American Assets Trust Inc (AAT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q4 and year-end 2014 American Assets Trust, Inc. earnings conference call. My name is Marie and I will be your operator for today. At this time, all participating are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. But now, I'd like to hand the call over to Adam Wyll, the Senior Vice President, General Counsel. Please proceed.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2014 fourth-quarter 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 2014 fourth-quarter 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 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, 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, reconciliations to net income are contained in the Company's supplemental operating and financial data for the fourth quarter of 2014 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 2014 earnings call. The performance of our premier portfolio of retail, office, and multifamily assets continued all year to provide solid returns for our shareholders.

In Portland, Oregon, our Lloyd District development is nearing completion with a July 2015 target move-in date for the first rolling. The Torrey Reserve expansion will be finished in April, and Sorrento Pointe should start next year. We believe that these development projects and others in our development pipeline should allow us to continue to increase our net asset value accretively for our shareholders for many, many years to come. This is part of the alpha that our management team brings to the table that produced a total shareholder annual return of over 25% for the last four years since we became public in January of four years ago.

We won't be able to produce this every year, but we believe real estate investment has a long-term horizon. We believe that over the next decade we can deliver a 10% compounded annual return for our stockholders. In addition to that, through development or trades we may be able to put some icing on the cake, not every year but over the next decade with our high-quality West Coast diversified strategy and our focus on net asset value creation over the long run. This is what makes us different. This is what makes us special.

While we continue to trade at a disappointing discount to our net asset value, we believe it is a good entry point for many investors. We look forward to publishing our updated net asset value later this spring on an asset-by-asset basis so that you can see how we value our portfolio.

As I have shared my view in the past, American Assets Trust should be trading at a premium to our NAV, due to the high-quality coastal diversified strategy. The assets we have could not be purchased at the current implied cap rate. Many trade as infrequently as once a century. It has taken us almost half a century to build or acquire what we have today but we are not stopping here. Every step we take is focused on creating long-term value for our stockholders. We are not seeking to be the biggest; we just want to be the best. Our multi-asset class strategy continues to demonstrate that diversity 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 your Company, and we look forward to 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 strength in all three of our asset classes. We expect this to continue into the foreseeable future.

Our FFO per share increased 5% year-over-year for the three months and year ended December 31, 2014, compared to the same periods in 2013. Same-store cash NOI increased 4.4% and 1.9%, respectively, for the same periods as well. An abundance of office and retail leasing was accomplished including 25 leases totaling 255,000 square feet. Net income available to common stockholders increased 50% and 43% to $7 million and $21.8 million for the three months and year ended December 31, 2014, respectively, compared to the same periods in 2013. Bob will provide more details on our FFO and same-store NOI shortly.

In San Diego construction is nearly complete on the five-building 80,000 square-foot expansion of Torrey Reserve. Our original development pro forma estimated a stabilized yield of 8.6%, which continues to be our expectation.

Sorrento Point, a project that again with the execution of a purchase-and-sale agreement on May 9, 1997, is finally at the finish line. With the execution of a few more technical documents, we expect to commence grading next quarter.

In Bellevue, Washington, our City Center tower, totaling 493,000 square feet, has just four suites vacant for a total of 10,000 square feet or just a 2% vacancy.

In Portland, Oregon, as Ernest mentioned, our Hassalo on Eighth project is nearing completion. The three city blocks under construction are anticipated to be brought online one at a time in July, August, and September. As you may recall, we commenced construction on September 10, 2013; and as of today's date we are just one single day behind schedule and we are still on budget. The apartment vacancy for the Lloyd District is holding steady, hovering at about 3%, the best in the Portland MSA.

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 informed.

In Hawaii, our Beach Walk project continues to post impressive results. The complete refresh of both hotel towers during 2014 resulted in a loss of 14,000 room nights for the year, yet we still experienced an increase in same-store NOI growth, as Bob will describe in more detail. Retail sales across the board continue to increase and now average over $1,000 per square foot.

