American Assets Trust Inc (AAT) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 American Assets Trust earnings conference call. My name is Denyse, and I will be your conference moderator 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 conference 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 third-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 third-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 obtained.

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 providing 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 operation, or 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 2013, furnished to the Securities and Exchange Commission, and this information is available on the Company's website 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. Thank you for joining American Assets Trust third-quarter 2013 earnings call.

The performance of our premiere portfolio of retail, office and multi-family assets continues to provide solid results for our shareholders. Our FFO-per-share increased 8% and 17% to $0.39 and $1.15 per diluted share unit for the three and nine months ended September 13. Extraordinary results, compared to the same period in 2012.

We increasing our 2013 annual guidance by 2% over the prior midpoint, and the Board of Directors has increased our quarterly dividend 5% to $0.22 per share of stock. The Portland, Oregon, Lloyd District development and Torrey Reserve development are well underway. And the Sorrento Pointe in San Diego is not far behind. As a matter of fact, if you hear some background noise, that's the Torrey Reserve redevelopment under construction. We believe that these development projects, and others in our pipeline, should allow us to increase our net asset value significantly and be accretive to shareholders through development for many years to come.

Our focus remains on creating long-term value for our stockholders. We are not seeking to be the biggest, just the best. Our multi-asset class strategery continues to demonstrate the diversity and diversification that is additive to our ability to provide consistent growth, strong returns, and value creation.

On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage our 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.

As I've mentioned on every earnings call since our IPO in January 2011, overall conditions in our core markets, Seattle, Portland, San Francisco, San Diego and Oahu, continues to show significant signs of strength in all three of our asset classes. As before, we expect this to continue into the foreseeable future.

In addition to the FFO performance Ernest just mentioned, same-store cash NOI increased 4.2% and 9.1% year over year for the three and nine months ending the same period. Bob will provide more detail shortly on our increased dividend and 2014 guidance.

In San Diego, construction continues on Phase 3 of Torrey Reserve, both on track and on budget. Building 6, completed in September, has been substantially leased to California Bank and Trust as an expansion of their operations at Torrey Reserve, taking 15,500 square feet of space.

They also extended their headquarters' lease on space across the street from our office, 19,200 square feet, from June 1 of 2019 to March 1 of 2024. The balance of Building 6, approximately 3,600 square feet, is in negotiation. Also in San Diego, at Carmel Mountain Plaza, lease negotiations are nearly complete with a 28,000 square feet high-quality national soft-good retailer for the space adjacent Nordstrom Rack. In Bellevue, Washington, we have executed a letter of intent with a technology company for the top two floors of City Center, totaling approximately 17,000 square feet. All of these transactions have essentially met or exceeded our expectations.

The Hawaii economy continues to show positive growth in both spending and arrivals at the end of the third quarter 2013. Total visitor arrivals in August grew to approximately 748,000, a 2.5% increase year over year. Arrivals by air increased 2.9% to 948,000 year over year. Notably, scheduled seats from Japan rose 10.9%. Oceana grew 42.5% with a doubling of seats from Auckland and new service from Brisbane and Melbourne, and increased service from Shanghai, and new service from Taiwan boosted Asia by 9.2%, all year-over-year. At Waikele we executed a letter of intent with a national pet-supply chain for approximately 5,000 square feet, space previously occupied by the Bank of Hawaii.

As mentioned in our two previous earnings calls, we will be taking back the Foodland premises at the end of January next year. Our plans are to demise that building in half, to create two approximately 25,000 square-foot units to be leased to two national soft-good retailers. Those tenants have been identified and negotiations are underway.

Our Embassy Suites at Beach Walk continues to exceed our competition in ADR and RevPAR measurements for the quarter. According to Smith Travel Research report, for the month of September, the property's ADR and RevPAR index were 125 and 119, respectively. The occupancy index was 95.2.

The outlook for the remainder of 2013 remains consistent with our expectations, pacing ahead of 2012. In Portland, Oregon, our project, now named Hassalo on Eighth, is well underway. We have excavated approximately 325,000 cubic yards of soil, installed two of three tower cranes, and poured a substantial number of footings. We are on track and on budget.

