American Assets Trust Inc (AAT) 2015 Q4 法說會逐字稿

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

I would now like to turn the conference over to Adam Wyll, Senior Vice President and General Counsel. Please proceed, sir.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2015 fourth-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 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 the expectations reflected in such forward-looking statements are based on reasonable assumptions, our future operations and our actual performance may differ materially from the information contained in our forward-looking statements, and we can give no assurance that these expectations will be attained.

Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions, and the risks and costs of construction. The earnings release and supplemental reporting package that we issued yesterday and 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 fourth quarter of 2015 furnished to the Securities and Exchange Commission. This information is available on the Company's website at www.AmericanAssetsTrust.com.

I'll now turn the call over to our Chairman, President, and CEO, 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 2015 earnings call.

American Assets Trust has now completed five years as a public company, and we are celebrating our 50th year of being in business. When you look back on our diversified strategy of high-quality coastal West Coast properties, combined with our focus of creating net asset value for our shareholders as a first priority, it looks like it has been the right strategy regardless of the current volatility in the capital markets.

We have grown the net asset value of your Company from approximately $22 a share at the initial public offering to over $45 a share today. I believe it is an industry-leading performance.

Our NAV growth continues today as we lease up Hassalo on Eighth multifamily and storefront retail development in the Lloyd District of Portland, our Torrey Reserve office and retail expansion in San Diego, and continue our office development of Torrey Point in San Diego.

Our FFO CAGR, or compound annual growth rate, has been approximately 13% since 2011. As of December 31, 2015, our retail portfolio of properties comprised of approximately 3 million square feet 98.6% leased. Our office portfolio, consisting of approximately 2.7 million square feet was 92.4% leased at year-end, of which half of that vacancy relates to Oregon Square, where we are currently evaluating various alternatives to reposition that asset into an accretive development for our stockholders.

Our same-store cash NOI growth was 9.9% for the fourth quarter. Even excluding the contributions from the Embassy Suites mixed-use portfolio, our same-store cash NOI was a very healthy 6.6%.

Consistent and predictable NAV and FFO growth per share, along with an increasing dividend, is our focus on all of our behalf. Many of you have heard me say that we hope to deliver a 10% or better shareholder return per annum over the next decade -- not every year, but over the next decade. We 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 our cash flows were flat to up.

I am also pleased and honored to be working with this top-notch management team, and our new structure is both efficient and effective. On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage your Company, and we look forward to your continued support.

I will now turn it over to Bob Barton, our Executive Vice President and CFO. Bob?

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

In San Diego, construction on Torrey Point is well underway as we've completed the excavation of the first building, which will become the basement for the subterranean garage. Our focus now is on putting up the steel and iron in late April, early May.

This two-building, approximately 90,000 square foot project is expected to be completed in the first quarter of 2017. We expect the building to be stabilized in the first quarter of 2018.

We expect this to be the crown jewel of office space in San Diego County, with its proximity to Interstate 5 and unobstructed views of Torrey Pines State Beach Park, Torrey Reserve, and the Pacific Ocean. We've also gone back with a fine-tooth comb with the hope that we underpromise and overdeliver on the stabilized yield, and therefore have reduced the previous midpoint of our estimated stabilized yield from 8.75% to a revised stabilized field of 8.05%. Our revised range of our estimated stabilized yield is 7.54% to 8.55%.

Some of the adjustments to our construction model included the following. One, with the current volatility in the market price of our stock we have assumed that the ATM will not be used, and instead we will use the line of credit for approximately $30 million, which we estimate to cost less than $300,000.

Secondly, we've increased the leasing commissions to reflect all 10-year leases, which have added approximately $750,000 to our construction cost. Realistically, we think it will be a combination of 10-, seven- and five-year leases, which will be less.

Thirdly, we've increased our tenant improvement allowances by an additional $1.3 million. And fourth, we've reduced our midpoint rental rate to $4 per square foot triple-net from $4.15 per square foot triple-net. By comparison, at our Torrey Reserve Campus, which is across the freeway from Torrey Point, we completed a lease at $4 per square foot triple-net in 2015 at one of our new buildings.

Our midpoint for Torrey Point assumes no growth in that rate for what we believe will be the best office space in San Diego. We believe the high end of our range at $4.25 per square foot triple-net, which would be a 2% compounded annual growth rate, is not unrealistic at all; but we want to err on the side of conservatism, and as a result we will use $4 per square foot triple-net at the midpoint.