Our acquisition and venture efforts continue in full swing. However, the pricing of assets equal to or greater in quality than our existing portfolio provide returns of unacceptably low levels. Disciplined investing is a core metric in AAT. If it is dilutive to shareholder value we just won't do it. Nonetheless, we continue to evaluate growth opportunities and the recycling of capital where the probability to increase internal growth exists.

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

Thank you, John. And good morning, everyone. The books are now closed for 2014. Last night we reported fourth-quarter 2014 FFO of $0.42 per share. Net income attributable to common stockholders was $0.16 per share for the fourth quarter. For the full year FFO was $1.62 per diluted share and net income attributable to common shareholders was $0.51 per diluted share. The Company's Board of Directors has declared a dividend on its common stock of $0.2325 per share for the quarterly period ending March 31, 2015.

American Assets had a solid fourth-quarter performance. Our high-quality coastal West Coast diversified strategy continues to have stellar performance. Our retail portfolio ended the quarter with 98.6% occupancy combined with the highest annualized base rents amongst our peers. On a year-over-year basis our retail occupancy is up 160 basis points, leaving approximately 42,000 square feet vacant in our 3 million-square-foot retail portfolio.

Our office portfolio ended the quarter at approximately 91.4% occupancy, also up 160 basis points on a year-over-year basis. The increase in net absorption for the office portfolio was due to two new leases signed at our properties in Portland, Oregon. At First and Main in the Federal Central Business District of Portland an energy consulting firm expanded its operations for an additional 28,000 square feet into the former Tax and Treasury space. Of the approximately 70,000 square feet of the Tax and Treasury space that was vacated a year ago, we have re-let all but approximately 25,000 square feet at rates much stronger than what the Tax and Treasury had been paying. It really speaks to both the quality of the building and the strengthening job market in Portland.

Portland continues to achieve levels of job growth with year-over-year expansion hitting 3%, one of the highest levels of major western metro areas. According to a recent research report from JLL, the rents of Portland CBD have increased 5.2% year over year. We have actually experienced more than double that increase in our First and Main building as we have released the Tax and Treasury space. Demand for the best spaces has been driven largely by high-tech employment growth and accompanying business expansion.

However, financial companies and law firms still hold a strong stake in the CBD. Vacancy in Portland's CBD Class A has decreased dramatically, hitting its lowest level in over 10 years at 6.4% for the fourth quarter.

Across the Willamette River at the Lloyd District in Portland, we executed a large lease late in the fourth quarter of approximately 91,000 square feet of office space in our Lloyd 700 building with the State of Oregon Department of Environmental Quality, which we refer to as the DEQ lease. This is in large part what is driving our strong office re-leasing spreads in our supplemental on page 27. We see this lease as a big vote of confidence for our Hassalo on Eighth development that will be coming online in the second half of 2015. The DEQ lease is a 15-year lease with approximately 36% of the space or 32,576 square feet commencing May 1, 2015, and the balance commencing November 1, 2016, as existing tenants vacate.

We continue to see strength in our core office markets. This was an outstanding quarter for the portfolio. The leasing activity in Portland had a positive effect for our 2015 guidance range, which I will discuss later in the call. As part of our diversified coastal West Coast strategy, we continue to limit our office NOI to approximately 35% of our total NOI.

Let's talk about same-store NOI for a moment. Same-store retail cash NOI significantly increased in the fourth quarter [to] 2.5%. The increase was mostly attributable to a full quarter of rents from Saks OFF 5TH Avenue at Carmel Mountain Plaza in San Diego. Our retail portfolio remains 98.6% leased, which ranks number one amongst our peers. It's also important to point out that we have approximately 88,000 square feet of retail expiring in 2015, assuming all remaining lease options have been exercised, at a time when our in-place retail rents are approximately 10% below market on a cash basis. The retail portfolio is expected to have excellent same-store growth in 2015, and we are reaffirming our same-store guidance of 5% for 2015.

