American Assets Trust Inc (AAT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Assets Trust second-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Adam Wyll, Senior Vice President, General Counsel. Sir, you may begin.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust's 2016 second-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 2016 second-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 second quarter of 2016 furnished to the Securities and Exchange Commission, and 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 second-quarter results. Ernest?

Thanks, Adam, and good morning, everyone. Thank you for joining American Assets Trust second-quarter 2016 earnings call. Our focus in 2016 continues to be in the growth of net asset value for our shareholders, which we believe will ultimately result in increasing cash flow and dividends to our stockholders.

At Hassalo on Eighth in the Lloyd district of Portland, Oregon, where we recently developed 657 multifamily units and approximately 40,000 square feet of storefront retail, we have seen very favorable progress in the lease-up of this project. At the beginning of the week, our apartments approximately 93% leased and 89% occupied. Our leasing velocity increased significantly during the second quarter due to 47 units being based on a staggered basis to a corporate housing tenant at the end of Q2, each for a three-month period.

Our leasing team is already working on replacing each of those units as they roll, and we expect the Hassalo apartments to be at least 94% leased by the beginning of the fourth quarter of this year. In addition, we are now beginning to focus on getting apartment rents up to market at Hassalo.

The storefront retail at Hassalo on Eighth is approximately 70% leased, with seven recent storefront retail tenants joining the specialty grocer, Green Zebra, which opened successfully this past April. The Lloyd district portfolio we acquired in 2011 consists of approximately 600,000 net rentable square feet on more than 16 acres located in the Lloyd district of Portland, Oregon. A portion of this property has been designated for additional development to include a high density, transit-oriented, mixed-use urban village. We continue to be focused on the development design of phase 2, which will be built on Oregon Square in the Lloyd district portfolio.

The four city blocks that make up Oregon Square provide us with the opportunity for substantial and significant apartment developed and/or repositioning of additional office and/or development of a new high-rise office tower in conjunction with an anchor tenant. Development yields continue to present returns that we believe are more attractive than acquisitions. And we have opportunity for additional development following -- development phases following Oregon Square. We believe there is much future development opportunity in the Lloyd district that we will prudently harvest as we continue to evaluate the performance of Hassalo on Eighth and finalize design developments for Oregon Square that have risk-adjusted returns that will be accretive to our shareholders -- of course, all of which is subject to economic and market conditions.

We also minimize development risk by limiting overall development at any one point not to exceed 15% of our total assets; locking in costs through the use of guaranteed maximum price contracts early or when possible; and pre-funding a significant portion, if not all, of the development capital requirements prior to getting started.

Our Torrey Point development in San Diego overlooking the Pacific Ocean is on track and on budget for completion by the end of the first-quarter 2017. Our San Diego multifamily continues to outperform, as you can see from the same-store cash NOI growth in San Diego multifamily of 15.6% this quarter. And the average same-store cash NOI growth over the last nine quarters, Q1 2014 through Q1 2016, has been approximately 6.8%.

Additionally, we continue to look to enhance our internal growth at our San Diego multifamily assets by selectively deploying capital to improve our units and common areas, which we believe will drive rents and allow us to remain more than competitive, if not superior to nearby apartment communities. Our Hawaii properties continue to be our jewel in the Pacific.

Lastly, we continue to look at all opportunities, but the pricing continues to be an obstacle. In the meantime, we focus on creating net asset value for our stockholders, as we have done for the last five years since we became public.

On behalf of all of 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'll now turn it over to Bob Barton, our Executive Vice President and CFO.

Good morning, and thank you, Ernest. Last night we reported second-quarter 2016 FFO of $0.45 per share. Net income attributable to common stockholders was $0.17 per share for the second 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 September 30, 2016. The dividend will be paid on September 29, 2016, to stockholders of record on September 15, 2016.

Our retail portfolio ended the quarter at 98.2% leased, combined with the highest annualized base rents amongst our peers. On a year-over-year basis, our retail occupancy was down approximately 30 basis points from the second quarter of 2015, leaving approximately 55,000 square feet vacant in our 3 million-plus square foot retail portfolio.

During the trailing four quarters, 79 retail leases were signed, representing approximately 315,000 square feet or 10% of our total retail portfolio. Of these leases signed, 62 leases consisting of approximately 268,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 6.9% over the prior leases.

On the office portfolio for the quarter recently ended -- it ended at approximately 90.4% leased, down approximately 250 basis points on a year-over-year basis, primarily due to the following two factors.

