American Assets Trust Inc (AAT) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2015 American Assets Trust, Inc. earnings conference call. My name is Tracy and I will be your operator today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Mr. Adam Wyll, Senior Vice President and General Counsel. Please proceed.

Good morning. I would like to thank everyone for joining us today for American Assets Trust 2015 third-quarter earnings conference call. Joining me on the call are Ernest Rady 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 2015 third-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 the expectations reflected in such forward-looking statements are based on reasonable assumptions, our future operations and are 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, in 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 and reconciliations to net income are contained in the Company's supplemental operating and financial data for the third quarter of 2015 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 Chairman, President and CEO, 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 2015 earnings call. The performance of our premier portfolio of retail, office and multifamily assets continue to provide industry-leading returns for our shareholders which we believe will continue into the foreseeable future.

Approximately two months from now, American Assets Trust will complete its five years as a public company. When you look back on our diversified strategy of high quality Coastal West Coast properties, combined with our focus on creating net asset value for our shareholders as our first priority, it looks like it has been a great strategy. We have grown the net asset value of your Company from approximately $22 a share at the IPO to over $45 per share to date which are also reflected in our strong shareholder returns.

As of the end of October last Friday, the annualized compounded total shareholder return since the beginning of 2011 has been just shy of 20% per year. Our FFO growth CAGR, or compounded annual growth rate, has been approximately 14% since 2011. Consistent and predictable NAV and FFO growth per share along with an increasing dividend is our focus and the Board has voted for a 7.5% increase in the dividend for the coming quarter.

Many of you have heard me say that we hope to deliver 10% or better total shareholder return per annum over the coming decade, not every year but over the next decade. When you look at real estate over the long-term, anyone who has been in real estate for a long time knows that there will be cycles, both up and down which is why we are focused on high quality, Coastal West Coast real estate. We have seen that even during the great recession that our cash flows were flat or up. So we consider this portfolio to be recession proof which makes me sleep well at night. I get to the 10% shareholder return by taking our FFO growth which we are projecting of approximately 66% for 2016 and 5% over the next decade as Bob will go over in more detail. And in adding our dividend yield of approximately 2.5% and then adding the icing on the cake from new developments like Hassalo on Eighth and future phases at Torrey Point and the expansion of Torrey Reserve which we expect altogether will generate in excess of a 10% shareholder return when you apply our average of current multiple to our expected FFO.

As you are most likely aware, our Form 8-K and press release regarding the resignation of John Chamberlain on 9-14, 2015, the Board of Directors accepted John's resignation and thought that I was the best person to be CEO at the present time. And I accepted the recommendation. Although I am 78 years young, I am still full of energy and I can't believe I am really 78 if you want to know the truth and have been in the real estate business all my life. In fact, as many of you know, I started American Assets with $35,000 in the trunk of my car in 1967 and I think we have come a long way since then.

Our strategy and focus is not changing. We have an excellent management team that is aligned and focused with creating net asset value for all of our shareholders.

On a personal basis, John and I worked together for 28 years and I will miss him but the Company will continue and not miss a beat, I promise. But I do want to acknowledge that John was a big factor in assembling the existing quality portfolio.

Lastly, for those of you that missed our investor tour date, you can still see the finished Hassalo on Eighth project on apartments.com and tour the site. It is an excellent presentation and I heartily recommend that you take a look at it. We are very, very proud of it and we would like to share that pride with you. We expect to put a link to this website on our own website in the very near future.

On behalf of all of us at American Trust, we thank you for your confidence in allowing us to manage your company and we look forward to your continued support. Thank you.

With that, I will turn it over to Bob Barton, our CFO. Bob, please.

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. In Hawaii, our Beach Walk project, continues to post impressive results. As of September 30, the property was 100% leased with sales per square foot over $1000 per square foot.

In September, our Embassy Suites, the number one-ranked Embassy Suites in North America as reported by Hilton Hotels, once again exceeded its competition in ADR and RevPAR for the month. According to the Smith Travel Research Report for the month of September in comparison to the competitive set, the property achieved an occupancy index of 96.5%, ADR index of 127.3% and a RevPAR index of 122.8%. In actual numbers for the month of September that index translates into an actual occupancy of 89.8%, ADR of $305 and RevPAR up $274.

Let's talk about our developments for a moment. In San Diego, construction commenced on Torrey Point on July 15. This two-building, approximately 90,000 square foot project is expected to be completed in the first quarter of 2017. We expect this to be the crown jewel of office space in San Diego County combined with a strong development yield ranging from 8.25% to 9.25%.

Thank you to all of you that participated in our Investor Day in Portland on October 15. It was an excellent turnout and it has been great to hear all of the positive feedback on our portfolio and in particular excitement about the Lloyd District redevelopment from participants.