Same-store office cash NOI was up 8.4% in the fourth quarter and up 6.1% for the year ended December 31, 2014. Same-store office growth in the fourth quarter was due to a new lease with VMware at City Center Bellevue and significant contractual rent bumps at both our City Center Bellevue building in Bellevue, Washington, and our Landmark Building in San Francisco. As I mentioned a few moments ago, our supplemental filing shows that the re-leasing spreads on six comparable office leases that were signed during the quarter at a 19.6% cash increase over the prior rents and a 31.6% increase on a straight-line basis over prior rents.

This, combined with the fact that our in-place office portfolio rents are approximately 19% below market on a cash basis, is a picture of forward-looking growth in a high-quality coastal West Coast office portfolio. We have maintained our 2015 same-store growth forecast of 6% for the office portfolio.

Same-store multifamily NOI, which comprises approximately 6% of our total in OI, was up 5.5% on a cash basis for the fourth quarter. Higher year-over-year average occupancy and higher rents are the main drivers of the same-store growth for the multifamily portfolio. We continue to be pleased with the execution and direction of our multifamily portfolio. We have maintained our 2015 same-store growth forecast of 3% for the multifamily portfolio.

Waikiki Beach Walk, our mixed-use property which represents approximately 11% of our NOI, reported same-store cash NOI growth of 2.6% for the fourth quarter. As you may recall, the fourth quarter was impacted by the room renovation of the Embassy Suites Hotel. Approximately 6,300 room nights or 18% of our total room nights were off-line in the seasonally slower months of October and November due to the room renovation or, as we call it, a room refresh during the fourth quarter.

I am also happy to report that the Embassy Suites Waikiki Beach Walk has again achieved the highest average daily rate in revenue per available room or RevPAR out of all Embassy Suites in North America. It is also number one in gross revenue for the Embassy brand, quite an accomplishment considering the hotel went through a major renovation with over 14,000 room nights out of service during 2014. Wow!

Waikiki Beach Walk retail continues to benefit from a new Hilton Grand Vacations high-end timeshare called Hokulani that opened above our end cap retailer, Quicksilver, earlier in 2014, and which fronts Kalakaua Boulevard, the main boulevard in Waikiki. And it has increased foot traffic and sales in our retail center. Tenant sales at Waikiki Beach Walk retail were up over 10.1% on a year-over basis and approximately $1,077 per square foot as the center continues to outperform. We are maintaining our previously issued 2015 same-store guidance of 7.7% for our mixed-use asset.

Turning to our results, fourth quarter FFO increased slightly compared to the third quarter on a dollar basis but remained unchanged at $0.42 per FFO share. Despite a relatively flat quarter-over-quarter change, I would like to highlight the following three items. Number one, we reduced our quarterly interest expense by approximately $770,000 or $0.125 per share due to the repayment of the Waikele secured debt, which was refinanced with unsecured Series A notes issued on October 31, 2014.

Number two, the retail portfolio added approximately $0.01 of FFO, due primarily to year-end percentage rents from various tenants.

And third, the Embassy Suites operating results reduced FFO in the current quarter by approximately $0.018 of FFO due to the expected seasonality of the hotel.

Now as we look at our balance sheet and liquidity at the end of the fourth quarter, we had approximately $309 million in liquidity comprised of $59 million of cash and cash equivalents and $250 million of availability on our line of credit. Our leverage at the end of Q4 remains low at 30.4% total debt to total capitalization and a net debt to EBITDA of 6.6 times, which we would like to see reduced to a five handle over time. Our interest coverage and fixed charge coverage ratio ended the quarter at 2.9 times.

And lastly, we have increased the lower end of our 2015 guidance range from $1.65 to $1.67. We are issuing a full-year guidance range of $1.67 to $1.73 from the previously issued guidance range of $1.65 to $1.73. The increase in the lower end of the range is attributable to the office leases executed in the quarter at First and Main and the Lloyd District. Both leases were originally modeled into our original guidance as speculative lease-up assumptions later in the year. Since both leases have materialized, we are comfortable increasing the lower end of our guidance range by $0.02 at the midpoint of the guidance range -- and the midpoint of the guidance range by $0.01 per FFO share.