The apartment vacancy for the Lloyd District submarket is holding firm at approximately 3%, the best in the Portland Metropolitan statistical area. Last week we held a successful investor tour showcasing this project and our building in the CBD known as First and Main. Our thanks again to those made an effort to attend. 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, the pricing of assets equal to or greater in quality than our existing portfolio provide returns of unacceptably low levels. Primarily, pension funds continue to drive CAP rates down in our specific markets for institutional properties. Disciplined investing is a core metric at American Assets Trust. If it has diluted to shareholder value, we won't do it. Nonetheless, 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 third-quarter 2013 FFO of $0.39 per share. Net income attributable to common stockholders was $0.11 per share for the third quarter. The Company's Board of Directors has declared a dividend on its common stock of $0.22 per share for the quarterly period ending December 31, 2013. This represents approximately a 5% increase in the quarterly dividend rate. For the third quarter, our dividend payout ratio was approximately 68% of AFFO or FAD.

Our target payout ratio is approximately 85% of AFFO, or FAD. We believe that our high-quality portfolio, combined with strong operating results and solid balance sheet management, will allow us to continue to grow our dividend in years to come. American Assets have a solid third-quarter performance based on steady leasing and increased pricing power due to strong occupancy in retail and office.

That's talk about same-store NOI for a moment. Same-store retail cash NOI for the quarter had strong growth of 3% in the third quarter, and is currently up 6.6% for the nine months ended September 30, 2013. We are still anticipating full-year 2013 retail same-store growth to be approximately 4% as the fourth quarter year-over-year comparables will be impacted by the Ross vacancy at Lomas Santa Fe and the Blast Fitness gym vacancy at Alamo Quarry. However, despite these vacancies in 2013, we are still on track to finish the year with retail occupancy over 95%, which still ranks first amongst our peers.

Same-store office NOI was down 3.4% in the third quarter, due to decreased occupancy at Solana Beach Corporate Centre. However, it is still up 9.3% for the nine months ended September 30. Office same-store NOI was adjusted in the third quarter to exclude Torrey Reserve and Lloyd District from the same-store comparable metrics, as both properties have active developments that materially impact their operations, which make them un-comparable on a same-store basis.

To enhance our financial reporting transparency even further, we have added a new page to our supplemental. I believe it is on page 14. That tracks same-store portfolio NOI comparisons with redevelopment. This way you will be able to see the impact of same-store NOI from redevelopment once it meets our definition of same-store comparability. Even though the total project has not been transferred into core same-store comparability.

For the full year, we are anticipating office same-store cash NOI to be up 4.5%, excluding properties that are being redeveloped. And flat to slightly negative when including same-store -- when including these properties. Same-store multifamily NOI, which comprises approximately 6% of our total NOI, was up 12% on a cash basis for the three months ending, and up 16.9% for the nine months ending September 30. Higher year-over-year occupancy and higher rents are the main drivers of the same-store growth for the multifamily portfolio. We have increased our anticipated full-year same-store cash NOI growth to approximately 14% for the multifamily portfolio.

Waikiki Beach Walk, our mixed use property, which represents approximately 16% of our NOI, continues to outperform with robust same-store cash NOI growth of 14% for the three months ending September 30, and 13.2% for the nine months ending September 30. Same-store growth is being driven by significantly higher average daily rates for Embassy Suites in Waikiki. We have increased our full-year same-store cash NOI projections to 13% for Waikiki Beach Walk.

Turning to our results, third-quarter FFO increased approximately $1.4 million, or approximately 6.5% to $0.39 per FFO share, compared to the second-quarter 2013 FFO of $0.37 per FFO share. The increase in quarterly FFO was mostly attributable to increased revenues and operating income at Embassy Suites in Hawaii, from their peak summer season.

Let's put this in perspective. For the nine months ending September 30, 2013, our Average Daily Rate, or ADR, increased approximately 14.8% to $302. For the nine months ending September 30, 2013, our revenue per available room, or RevPAR, increased approximately 12.6% to $268. The Embassy Suites continues to have stellar performance.

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 $289 million in liquidity, comprised of $65 million of cash and cash equivalents, and $224 million availability the line of credit.

However, I should note that during the first week of the fourth quarter, we did draw down on the line of credit for $93 million in order to prepay our maturing CMBS debt secured by Alamo Quarry shopping center. We expect this early repayment of debt to save the Company over $800,000 in interest savings in 2013.

At the end of the third quarter, our total debt to total capitalization was 37.2%. 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 secure debt ratio less than 30% by 2015.