Our Hassalo on Eighth project and the Lloyd District portfolio welcomed its first resident on July 2. Our initial leasing pace on the first apartment building is ahead of target. As of the beginning of this week, the Velamor building, which has 177 units and was the first phase of the lease up, is approximately 90% leased and 84% occupied. The Elwood building and the Aster Tower welcomed their first tenants on October 15. As of the beginning of this week, the Elwood building which has 143 units is approximately 27% leased and 15% occupied. The Aster Tower which has 337 units is 27% leased and 12% occupied. Our team in Portland is focused on making this project a true success.

The apartment vacancy for the Lloyd District is holding steady hovering at less than 3%, the best in Portland Metropolitan statistical area and one of the best in the nation.

As we are coming to a close on Phase 1 of the Lloyd District portfolio development, we are adjusting to 2017 estimated stabilized yield on Phase 1. Our updated range for Phase 1 is 5.75% to 6.25% with a midpoint of approximately 6%. This is based on our best current estimate of the weighted average rental rates of $2.50 per square foot when Phase 1 is fully leased up in 2017.

Additionally, we are running approximately $10 million over in construction costs above our initial estimate of approximately $192 million. The majority of these costs related to the top two amenity rich floors of the Aster Tower which we believe are important to have and differentiate us from our competition.

A little more color on the revenue side of Hassalo which is a key driver in our updated estimates. We are currently at a weighted average rental rate of approximately $2.36 per square foot. This reflects rates ranging from $2 per square foot to $2.80 per square foot depending on building, size, view and so on. We believe that beginning in 2017, when new leases occur and existing leases come up for renewal, that leasing rates at that time should produce a weighted average rent of $2.50 per square foot. This is approximately a 6% increase in rental rates over the next 15 months. This estimate is supported by data provided by Johnson Economics, a reputable Portland-based advisory and statistics firm, on our competitive set which includes three properties across the Willamette River in the Pearl District and five properties in the inner-East side which is where Hassalo is located. The weighted current average rents per square foot on these apartment communities is $2.79 per square foot with a range of $2.17 per square foot to a high of $3.22 per square foot.

We believe our Hassalo's amenities and locations are superior to our competition and believe our $2.50 per square foot estimate for 2017 is reasonable. We don't expect these rents on day one as we lease up the property for the first time but as new leases are written and renewals occur, we will expect to see these rates take place given the favorable supply and demand dynamics in the market.

As this transit- oriented neighborhood is transformed, we expect to see more retail, more restaurants and more nightlife in this neighborhood that has approximately 11,000 people coming to work each day. It is a transformation that is taking place before your eyes and we believe it will only get better over time.

As reflected in the supplemental, approximately $20 million of the overall Phase 1 project costs relates to improvements for the benefit of the L-700 office building, specifically, the shared subterranean parking structure and so we have allocated this $20 million of cost out of the apartment project and into the office building. As a result, we have been able to increase rents approximately $8 dollars per square foot on the Lloyd 700 buildings and expect to stabilize the yield on this portion of the project in a range of 6.5% to 7.5%.

If we want the L-700 office building to achieve Class A rental rates we need to provide Class A amenities that begin with a covered subterranean parking structure especially where the rainfall is significant.

As a result, we are now seeing rental rates begin at $28 per square foot and higher. That is an approximately 40% increase in the rental rate since our acquisition of the L-700 office building in 2011. You may recall that when we acquired the Lloyd District office portfolio, the rents in the L-700 office building ranged from $18 per square foot to $20 per square foot. The Department of Environmental Quality Lease is an example of that new Class A rental rate.

I do want to highlight that the revised estimates have no impact on our 2016 guidance which we will discuss in more detail later.

Since net asset value is our first priority let's take a look at the net asset value creation for Phase 1. Based on my calculation using a $2.50 per square foot weighted average rental rate in 2017 which is expected to produce approximately a 6% stabilized yield in 2017 and applying a 4% cap rate to this Class A project, we will have created approximately $1.50 or $1.50 per share of net asset value and approximately $0.17 per share of additional FFO.

Achieving the current weighted average rental rate of our competitive set of $2.79 per square foot would create over $2 per share of net asset value and approximately $0.20 per FFO share.

I hope this has been helpful as we continue to strive to be as transparent as possible.

Transitioning to acquisitions, the pricing of assets equal to or greater in quality then our existing portfolio generally provide returns of unacceptably low levels. At the present time while our stock has been trading at a discount to NAV, acquisitions have not made a lot of sense in terms of NAV creation. Disciplined investing is a core metric at AAT. Nonetheless, we continue to evaluate growth opportunities and recycling capital where the probability to increase net asset value and internal growth exists.

Let's move on to a financial perspective. Last night we reported third-quarter 2015 FFO of $0.44 per share. Net income attributable to common stockholders was $0.30 per share for the third quarter. The Company's Board of Directors has declared a dividend on its common stock of $0.25 per share for the quarterly period ending December 31, 2015, a 7.5% increase over the prior quarterly dividend.

American Assets Trust had a solid third-quarter performance. Our retail portfolio ended the quarter with 98.3% occupancy combined with the highest annualized base rents amongst our peers.