For comparability, our 2015 guidance midpoint of $1.70 is up $0.08 over our 2014 FFO per share of $1.62, representing an increase in FFO of approximately 5%. Excluding the $0.03 of nonrecurring termination fees received in 2014, the 2015 FFO growth per share is up 7% on a more comparable basis. 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) Todd Thomas from KeyBanc Capital Markets.

A couple of questions on Hassalo on Eighth here. As the openings approach, I was wondering if you could just talk about what kind of rents you are targeting for the multi on a per-square-foot basis. And when will pre-leasing begin?

We are not disclosing that information at this time. What I can tell you is we are anticipating rents higher than when we commenced construction on the project. And pre-leasing will commence April 1. We have a team in place ready to start taking applications and signing people up, and we are very excited and looking forward to that phase of the project commencing.

On the Hassalo on Eighth, we have nine different pricing points, nine different models. So it's difficult to lay those out. It's not a back-of-the-napkin calculation you can do. But I can tell you that on a quarterly basis we have an independent consulting firm or research firm that studies what the rents are in the surrounding area, what our supply is. And like John said, I can tell you what we modeled going into this. We haven't changed but the rents have continued to increase. So we are looking forward to the opening of these buildings.

Okay, and how about on the retail side? Can you give us an update there in terms of what's leased, the 47,000 square feet, when will those tenants take occupancy?

On the retail leasing, now that we are able to do tours through the buildings, our activity has picked up quite a bit. But I can't really pin it down exactly where I'm going to be at pre-leased this summer, when we start opening up the buildings. But I can say that the activity has really picked up in the area now.

Okay. And then, Bob, just in terms of thinking about the capitalized interest on Lloyd, you mentioned the delivery schedule, I think, July-August-September, for the three buildings. Is that we should think about in terms of when the cap interest will burn off? And I realize you funded this with equity and/or your facility. So the rate at which you are capitalizing interest is, what, around 5%? That's what will begin to hit FFO on a GAAP basis?

Correct, yes. So we stop capitalizing the interest as soon as we receive the first dollar of income for each building. So you will see it stopped for the first building in July. You'll see the capitalized interest stop for the second building opening in August and the third one in September.

Okay. And then just last question, maybe for John -- I was just curious if you could elaborate a little bit on the opportunities you are seeing for new investments. Sounds like your pricing is obviously very competitive. What markets and what property types are you seeing the most opportunity today, and what does the pipeline look like?

Well, I would say in our markets the most active sector is certainly in the office, with office properties. A lot of very high-quality properties being brought to market, cap rates in ranges I've never seen before. That's an area that we are actually looking to take advantage of in terms of dispositions. But as we've always said, dispositions are driven by acquisitions. So we are looking to -- we continue to look for opportunities. They are just few and far between. A lot of activity in multifamily, in our markets; very, very little activity in high-quality retail. And retail is something, as you know, that we would be very much interested in expanding.

Okay, thank you.

Paul Morgan from MLV.

So you mentioned that both at Lloyd and at Torrey Reserve -- I think, at Torrey -- that the rents are above what you had in modeling from your pro forma. And those projects have been in the supp for some time and the yields haven't changed. What's keeping you from bumping them higher, since those are stabilized numbers and you know the rents are coming in above where you are targeting?

Once we have the project leased, we will provide an update. At the moment, as we always say, we like to under promise and over deliver. We have a lot of activity on Torrey Reserve. We have executed letters of intent. We have quite a bit of interest in what we are finishing up right now. It has been a little difficult to accelerate the leasing program because we've been unable to actually give tours in the building because of the construction. That's ending now. So what you call hard-hat tours have now commenced. I would expect that over the next -- sometime in the next quarter we will be able to give you a little more color on exactly where those rents are.