First, the completion of our development project at Torrey Reserve, resulting in the addition of approximately 38,000 square feet to our Torrey Reserve property. And secondly, the planned winding down of leases at Oregon Square, located in Phase 2 of our Lloyd district portfolio, to accommodate our ongoing design review efforts, resulting in approximately 108,000 square feet of vacancy at Oregon Square.

During the trailing four quarters, 79 new office leases were signed, representing approximately 296,000 square feet or 11% of our total office portfolio. Of these leases signed during the year, 57 leases consisting of approximately 222,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 6.7% over the prior leases.

Let's talk about same-store NOI for a moment. Same-store retail cash NOI increased in the second quarter to 0.3%. The relatively flat same-store retail cash NOI for the quarter was primarily attributable to a bad debt reserve we recorded for Sports Authority at both our Carmel Mountain Plaza and Waikele regional retail centers.

Chris Sullivan, who heads up our retail leasing, is in discussions with possible replacement tenants for both retail centers, but nothing has been signed at the moment -- except that Dick's Sporting Goods acquired designation rights for our Carmel Mountain Plaza location. We view these hiccups as opportunities to improve the overall center, especially when you have great real estate in A+ locations.

Same-store office NOI was up 11.6% in the second quarter, primarily due to increases in rent at our Landmark building in San Francisco, in addition to TI reimbursements received at First & Main in Portland, Oregon. Same-store multifamily NOI was up 15.6% on a cash basis for the second 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.

Waikiki Beach Walk, our mixed-use property consisting of the Embassy Suites Hotel and Waikiki Beach Walk retail, reported a combined increase in same-store cash NOI of 4% for the second quarter. Tenant sales at Waikiki Beach Walk retail were at approximately $1,060 per square foot for the rolling 12 months, as our tenants continue to outperform.

Turning to our second-quarter results, FFO remained unchanged at $0.45 per FFO share compared to the first quarter. Despite a relatively flat quarter-over-quarter change, I'd like to highlight the following items. First, Hassalo on Eighth lease occupancy increased 55% during the second quarter, resulting in an increase to NOI of approximately $627,000. This added approximately $0.01 to the second-quarter FFO.

And secondly, Sports Authority's failure to emerge from bankruptcy resulted in an approximate charge of about $550,000 during the second quarter for bad debt expenses. This reduced our FFO per share by approximately $0.01 for the second quarter.

Now, as we look at our balance sheet and liquidity at the end of the second quarter, we had approximately $294 million in liquidity, comprised of $44 million of cash and cash equivalents and $250 million of availability in our line of credit. Our leverage at the end of the second quarter remains low, at 28.5% total debt to total capitalization -- and the 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.

Let's talk about guidance. We are reaffirming our 2016 guidance range of $1.82 to $1.88 FFO per diluted share, with a midpoint of $1.85 of FFO per diluted share. As you recall, we have historically issued our annual guidance range during our Q3 earnings call, which is approximately 15 months of forecasting into the future. We usually begin adjusting the guidance range in Q2 of the following year, based on new information in our results that support those adjustments. Some of the cash flow can be determined based on in-place contractual rents. Some of the leases roll each year, and we factor in our best guess as to the tenant retention. Some of the tenants will vacate, and we estimate our best guess as to the lease-up of those spaces that are or will be vacant.

Lease-up on completed developments also presents a complexity that we, again, use our best estimate as to the new development's overall lease-up as to rate and timing based on our knowledge in the markets. Sometimes we get it right, and sometimes the unexpected happens, which we try to factor in.

Our overall direction is to be as realistic as possible, but if we are going to err, err on the side of being conservative. As a result of this process and our overall diversified strategy of high-quality West Coast properties, we are pleased to report that even though the sports authority liquidation will have approximately a negative $1.5 million or approximately $0.024 FFO impact to our retail guidance. Our overall combined portfolio guidance midpoint of $1.85 is not expected to change.

Let me update the 2016 guidance so you see how that works out. We anticipate the following changes in our annual 2016 guidance.

First, same-store retail cash NOI will decrease from our initial 2% positive guidance to 0.5% as a result of Sports Authority and our assumption that we will not receive any further rent for the remainder of the year.

Secondly, same-store office cash NOI will increase from our initial 7.5% positive guidance to 10% as a result of continued strong leasing results at Landmark and City Center Bellevue.

Third, same-store multifamily cash NOI will increase from our initial 3% positive guidance to 12% as a result of a very strong year-over-year leasing results that have been beyond our initial expectations.