Our office portfolio ended the quarter at approximately 93.2% occupancy, up 330 basis points on a year-over-year basis. Our same-store office portfolio occupancy is now approximately 98.4% leased.

Let's talk about same-store NOI for a moment. Same-store retail cash NOI increased in the third quarter to 3.2%. The increase was mostly attributable to a full quarter of rents from Home Goods at our Lomas Santa Fe shopping center in San Diego. Petco Unleashed and the UFC Gym in our Waikele Regional Center on the island of Hawaii to in Hawaii and significant rent increases from lease renewals at our Dell Monte Center in Monterey, California.

Our retail cash leasing spreads signed during the quarter were up 23% and are up 13.6% over the last four trailing quarters. We executed 21 leases for approximately 69,000 square feet.

Same-store office cash NOI was up 6% in the third quarter. Same-store office growth in the third quarter was due to new leases that had been signed at our One Beach property in San Francisco and at our First and Main office building in Portland, Oregon along with significant contractual rent bumps at both our City Center Bellevue building in Bellevue, Washington and our Landmark building in San Francisco.

We continued to see significant market rent growth across our office portfolio in all our core markets. Current in place office rents are still approximately 16% below market indicating that we still have significant internal growth in our office portfolio. Our office cash releasing spreads during the quarter were up 6.4% and are up 25.4% over the last four trailing quarters.

Same-store multifamily NOI which comprises approximately 7.4% of our total NOI was up 5% on a cash basis for the third quarter. Higher rents are the main drivers of the same-store growth for the multifamily portfolio. Average monthly rents on a year-over-year basis are up 11.8% while the weighted average occupancy decreased 93.6% -- to 93.6% as of the end of the quarter.

Waikiki Beach Walk, our mixed use property in Waikiki, Hawaii which represents approximately 17.8% of our NOI, reported same-store cash NOI of 3.5% in the third quarter. We expect same-store comparables for the fourth quarter of 2015 to be significantly higher as the fourth quarter of 2014 was impacted by the room refresh which took approximately 20% of available rooms off-line.

Turning to our results, third-quarter FFO was $0.44 per FFO share. It was mostly impacted by the following three items. Number one, as discussed in our press release dated September 14, John Chamberlain resigned as our President and CEO effective the same day. The net charge to FFO per share was approximately $0.03 in the third quarter as a result of his resignation.

Number two, the Embassy Suites Hotel Waikiki, Hawaii added approximately $0.02 of FFO due to the seasonality of the hotel from their peak summer season.

Number three, the office portfolio added approximately $0.01 due to higher rents and new tenants at the Torrey Reserve, First and Main and One Beach properties. It is important to note that had we not incurred the one-time nonrecurring transition cost, our FFO per share would have been approximately $0.48 per share or approximately 17% increase over the prior year.

Now as we look at our balance sheet and liquidity at the end of the third quarter, we had approximately $265 million in liquidity comprised of $40 million of cash and cash equivalents and $225 million of availability on our line of credit. Our leverage at the end of Q3 remains low at 29.1%; total debt to total capitalization and a net debt to EBITDA of 6.5 times which we would like to see reduced to a five handle over time. Our interest coverage on fixed charge and fixed charge coverage ratio ended the quarter at 3.2 times. Lastly, we have updated our 2015 guidance and introduced our initial 2016 guidance.

Let's first talk about 2015 guidance. We are narrowing the guidance range for our full-year 2015 FFO per share to a range of $1.74 to $1.76 with a midpoint of $1.75 from our most recent guidance of $1.73 to $1.77 per FFO share with the same midpoint of $1.75. For comparability, our 2015 guidance midpoint of $1.75 is up $0.13 over our 2014 FFO per share of $1.62, reflecting an 8% increase in FFO. Excluding the $0.03 of some nonrecurring termination fees received in 2014 and adding back the $0.03 nonrecurring charge for 2015 related to severance expenses, the 2015 FFO growth per share is up approximately 11.9% year-over-year on a more comparable basis.

Now let's talk about our 2016 guidance. We are introducing our 2016 FFO guidance range of $1.82 to $1.88 per share with a midpoint of $1.85 per share, which is approximately a 6% increase in FFO over the 2015 midpoint.

Our 2016 guidance range is based on the following nine assumptions. Number one, we are anticipating a 2% increase in 2016 same-store retail cash NOI. Occupancy is expected to be approximately 98.4% at year end 2016.

Number two, we are anticipating a 7.5% increase in same-store office cash NOI. Occupancy is expected to be approximately 97% at year-end 2016.

Thirdly, we are anticipating a 3% increase in same-store multifamily cash NOI. Occupancy is expected to be approximately 95.5% at year-end 2016.

Fourth, we are anticipating a 2% increase in same-store mixed-use cash NOI. Occupancy is expected to be approximately 98.2% at year-end 2016.