The difference in the cash NOI at the midpoint is less than $170,000 annually. Again, this has no impact on our 2016 guidance; and as you know, this development opportunity is subject to market conditions and the results may ultimately vary.

In Hawaii, our Waikiki Beach Walk mixed-use project continues to post impressive results. As of December 31, the retail property was 100% leased, with sales per square foot over $1,000 per square foot.

In December, the Embassy Suites Waikiki once again exceeded its competition in ADR and RevPAR for the month, according to Smith Travel Research report for the month of December. In comparison to the competitive set, the property achieved an occupancy index of 96.4%, ADR index of 132.8%, and a RevPAR index of 128%. In actual numbers for the month of December, that index translates into actual occupancy of 89.5%, ADR of $317, and RevPAR of $284.

The Embassy Suites Waikiki remains the number-one performing hotel in 2015 compared with 223 Embassy brand hotels in terms of average daily rate, RevPAR, gross suite revenue; and it came in number six in occupancy at 89.8%. Our booking pace at the Embassy Suites for 2016 seems to be running ahead of 2015 so far.

We keep a close eye on April and May, which are considered to be our shoulder months at the Embassy. This is also one of the reasons we have historically not adjusted our guidance in our Q4 earnings call, because we need to see how the Embassy is doing during Q1 and into Q2.

In Portland, Oregon, our recently completed Hassalo on Eighth project in the Lloyd District is currently in lease-up mode. As you may recall, our Hassalo on Eighth project consists of three apartment buildings: the Velomor Building, which has 177 units; the Elwood Building, which has 143 units; and the Aster Tower, which has 337 units.

Velomor was the first building to open, in early July 2015; and Aster and Elwood opened in mid October 2015. Our most recent leasing stats as of the beginning of this week show Velomor being 92% leased; the Aster Tower is 46% leased; and Elwood is 47% leased. Overall as of the beginning of this week, the Hassalo on Eighth project is 59% leased and 50% occupied with an average rent per square foot of approximately $2.36.

Our team in Portland is committed to making this project a success, as evidenced by their accomplishments to date. The Hassalo on Eighth leasing results are on track to achieve our estimated stabilized yields in 2017.

Each community that we invest in has its own unique attributes, personality, energy, and vibe. For example, we love Portland because it is so different from San Diego, San Francisco, Hawaii, and other markets that we are in.

It's very cool, very hip. Portland loves its food, its wine, sustainability, and its bicycles. We love the way that we build more bicycle racks in our projects than we do parking spaces. In fact, I believe approximately 50% of the Portland community uses alternative forms of transportation -- i.e., bicycles, buses and so on -- compared with approximately 8% in San Diego.

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.

Transitioning to acquisitions, the pricing of assets equal to or greater in quality than 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.

Turning to financial results, last night we reported fourth-quarter 2015 FFO of $0.45 per share. Net income attributable to common stockholders was $0.18 per share for the fourth quarter. For the full year, FFO was $1.76 per diluted share and net income attributable to common shareholders was $0.86 per diluted share for the year.

The Company's Board of Directors has declared a dividend on its common stock of $0.25 per share for the quarterly period ending March 31, 2016.

Our retail portfolio ended the quarter with 98.6% leased, combined with the highest annualized base rents amongst our peers. On a year-over-year basis, our retail occupancy remains the same, leaving approximately 42,000 square feet vacant in our 3 million square foot retail portfolio.

During the year 84 retail leases were signed, representing approximately 278,000 square feet or 9% of our total retail portfolio. Of the new retail leases signed during the year, 67 leases consisting of approximately 236,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 13.6% over the prior leases.

Our office portfolio ended the quarter at approximately 92.4% leased, up 100 basis points on a year-over-year basis. The increase in net absorption for the office portfolio is due to significant leases signed at our Solana Beach Corporate Centre in our San Diego market; One Beach Street in our San Francisco market; and First & Main in our Portland market.

During the year 84 new office leases were signed, representing approximately 432,000 square feet or 16% of our total office portfolio. Of the new office leases signed during the year, 58 leases consisting of approximately 327,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 21.3% over the prior leases.

Let's talk about same-store NOI for a moment. Same-store retail cash NOI increased in the fourth quarter to 4.8%. The increase for the quarter was mostly attributable to higher annualized base rents and percentage rents at year-end. We are reaffirming our same-store guidance of a positive 2% for 2016.