Fourth, same-store mixed-use cash NOI will increase from our initial 2% positive combined guidance, which was attributable to 4% from Embassy and flat for the retail to 5% combined mixed-use guidance, which is attributable to approximately 8% from Embassy and 2% from retail. Waikiki Beach Walk retail sales were approximately $1,060 per square foot for the rolling 12 months.

Number five, Hassalo on Eighth multifamily is expected to contribute approximately $0.08 of FFO from the year, down about $0.01 from our initial guidance, primarily due to an allocation of parking income to the L700 building in Portland, Oregon, and higher than anticipated operating expenses during the first year of lease-up.

Number six, non-same-store cash NOI from Torrey Reserve and Lloyd district office buildings is expected to contribute approximately $0.005, down about $0.005 from our initial guidance, primarily due to pushing out the lease-up of Torrey Reserve buildings 5, 13, and 14 in San Diego into 2017. Our initial guidance factored in then-active lease negotiations with a prospective tenant that did not materialize.

And lastly, number seven: 2016 GAAP income adjustments that we expected to be approximately $5.7 million for 2016 are expected to decrease by approximately $3 million to approximately $2.6 million, which is expected to reduce FFO by approximately $0.05. This is related in large part to our initial expectation that we would have Torrey Reserve buildings 5, 13, and 14 in San Diego leased up in the second half of 2016, which -- we are now pushing those assumptions into 2017.

So when you add up these changes, it still comes out to our midpoint of $1.85 of FFO per diluted share. This, of course, includes any impact of additional acquisitions, dispositions, equity assurances, or repurchases. We are well prepared with a strong balance sheet to capitalize and execute on opportunities that we believe will present themselves in the coming quarters.

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

(Operator Instructions) Todd Thomas, KeyBanc.

First question on Hassalo. In terms of the lease-up there, can you just talk about how you are tracking relative to the 6% stabilized field forecast and when you think you might be able to achieve that yield?

You know, Todd, we're at a point in the lease-up where we've been successful with our leasing to date. Now we have to explore what the true market is for the rentals in that project. And I don't know what it is, and we won't know what it is until we test the limits. And we are now in a position, having the cash flow that has been developed or evolved from our successful leasing to date, to test those limits. And so we'll have a better idea next year.

Our objective now is, first of all, to get the rents closer to market, because we think we are below market; and, second of all, to make sure that the occupancy of the project does not decline over the Christmas season. Because December, January, February is the rainy season in Portland, and it's a slow rental season everywhere. So we want to get through that season with as much occupancy as we can.

So we're in the process of exploring our opportunities, trying to minimize our downside, and see what upside we can achieve. And I don't know exactly what it is yet, but I think it's going to be certainly in excess of where we are today.

Todd, this is Bob here. Let me just add to that. If you look in the supplemental, on page 23 it shows the percentage leased and the ADR for Hassalo on Eighth, each of the apartments. And it shows the percentage leased at the various percentages that were in place at the end of June 30. If you annualize those, that ADR to 94%, you come out to in-place of about 5.35% yield.

So if we get to 94%, based on the rents that are below market today and excluding parking income, which we do have that as well, you're at a minimum of 5.35%. So we are hopeful, as we continue to lease that up and we continue to push rents, we will get to that 6% yield in the coming year.

And the 6% yield in my thought process is the opening salvo from this project, which has turned out to be very desirable and very successful. Jerry Gammieri, who is in charge of construction, just informed me that since the time we bought this project, construction-wise out, costs have gone up at least 6.5%. So you're looking at increasing costs of -- if we were to replace this project today -- of 20% to 30%. Well, that's $50 million, give or take.

So we've got a winner. We just don't know how successful it's going to be in the short run. We're going to test those limits. But in the long run, we have a very successful project.

That's helpful. And then as you lease up these remaining units, and I guess you look to re-lease the 47 corporate housing units that you talked about and all of that, are you burning off concession and trending rents higher for these final batch of units here?

Certainly. That's where we are now. That's what the 94% gives us -- the comfort of being able to say, where can we go? Up till now, we've wanted to maximize our cash flow in the short run. Now we want to maximize our cash flow in the medium and long term, and we're just going to have to explore those limits.

Okay, got it. Moving over to the office and the Torrey Reserve, the ICW move-out at year-end -- I was just wondering if you could provide an update there on progress to backfill that space and maybe give us a little bit of an update or a sense where rents will be versus the $34 that ICW is paying today. And then, also, can you remind us how much leasing capital you will expect to spend there?

We have a lot of balls in the air. There's a lot of activity. We have not been successful in landing a replacement tenant for ICW. Jim, do you want to add some color to that, please? Jim Durfey is in charge of Leasing.