Fifth, Hassalo on Eighth is expected to contribute approximately $5.7 million of FFO or approximately $0.09 per FFO share. There are a lot of unknowns during the first year of lease up but this is our best estimate at the present time.

Number six, non-same-store office cash NOI from Torrey Reserve in the Lloyd District is expected to increase approximately 4% and add an additional $0.01 of FFO per share over 2015.

Number seven, G&A is budgeted to decrease by approximately 16% to $19 million which is expected to add approximately $0.025 of FFO. This assumes that we eliminate the cost of the Executive Chairman and leave the cost of the CEO.

Eight, we are anticipating an increase in interest expense of approximately $5 million from lower capitalized interest on Hassalo, as Hassalo transfers out of construction in process into operations which is expected to reduce FFO by approximately $0.08 per share.

Nine, 2016 GAAP income adjustments for straight-line rents and above and below market adjustments are budgeted to be approximately $5.3 million and are expected to reduce FFO by approximately $0.01.

These adjustments should approximately reconcile our 2015 midpoint guidance with our 2016 midpoint guidance. When I compare our 2016 midpoint guidance to the 2016 consensus that I see on my Bloomberg screen of $1.897, we are different by approximately $0.047 or approximately $3 million of FFO. I believe the difference is due to approximately $0.01 of FFO due to the sale of Rancho Carmel Plaza which we have not yet replaced and the balance is due to different expectations on the lease up of Hassalo on Eighth. For guidance purposes, we have factored in reaching stabilization for Hassalo on Eighth in November 2016.

Lastly, our operational capital expenditures for 2016 are budgeted to be approximately $36 million.

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

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

(Operator Instructions). Todd Thomas, KeyBanc Capital.

Hi, it is Jordan Sadler here with Todd. First, just first question on the Old Navy expiration at South Bay and Waikele next year. Do you have a sense of where those are headed yet and what we should anticipate, what is reflected in guidance?

We are working on those now. Both of those leases will get renewed, they are both big stores with Gap but I don't have any real guidance on that. We should be able to provide that next quarter.

Okay, that is helpful. And then a bigger picture one on leverage, I believe the commentary there, Bob, was on getting leverage down from 6.5 to hopefully something with 5 handle longer-term. Is that just the anticipation that cash flow or EBITDA will grow over time and you hope to migrate lower or do you believe fundamentally that the business should be operated at a lower overall leverage?

Jordan, that is a good question. We have said on prior calls too is that we hope to get our net debt to EBITDA down to approximately 5.6 by the fourth quarter of 2016. We believe that can be accomplished strictly through the lease up of Hassalo on Eighth. So if we don't do anything else, no further acquisitions, our expectation is that we will be approximately 5.6 in the fourth quarter of 2016.

And then in terms of leverage, we have three loans maturing in 2016, one is First and Main which matures July 1. It is small loan approximately $82 million to $84 million, 3.97% today. We will probably refinance that in a private placement market and switch from secure to unsecured. The other two are smaller -- and some of our apartment projects in San Diego and we may pay those off with just cash flow from operations.

That is great. Ernest, one for you. On sort of the succession planning here, you are obviously a sprite 78-year-old. But curious here what the Board's thoughts on longer-term succession planning would be and how we should be thinking about that as we look out let's say three to five years?

Jordan, the Board and I are in complete accord that the best person to run this company ought to be the person running it. At the moment the Board and I are in accord that I'm the best person to run it. I am not interim; I love this company and I really enjoy the job I do. And the Board knows that their responsibility is for a succession and they have had discussions about that. I have not been included in those discussions and I don't want to be. My job now is to do the best I can for all of our stockholders. I am really focused on it and God give me the health and the energy, I will be here as long as the Board wants and as long as I am the best person to do the job.

Okay. Is there a search ongoing do you know for another executive at the C-suite level that would be a potential?

No.

No, okay.

I am here, it is my job. I'm going to do the best I can as long as the Board wants me and I want to do it. And if there is a better person to do the job, I won't do the job. But as long as I am the best person at the job I can do the job and there is no search ongoing and thanks for the question.

I wish you the best and I hope you have a long tenure in the role. I guess my question really goes toward longer-term planning even if you are in the seat for let's say five years, who is behind you in three years from now who watches you do the job for two years and run the (multiple speakers) ?

We have a very competent outside Board and I know they have had discussions of succession. I know they are aware of it. We have very competent people in the Company. Believe it or not I don't take myself so seriously that I think if something happened to me that everything would fall apart. As a matter of fact if anything happened to me, the real estate would be there, the competent people who run the Company would still be there and they are devoted to the Company. We love the strategy we have. It is an irreplaceable properties and I think that -- I hope to add some of the icing on the cake that I talked to if I can during my tenure.

Thanks for the question. By the way, my prayers are with you. I hope I am this healthy and this energetic as I am now for as long as possible. Thanks for your good wishes.

Thank you.

Paul Morgan, Canaccord.