Same-store office NOI was up 8.9% in the fourth quarter, primarily due to higher annualized base rents at First & Main, City Center Bellevue, One Beach, and Landmark. Our supplemental filing shows the releasing spreads on 15 comparable office leases that were signed during the quarter at a 4.4% cash increase over the prior rents, and a 10.6% increase on a straight line basis over the prior rents.

On an annual basis the releasing spreads on 58 comparable office leases are at a 21.3% cash increase over the prior rents, and a 29.4% increase on a straight-line basis over the prior leases. This, combined with the fact that our in-place office portfolio rents are approximately 20% 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 2016 same-store growth forecast of positive 7.5% for the office portfolio.

Same-store multifamily NOI was up 9.6% on a cash basis for the quarter. Higher year-over-year rents is the main driver 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 2016 same-store growth forecast of positive 3% for the multifamily portfolio.

Waikiki Beach Walk, our mixed-use property consisting of the Embassy Suites Hotel and Waikiki Beach Walk - Retail reported combined same-store cash NOI of 30.8% in the fourth quarter. This is actually comprised of a 61% same-store cash NOI increase in the Embassy Suites, where approximately 6,500 room nights were off-line during the fourth quarter of 2014, and an 11% same-store cash NOI increase in the Waikiki Beach Walk - Retail resulting from increased annualized base rents and percentage rents.

Tenant sales at WBW - Retail were at approximately $1,072 per square foot as our tenants continue to outperform. We are maintaining our previously issued 2016 same-store guidance of positive 2% for our mixed-use asset.

Turning to our fourth-quarter results, FFO increased to $0.45 compared to third-quarter FFO of $0.44. Despite a relatively flat quarter-over-quarter change, I would like to highlight the following items.

Number one, G&A expense decreased significantly in the fourth quarter due to the severance expenses incurred during the third quarter related to our former CEO's resignation. This added approximately $0.04 to the fourth-quarter FFO.

Secondly, the retail portfolio added approximately $0.02 of FFO due primarily to year-end percentage rents from various tenants and a reduction in operating expenses at various properties. Number three, an increase in interest expense resulting from the reduction of capitalized interest cost with respect to construction of Hassalo on Eighth reduced FFO by approximately $0.03.

Fourth, the Embassy Suites' operating results reduced FFO in the current quarter by approximately $0.015 of FFO due to the expected seasonality of the hotel. And fifth, Hassalo on Eighth leasing costs increased due to the Aster Tower and Elwood Building, both placed into service in mid October 2015, resulting in about a $0.005 reduction of FFO.

Now as we look at our balance sheet and liquidity at the end of fourth quarter, we had approximately $260 million in liquidity comprised of $40 million of cash and cash equivalents and $220 million of availability on our line of credit. Our leverage at the end of Q4 remains low at a 30.5% total debt to total capitalization, and a net debt-to-EBITDA of 6.2 times, which we would like to see reduced to a 5 handle over time. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.4 times.

Our next debt maturity, secured by First & Main in Portland, Oregon, matures July 1, 2016, at a 3.97% fixed interest rate. We have recently entered into an interest rate swap that we believe will serve to hedge the interest rate risk on a prospective, unsecured term loan with an all-in rate around 3.25%.

We expect the new term loan to close around March 1, 2016, during the open prepayment window of the First & Main mortgage. However, we can make no assurances that it will close as contemplated, or at all.

Lastly, we are reaffirming our 2016 guidance range of $1.82 to $1.88 of FFO per diluted share, with a midpoint of $1.85 of FFO per diluted share. This is a 5.1% increase over our 2015 FFO of $1.76 per diluted share.

As I look at the current Bloomberg consensus for Q1 2016, I am seeing $0.456 per FFO share on the screen. Our expectation is that Q1 2016 FFO will be approximately $0.43 per FFO share, which is similar to Q1 2015.

I believe the difference is in the assumption of our lease-up timeline and the expected cash NOI growth at Hassalo, combined with the estimated interest expense. Our interest expense is estimated to be approximately $13 million for Q1 2016.

Our cash NOI for Hassalo was approximately $480,000 negative for Q4 2015 and is expected to be approximately $200,000 positive for Q1 2016. We expect to see significant growth in the cash NOI of Hassalo as we continue to lease up the property in subsequent quarters. I hope this added color helps.

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) Todd Thomas, KeyBanc.

Thanks. It's Jordan Sadler here with Todd. First question, regarding the NAV. Ernest, you led off with the tremendous growth in NAV over the last couple of years, which is pretty remarkable.