Hi, Todd. There's still good activity in the Delmar Heights office market. And as you know, we've got a pretty good size block of space coming on January 1 with ICW. We have a couple of proposals out, one of them rather large. I give it a 50%/50% chance; we'll see where that goes.

In terms of your question regarding rents, rents are clearly going to be in excess of where ICW was when their lease expires on 12/31. In terms of your question on concessions relative to tenant improvements, yes, we think we're going to have to spend a few bucks to improve the premises, because they've been the way they are for 20-odd years. But we see it as a great opportunity to increase rents, and we're working very hard to fill that space.

20 years ago this building was built as an -- this is an overstatement -- but as an insurance factory. It's not structured or positioned as a multitenant building. We now have the opportunity to upgrade this, because it's a great location and a great structure. And that's what we're in the process of doing, looking into, and executing on.

Okay, but it sounds like it would be fair to expect some downtime as we head into 2017 for that space. Is that right?

Well, you can count on it, but we're not counting on it. We want to be conservative. We hope there won't be downtime. There's certainly the possibility there could be downtime. We just don't know.

Okay.

No effort is being spared to succeed with the re-leasing of this space.

All right, great. Thank you.

Thank you, Todd.

Jason White, Green Street Advisors.

Just to stay on Torrey Reserve for a second, and maybe Torrey Point as well: if you kind of step back, just look at the big picture for a second at the kind of underwriting you did and the demand you saw in the market when you undertook the expansion of Torrey Reserve, and Torrey Point, for that matter, what has changed or what are you seeing now on the ground that maybe you didn't see at the time you made the investment decision? Because it seems like this has been -- you know, it's a great space, but it seems like it's been very difficult to lease up.

Has the market changed, or is there just not that much demand in the submarket? Or can you just walk through the big picture and help us understand what may have changed from your expectations versus what we're seeing on the ground?

I think there's a little more space available then we contemplated at the time when we embarked on this. We think we still have the best location and a very, very high quality project. Jim can comment on the amount of activity in the submarket, and it's pretty significant. We just have to get the bid, as they say, and be successful at signing a lease.

Jim, you want to add something there?

Sure. Good morning, Jason. Relative to the two new buildings, building 13 and 14, we actually signed our first lease last week for about 5,400 square feet. So we've broken the ice over there.

As you know, those are two-story buildings with about 9,000 foot floor place, and there's only one way to subdivide it. And you kind of split them in half, or you lease the whole floor. So that limits our ability to do 2,000- or 3,000-foot leases.

Point number two on the subject is we are at the absolute top of the market, competing with the best buildings in the Delmar Heights submarket. So you've eliminated part of your potential constituency based on rents. We've got some good activity on those buildings right now. We, as I mentioned, had broken the ice with the first lease and expect to have in the next quarter something else coming out, which I can't comment on at this point in time, but we're still seeing good activity.

And as Jim points out, the project was built a number of years -- a significant portion of the project was built a number of years ago. And in addition to these leasing efforts, we are spending money to make sure that amenities that we offer are state-of-the-art, state-of-the-market.

Jason, Torrey Point -- you asked a question about Torrey Point.

Yes.

Obviously, we're getting close to the point where you have got an enclosed building up there. This has never been a preleased market from an office perspective. You've got to have something where they can kick the tires.

And we are now getting some activity. Anyone who has been up and down Interstate 5 can see the giant leasing sign. And we're getting a number of calls on it as a result of the fact the building is way out of the ground and expected to be done by the end of the year. So we're still very optimistic that that's going to be a home run up there on the top of the hill.

I think the broker said he's never had more calls on any project than that one. But calls do not make a signed lease or cash income. So now we have to make sure that we can convert that interest into a lease and dollars.

Okay, great. And maybe, also, if you could walk through the recent property trade down the road for Carmel Mountain Plaza? I think it traded in the high 3% cap rate range. If you can maybe contrast that with Carmel Mountain and what you saw there? Because I believe you bid on the project, but just curious if you can kind of contrast the two properties.

The properties that traded, in my mind, I categorize as A-, because it's in a very busy submarket with lots of competition. Carmel Mountain has very little competition, because it is the major shopping area for -- in that community.

We have anchor tenants; we have some big box. The tenant -- the project that closed that we bid on was largely big box. So in my mind, if that traded for a sub-4 cap rate, I don't know what Carmel Mountain Plaza would trade for. But I would pay more for Carmel Mountain Plaza on a capitalized income basis than I would pay for what we bid on. So we're very happy we own Carmel Mountain Plaza. And had we bought this other project, it would have been fine, but it would have taken a while to reposition it to where we can produce returns that would be eye-catching.