Good morning. Just a clarification about the guidance number. So you said for Hassalo, it was a $0.09 positive FFO in 2016 and then you attributed an $0.08 hit from lower cap interest, mostly from the same project. Is the $0.09 FFO gain net of that impact or is it separate?

Separate.

So it is sort of an $0.01 -- it is a $0.01 positive impact net of that and then in 2017 I guess because you've got $0.17 that is where you get most of the FFO gain?

Yes, that is one way to look at it if you want to offset one against the other you can look at that, that is not how I am looking at it. But the numbers all add up based on what you are saying that would be correct. So 2017, 2017 is really where we expect to see that $0.09 almost double and 2017 is also the year that we are focused on for stabilization.

Understood. Going to the office maturities, you've got about 300,000 square feet at about $32 a foot expiring next year. You mentioned overall your rents are 16% below market but could you comment about what is comprised in that $300,000 and how that is looking and kind of when that will hit over the course of the year?

Paul, we are going to ask Jim Durfey, who handles that, who does a great job in leasing our office portfolio.

Good morning, Paul. We actually have about 285,000 square feet of expiring leases next year. A big chunk of that is the Insurance Company of the Wests here in the building, the ICW Building that we are sitting in and that space will come vacant at the end of next year. We are already marketing that space to a number of users and are very confident that when we do backfill that space not only will it be backfilled but it will also be backfilled at higher rents than they are currently paying.

Other spaces coming available is mostly in smaller pieces spread out throughout the portfolio. So the big chunk is here at ICW. But as I review our leasing activity, anything that is currently on the market or will be between now and the end of the year is already being marketed not only from the standpoint of attempting to renew which we hope that our renewal rate will be in the 60% to 70% for the balance of that upcoming expiration but also in the event that we have to backfill. So we are on top of it, we track it on a two-year going forward basis. We lease it on a two-year going forward basis and continue to see rents increase as these leases roll. So we are very positive on the office market continuing through next year.

By the way, ICW moving out is not a negative comment on the project. It is moving a claim department, one of its claim departments out because the people who work in that claim department are located in one area of the city and it is closer to them where we are moving to than it is where we are now. So it is great space and it is just that it is more convenient for the company and I know we have worked out a strategy that if he can lease it sooner we can move sooner.

You know, Paul, historically we have had in about 250,000 square feet a year somewhere in that range on office and retail expiring each year and each year we have relet those spaces and as Jim said, we approach it approximately a year ahead of time.

Where our in place versus market is the biggest differential is really San Francisco and also City Center Bellevue and we saw the top floor of our One Beach asset get filled up recently and when we bought that building it was at $28 per square foot on a weighted average basis and we replaced that top floor at approximately $48 per square foot.

In the Landmark building, we keep getting approximately 10% or $2 per square foot bumps every year up there and that building just continues to have strong internal growth. And our City Center Bellevue up in Bellevue, Washington, the same thing when we bought that building the weighted average rents were at $32 I believe and now we are pushing much higher than that.

And if you look over the last several quarters that is why we continue to have such strong same-store growth in our office portfolio.

Of course one thing that we would have to add is the very, very pleasant surprise we have had on the L-700 building on Hassalo where we have spent a substantial amount of money to improve it. We have been able to increase rents dramatically. The quality of the tenants has improved dramatically and it has really added to the value of our holdings in that area.

Great. Just lastly on Embassy Suites and your guidance for next year, 2% same-store for mixed-use. If you look at the tourist volumes, they have been kind of flattish recently on Oahu for example and has that kind of part of the reason why your numbers flow, are you kind of conservative about your expectations there? I guess we would probably see a pop next quarter because some rooms were down year-over-year but as you think about next year and the 2% number, any color there?

That is the most cyclical part of our portfolio is that Embassy Suites. So for us to predict what the state of travel is going to be is probably the highest amount of uncertainty in our projections but it is a great property, I would say that over the next decade our rents will double. But I think I hope we make conservative projections over the next 12 months because the uncertainty and the cyclicality of the travel business but I am told that the Embassy Suites has done much better than its peers on Waikiki because it is the right product in the right place. Bob, do want to add something to that?

Yes. We have this competitive set and it includes in addition to surrounding hotels but it also includes several of the hotels on the beach and the Embassy Suites from a rate standpoint and a RevPAR standpoint, we have outperformed those within our competitive set that are on the beach. We follow it very closely. We talk with our general manager, Bob Yeoman, at the Embassy Suites, they take their budgeting very seriously and we are all aware that the strength of the dollar against the yen sometimes will have an impact.

We started to see a blip last April but that didn't materialize. The hotels along and on the beach saw more of an impact than we did. So we are still for the Embassy Suites, we are still on budget for 2015 in terms of cash NOI. We think that 2% is a fair estimation for 2016. Keep in mind the 2% is based on both the combination of the Embassy Suites and the retail. So within that 2%, really you have probably 4% for the Embassy Suites and you have a lesser amount for the retail portion of that.

Great, thanks.