Part of our plan is to refinance our fixed-rate CMBS maturities in 2014 with either senior unsecured term loans, or the line of credit, 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 2013 guidance and introduced our initial 2014 guidance. Let's talk about 2013 guidance first. We are increasing our full-year 2013 FFO-per-share guidance to a range of $1.50 to $1.53, with a midpoint of $1.515, from our most recent guidance of $1.47 to $1.50 per FFO share, with the midpoint of $1.485.

The 2% increase in the midpoint, or approximately $0.03 per FFO share, equals approximately $1.7 million in additional FFO for 2013, and is mostly attributable to -- number one, the continued outperformance of our Waikiki Beach Walk asset in Honolulu. Number two, stronger than anticipated occupancy levels for the multi-family portfolio. And number three, reduced interest expense from the prepayment of the CMBS debt at Alamo Quarry. Our previous guidance range excluded this refinancing, as we did not know for certain the timing of the repayment of the maturity of the Alamo debt. Additionally, our operational capital expenditures are expected to finish the year at approximately $18 million to $21 million, with our AFFO or FAD coming in a range of $1.19 to $1.23 per share.

Now let's talk about our 2014 guidance. We are introducing our 2014 FFO guidance range of $1.54 to $1.62 per share, with a midpoint of $1.58 per share. Which is an increase of $0.065 per FFO share, or a 4.3% growth over our updated 2013 FFO guidance midpoint of $0.01515 per FFO share and is based on the following assumptions.

Number one, we are anticipating a 2% decrease in 2014 same-store retail cash NOI, which is expected to reduce FFO by $0.02 per share. The decrease in same-store retail cash NOI is due to the vacancy of Foodland at Waikele, which we had previously talked about, and which expires on January 25th, 2014.

Foodland occupies 50,000 square feet at our Waikele regional shopping center which is approximately 20 minutes west of Waikiki, Hawaii. Foodland's rent is approximately $2.5 million per year, and a component of their rent has been included in above-market rent intangibles since we acquired the property. The market for that side is approximately $1.2 million per year. We are basically rolling down from $4.25 to $2 per square foot NNN. Currently Foodland is subleasing their property to the Hope Chapel.

As John has previously mentioned, he in our leasing team are focused on splitting the building into two 25,000 square foot buildings and leasing it to two national soft-good retailers. For purposes of our corporate operating model and our 2014 guidance, we have left the building vacant for the entire year, other than the temporary lease with the Hope Chapel.

Excluding the above-market lease with Foodland at Waikele, the remainder of our retail portfolio ramps are approximately 7% plus below market on a weighted average portfolio basis. In fact, several of our retail properties range from 11% to 20% below market rents.

Number two, we are anticipating a 4% increase in same-store office NOI, which is expected to add $0.025 cents per share to FFO.

Our office portfolio continues to be approximately 10% below market on a weighted average portfolio basis. Our properties in San Francisco are over 20% below market, versus in-place rents. In City Center Bellevue and Seattle is approximately 17% plus below market, versus in-place rents.

Number three, we are anticipating our office properties under redevelopment and expansion at Torrey Reserve in San Diego and Lloyd in Portland will reduce the FFO by approximately $0.01 per share due to the development's impact on leasing and operations.

Number four, we are anticipating a 2% increase in same-store multi-family cash NOI, which is expected to add $0.005 per share to the FFO.

Number five, we are anticipating a 5% increase in same-store mixed-use cash NOI, which is expected to add $0.02 per share to FFO. This is actually a 5% increase after our plans to take each tower of the Embassy Suites hotel off-line for approximately eight weeks to complete a $10 million to $12 million remodel during 2014. This is something that we expect to do approximately every seven years to maintain a consistently high-quality guest experience at the Embassy Suites hotel. Absent this remodel, we were anticipating an approximately 10% increase in same-store mixed-use cash NOI.

Number six, G&A is budgeted at $17.8 million for 2014, which is expected to reduce 2014 FFO by $0.015 per share. We have not increased our G&A budget for three years, and we are now forecasting it to increase by approximately $1 million, or $0.015 cents per FFO share, primarily related to back-office salaries, insurance, and other general administrative expenses.

Number seven, we are anticipating a reduction in interest expense of approximately $4 million from higher capitalized interest from our ongoing developments, and lower interest cost on the Alamo debt which was refinanced in Q4 of 2013 using our line of credit. And lower interest cost on two months from the repayment of the Waikele debt, which matures November 1, 2014. We expect our interest savings in 2014 to add approximately $0.07 per share to FFO.

