Kalakaua remain 100% leased and occupied. 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 -- excuse me -- for the month of March, the property's ADR and RevPAR index were 126.2 and 124.3, respectively. Year-to-date, room revenue exceeds last year by $1,184,000 or 15%. The outlook for the first half of 2013 remains consistent with our expectations, pacing ahead of 2012.

Now a brief date on our development activities in Portland, Oregon. Our permitting efforts are well underway. Our development program has been defined to include approximately 47,000 square feet of retail and commercial area, with 657 multifamily units, in addition to the existing 238,000-square-foot office tower. The project will also include approximately 1218 stalls of underground parking.

We currently anticipate securing the necessary permits and commencing construction July 1. Construction is expected to take 24 months. The project will be LEED-Certified and contain state-of-the-art green features, including a living machine that is projected to reduce water and sewer costs by as much as 75%.

The retail will be anchored by a specialty grocer and provide services and amenities for the apartment residents, office tenants and neighborhood alike. The project will be a mix of all market rate studios, 1-, 2- and 3-bedroom apartments, ranging from walkup flats to penthouse units.

Total project costs, including hard and soft costs, are currently estimated at $192 million. The stabilized cash-on-cash return is anticipated to initially commence between approximately 6.25% and 7.25%, and is anticipated to grow steadily.

Currently, the apartment vacancy for the Lloyd District submarket is approximately 3%, the best in the Portland metropolitan statistical area.

Regarding Sorrento Pointe and Solana Beach 101, our entitlement efforts continue. Sorrento Pointe is scheduled for a final approval from the California Coastal Commission on May 8. Assuming we are approved, we are poised to immediately begin the preparation and processing of construction documents. Groundbreaking would be targeted for Q2 2014. Solana Beach is currently tracking for a 2014 to 2015 approval.

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, we continue to be very disciplined. All opportunities are of high quality, located in our existing core markets and include primarily retail and multifamily assets. Concurrently, we continue to evaluate opportunities to recycle capital where the probability to increase internal growth exists.

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

Thank you, John, and good morning, everyone. Last night, we reported first-quarter FFO of $0.38 per share. Net income attributable to common stockholders was $0.08 per share for the first 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 June 30, 2013. The dividend will be paid on June 28, 2013 to stockholders of record on June 14, 2013.

American Assets had a solid first-quarter performance based on steady leasing and increased pricing power due to the consistently strong occupancy in retail and office, with retail occupancy at the end of the first quarter decreasing 90 basis points to 96.1%, primarily due to the loss of Ross at our Loma Santa Fe shopping center in San Diego. We anticipated Ross would vacate their space, and we believe that the space will be re-leased by the end of the year. We see this as another opportunity to enhance the overall tenant mix of the Center.

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. The Lomas Santa Fe Plaza in San Diego, California is an infill location with freeway frontage and has one of the highest demographics in the country, being right next door to Rancho Santa Fe.

Total office portfolio occupancy increased quarter over quarter by approximately 50 basis points, primarily due to increased occupancy for our office properties in Seattle and Portland. Our Lloyd District property ended the quarter at 86%, and leasing activity appears to be on the upswing for the Lloyd property. All of the other same-store office buildings in our portfolio continue 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 6.5% on a cash basis and 5.8% on a GAAP basis. This growth 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. H&M at Del Monte Center also opened late June and began paying rent, and a lease with Petco at South Bay Marketplace, as well.

Retail leasing spreads are also a testimony to the quality and location of the retail product available for lease, as spreads on nine comparable retail lease renewals increased at an average of 6.8% on a cash basis and 11.6% on a GAAP basis, as shown in the supplemental.

Same-store office NOI for the quarter increased 8.1% on a cash basis, and reflects the strong SalesForce.com rent that we continue to receive at our Landmark property in San Francisco compared with last year's free rent period. On a GAAP basis, same-store office NOI decreased by approximately 2.5%, reflecting the lower occupancy at Lloyd on a year-over-year basis.

Office leasing spreads on eight comparable office lease renewals rose at an average of 9.8% on a cash basis and 19.6% on a GAAP basis, as shown in the supplemental.