It is great property. It is very difficult to predict quarter by quarter because of the cyclical nature of the hotel business but great property.

Craig Schmidt, Bank of America.

Good morning. Thanks. Bob, on your nine assumptions, did I hear correct, you are saying retail same-store NOI next year is 2%?

Correct, that is our initial estimation is a 2% increase in 2016 same-store retail cash NOI.

That seems lower than past years and definitely lower than some other high-quality retail portfolios. What is the drag on that number?

Well, I think what you have seen somewhat is that in 2015 is that we had Home Goods come in in the retail which was a very strong driver from that standpoint. And we also had some leases at Alamo Quarry that came in strongly in 2015.

Additionally, we have Rancho Carmel out of that pool going forward. So we did sell Rancho Carmel Plaza which was one of our smaller shopping centers during the third quarter and we have not yet replaced that or that income in the retail pool so that is probably a $0.01 drag.

Of course you have to consider that we are running 98.5% so leases are not falling off and we are not having to refill them. But Chris, do you have some comment on that?

No, I think it is more of a numbers issue so 98% -- a little more that 98% occupied and what is on the pipeline next year, there is not a whole lot of big bumps or big rent gains that we are currently seeing so we are very stable next year is the way I see it.

Okay, thanks. You had given a stabilized yield I mean a possible cap rate on Hassalo on Eighth, could you do the same for Torrey Point? What kind of cap rate do think that could sell for when it is completed and stabilized?

It would just be a wild guess. First of all, it is under construction. Second of all, we are starting to show it for lease up so it would just be a wild guess. Do you agree, Bob?

Yes, it would be a wild guess. But if I had to make a wild guess, I would have to take a look at what the cap rate was that we published last May on Torrey Reserve Campus, where we are speaking today, and so Torrey Point is across the river with a much better view and location so in my opinion it would be a lower cap rate. You've got great freeway visibility, the views of the Pacific Ocean.

Almost half a million cars a day passing by.

It would be either a 5 or lower and I just don't know because we probably would never sell that asset

Never.

Okay, thank you for that.

Haendel St. Juste.

Good morning out there. So first, a couple of clarifications, Bob. I just wanted to clarify that the G&A guidance you gave earlier that is embedded within your 2016 outlook, are you saying there that the cost net of G&A savings from John's departure and then the net additional cost for Ernest is going to result in net annual savings next year of about $0.025? Did I hear that correctly?

Yes, you did.

Okay. Then can you talk a bit more about the $10 million cost increase at Hassalo, are the enhancements you discussed defensive maybe reflecting a bit stronger market competition or perhaps more offensive as you pursue higher rents or higher clientele?

I think it was offensive. I think that the increased costs came from us taking steps to improve and expand the quality of the project to some extent. The FF&E was also an expenditure that was made in the first class basis. So I don't think we got nothing for something. I think we got a lot for what we spent and I think the project has turned out much better than we had ever hoped or dreamed. Do you want to add something, Bob?

No, I think you are right. I mean big picture, you are approximately 5% or less over budget but it really was a decision to create that amenity rich top two floors and we think that really differentiates us -- the Hassalo project from our competition and we think it will reap rewards down the road in rental rate.

And if you want to go on that website earlier, it shows some of those amenities that we added and I think it is going to work out well for the project over the long run.

Okay, I appreciate the thoughts there. Can you also talk about this quarter's apartment performance? The 3.5% same-store NOI is at least a couple of hundred basis points below what we have seen from other apartment REITs with meaningful West Coast exposures and then the 3% same-store NOI forecast for next year is also well below what we would expect. So maybe can you talk about what is impacting the recent results and perhaps what is maybe a drag on the outlook for next year?

I'm going to ask Russell Rodriguez to handle that. He handles the San Diego portfolio which is really the numbers that you are asking about. Russell?

That is a good question and I want to speak to that and give some clarity for this year and for next year. You know, macro numbers and the current metrics are strong as you know and so we expect 2016 revenue to be strong as well. However, we are expecting some increase in expenses, payroll and taxes and other services to our residents who are expecting a higher response and a higher expectation with the new higher rents that they are paying. So our expenses are going up and this is our initial guidance for next year and we expect to outperform that and we keep on optimizing our rental growth rate and expenses are going up a little next year. That is concurrent and a lot of our peers are experiencing the same thing.

We constantly look to improve the properties we have and perhaps some of the expenses are for improvement which will produce increased revenue over time. We have owned that property for a number of years and any comparison to the property we bought to the property that we have today is purely coincidental. It just happens to be in the same location. We are looking to reposition some of those units and we are really -- it is a fantastic location.

I just want to close and add on that, our product is not what our peers are bringing to market currently. I mean the absorption that is coming into San Diego is new product, is a lot of amenity rich product. We are in a different type of set and we are like Ernest said, repositioning and currently capitalizing those units as well to stay current.

I appreciate the color there. It sounds like just to confirm that you are seeing pressure mostly on the expense side and that is what is really causing most of the drag?