Number eight, we are anticipating our 2013 GAAP income adjustments for straight line rents in above- and below-market adjustments to total approximately $4.5 million, which is expected to reduce FFO by approximately $0.01 per share over 2013.

Number nine, additionally, our 2014 operational capital expenditures are expected to be in the range of $36 million to $40 million. Of this amount, approximately $10 million to $12 million represents our 2014 renovation of the Embassy Suites hotel, which I discussed the moment ago. The remaining operational CapEx is expected to be approximately $26 million to $28 million. Our AFFO, or FAD, will be in the range of approximately $0.95 to $1.01 per share, factoring in the Embassy Suites renovation. Or in a range of approximately $1.15 to $1.22 per share, excluding the Embassy Suites renovation.

The reason I break this out is because upon formation of American Assets Trust at the IPO three years ago, $10 million of cash working capital held by the Waikiki Beach Walk entities was transferred into American Assets Trust pursuant to the formation transaction documents. So this $10 million was not generated from continuing operations of American Assets Trust. Although, not considered to be restricted cash, we did set these funds aside internally for the upcoming renovation of the Embassy. So the way I think about this, is that this renovation was already paid for and the time of the IPO.

A couple of last points regarding 2014 guidance for those that are updating their models on AAT -- Looking at my Bloomberg screen, I show that the 2014 full-year consensus is $1.616, compared with our 2014 midpoint of $1.58 per FFO share, which excludes acquisitions. The difference is primarily assumed acquisitions by various analysts.

Excluding the acquisitions modeled by various analysts, the 2014 consensus would be $1.579, compared with our midpoint of $1.58, which is more in line with our 2014 guidance. It is not to say that we won't find acquisitions that meet our internal underwriting requirements. But for purposes of issuing guidance, our guidance excludes any impact of additional acquisitions, dispositions, equity issuances or repurchases, debt financings, or repayments other than Waikele in November of 2014.

We will continue our best to be as transparent as possible and share with you how we are thinking about our quarterly numbers. We are well prepared with a strong balance sheet to capitalize and execute on the opportunities that we believe will present themselves over the coming quarters.

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

(Operator Instructions)

[Lane Scheck], Wells Fargo.

The multi-family same-store NOI guidance, if I got it right, at 2% is quite a drop from the 14% you are expecting for 2013. Is this just due to tougher comps? Or can you comment on what will be causing the difference?

It is really just an estimate of what the market will be like going forward. As you know, apartments rerent on a regular basis. We have always tried to make our projections as accurate as possible. If we want to err we are going to err on the conservative side.

This is just our best guess, but the market does look strong in San Diego and we are optimistic about the coming years. But we don't want to put that optimism into numbers that might mislead our investors.

Okay sure. Fair enough. And then -- yes, go ahead.

Lane, this is Bob. The other point to that, too, is that we were coming off of lower occupancy in 2012. So when you compare it to 2012, we are showing a strong same-store on the multi-family for 2013. So I don't expect to see the same 12% growth that we are having for Q3, or 16% for the nine months. It will be on a more normalized same-store growth for 2014.

Although the when you occupancy does rise, it gives you the opportunity to increase your rents. So, we will have to see how the year plays out. But believe me our strategy is not to leave money on the table. We would do the best we can for stockholders.

Sure, that's good color. Thank you.

It looked like there was a move outside your Lloyd District portfolio during the quarter. Did that have anything to do with the renovation? Are you guys going to look to re-tenant that immediately? Or maybe wait until more is done at the site? And then you might be able to get a higher rate?

One of the moveouts had nothing to do with the project or the redevelopment. It was a company that essentially folded with the death of the owner of the company. That space is in the Lloyd 700 Building, which is directly impacted by the development.

Since we have started the development, oddly enough, we have had an increase in activity, from a leasing standpoint. So we are going to do the best we can over the next 18 to 24 months. We believe when the project is finished, we are going to have a much enhanced opportunity for people to lease office space there. So we're going to continue our efforts leasing-wise. But it will have its challenges until we're finished.

And this apartment project you are building will have a very significant effect positively on the environment. So we think that building is going to be a significant asset when it's finished. And in the meantime we are going to try and maximize our returns in the short term.

Sure that's helpful. And then maybe one more for Bob. It looks like maybe there was a termination fee for office in the quarter. Is that right? If so, can you quantify it and maybe give a little color on the situation?