Same-store multifamily NOI, which comprises approximately 6% of our total NOI, increased 9.2% on both a GAAP and a cash basis, primarily reflecting strong occupancy gains, combined with the increased rents on a year-over-year basis. Multifamily occupancy remains strong at 94.3% leased overall at the end of the first quarter.

Waikiki Beach Walk, our mixed-use property which represents approximately 15% of our NOI, continues to outperform with strong same-store growth of 13.1% on a cash basis and 13.8% on a GAAP basis. The Embassy Suites just by itself had 26.5% same-store NOI growth on a year-over-year basis for the first quarter. And if you remember from the last earnings call, the Embassy Suites just by itself had 20% same-store NOI growth year over year for the fourth quarter of 2012. It really demonstrates the high quality of this asset, with the right product in an extremely high barrier to entry location that is favored by tourists. We expect this mixed-use asset to only get better over time.

Turning to our results, 2013 first-quarter FFO was $0.38 per diluted share, which was approximately the same as the previous quarter, but a 22% increase on a year-over-year basis from first quarter 2012 of $0.31. There is nothing that really stood out, other than the following three items.

First, the expected seasonality of the Embassy Suites Hotel increased FFO by approximately $0.021. The sale of 160 King Street last December reduced FFO by approximately $0.013 per FFO share in the first quarter. G&A increased by approximately $0.006 to $4.2 million, which again is what we continue to believe our run rate will be on a quarterly basis.

Now as we look at our balance sheet and liquidity at the end of the first quarter, we are well-positioned to continue to execute on our strategy of selectively acquiring or developing accretive high-quality assets in our core West Coast markets. At the end of the first quarter, we had approximately $270 million in liquidity, comprised of $44 million of cash and cash equivalents and $226 million of availability on our line of credit.

At the end of the first quarter, our total debt to total capitalization was 36.4%, and our net debt to EBITDA was approximately 6.9 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 our 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 have several ways to go and are focused on conservative and disciplined balance sheet management. We are not only focused on our 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 and increasing shareholder value.

Lastly, we are increasing our full-year 2013 guidance to a range of $1.42 to $1.49 per FFO share, with a midpoint of $1.45, from our initial guidance of $1.38 to $1.46 per FFO share, with a midpoint of $1.42. The primary driver for the updated guidance is the outperformance of the mixed-use asset at Honolulu and higher-than-anticipated occupancy for our multifamily portfolio.

Our updated 2013 guidance midpoint of $1.45 per FFO share is approximately a 7.4% growth rate over our 2012 actual of $1.35 per FFO share, and is based on the following assumptions for same-store growth on a cash basis. The retail portfolio is expected to increase by approximately 3.5%. The office portfolio is anticipated to be flat to slightly down to the sale of King Street and reduced occupancy at Lloyd, and the assumption that Tax and Treasury Department vacates First & Main in Portland, Oregon, which we factored into our original underwriting of this property.

Multifamily is expected to increase 8% due to higher occupancy in the first half of the year versus 2012. Mixed-use is also expected to increase 7% due to the continued outperformance of the Embassy Suites Hotel in Honolulu, Hawaii.

Our guidance excludes any impact from additional acquisitions, dispositions, equity issuances or repurchases or debt financings.

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 continue to present themselves over the coming quarters.

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

Paul Morgan.

Morning, Paul.

I apologize. Craig Schmidt.

Good morning. It appears that some of your markets have very, very low vacancy, in particularly San Francisco and Hawaii. Is that part of the reason for the push for the higher earnings results?

I think the fact that the vacancy rates are low allows us to adjust rents, as well as we can, to maximize the benefit to the stockholders as well as serve our customers.

I would add to that that the higher earnings results are largely the result of the higher performance at multifamily, plus the outperformance at the Embassy Suites in Waikiki. Our retail continues to be very strong at 3.5% plus going forward.

Great. I guess wanted to get your opinion of the international marketplace, Towbin's joint venture project, in terms of does the competition balance the raising of the profile of the area, or just what are your thoughts on that?