Chris, do you have any additional comments?

No, I think Ernest did it. I've talked to Jason about the project before.

Good.

Okay, thanks.

Craig Schmidt, Bank of America.

Do you guys know what the same-store NOI for retail would be without Sports Authority?

Without Sports Authority? Without Sports Authority, it is what it is right today. We are at 0.3% same-store cash NOI for the second quarter because of Sports Authority. We took a $0.01 charge in the second quarter. And then we -- for the year we've gone flat, because we've taken it out for the rest of the year. So we're still at the midpoint, but the information I gave in the guidance update reflects that.

And as we pointed out, we have two Sports Authorities in our portfolio; one has been -- one has attracted a bid from Dick's Sporting Goods in Carmel Mountain Plaza, and the other did not attract a bid in Hawaii for that property. But we believe that opportunity is now ours to upgrade the use of that property.

So we are somewhat disappointed, but we are optimistic that we are going to be able to upgrade that portfolio by putting a better use in there.

Okay.

Is that okay, Chris? Chris agrees with me, so it must be okay.

Also, given the somewhat stronger yen, are you seeing that impact your Hawaii assets?

I think Bob covered that in the guidance. Do you want to go over that again?

Yes, I mean, we didn't know what to expect, Craig. That's a good question. And we have insight through the Star Reports from our hotel in Waikiki, and we've seen some softening on the beachfront hotels, but we have not missed a beat on the Embassy Suites, and we continue to outperform.

So we have not seen the impact on that -- on the strength of the dollar or vice versa, the yen.

Embassy Suites has a diversified clientele. And it's not only the Japanese, but it's the Philippines, it's Canada, even as far away as New York -- not the same thing as California. So with that diversified market, (multiple speakers) that when there's a reduction in interest from one segment of our market, another segment of that market pops up and picks it up.

But there's no question, it's a cyclical asset. And at some point we're going to have returns that are not up. But in the meantime -- in the short run, that may happen, but in the long run, what a great property.

You know, Craig, to add to Ernest's comment, the composition of our customers at the Embassy suites through the end of June made up -- 60%, 63% were from the United States; 11% was from Japan; 9% was from Australia; 4% was from Canada; and then 12% from Oceana, and Korea, and New Zealand, Philippines, and other countries. So kind of gives you an insight into who are customer base is.

Our rent expectations there have been more than met over the time that we've owned it. And my hope is over the next decade that the ADR will double again. We are really fortunate to own it.

Okay. And I guess my last question is: was there anything that you guys learned about downtown Portland, given that you're bringing your Hassalo on Eighth projects up to stabilization, that you can apply towards the next phase of work there?

Absolutely. We are taking every bit of information that's produced from our existing project and incorporating it in our plan for the next portion. And as I said, we have alternatives. We have the repositioning of one of the office buildings there. We have -- a major tenant in Portland has put out a request for a proposal, and we've responded.

The apartments -- we have to go through a design review. We went through design review once, and that project was so ambitious that it would not have been economic for us to build something of that size. So we are now asking design review to approve this in phases.

And we are taking all of the information that we got. What do the tenants like? What square footage is the most effective? What amenities are required? And we also have to deal with the fact that costs have escalated. As I said earlier, Jerry Gammieri has informed me, and I sat in with the contractor, costs go up 6.5% a year.

So we are going to have to have rents adjust, or the product that we provide adjust, to take into account and absorb those higher costs and produce a revenue that makes sense for us to go ahead. So it's a jigsaw puzzle, and we're working to get the pieces in place. But now we have the information, and we're certainly working on developing that additional project, which we looked upon as a significant short-term and long-range opportunity for this Company.

Okay, thank you.

Thank you, sir. And welcome back, Craig.

Paul Morgan, Canaccord.

Just a quick clarification. You mentioned the corporate units at Hassalo. Did I hear this right -- it's 43? And kind of when did they roll in, and when will they roll off?

I think it's, what, a 90-day deal?

Three months. Three something.

Yes, and that's their plan. And it gives us the opportunity to have more time to, A, cover those units when they roll out and get some income in the short run. And the whole thing is very positive.

So, Paul, the units that we brought on -- it's 47 units from a corporate housing. And we saw that as an opportunity, even though it was a short-term lease. But in the meantime, our leasing team is getting -- is prepared, and they are getting ready as those roll to bring on other tenants.