Great. And then on the Embassy Suites, as I looked back at your guidance from last quarter you were saying I think 15% same-store NOI bump and like 3% to 4% increase in ADRs. And now that the rooms have all been refreshed, is that ADR increase what you're seeing? Is there any reason to think maybe could come in more than that, given the strength in the tourist market there? Or are you sticking with where you were?

I'm sticking with where we are. You still have the strength of the dollar that we are seeing over there. But we've seen -- for instance, looking into January we are down maybe $100,000 in revenue but we are meeting our NOI projections. But we want to see how the strength of the dollar impacts the Japanese currency. So I'm very comfortable where we are on that. We have a monthly update with our management team over in Hawaii at the beginning of each month, and we go through it and take a look at it. So I think that what we are is realistic in terms of the guidance. And you also have the volatility in the hotel sector. So it's not like long-term leases locked in. So I don't think it's prudent to try to push that guidance until we can get a better glimpse of it down the road.

Thanks. And then just lastly, any update on what you are thinking about for the Foodland site at Waikele?

We are continuing to evaluate two options. One is a repositioning of retail tenants in our existing gym. The other is to build multifamily apartments. We are pursuing both opportunities on parallel tracks and expect to reach a conclusion as to which way we are going to go here probably sometime next quarter.

Great, thanks.

Brendan Maiorana from Wells Fargo Securities.

Bob, so just to follow up on the Hassalo development and the impact of that on guidance, it looks like in the fourth quarter -- I think it was a pretty clean quarter -- you guys did $0.42. So that's $1.67 or $1.68 if you annualize it. It's the low end of your range. You've got some growth on some of the leases that you did. If I'm looking at it correctly, I guess the delivery of the development project is probably slightly negative to NOI upon initial delivery and maybe it gets to zero late in the year. And then the expense of that interest is probably $2.5 million, $3 million upon date of delivery through the end of the year. So that's maybe negative $0.04 to $0.05. Is that the right way to think about it?

Yes, I think you are close. That's exactly what we talked about on our Q3 call. So we are -- from a guidance standpoint, or from our own internal model we are looking at it been 30% pre-leased in September. And hopefully, in reality, it's a lot sooner than that. But we think that we will be breakeven on Hassalo by year-end.

Okay. By year-end?

By year-end. We are not bringing in any positive income on a net -- any positive net operating income from Hassalo in 2015 for guidance purposes.

Right. Yes, and that's on net NOI and then obviously you are expensing the capitalized interest. So the change once the delivery is impactful. And then do you still think that stabilization in 2017 is likely? Or do you feel like that's more likely in 2016, given where it seems to be, that the market dynamics are pretty positive at this point?

We are optimistic it will occur in 2016.

Okay, great. And then the exposure at Landmark at One Market with Salesforce -- can you give us an update there, given what they have in doing, acquiring the one asset that they did in San Francisco and then the two big development projects that they have delivering over the next couple years? What is the outlook like for their space at One Market?

There is absolutely no change to what we have shared with you in the past. They have indicated absolutely no interest in moving out of our building. Salesforce is continuing to expand and increasing their hiring, which is driving the need for additional space. You know, we would love for them to move out. Their rent is probably 40% below market, 35%, 40% below market. So it's a good problem to have. But at the moment, as of today's date, they have indicated absolutely no interest in vacating.

Okay, great. And then just last one, any update on the Kmart space at Waikele and whether or not they may look to give you some of that space back or if there are interested parties? Or is it still too early on that space?

We continue to attempt to move the discussions along with Sears on both the building in Carmel Mountain Plaza and Waikele. And we have had absolutely no response or no indication that they want to give back either of the buildings. But we are continuing to keep an open line of communication with them and we would love to get our hands on both. But at the moment the Kmart store in Waikele is still profitable for them. The store at Carmel Mountain Plaza -- they believe they have a significant equity position in it. And so at the moment there's just been no traction in terms of us being able to accelerate taking those spaces back.

And of course, at Carmel Mountain Plaza we own the land. Somebody else owns the improvements, and Sears pays rents to both of us.

Yes, sure, thanks. And any sense of what the upside would be or where rents are relative to market for each of the spaces?