I think they have a very, very aggressive plan for that property. It is a great location. It is right in the heart of Waikiki. It's about one block from our project. And frankly, I think the more synergy that is created along Kalakaua Avenue the better for everybody, the better for all the retail tenants, the better for hotel customers and we look forward to seeing their success.

I agree.

Okay, thank you.

(inaudible)

You guys posted an investor presentation on your website from last month that included a detailed NAV that tagged it at $33.50. Given that you are now trading almost a dollar north of that, your leverage is at or a little bit above long-term targets on a debt-to-EBITDA basis, and you are facing quite a bit of development spend, how do you -- do you think now is a good time to go ahead and tap the capital markets to go ahead and fund some of your future growth?

It is something we always will consider -- how do we serve the best interests of our existing stockholders. While, as Bob pointed out in his presentation, we have many, many ways to go to fund our development, at the same time, what we posted as NAV we think was accurate, if not conservative.

So we have to take all of these factors into consideration and the Board will take them into consideration and make the decision how to proceed and benefit all of our stockholders as well as possible.

Okay, that's helpful. Then you mentioned (multiple speakers) -- what's that?

That's a great question. Thank you.

You mentioned, I think, John, that the initial yield on the Lloyd District development is expected to grow steadily from 6.25 to 7.25, and I think from past conversations that is due to your expectations to be able to push rents on the multifamily portion. Can you guys quantify how much you think you can grow that, say, the first three to five years?

Our expectations for that project is our returns will initially commence in the range of 6.25 to 7.25. There are a number of variables still outstanding. What are -- actually bidding the construction, buying materials, et cetera. So we are keeping a range that we are offering as guidance, and we believe if you look at the Portland market over the last 10 years, I think we can anticipate rent growth of over 3% a year. And obviously, that can change.

But right now, the market is operating with a 3% vacancy. We will have little or no competition to our project when it comes online, and we feel we have probably the best location in the northeast area of Portland.

Blaine, from a modeling standpoint, what -- we are trying to be consistent with REIS's reports, that publishes their expectation on growth rates on the --. And what we look at is the eastern side of Portland. We take that, and then we will fine-tune that accordingly. So I think what John just said about -- that we are comfortable with a 3% plus growth rate in the rental rates.

I think when you are building into a market with a 3% vacancy in a location which John described as being excellent, it's a great opportunity, and I am personally very excited about it now and for the future.

No, it definitely sounds great. And then, John, just the last one. You mentioned that you are seeing San Francisco as strong, but beginning to slow a bit. Can you just expand on that comment?

San Francisco, for the first time since the recovery, if you will, saw some negative absorption. And I think that caught everyone a little bit by surprise. There is still an abundance of tenants looking for space in the market, so I think rental rates are going to continue to grow. But it was the first sign of a pause, is probably the best way to describe it.

Okay, great. Thanks, guys.

Mitch Germain.

Just curious about your interest in the Valley. Has that been a market that you've had some interest in in the past?

Which market are you referring to?

Silicon Valley, sorry.

We actually are not looking at anything in the Silicon Valley right now. We have -- historically, our predecessor owned a shopping center in that area, so we are very familiar with it. But it is currently not a target market.

Got you. And you had mentioned some retail at the Lloyd District development. There is no lease signed with the shops -- with a supermarket chain, correct? It is just something that you are going to lease after development?

No, there is no lease signed, but the project has been designed to accommodate a specialty grocery store, approximately 25,000 square feet. And obviously, with that as a use, we have to take into account loading and trash and everything else that goes with it.

So the project has been designed for one. We are in discussions with several potential tenants, and we are quite confident that once we put a shovel in the ground we will be able to sign somebody up.

Great. And last question, maybe for Ernest. We just a couple months ago marked your two-year anniversary after going public. This is your eighth quarter now. I'm just curious about how looking back at the process, how things unfolded, anything you might have done different over the last few years?

I don't know that we would have done anything different. If I had to do it all over again, I might have been a little bit more insistent with the underwriters that they give us the last $0.50 on the range. But I lost that, and since then, we've really enjoyed being in the public marketplace, having a lot of partners looking over our shoulder and encouraging us to do better. And we've got a lot of satisfaction out of creating wealth and value for them.