It was really immaterial. It was over at Solana Beach Corporate Center, and the real move in the GAAP same-store was really from the above- and below-market rents. That was all factored in and the termination fee was really immaterial, it's not even worth talking about.

The one thing I do want to touch on is on that Lloyd District question you just asked about is that we are expecting some change going on at the Lloyd District. As you noticed we had about 40,000 of vacancy drop at the Lloyd District. But the way I look at that is that we are still getting -- even with that drop, we are still getting around 8% plus unlevered cash-on-cash yield on that project during development. And we will have some choppiness during that development, which is where we pulled it out of same-store. Part of the development, in the excavation, we have demolished part of the parking lot that is attached to one of the buildings. So there will be a little bit of bumpiness along the way. We are trying to accommodate the tenants. But this is as expected. And the fact that we are getting 8% plus on the existing office campus during development is just unheard of.

Sure, that's great. All right, thanks for the color.

Thank you. Vance Edelson, Morgan Stanley.

Hello guys. Great job on the quarter. Maybe for John, when you mentioned the acceptable returns from potential acquisitions, and the pension funds driving down CAP rates, can you comment as to whether that is more prevalent in any particular property type in your markets? And does that perhaps mean that you are little bit closer to pulling the trigger in some of the other asset classes?

It is most prevalent in retail. We are looking at retail properties that are, keep in mind, of a quality consistent with the rest of our portfolio. So I'm talking about the best of the best. Those properties, one in particular in Los Angeles, is going to trade with the CAP rate starting at three. That, to us, is an unacceptable price metric.

As far as the others, generally speaking, office assets that are of our quality are trading somewhere between a mid four to a low five. That is not particularly appetizing.

And multi-family assets in our markets are trading consistently in the low-to-mid fours. All of this leads us to believe that the opportunities that exist today are more on the development side than on the acquisition side. But again, as I mentioned, we continue to evaluate, both opportunities that we can recycle internally, as well as acquisitions.

Okay. And as a John mentions, the very low CAP rates that he's coming across and seeing in the marketplace, the other side of that is that that really reinforces the specialists of our portfolio in those same markets. And the value associated with these properties. You just can't buy them.

Okay. Great point.

You can buy them, but it is not a very attractive return that you would anticipate.

Okay. Makes sense. Thanks for that. And then the decrease in maintenance expense on the office side, is there anything that drove that? Is that level sustainable? Or should we view it as more of an aberration?

On the maintenance expenses a decrease -- they'll be up and down from year to year. I wouldn't call it an aberration. I think it is just ongoing fluctuation in maintenance expenses. It is usually within a range per square foot depending on the property. But there's nothing really significant to point out.

We are really adverse to deferred maintenance. So we try and keep our properties in the very best possible condition.

Perfect. Okay very helpful. Thanks.

Thank you.

Craig Schmidt, Bank of America.

Thank you. I wondered, what do you think the rent differential on the two soft-good retailers versus Foodland might be?

Well, hello, Craig. Bob here. In my script I mentioned that the rolldown is approximately $0.02 per FFO. So at Foodland we're getting about $2.5 million a year, which is about a $4.25 per square foot, and that's rolling down to about $2 to $2.25 per square foot. I think for purposes of our guidance, we factored in about $2 per square foot.

And Craig, that is, again, the typical approach that we take where we want to under-promise and over-deliver. So the discussions on that space are in their infancy. We do have two tenants identified that we are speaking with directly. And we will have some more clarity on that probably next quarter.

Craig, one other point too is that it's interesting, going through the numbers, is that while we have a 2% -- a negative 2% same-store in retail for 2014, if you pull out Waikele, or if you pull out the Foodland rolldown, we would be north of 4%. So it's pretty strong.

Great. That was my follow-up question. Thank you.

Thank you Craig.

Jason White, Green Street advisors.

Morning, guys. How are you doing? Sounds like you guys have a lot of leasing going on on the retail side of things, and I have a question about your re-leasing spreads. When we look at some of the peers, you guys appear to be mid-single digits for the year. And a lot of peers do, as well. But with your high-quality portfolio, I would think that you guys might be outpacing the group. Is there anything that -- just lumpiness? Or is there anything you can point to that might explain why the expected outperformance that we don't necessarily see right now?

Well, I would start by saying that a lot of the leases that we are renewing and have been renewing this year, were leases that were negotiated in 2007, and we pushed rents as absolutely as high as we could then. And as a result, with some of these renewals, we are having in some cases some rolldowns.