But clearly, given the dislocation year-to-date, you're now trading significantly below those levels and it's started to impact some of the assumptions you've made, as Bob you referred to in some of your text here. What are the plans currently to address that discount versus net asset value today, if any?

You know, Jordan and Todd, we've just got to keep doing what we're doing. We're really focused on the quality of the portfolio, maximizing the returns; and we hope that in the end -- and perhaps in midterm -- the market recognizes what we've accomplished.

If it doesn't, we're just going to have to continue doing what we've been doing, which is to increase our NAV. And in the long run, I believe the market valuations will reflect the quality of the portfolio and the skill with which we manage it.

So I don't have any magic formula other than to say we all work hard, we're all focused, we all work together for the same cause. And we hope that we'll continue to produce results which will be satisfactory for our investors.

Okay, thank you. Then on Hassalo, what's changed that you've pushed the stabilization time frame up to the second half of 2016 versus 2017? And then separately, with Phase 1 shaping up a bit better now, how are you thinking about Phase 2?

Well, as far as the delay, one of the reasons for the delay is that we had a leak in one of the buildings and it postponed its opening; and that drove the lease-up period into a slower leasing period in Portland. We think that, given the delays that we had and the accomplishments we've had in leasing, we're entirely satisfied -- as matter of fact, enthusiastic about the progress we're making and we have made.

As far as Phase 2, Oregon Square, we're now examining at least a half a dozen alternatives. It's four square city blocks. It's an opportunity to really create something significant in terms of enhancing NAV.

We don't want to -- as my late father used to say -- act in haste, repent at leisure. So we're looking at every opportunity, including some office, including some apartments, including phasing it. And we're now working on examining each of those alternatives.

It's a real opportunity, and we want to make sure we make the most of it. And as the results become evident and our plans become evident, you know we'll look forward to sharing it with everybody in the AAT family.

Jordan, I wasn't clear on your question, but I just want to make sure that we're on the same page. Is that -- for guidance purposes, we have like mid-November for stabilization. So what you're going to see is that in Q1, like I mentioned on the call, the NOI will be minimal; we think around $200,000.

And then it's going to ramp up, and you're going to see it ramp up each subsequent quarter more and more and more. So while guidance for guidance purposes, we've tried to be conservative and put it sometime in the mid-fourth quarter. We're hopeful that it will be sooner than that when we're talking to our leasing team up there.

And just to give some additional perspective and color, with 657 apartments to lease and coming into winter months -- the rainy months in Portland -- we thought that rather than maximize our initial rents, they would try and maximize our initial cash flow. And as the property reaches stabilization, we'll then try and maximize our cash flow.

So we think we're doing the best we can for the short run, which is minimize our cash loss or maximize our cash flow. And then over the coming years we think that property will produce increasing returns, as we're able to realize the true value of the property in terms of rentals.

Okay, thanks. I'll hop back in the queue.

Paul Morgan, Canaccord.

Hi, good morning. Just in terms of the cadence of the leasing at Hassalo, you mentioned the leak. Can you give any more color there? What building was that?

It looks like from the time that you held the third-quarter call to the end of the year, that it was pretty flat in most of the buildings. But I'm wondering what building was affected. And then things just seem to have definitely ramped up so far this year.

It was the high-rise and I think that delayed the opening by what, six weeks, Jerry?

Yes.

Six weeks, and that was sad; but still it's all fixed and we're going forward with great enthusiasm.

But even talking to that point is that even with the six weeks' delay we still opened in mid-October. And by the earnings call on November 3 we were 27% leased; and today we're now 46%, 47% leased -- and that's during the slow months.

So it's been well received. We're on track. And we're very encouraged by what we've seen so far.

Is there any mid-November stabilization? Obviously, you can go through the strong months over the summer. Is there anything that's keeping you from thinking it could happen closer to the September time frame?

And then in terms of the street retail, what's the timing of the openings there? When will that be substantially stabilized?

Yes, Paul, I'll take the apartment; this is Ernest. This is the first apartment project we've ever opened in Portland, so we've given you our best guess. We hope that we'll do better, and we're going to try and do better.

We have a great team up there, and they're doing a great job. And we'll keep you posted as to the progress we made.

As to street retail, is Sully here? Sorry, Jerry wants to -- Jerry is in charge of construction.