Interesting is that our weighted average rent per square foot on our existing units is around $2.40 now. And the weighted average rent per square foot on this corporate housing -- because of the short-term lease, we were able to get more, and it's closer to $2.70. So in the short run, that helps us. And we are going to push rents as these roll.

And, obviously, the units that were rented in this corporate arrangement were not rented. So it gives us the information that those rents are going to have to be adjusted to make sure that we can have higher occupancy with those rents than we had.

On the other hand, the rents that were rented -- we know now that we can increase those rents, because there was a lower vacancy rate. So that's all what we are going through now to examine where we are now, what our opportunities are now to get rents closer to market value, and get -- take that information and apply it to the next phase.

And when do they start coming in? I mean, I'm just trying to see when you're going to be re-leasing that space, given this is kind of the peak season right now.

I think they are in now, and I think it's 90 days.

Yes, so they -- we signed the contract around June 15, and so 90 days -- so sometime September 15, towards the end of September, those will start rolling out.

And that gives us time before the slowdown to fill them up again.

So I don't know that -- I guess the Portland seasonality that well, but normally I would think that this would be a stronger leasing season. Did you do that because you expect that the September or October period will be better than if you had taken those kind of to a longer-term lease market over the summer?

I think this was an -- we still have -- at 94% we still have apartments to rent. So this just took a portion of the apartments for rent and rented them. And now we have this rental season over the summer and coming into -- before the Christmas season to adjust the rents on the existing apartments as they become available and, as important, to make sure that the lease terms on those apartments cover as much as possible the Christmas holidays.

And we're just learning this, frankly. I mean, this is a whole new residential area that's turned out to be very well accepted by the community. And we now have to see how we're going to operate this in the long run to maximize our revenue over a 12-month period.

Okay, thanks. And then, just going back to the Sports Authority, you had mentioned last quarter that -- I think, if I get this right, you were saying you thought Carmel Mountain was below market rent; Waikele was sort of closer to market. Is that still the view there?

And then just on your comment that Dick's acquired the designation rights at Carmel Mountain -- I mean, how meaningful is that? If there's only a couple of years left on the lease, I would assume anybody who would kind of want to move in would need to negotiate with you as well.

Okay. Chris is going to cover that, Paul.

Hey, Paul, it's Chris Sullivan. So Carmel Mountain -- that box is approximately 40,000 square feet. There's two five-year options on it. The current rent is a bit low. So with Dick's, we're still negotiating. It's not wrapped up yet. So they are taking several sites. They have proposed to take several sites in San Diego, and I believe they took -- maybe it was 30 sites of Sports Authority throughout the country? Don't quote me on that.

But they are working their way through that. I think we'll probably get something wrapped up. But as I said, we've still got work to do. So that rent has probably got some lift there.

Waikele is a 50,000 foot box -- you've seen the box before; it's right on H1 there. So we've got some decent prospects on that that -- we are working to get those settled. But I think that rent at $30 is probably going to be pretty close to market.

Okay. And then your guidance assumes that nothing moves in before year-end. I guess that's probably realistic at this point, but --.

Yes. Unfortunately, you know, with these big boxes they've got an awful lot of work to do. They've got their TIs to do. So we were hopeful in one of the cases that we might see some boxes on the shelf by the time Santa Claus shows up, but that's just not realistic.

Okay. All right, great. Thanks.

Thank you.

Haendel St. Juste, Mizuho.

Any update to provide on Bellevue office? There's some pretty big lease expirations, as you have talked about previously, coming up over the next couple of years. Anything new there?

That's a really good question, and Jim is really working hard to tie up as much of those renewals as possible. And, Jim, do you want to cover anything on that?

Yes, absolutely. Good morning, Haendel. The Bellevue market -- although I think the picture gets painted of a lot of excess space because of three new buildings coming on the market and Expedia rolling out, which has now been pushed out to 2020, which is good news for everybody -- but the news that I think a lot of people aren't aware of is there is over 1 million square feet of active, new prospects in that market as we speak.

So there's still good activity in Bellevue. That's clearly not going to cover the entire 1.5 million square feet of new buildings. But also, we have received information there's a couple of new buildings that just signed some pretty good-sized leases as well. So Bellevue -- although it is still going to take a little time to fill all that space, Bellevue still on a long-term basis is a great opportunity in the office market.

Now specifically with American Assets' portfolio, we have, between now and the end of 2018, 13 full floors that are expiring. And I'm currently in discussions to either renew or backfill 11 of those 13 floors. So the activity is very good. And in most cases, those rents for us are going to be an increase over what the old tenant was paying. So still very optimistic about Bellevue. Got some work to do, but we see light at the end of the tunnel.