I think that's a very difficult problem to tackle. So we'll leave it up to Chris, see if he can --

Yes. I think you have at Carmel Mountain the Sears rent is -- I believe the rent that we are getting on the ground lease is $4 a foot, something like that. Looking at you, Bob. It's pretty low. So obviously market rent is significantly higher than that for the box. In Waikele I think we are in the $30 range for that building if we split it up with different retailers.

Okay, great. Thank you.

Rich Moore from RBC Capital Markets.

Not to be pushy or anything, but what are you thinking about the next two phases for Lloyd, now that you are almost done with the first phase?

Well, we've actually started the planning for Phase 2. Phase 2 will encompass four city blocks. It's what we refer to as Oregon Square. We are looking at potentially incorporating different uses. We've been approached by a utility company in Portland for their headquarters. So we could incorporate some office space. If we were to do so, it would have to be on a pre-leased or a build-to-suit basis. We've also been approached by senior housing providers. And that's another use that I think would be -- and in fact, we've done some market studies on it. That would be very feasible. But we haven't made those decisions yet. We're continuing to work through the design review process and expect to have an approval toward the end of next quarter, the second quarter. And at that point we can decide which direction we are actually going to go. If we were to keep it all multifamily, the second phase would be 1,100 units. So that's obviously probably more than we would look to undertake at one time. So we are -- obviously, we are looking at phasing that.

As far as Phase 3 is concerned, we are giving that some thought. It's obviously a few years out. But it's on the -- I wouldn't say the back burner, it's on the middle burner. So we will keep you guys informed as we get closer on those decisions.

We do consider Oregon Square a very significant opportunity. And of course, the success of the first phase of our apartments is going to dictate our appetite for Oregon Square. But we have the flexibility of doing what will work out to be most profitable for our stockholders. That's a good question. That's a good question, Rich, thanks.

Thank you. And then on Hawaii -- so I take it so far you guys haven't really seen a big negative impact from the stronger US dollar. Is that right? On the hotel or the retail? Obviously, it sounds pretty good. So the hotel business hasn't really been hurt?

Correct. Yes.

Okay. And so you usually have a pretty good pulse. And you've given it to us before in terms of travel. Bob, you usually tell us -- or John -- who's coming from where. Are you seeing travel down from the East, coming from the West, I guess to the East?

It's a very interesting dynamic. Anytime we see a decrease from one particular region we seem to recognize an increase from another. And as travel continues to open up throughout Asia to the Hawaiian Islands, it has more or less taken the lumps out of the fluctuation from US West and US East segments. The airline industry continues to add additional flights. There are now direct flights from a couple more cities in China. They've added another direct flight from Japan. So, we are continuing to see positive growth in terms of inbound visitors, and it's coming from new areas, not just the core areas. So we are seeing an increase from -- let's say, from Guam. We are seeing an increase from New Zealand, increases from Australia. With what has been added in the United States, I'd say US East and US West are about where they were before. But we had -- as I mentioned on the last call, there was a significant increase from Canada. So it just continues to impress us. Bob, you want to add anything?

No, I think you covered it. We saw a slight softening from Japan but nothing significant. But actually, when that went down China ticked up. And you covered all the other exciting --

China is making it more and more easy for people to travel to the United States, both China and Korea. So we are -- we keep an eye on those sectors.

Honolulu is America's entrance into the Pacific Rim. So when the countries in the Pacific Rim choose to travel, it's much easier for them to come to Honolulu than it is to fly to the mainland. So it's a very good position to be in as that is a dynamic and growing area for travel.

Okay, good, thank you. And then last thing from me, Bob -- the private placement of the notes -- tell us a little bit about why you chose that route. And does that change anything with your plans? Or does that help, maybe even, your plans for broader unsecured note issuance going forward?