Right, so the first Green Zebra store, our first retail tenant, will open in April of this year. So a lot of the leasing effort that we've had so far, we've done it without the benefit of retail there. Now with the grocery store opening in April, I think it will only enhance the leasing effort.

Chris, do you want to add?

Yes. So we have the grocery store open mid-April, Paul; and then our food tenants that are around that -- I think we have three or four food tenants that should be opening roughly about that same period of time. And that will bring it up to about -- the streetfront opened at about 40%. Then in the [burner] we have a couple other larger leases in the burner, when I say that, out for execution.

So we're making pretty good progress. When those other two leases, should those close, it will be approximately 75% of those street shops will then be leased.

Okay, great. Has there been any change in the -- going back to the multifamily part of it, any change in the concessions that you're offering?

Modest, and not worth commenting. Sometimes in a slow period they'll give a little more; in a busy period they'll give a little less. But the concessions are not significant.

The concession is in the overall rental rate, which may be as much as 15% or 20% below what we can achieve when we reach stabilization. That's the plum or the apple that we're reaching for, but it's going to take time to get there. Sometimes you try and climb up a ladder too fast, you fall off.

Our strategy is to fill it up, give the project the quality reputation it deserves, and then start to get a return which we think the high quality of the project deserves.

Great. Then just last for me on the change in the yield guidance for the Torrey project. I mean, you've talked about the great location; and your own data points in terms of leasing across the freeway there seem to suggest that the rent expectations that you had before were achievable.

So I'm wondering. Is it discussions with brokers, or is there any specific reason -- what's going on in the tech market or anything that's caused you to be more conservative in terms of pro forma rents?

No, Paul, this is Bob. I think it's just sticking to our motto of underpromise and overdeliver. We've got a lot of volatility going on in the market at this point in time. But I tell you, once you stand on top of that knoll and you look at the Pacific Ocean, it is an amazing property.

And the fact that this new building right next to us that we've leased in 2015 at $4 triple-net, it leads me to believe that -- Jim Durfey, who heads up our office, he's very bullish on the $4.25. So I think it's really just let's just tone down the guidance; let's be -- take a little bit -- be a little bit more conservative; underpromise and overdeliver.

And if you consider maximizing cash flow, if you rent it for a little bit less at the outset, and you're occupied six months earlier, that's a lot more cash in the bank than waiting for the last dollar and collecting it over the next decade. So we just don't want to fool ourselves. We don't really know.

We're very enthusiastic, and we'll keep you in the loop. And it's hopeful this can be -- but this is just our best guess.

Yes, there's nothing specific that has dictated that reduction other than just an air of conservatism.

Okay, great.

Thanks for the question, Paul. You come out here we'd love to take you up there and show you.

Yes, great. I look forward to that.

Jason White, Green Street Advisors.

Hey, good morning. Just a quick question on your 2018 lease expirations. I just was just hoping for some more color in terms of -- are you working on some of those leases yet? Or are there embedded options that you plan to have taken?

Just how are you thinking about that, given it's a sizable slug of your retail portfolio?

Chris, do you want to cover that?

Hey, Jason; it's Chris Sullivan. No, I am always working on them well out in advance. Are there any ones specific?

The -- it was 35% of your rent, so I was looking at Kmart, Lowe's, The Sports Authoritys, it's a whole laundry list. So I didn't know if there are ones that you felt like were options that were going to be taken so you didn't have to worry about them, or the other ones that you may be more concerned about -- even the Sports Authoritys that might come back sooner.

I'm sorry, Jason, are you talking 2017 or 2018?

2018.

I can assure you that we're working on it now.

Hey, Jason, you've seen my shade of gray hair; it's all going gray to white. So no, we're working on all those now.

I can't really provide a whole lot of color on Sports Authority, but the two stores that we do have with them are -- the rental rate's right and the stores' performance are very strong. We'll just have to see where that sorts out.

Jason, let me just add a little bit of other input. It's that in 2018 that includes Macy's, which is 212,000 square feet, which their rent is very low and we're not concerned about that at all.

As a matter of fact, isn't that a land lease?

Yes. It's minimal rent. And then you have the Sears out at Carmel Mountain Plaza in San Diego, and we'd love to get that back.

That would be an answer to our most sincere prayers.

That's 107,000 square feet. And The Sports Authority in Carmel Mountain Plaza, the occupancy percentage is very healthy, so we don't believe it's going anywhere.