But for the most part, any time we get space back, we are able to re-let it very quickly. And I think that's a testament to the quality of the portfolio. We have executed exactly what we intended to do on the Mervyn's building that we acquired at the IPO. It has taken us a little longer than we had hoped to get the building repositioned. But the end result is something that is a fantastic long-term solution.

So you know, lumpiness, I would not equate it to that. Bob, you want to add something?

Well, in supplemental we have a page on re-leasing spreads. And if you look at the new leases, the re-leasing spreads on the new leases for the third quarter, it is negative 14% on a cash basis for brand-new leases. But that really doesn't tell the whole story. That negative 14% is only on three leases, and the majority of that, it relates to Rancho Carmel Plaza. And what we did is we replaced a Sprint tenant with Starbucks. So we've enhanced the center.

Sprint left in Q1, probably at the beginning of Q2. And they actually paid a significant go-dark fee. And we allowed them to go dark and still pay their rent, and that termination fee, if you actually factored it into the drop in the starting rent for Starbucks, would make up for that rolldown.

Sprint was about $49 a square foot, which is way above market. And Starbucks is more at-market in the low-to-mid $30s, on Rancho Carmel Plaza. So while the percentages look negative on the new re-leasing spreads, when you see the entire picture, it -- you cannot take one part of it. You look at it out of context. If you look on the renewals, on a straight-line basis, it's 7.7% for the quarter and 4.5% for the entire nine months. So, I think our re-leasing spreads are good.

Also, if you compare where our in-place is, compared to where market is, which really is a glimpse into what we see coming down as roles take place. Like I mentioned earlier, is that if you took Waikele out, or if you took Foodland out, our weighted average portfolio for the retail would be approximately 7.2% below market. So I am still very bullish on this retail portfolio.

And I think if you look across the entire spectrum in the country, the leasing activity it is very strong in each of our three categories.

Okay that's very helpful. And I guess just a follow-up on that point. It seems like there is two camps in terms of leasing. One camp is -- renewals are cheaper because you don't have to pay for the TIs, and that is one way to attack rolling leases. And the other camp is to push competition rents as high as possible, and pay for TIs, but economically long-term it's a win for the company if the numbers work. And I noticed a couple of your peers that you would probably comp yourselves to have much more new leases as a percentage of overall leases than you do your portfolio. And I was wondering if that's a strategic decision? Or if that's just, lease-by-lease, how it out works out?

To tell you the truth, Jason, it is something we never thought about. We look at maximizing dollars in, and regardless of the form they are, we want the most dollars for what we have.

And we have taken into account TI and leasing, and again, what produces the best results for our stockholders. I don't think we have ever even discussed that strategy. Our strategy is max their dollars.

Okay thank you.

Thanks Jason.

(Operator instructions)

Wes Golladay, RBC Capital Markets.

Good morning, guys. Speaking with the renewal leasing as we look out to next year, do have more of the below-market leases renewing, or do you still have a headwind from the burn-off of leases signed at the peak of the market?

Well, in our supplemental we have a page that lists out the expirations. For 2014, 2015, I think total expirations are combined against all sectors, multi-family --sorry, retail and office and mixed-use. It's about 500,000 square feet, if I'm correct. But, if you factor in the renewal of their options --if you assume that they exercise their options to renew, that amount gets cut in half. And Jim Durfey, who heads up our office, and Chris Sullivan, who heads up our retail leasing, have both done a terrific job on staying on top of those expirations as they come up. They generally approach the tenant a year in advance, and we generally captured a high degree of those renewals. If you look historically, 92% of our retail portfolio has renewed. Or said another way, our tenant retention for retail portfolio has been 92% historically. And, if you look on the office side historically, it has been 80% to 84% or somewhere in that range. So we're very comfortable with what is coming down the road.

Okay. And then, looking at the acquisitions, is the gap between what you are willing to pay, and what assets were transacting widening, versus, say, in the beginning of the year?

I would say yes. There is less high-quality product bring brought to market, and the product that is being brought to market that would satisfy our demand, is getting priced at lower and lower CAP rates. I mean, I have never seen retail price at a three. It's crazy.

You know, Wes, that speaks to the wisdom of our strategy of taking our efforts and putting them behind development. What we are producing for our stockholders over the next two years will produce significant increase in net asset value, as opposed to purchases. Purchases produce a short-term benefit. We are producing a long-term, significant benefit by creating value by development. And we're very comfortable with the decision we made to put the emphasis on that strategy over the next two years.