So I think it has been good for our new shareholders. It's been good for our associates. It's been good for the people we do business with, our customers, and it has been good for our financial sources as well. So net-net, I'm very grateful for the blessings that we've enjoyed over the last two years, and that is a great question. Thank you.

Thank you, guys. Great quarter.

[Pat Thompson].

Thanks. Good morning. Just a follow-up on San Francisco. I was just wondering are you seeing an impact at all on cap rates in Northern California, given the slowdown you saw -- or I guess the negative absorption? Does this potentially create an investment opportunity for the Company?

We have not seen cap rates move. They are, I think, broadly described as at all-time lows. As you are aware, we took advantage of where those cap rates were when we sold King Street.

We continue to look in that market. It is obviously one that we're very bullish on. But we at the moment do not have any current prospects.

Switching over to Portland, so the 6.25% to 7.25% stabilized yield, just a couple questions. First, are you assuming current apartment rents in your stabilized yield expectations, or they sort of trended rents over the next couple of years until the project is stabilized?

And then just a follow-up. I was just wondering -- I thought initially that the yields at this project were going to be a little bit higher than that 6.25% to 7.25% range, since you acquired the land at a fairly attractive price. I was just curious if you could comment on whether that yield has come down a little bit now the plans and costs are starting to be finalized a bit.

That's part of it. We want to be very conservative. There are a lot of systems we are incorporating in the project that will result in significant operating costs. We don't know -- we have a range of what those will be. If we achieve the higher end of that range, we are going to -- obviously, that will reflect on the bottom line.

So we are being conservative. The project has not been formally bid out. We are dealing with the shoring portion of the bid right now and the numbers are coming in at very attractive rates. And we will -- I would expect that once we commence construction, we will offer additional guidance on where those returns are likely to end up.

From the point of view of our relationship with the Board and our stockholders, we would sooner underpromise and overdeliver. That has always been our mantra, always been our strategy.

Again, I would like to repeat that I am very enthusiastic about building the apartments into a 3% vacancy market. And I think John referred to it as the best location in the Northeast. So what we are providing today is some guidance, but we are very optimistic, and we hope we will do a lot better, and we are going to do the very best we can to produce the returns that you will be pleased with.

And regarding the rental, yes, we are taking the current rents that we are seeing in the market, in the model, and then we are growing them. And what we take a look at is, in terms of the growth rate, we are looking at independent studies by Johnson Reid and others, and then we triangulate that with the REIS reports and what their view is going forward in that type market.

Okay, that's helpful. And then just lastly, I was just wondering -- I know you don't have any acquisitions embedded in guidance, but I was just wondering if you could -- you touched on San Francisco a little bit, Northern California. But I was wondering if you could characterize the environment sort of elsewhere along your target markets, and just wondering if competition has let up a little bit or if you're actually seeing it increase and kind of what is happening to pricing overall.

I would say that pricing is holding very steady. There is a lot of aggressive money in the market, particularly in the markets we are in. We haven't seen much change. And frankly, I don't expect that to change in the foreseeable future.

Which is why in the presentation we said that we are looking to the maximization of our existing portfolio and the development opportunities that we have internally to continue to produce results that will be satisfactory for our stockholders.

We are really excited about this Lloyd development. It is a jewel in terms of having a development -- what we refer to as a transit-oriented development where you have the Max line and the Light line intersect at our property. And then building into a very tight, low-vacancy market, and with cap rates and actually lower-quality product going in the low fours.

So we feel very good about this, and we think this is going to create shareholder value, and that is what our focus is.

And not just anything about next door to a regional shopping center, as well. So when you're looking for an apartment development, this is as good as I've seen it get.

Okay, that's helpful. Thank you.

Jason White.

Just a quick follow-up on the Lloyd question, first, for rents. Where are your rents that you are underwriting lease up versus where they are today? What is the growth you are assuming having there?

This is on the Lloyd, Jason?

Yes, you kind of give the methodology. I was wondering what the magnitude of the rent REIS's were between now and (technical difficulty).