And if you look historically at our retail portfolio, approximately 92% of our retail leases have renewed, whereas on the office side probably around 82%, 84%. So we're always looking a year, two in advance; we try to renew them when we can; and we're not really concerned at this point in time.

If we do start to be worried, we're going to let you know.

All right. Then just a question on the Old Navy. I see they've had some tough comps recently, and you have two expirations coming up this year and one next year. Is there anything going on with those? Or are they just going to keep their space and keep rolling?

We've worked out terms with them, and so those are in the process of being renewed.

Okay. Then last question for me. The Seattle office market, I think you gave some highlights last call, Bob; but any developments there in terms of the supply coming online, and what your tenant footprint looks like, and maybe potential risk up there?

Yes, Jason, Jim Durfey, who you know and who heads up our office, can speak to that.

Good morning, Jason. No, the office market up in Bellevue is very similar to what we talked about the last quarter. The big news that we got in the last six months was Expedia planning on moving out of a bunch of space in 2018; they've now come back to the market and said they don't think they can move quite that early. So they are in the process of trying to renew some of their existing leases through 2020, which is good news for all of us, obviously.

Three new buildings that are coming online: the 929 building which is the first one coming out of the ground from Trammell Crow, has had some lease-up success. They've still got some space to go. The other two are still in a very early pre-lease mode.

Much like the San Diego market, the Bellevue market appears that you need to see a finished product. Pre-leasing is not premier in the office market up there either. You need to kick a tire.

So we have seen -- and we don't have a lot of space in our building, as you know. We've got some rolling; we've already started talking to some of those tenants who could potentially roll, and we're very hopeful that we can retain a portion of them.

Some of them have subtenants in their spaces who, if the tenant moves out, we hope to retain the subtenants. So we're still very bullish on Bellevue, although we don't see rental rates increasing as rapidly going forward. They are pretty much flat.

And we have spent a substantial amount of money to bring that building into tiptop condition to compete with any new product that comes in the market, which I think will prove to be very wise. Upgrading the elevators, upgrading lobbies, it's now as nice as anything that can be built today. And our offerings can be at a more competitive cost than new construction.

Great. Thanks for the update.

Brendan Maiorana, Wells Fargo.

Hey, good morning, Ernest, Bob. Question for you guys. Northern California office, speaking with some investment sales brokers it sounds like there's more product that's likely to come out to market; maybe the number of bidders is down a little bit.

So it seems like there's potential that prices could soften a little bit. If that were to happen, does that become a market that's somewhere where you'd like to gain increased scale -- office in San Francisco? Or do you feel like the two buildings that you have now is probably about as much exposure as you'd like to get to that market?

We'd like to have more exposure in San Francisco, but not at the heady prices that exist in the marketplace today. You might look at the rental rates we're getting in the office that we have, and they are substantially below the market prices for rents that exist today.

So even if they soften somewhat, they won't get anywhere near the rates that we have in place in our buildings. We always look for the opportunity; right now the best opportunity we have is to run what we have, and we're doing it, and doing it, and we're proud that we're doing it.

That's a good question. Thank you.

Maybe for Jim, is there any sign of softness in rents in San Francisco office that's showing up yet? Or is it just maybe fear of what could happen if financing for some of the private tech companies slows down and they're less aggressive?

I think it's more fear, Brendan, then anything else. At this point in time, the market is still very strong.

As you know, we don't have a single square foot of vacant space. So to that end -- and we're looking at nothing rolling until we've got one more floor of sales for -- or of Autodesk rolling in 2017. So we're stable; we're in good shape.

I don't think the market is going to take a turn south here in the next six to 12 months that I could forecast in my crystal ball. But at any time you've got so much rapid growth, you're always concerned going forward.

Sure.

(multiple speakers) the strategies that's proved worthwhile for American Assets over the last decade is the worst of times are the best of times. Bring it on, and we'll start looking for opportunity, and I think we'll be able to increase NAV.

Yes, it sounds great. For Bob, so Oregon Square on the office side, or just overall Lloyd District Portfolio on the office side, given that you guys are contemplating a couple of different options there, how should we think about just existing NOI that is being generated today? How is that likely to trend over the next year or two?

Is that likely to be pretty steady until you make a decision in terms of what you're likely to do for new development or redevelopment?

Yes, well, Oregon Square we're evaluating the various options on redevelopment, repositioning that asset. Whether we do it all at once, whether we do -- we keep two existing buildings and then build the other half of it, what's driving us is to create a development that is accretive for the shareholders. Once we can figure that puzzle out, which we're working on right now, then we'll move forward.