And we've seen this light coming in the tunnel, and we've used these last couple of years to upgrade the amenities for the tenants that are there. So we can compete with whatever gets thrown at us -- upgraded elevators, upgraded hallways, upgraded bathrooms. So we have a first-class building in a first-class market competing with some first-class competition. But we have the benefit of cost and place.

You know, we've looked at what it costs to replace a building like this that we own now at a lower cost, and it would be substantially in excess of what our cost is. So we're ready to compete.

Got you. So if I hear you, you're seeing some pretty good demand. You're in conversations with, you said, 11 of the 13 floors; expect to get better rent in many cases, which certainly is good, certainly given the market dynamics of that higher supply and what people expect to be slower job growth. But how committed are you to Bellevue long-term? Is that an asset that you were thinking of or maybe should be thinking of monetizing here?

No. It's an A location, an A building. And if anything, in the long-term vision of the Company -- as you know, we have a marketplace in San Diego, one in Portland, one in Honolulu, one in the Bay Area; I'd like to add Seattle. And so our objective is to make Seattle a center of opportunity for us, not an area that we would want to retreat from.

Got you. Okay. Any more color you can give us around a phase 2 that's under review in Portland? You talked about maybe some office, some apartments. But any round numbers on potential investment dollars or yields you could give us a sense of? And maybe timing?

I wouldn't want to do that. The timing is, I think, that the design review is going to take place sometime this summer. We are not sure if they're going to have a quorum for that. In the meantime, costs are increasing at the 6.5% annual rate that we said earlier. In the meantime, rents are going up.

So it is such a moving target. But in the long run, that's a -- and I don't know how long the long run is; certainly it's from 2 to 10 years -- it's going to be a giant asset for this Company to own forever and ever.

We are taking an area that was a work area only and turning it into a work and live area. And it's getting an ambience that it didn't have before. So we're kind of excited about what the future holds for us in Portland and in the Lloyd district.

Okay. And then one last one, if I may -- and Bob, maybe this one's for you. Didn't he already mention the ATM issuance in your sort of composition of guidance, as you laid out? Is that something that -- while your stock has had a pretty nice recovery here the past few months -- that you are thinking of? And maybe are there -- would it typically be the same type of re-dev funding that you've done in the past, tapping the ATM for?

And maybe, additionally, are there any investment opportunities that perhaps didn't quite pencil maybe three months ago that may make more sense here near-term as you consider your better cost of capital?

That's a good question, Haendel. We're always looking at acquisitions. And we -- you know, our focus is to create net asset value first. And if it's accretive to NAV, then we'll look at it. And we don't mind getting aggressive on it, but it still has to be accretive over the long period -- short period and long period.

Relative to your question on the ATM, we evaluate that each quarter. I think year-to-date we have not tapped the ATM. We have sufficient capacity through our line of credit and cash on the balance sheet to handle what we need.

So we are on track with CapEx. We are on track with our capital spend, including Torrey Point. So we're not desperate for cash at all, by any means. You know, we evaluate it quarter to quarter. If it makes sense, we may take a little. But right now we haven't -- my intention is not to tap into the ATM. But we evaluate that quarter to quarter.

One might note that our NAV, we believe, is still in excess of our market price. So if we were to tap into the ATM, we would have to find something that produces returns that add to the NAV more than the dilution we would be subject to by selling stock under the ATM. It's a very tough objective to achieve, and it's frustrating, if you want to know the truth.

Actually, you know what? You mentioned the NAV -- can you give us a few of the building blocks for NAV, maybe some of the cap rates that in your NAV you assume for some of your key markets and asset types?

I think Bob publishes that once a year, and then we're asked by the SEC to remove it. So, Bob, do you want to give some color on that?

Yes, once a year we do update our NAV, and we published it mid-June. What we do is we issue an 8-K that references to our website, and we put the detail on an asset-by-asset basis showing you what our NOI is, showing what we believe to be the cap rate is. And we approach it on a conservative basis.

We think that when we publish -- at least our goal is that when we publish what we believe our NAV, based on our knowledge in the marketplace, that whatever we publish, we could generally sell those buildings for more than that. So we did publish mid-June a net asset value that we believe of $50 per share. And if anybody's interested, you know, they can contact us. I'm not sure if it's still on the website.

It is.

It's still on the website. Adam tells us it's still on the website. So if you go to the website and look under the -- is it --?

Presentations.

Under the Presentations, you'll be able to see the detail asset by asset and how we think about the value of our assets.

Wonderful, okay. Thank you, guys.