The private placement -- the whole process started, we had a maturity on our Waikele debt in October 31, 2014, and so we approach the private placement market. And to our surprise, the insurers that came back -- we had over 23, 25 insurance companies that came back and wanted to provide financing. And at that time, the interest rates were very low relative to the rest of 2014. And so when the insurers came back they said, look, let us take out this maturity for you and let us also provide you some attractive financing to refinance all of your 2015 maturities. And we looked at it, we talked about it, we talked amongst management and the Board. And we thought that that was an attractive price at the time. We thought that it took the risk off the table. And it helped transition our balance sheet to investment-grade.

So we ended up refinancing our October 31 maturity for $150 million. We just received $100 million the first week of February, which we paid off two other maturities. And we have the last $100 million coming the first week of April that will pay off our last 2015 maturity.

So when that last financing is completed the first week of April, our balance sheet, our secured debt will be less than 30%. Our unencumbered NOI will be greater than 50%, actually closer to 59%. And basically we believe that our balance sheet is investment-grade, although not rated.

So as we think of 2015, what we want to do is we want to approach the investment-grade market and get a rating. We don't need it right now but it's good, it's another tool in the toolbox. And we think it's important to have. So, we are going to proceed with that process. And I think the goal is to have a rating in or before the fourth quarter of 2015.

Just some additional color -- there was no charge for the delayed funding, which was appealing. At the time we thought that the interest rate was extremely attractive. Of course, our hindsight was not as good as it -- or our foresight was not as good as it should have been. We think that over the life of these loans we will be very pleased that we did it, and we continue to have all the financing opportunities available to us that are available to anybody in our industry.

So in the short run perhaps we didn't hit the nail on the head. In the long run, I think it was a good move and the enthusiasm of the investors for us even without an investment-grade rating was quite assuring and overwhelming, actually.

So this would have been in lieu, Bob, of doing like a term loan, for example, with a bank?

[Yes] (technical difficulty) --

Got you. Thank you, guys.

Mitch Germain from JMP Securities.

Bob, you said, what was it, a $0.01 in the retail space for the percentage rents? Is that correct?

Correct, yes.

And when you looked your guidance -- I'm assuming that's 4Q only. Right? So when you look at your guidance, is that contemplated to have a $0.01 for next year or is that purely upside based upon how things work out?

Yes, that's percentage rents. That's not changing our 2015 guidance. We had the higher percentage rents in Q4, but for 2015 we are very comfortable with what we've stated.

Okay. And then in the office sector, I think you have about 6% or 7% rolling on the year. Is there any big move-outs that are planned?

Jim Durfey is going to respond to that.

There is one possible 26,000-foot move-out in the entire portfolio, so about 1%. My expectation is we will rapidly backfill 20,000 feet of that. So no, there are no significant hits in 2015. There is a renewal on a portion of the Autodesk space at the Landmark. I have no expectations that they are going anywhere. I think, to the contrary, if Salesforce ever left they would probably take a little more space, if not all of it. So no, no significant hits to the office portfolio in 2015.

Probably there's more significant opportunities in the office portfolio than there is concern about the downside on the hits. Is that fair, Jim?

That is fair. My expectation on that 26,000 feet is we will backfill 20,000 of it at about $0.60 a foot higher than the people leaving.

And the remaining Tax and Treasury space -- is that contiguous or is that just select floors?

Well, it's 21,000 feet on one floor and 4,700 feet on the floor below it. So could you call it contiguous?

I guess so. I guess with what you've done leasing-wise you have filled out most of it. Thanks, guys. Great year.

Thanks for your confidence.

Now, I would like to hand the call back to Ernest Rady, Executive Chairman, for closing remarks.

Thank you very much. And thank you all very much for being with us and being with us for the last four years, many of you. We are delighted to have an able to produce the results that we produced, 25% a year for the last four years for our stockholders. We are very, very proud of those results.

And as proud as we are, we are even more dedicated to continuing the good results that we have. And we hope stockholders continue to hold our shares, and we continue to produce results for them which give us great pride. So thank you again.

Thank you. Ladies and gentlemen, that concludes your conference call for today. Thank you for joining us. You may now all disconnect. Thank you.