Until we know what we're developing, then Oregon Square remains in operations and is a drag on earnings. We have, what, 94,000 square feet that are vacant; so half of our office vacancy is at Oregon Square. And --

And that's a planned strategy, by the way. We're letting the leases expire so that then we have the freedom to go forward as we see fit. We're not bound by having to honor existing leases.

So even if you let the rest of the leases go, I mean that's probably 300,000, 400,000 at the most as it burns off year-over-year. But I think overall, I don't -- I think it's going to be pretty steady.

Is there much roll there, like in 2016, out of those 300,000 to 400,000 square feet of remaining occupancy?

We'll have to clarify that, Jim. Would you clarify that?

Yes, Brendan, on Oregon Square I think the important thing to point out here is there's four buildings totaling about 120,000 feet. As Bob mentioned, 94,000 is already vacant in a planned vacancy strategy.

Those leases expiring are somewhere between $19 and $24 gross. So as you can tell, with $10 operating expenses, those aren't a very large contributor to the net operating income of the Company -- or the Oregon portfolio, for that matter.

There is some potential to maybe backfill one of those four buildings on a short-term basis at rents closer to $25 with minimal TIs. We're looking at that as a possibility. But Oregon Square long-term is not a four-building office portfolio, and we're kind of geared up for that plan.

How would you describe, Jim, the leasing in the rest of our office portfolio in Portland?

Well, the office portfolio in Portland, we don't have a lot of space left but it's been very robust. As you know, Brendan, the Lloyd 700 Building had a large lease with the California Department of -- or Oregon Department of Environmental Quality. We're continuing to shift the square footage around -- not the total, but which floors they get.

Significantly, we had an existing tenant agree to renew a full floor lease on about the last day of the year. So that took 16,288 feet off the potential leasing market in the Lloyd 700 Building, which is great news for us.

We're still seeing activity and we're still seeing rents being pushed up. Portland is a very strong office market as we speak, with very low vacancies.

You would describe our existing portfolio as robust, and the vacancy we have is planned vacancy in order to reposition to create net asset value?

In the Oregon Square building, in Oregon Square. Absolutely.

Thank you.

Okay, great. Just last one I had, a quick one for Bob. You mentioned the term loan in March. You might've mentioned it; I apologize if I missed it; but just the amount of the term loan: is that about $80 million to replace the First & Main mortgage? Or would you think of doing more?

We're thinking of doing more, about $100 million.

Okay, great. Thank you.

Rich Moore, RBC Capital Markets.

Yes, hi; good morning, guys. When you guys say stabilized at Hassalo, I assume you mean stabilized occupancy. Is that right?

And if so, what are you thinking of in terms of occupancy when it's stabilized?

You know, we just don't know. Like I said earlier, Rich, we've never opened an office project -- or an apartment project in Portland. We think that, generally speaking, about 95% stabilized.

Then the question is going to be -- is how much we can increase the rental rates; and we'll have to measure that in terms of occupancy.

And when we get there, we have a history of being able to maximize our returns, and that will continue to be our strategy. We have a great team up there; They understand where we're going.

We've got the right product in the market. We've got a great location. And we'll just see how much rent that project can command.

Right, so you're thinking, Ernest, 95% by mid-November for occupancy?

As soon as possible.

Yes, got you.

We check in every week: How many leases? How many turn over? Believe me, we're watching it like a hawk.

For guidance purposes, that is correct, Rich.

Okay, all right. Thanks, Bob. Then if you guys think about Oregon Square, what would probably be the time frame for starting something there?

I can't quite figure out exactly where you guys are with that. It sounds like you're still studying options. But the most reasonable time frame for something going on there, what do you think that is?

A couple years, two, three years. Fourth quarter, December. You know, we have an approved project for Oregon Square, and it's not as economically compelling as it should be. So we're now looking at alternatives, which could prove to be more economically compelling.

We don't know the exact outcome of those studies. We're working on it as quickly as possible.

We want to make sure we do the right thing that maximizes our returns. So we have our analytics department working on it; the architects have come up with various iterations; the leasing people up there are putting numbers to it.

We just -- we're in the process of studying it. So if I led you to a conclusion that would be something that we don't have ourselves. Jerry, do you want to add something to that?

No, I think that's well put. That's really where we're at. We're studying different options to make sure that best product that we can put out is in the interest of all the shareholders.