Also too, one last point on that is that like Lomas Palisades, which drives most of our multifamily and same-store because it is the largest number of units I think 568 out of 900 in San Diego, is that we are dropping the occupancy to 95.5% at year-end 2016 when it has been 96%, 99%, 98%. So I think you are really talking about several things. You've got number one is it is a reduction in occupancy in terms of guidance. We hope to realize a higher occupancy but for guidance purposes, we are putting 95.5% and there will be some other maintenance expenses coming through but I think the occupancy is the big driver.

Got you. And then one last one if I may, Ernest, for you. Just curious on your thoughts overall on further developments this cycle. How much longer do see the opportunities to develop as an attractive one, are using incremental opportunities? And then can you guys talk about I think cost pressures that you are seeing on the labor inflation side? We have heard labor shortages across other real estate sectors, multifamily, the homebuilders, just curious what you might be seeing?

Well, Jerry Gammieri, who runs our construction tells me that if we were to replace Hassalo on Eighth today that the additional cost would be at least 10%, another $20 million. So there is no question there is inflation push as far as construction costs goes.

As far as development goes, we are always looking. You know we have Oregon Square and we are continuing to process that. We think we've got to do some value engineering to make sure the project is as it should be from a return point of view. We intend to learn from the Hassalo project that is built is what type of project and what type of amenities will command the higher rents and as we gather that information and as we are able to value engineer that project, that is a significant opportunity for us.

And then we keep looking. Sometimes the best thing is to wait for the opportunity to arise that is compelling rather than to just chase opportunity for opportunity sake. And that is our strategy.

Anything notable on the labor constraint side? Any labor inflation, any issue that you are seeing there?

What we are seeing market wise in construction overall is an increase of about 10% in the Portland market. The Seattle market is even higher, it is about 13% and San Francisco in today's dollars it is almost 34% higher than Portland's market. So escalation is a real thing in the building industry right now like you are seeing across the board.

But when you first bid out Torrey Reserve and then the construction was delayed due to some technicalities which we were able to overcome, what inflation adjustment did you see, Jerry, approximately?

I want to say the difference was about 7%.

So costs are moving up. Of course that speaks well to the value of existing real estate.

Thank you for the time.

Brendan Maiorana, Wells Fargo.

So Bob, just to clarify lastly on interest expense, so are you fully expensing all of the cost for Hassalo in 2016 or is there any interest capitalization protection or operating cost capitalization that is going on with that project at all for 2016?

For the fourth quarter, no, there will not be any more capitalization. So basically our accounting policy is once we begin to receive that first dollar of income for the specific property like we've got three buildings up there, as income comes in day one, we stop capitalization. So as of October 15, it was leased; we opened it up and it was leased shortly thereafter and we stopped the capitalization.

Okay, great. So as you guys lease it up and I think you said the top line or the NOI contribution can be double in 2017 versus what it is in 2016, that all falls to the bottom line?

Yes.

Okay, great. And then on the office portfolio so you gave outlook and occupancy on the same-store. Just curious as to where you are likely to be for Torrey Reserve and Lloyd District on an occupancy basis as we progress through 2016?

Torrey Reserve includes the ICW Building and of course that large piece of space is leased until the end of 2016 so that impact if any would be in 2017. Other leases expiring in 2016 in the Torrey Reserve project really is not significant amounts. It is 25,000, 30,000 feet here and there so not big numbers coming up in Torrey Reserve.

In Portland, one of the things that kind of skews the look of upcoming vacancies is we've got 60,000 feet of Oregon Square still occupied which will become by the end of next year vacant as we hopefully look down the road to future development.

So where in that market you've got 125,000 feet rolling in 2016, 60,000 of it is Oregon Square. So the other 60,000 is interspersed among the other two buildings in smaller tranches. We have one full floor tenant that we are attempting to renew as we speak and a couple of others smaller than that. So I mean the impact is minimal in my opinion based on actual vacancies in 2016.

The pleasant surprise there of course is the Lloyd 700 building on which we have invested a substantial amount of capital and Jim has done a great job in attaining leases that at current rents are significantly higher than they were but the leases also contain escalation clauses which speaks very well to the success of the project over the coming at least decade.

The Lloyd 700 building by the way only has 9,700 feet of vacant space out of a 250,000. It shows that we have some rolling but a lot of those are actually being absorbed by the DEQ. We are still moving --

DEQ is the Department of Environmental Quality from the state.

So when the smoke clears and we finally figure out which floors we are actually determining they will receive and that will happen on March 1, the final allocation, those potential vacancies actually will be absorbed in part of the DEQ space.

I think it is safe to say that it is a problem of finding space for this new tenant at these higher rates not a problem of finding a tenant for vacant space -- big difference.