I mean, what we are seeing with the REIS reports coming in are starting probably like 4% growth rate for the next -- 4%, 3%, through stabilization. And we expect to be stabilized on the first two buildings early 2015, and then the remaining high-rise building probably by mid-2015. So our first full stabilized year will be 2016.

Okay, that's helpful. And then several other questions. I saw three straight quarters of new lease rent rolldown in the office portfolio. Is that just kind of small sample set or is that a trend that is going on in your portfolio?

On the office portfolio or --?

Office, just the new leases, yes.

I think that is probably just a small subset. If you look at where we are -- I mean, I look at our in-place compared to market, and on a weighted-average basis, we are approximately 8% below market. Again, that is on a weighted-average basis.

In San Francisco, I'm using the market which is, again, on a weighted-average basis, of about 53. And compared to the recent leases that we've signed in Landmark at 72, 74. So I would say if we're 8% below market, that's a very conservative number.

Okay, so the new lease spreads at the cash basis are just kind of a blip on the radar then for the last three quarters?

I would say that.

Okay. And then last question is about the Ross box and the second half of that Mervyn's box at Carmel Mountain Plaza. Does there need to be any work there to repurpose that Ross box by the types of tenant interest you are seeing? And are there any more prospects for that -- the Mervyn's box that is still vacant?

We have signed letters of intent on both boxes. There will be some repositioning costs, preparing this space for the two new tenants and then providing a tenant improvement allowance. But that has all been anticipated and a part of our projections.

Okay, thanks. That's all I have.

(Operator Instructions) Wes Golladay.

Good morning, guys. Once again, another nice quarter. Looking at the retail and office deal volume, where are you seeing the most volume? And for the properties you are bidding for, are you materially off versus the winning bidder?

There is a lot more deal flow in the office sector than anywhere else. I'd put multifamily second and retail a very distant third. We are not actively bidding on office properties right now. Our underwriting on multifamily, we always keep in mind our average cost of capital, and unless we believe we can move -- acquire something at the current cap rates that properties are trading at and move those returns up into something north of a 7, that the properties simply don't meet our criteria. So we continue to look, but we are not -- we're skeptical.

Okay, thanks for the color. And looking the Embassy Suites, what type of RevPAR growth do you have embedded in guidance?

I don't have that in front of me, but I can get that to you at a later time.

Okay.

We are very optimistic about the Embassy Suites over the next decade. It is just one-of-a-kind property.

What has been successful is that we changed our strategy in terms of the ADR probably halfway through 2012. And what we did is instead of trying to fill the Embassy Suites up earlier, we held off and maintained a $300 per night ADR. And so that is really what is driving this, is that --.

And we generally get a glimpse several months out. We can see the reservations that are coming in. And that strategy has actually paid off and increased -- it's driven to the bottom line and increased our ADR. My recollection is that I think our RevPAR, we ended up with about 264, based on ADR at 300-something.

And looking at those recent transactions in Oahu, do you have any idea which cap rate those went at? The Hyatt?

Which properties again?

There was a Hyatt that traded recently in Oahu. Blackstone bought it.

Wasn't that on leased land?

Yes, that is really not a comp to us from an investment standpoint because it is on leased land.

Correct. Obviously, you guys would go for a premium over that, but just curious if you had the -- if you guys were involved in it or saw any -- of how -- the pricing of it.

No, we were not involved. We did not bid. We didn't even underwrite it.

If you will recall, our entire portfolio in Hawaii is on fee simple land that we own. And as a matter of policy, we do not bid on properties that are on leased land. So John's reaction is absolutely appropriate, that we wouldn't even bother taking a look at it.

Okay. Thanks for taking the questions, guys.

Now I'd like to turn the call back over to Mr. Ernest Rady.

Thank you for -- all of you for attending our call. We are really proud of the results that we've been able to produce for all of our stockholders. It has been an exciting two years, as I said earlier, and we look forward to many more quarters in which we hope you will join us and we hope and believe that we continue to have very, very good news for you.

So again, thank you for your time. Thank you for your interest. Good morning.

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