Okay. And speaking with asset pricing, would you guys become a seller to possibly fund your development pipeline?

We wouldn't sell to fund our development pipeline, because our development pipeline is already funded. We always do look at -- and John can speak to this, with more clarity -- we always do look at what we have compared to what we could acquire. And that is an ongoing process, I think as John mentioned in his presentation.

Yes. We constantly look, in terms of dispositions, we are constantly looking at how we can improve internal growth. And, if we have an opportunity to acquire something that has a stronger same-store NOI than something that is currently in the portfolio, we will sell it. Those efforts continue constantly. So we're out there. We are looking. We are just not finding much that meets our criteria.

Okay. And how should we look at the deployment of capital to fund this pipeline? Do you guys have a rough amount you'll spend in the fourth quarter and into 2014?

Yes. To date, we have spent, as of third quarter, we paid about $9.7 million, which was about $6 million on Lloyd, and Torrey Reserve was about $3.5 million. We're expecting, by the end of 2014, to deploy about $168 million cost-to-date. So that would include what we have now.

Our forecast for 2014 is that we would spend about $105 million on Lloyd and about another $13 million on Torrey Reserve. But in terms of how that's broken up quarter-by-quarter, I would probably look at that on a binomial distribution. Your typical binomial curve. And take probably 10% to 15% over the next couple of quarters. And then, it peaks and then it starts coming back down.

Okay. Thanks a lot guys.

Funding it, of course, the whole Lloyd investment is free and clear. So we have all kinds of our alternatives. Thanks for the question, Wes.

Jason White, Green Street Advisors.

Hey guys, just a quick follow-up on the transaction environment. It seems like retail pricing is extremely frothy according to John.

Is there a reason to hold off on any potential dispositions, and just in terms of the capital recycling standpoint? Do you have to be a buyer if you are a seller, or if you see prices that are ridiculous from your standpoint, doesn't becoming a seller make sense to maximize value?

Actually we want to grow the portfolio and not shrink it. So we do look for opportunities to trade. And that's really our strategy. Just to sell part of our portfolio and become a smaller company, as I said earlier, we want to continue to be the best company.

But we think there is some advantage to being larger in terms of spreading the overhead over more assets. So our objective is to create more assets. So we would look for doing a trade would be accretive. Do want to add to that John?

That is exactly correct. We have always said, dispositions are driven by acquisitions. And if we have an opportunity to redeploy capital in a manner that creates greater internal growth, we are going to do it. We have often said that there are no sacred cows in the portfolio. So if we find an office asset or multi-family asset or retail asset that we can sell and roll into something else, we are going to do it. So we have, as I mentioned before, we look at that constantly.

Okay so say that under the current environment it looks like someone would overpay you for one of your assets, according to the way you view the world. Growing the portfolio has better value ramifications than actually taking that additional value if someone were to overpay you.

You know if somebody overpays you, then at some point you want to replace that asset. Many of our assets have traded once in 50 years, once in 25 years, a couple of them 2 times in 100 years. You can't replace these assets, Jason. It is tough to-- it is easy to look at it and say -- you could do this transaction, and it would be a wonderful transaction in the short run. But in the long run, how do you create value? In our view, it is to own the best assets and make the most of them over the long run. And that is our strategy. Our strategy is not to do short-term trades. Our strategy is to create wealth over the long run by enhancing the value of assets that we have and creating value that way.

Okay thanks.

Thank you Jason.

We have no further questions and I would now like to turn the call back over to Ernest Rady. Please proceed.

Okay ladies and gentlemen, thank you so much again for your interest in American Assets Trust. We worked hard to earn your confidence. We think that the strategies that we have, and the work that we've done over the last quarter, will help create long-term value.

I want to emphasize again how excited we are about the development, and how it's going to add to net asset value and cash flow over the medium and longer term, a much better strategy than a short-term acquisition strategy, which may create value in the short run, but not the type of value we're creating in the long run.

So again, thank you for sticking with us, we will do our best not to disappoint you. Our projections are based upon a circumstance that is as accurate as we can be, but we always look to beat those projections.

So I can tell you that is our strategy going forward. That's our objective going forward. Do better than we promised, and we will do the best we can to produce. Thank you very much for your confidence and interest.

This concludes today's conference. You may now disconnect. Have a great day.