Yes.

So, Rich, while we don't have an absolute day, I think collectively it's our hope that we would like to start in September. It could be six months out, but we don't have a date certain.

Start construction in September?

No, just start the --

The process, yes.

Start the process. We're already in design development. We're trying to figure out what model is the right model that creates -- that is accretive for our shareholders.

We have the entitlement, so the entitlement is not a certain obstacle. But you have to go through design review; and design review can be time-consuming and expensive.

We have the design view for a project which we don't believe maximizes the economies that can be obtained from that site. So we'll see. Maybe it isn't, maybe it is, but it's just too early to say. But we're working on everybody's behalf.

Okay, all right. Yes, good. Thank you, guys. Then what I'm curious about I guess is, while you're doing that, while all that activity is going on, is there anything else you're working on in terms of development? Because obviously the acquisition market is pretty tough, so I'm assuming while you review things you're not spending a great deal of time trying to figure out another acquisition.

But is there anything else on the development front that you are contemplating?

Nothing that would hit the radar screen with a bang. But Jerry, how many projects do you have going within our existing portfolio now -- for TIs, improvements, etc.?

Sure. Active right now across the portfolio it's probably about 110 to 115 different types of projects from capital improvements to tenant improvements. And we are doing some planning, some potential repositioning of things for different sites that we have across the portfolio, and looking at every option to see if we have another.

So from a macro point of view, our strategy is to improve what we have and wait for the opportunity to make a giant step forward. Right now, a giant step forward is difficult because of the pricing in the marketplace.

But we're not resting on our laurels. We're looking to improve what we have.

If you look at some of the properties we have, over the years they've increased as many in value by as much as 10 times, just by a constant massaging and improving and repositioning. That's what we continue to do and that's why we're able to produce industry-leading increase in NAV.

Okay. So will you guys include some of those in the supplemental? Are they that size or not?

Bob is shaking his head no.

Bob is shaking his head because he is old.

All right, good. I appreciate it, guys. Thanks.

Mitch Germain, JMP.

Good morning, everyone. Just a quick one for me, Bob. I couldn't -- just reconcile for me the change in your FFO guide, taking us from the fourth quarter to the first quarter, what that $0.02 of decline is related to.

In part it's due to the Embassy, and it's consistent with Q1 2015.

So it's just going to be a $0.02 decline in the hotel; is that the way to think about it?

Well, it's that, plus -- I think that the big difference really is between what we're seeing on Bloomberg and what we're projecting of $0.43, is really the difference at the Hassalo lease-up between what the market is expecting and what we internally believe.

Got you, got you. Then, Ernest, maybe big-picture for you, asset pricing changes a bit more favorably for you guys to maybe begin to consider acquiring and putting some real capital to work. Anything specific from a sector standpoint or market standpoint where you want to beef up a little?

We would love to own more apartments, and the likelihood is we'll have to develop them if we're going to acquire them. We keep looking at that possibility.

We'd love to do open more shopping centers, but nothing comes up for sale that is compelling for us. Because with the price of our stock as it is, we'd have to trade something that we have for something that would be better. What we have is so elegant we can't find anything that would be better.

Office, we've always said that our office should remain in the 35% of our cash flow, and that's where we are. Actually we're 37%.

So without availability through the ATM of additional capital, we have to look at maximizing what we have, and that's what we're doing. But we're doing on a piece-by-piece basis rather than doing something dramatic.

Give us the opportunity, we'll do something dramatic. But we don't see any opportunity out there.

Yes, Mitch, in the last two months we did look at a big retail acquisition. But as Ernest says, it's that -- what happens is when you're trading at a discount to NAV that added on $15 million of cost to the acquisition, which made it -- it was not accretive to anybody.

So we passed on that. We maintain that discipline that we continue to talk about.

I think you have to look at the quality of the portfolio and how we continue to massage it. Even without acquisition it produces industry-leading metrics, and that's our strategy.

That's true. When you look at our corporate operating model going out into 2017, 2018, you still see the growth coming.

Great. Well, great five-year run. Thanks, guys.

With no further questions I would now like to turn the conference over to Ernest Rady, Chairman and CEO, for closing remarks.

Thank you all for joining us today. We're so proud and pleased to have been able to produce results that are acceptable, if not admirable for our stockholders. We're going to continue to work on those strategies and continue to offer the results that we hope will be pleasing to everybody.

So thanks for your interest. Look forward to seeing you all soon.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.