Okay, sure. That is very helpful. And then last one probably again for Jim, so Bellevue has got three towers and I think are now under construction deliver over the next year or two and Expedia is moving out to their big tenant in downtown Bellevue. How do you feel like you are positioned with City Center at Bellevue with your existing tenants or role and how do you feel like the building is competitively positioned versus what seems like will become a tougher competitive environment at least in the next few years?

Brendan, you are absolutely right. It is going to be a more competitive environment going forward. In anticipation of that, we have spent substantial amounts of money upgrading the amenities in the building and Jim and I have talked and we are now adopting an aggressive stance on renewals of our existing tenants so that we don't lose them. If you are in a building and you have the opportunity to move, it is a task. So I think the tendency is to stay where you are and we have done everything we can to make the environment that we offer competitive with any new product that comes in the market.

Jim, do you want to add something to that?

Yes, maybe a little more specifics for you, Brendan, on that. We have seven tenants of some size that expire in 2017, 2018. We have already started conversations with all seven of them on what are your needs going forward? Do you need more space, do you need less space. Of that space, I would say about 25% is already subleased to a new tech tenant who is on the growth edge of the world so our expectation is we may have some reduction in those existing seven tenants but it may be backfilled by the subtenants who our currently in the space that those people are subleasing from those seven tenants.

Yes, there are three buildings, with 1,500,000 square feet coming on. I understand that Salesforce just signed a lease and one of them for about 85,000 square feet which is brand new positive net absorption for that marketplace, Salesforce had a smaller space in Seattle. And as we know, Salesforce from our history is a strong growth prospect in the outer markets, the Portland and Seattle.

HBA has mentioned that they are leaving in 2018. They have now pushed that back to 2019 so that 300,000 feet is going to come on the market a year later than originally expected.

Yes, there are some challenges there. Our building has been positioned appropriately. We have spent a lot of capital money on we are in the process of elevator remodels, the HVAC system remodel. We just finished a lobby remodel to bring the building up into the same standards that we are competing with with the newer buildings. The location can't be beat. We think the management can't be beat so we are optimistic although we expect there will be a little bumpiness for the next couple of years.

That is great. And then just kind of where are your rents relative to market and do you feel like you guys are roughly in line or is there opportunity to move rents up as things roll?

There are opportunities to move rents up on the existing tenants. We pushed our rents up in the $46, $47 range over the last year.

From what price originally?

Well, when we bought the building we were in the 30s. We've kind of pushed it to the top of the market. Now obviously we're going to compete with three brand-new buildings which means we probably won't be at the top of the market anymore. The question is $47 still the accurate number when these new buildings come out. We are going to give a lot of concessions and right up front they are going to give away some stuff to fill these buildings.

So we may not see the $47 numbers going forward but we are still optimistic that we are going to be way above where we were in the mid-30s and something north of $40. It is just going to depend on each deal and each requirement as it comes up.

I think it is safe to say it is a great building and we are ready to compete. We think we have the plant in place, the amenities in place, we think we will do -- get our share and then some.

Great. Thanks, guys.

Mitch Germain, JMP Securities.

Good morning, guys. So I just want to make sure I get the ins and outs of the retail NOI correct. So this quarter you had a bit of a sequential decline and I think if I'm not mistaken that was the Saks burn off and then next year you have got the Home Goods. Is that the way to think about some of the ins and outs?

This year we really have the Home Goods because Home Goods came in in Q4 of 2014 so you have seen the impact of Home Goods during 2015.

In terms of 2016, it is like I think Chris mentioned earlier is that occupancy is up there and as tenants roll, we will continue to see rents -- I think our in place on a weighted average basis is probably 8% to 10% below market and it depends from property to property. So we will capitalize on those as they happen but right now I think we have had most of our rolls and we will deal with the small stuff. Chris, do you have a different opinion?

No, I think it is a numbers issue. So 90+% is not a whole lot of room to go and we don't have any big rolls that are significant next year. So the way to look at it we are very stable in those POPs we got this year are going to -- they still stay there but they don't get the benefit of it next year (multiple speakers).

Okay, great. Thanks. And then I didn't hear any details on the sale. I might have missed it, Bob?

Yes, Rancho Carmel Plaza is -- was our smallest retail shopping center, 34,000 square feet and it was here in San Diego but the location was not what I would call A -- compared to like Carmel Mountain Plaza. It was close to that but not in the right location. And so we thought it was the best time to harvest the gain on that. I think we had a $7 million gain, sold it for $12 million and change and I think our gain that was included in our income was approximately $7 million.

So what we have done is we put that into an exchange, the proceeds are -- with an accommodator until we find another property. If we don't find another property, we will apply those proceeds toward our development spend.

It is part of our strategy of icing on the cake. How do we improve the quality of the portfolio?

I appreciate it.

I would now like to turn the call over to Ernest Rady for closing remarks.

Okay, folks. Thanks again for your interest and coming on our call. I can't repeat what a great pleasure and an honor it is for us to manage this very significant portfolio of Coastal West Coast assets. And we will see you or hear from you next quarterly earnings call if not sooner and thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.