Jeff Donnelly, Wells Fargo.

Good morning. Ernest, thanks for your commentary on that power center transaction in Mira Mesa. I was curious: are you seeing any opportunities to obtain or to merely acquire assets, I should say, at more reasonable prices by using your OP units as currency, or is that just not available?

You know, when our OP, when our stock price is a -- less than our NAV, and you go to a buyer and say, you know, you can get $100 per share in cash or we could give you a price in our units, but we'd have to adjust the number of units to take into account the fact that we are selling at a discount, it's very tough to have currency that makes a compelling transaction for a possible seller. So we've explored over the years a number of those opportunities, but we have not been successful.

Okay. And I'm curious -- let me ask, I guess, Craig's earlier question differently. If it were not for the Sports Authority vacating their spaces, would you guys have felt compelled to revise your same-store retail NOI growth guidance?

Yes, we try to be as realistic as possible. And if we -- we take a look at where our initial guidance is; we generally will update or comment on it in Q2 of each year. And just kind of true it up with what we think is realistic within a certain range. If we don't think the upward range is increasing, but we think -- we feel more confident about a certain range, we'll tighten up the bottom end. But we probably would have tightened up that range.

I think Bob does a great job at being highly accurate. And as he pointed out, if we err, we want to err on the conservative side. That's always been our strategy.

That's helpful. And just switching over to Hassalo, I'm just curious: do you guys have a sense how your higher-price-point competition over on the Pearl District has been faring in the recent quarters? Have there been any signs of either increased concessioning or maybe slowdown in their leasing pace? Because they are sort of the price leader in the market, and I was just curious if you had any color on that.

I'm not intimately acquainted with what's going on in the Pearl District, but there's no question they have a [more front-loaded] rental price than we do. And that's something that perhaps we can evolve to over the next number of years.

I think that the market as a whole is pretty strong. We came up with a new product in a new area, and we are the new boy on the block. And I think now we can say that -- you know, we bust into the marketplace; we've established the fact that it's a good place to live. It's very sensitive to our tenants' requirements. And we think that the opportunity going forward is even more significant than it was when we first set our eyes on this.

Jeff, let me add to those comments -- is that we have that competitive set that we look at, three apartments on the in the Pearl District area and five the inner East Side, where we are. And that range goes all the way up to a high of, I think, $3.20 per square foot down to a low of, like, $2.20. And the weighted average is $2.79.

So the strategy that we took was not to be at the market; it was to fill it up quickly. And it's amazing, with such a terrific product that was built, and you look at those three buildings -- the first one opened up the first week of July in 2015, and it was -- it reached 93% by the end of September that year. Then we opened up the other two apartment buildings, the Ellwood and the Astor apartment buildings in late October, beginning of November. And they are close to stabilization today. So the response has been terrific, and now the focus is getting it back up to market.

Understood. And I know there aren't many data points, but do you know what comparisons have been for units at Hassalo that have rolled over or renewed in the short time that that building has been operating?

I don't have that metric. I can get that for you if you want. But I know that it's only recently we've asked the person in charge of that project to now have her objectives at two points. First of all, get the rents closer to market; and, second of all, make sure that during slow rental season we have as much leasing that covers that season so that we don't take a giant step back.

So I'm also looking at --

In occupancy.

Jeff, I'm also looking at a few data points. When we started, we did it at -- where focus was at $2.36 on a square foot on a weighted average basis. As of the end of June, that's starting to inch up. We are now at $2.40 a square foot. And when you add in the corporate housing units, that weighted average is $2.73.

So we are on the way. We know that at $2.50, you get a 6% unlevered cash on cash return on our investment. So we are tracking, and we think we are on track.

And if you take the 6% targeted return and compare it to the market value, which a cap rate on a project like that would be around 4%, and the project cost $200 million, the math comes out as being very beneficial to our existing stockholders.

And just one last question. I guess, Ernest, you were saying earlier it's kind of exciting for you to watch this sort of predominantly work area transform to a live/work area. And I was just curious what your appetite is for expanding your ownership in that area to provide -- either to provide more control of the existing inventory that's in that market, whether it's retail or apartments, or fuel for future developments, whether it be multifamily or street retail? Because sometimes more street retail is needed to sort of fuel those changes.

When I was visiting your property in the second quarter, I had heard you guys once looked at one of the parking decks that Kaiser owns right at your front door. And, I don't know, it just got me wondering if you guys actively look at expanding your presence there? Or are you just kind of happy with what you have?

We actively look at the presence we have there. But any expansion would not be significant beyond what we have, because we have four square city blocks that we are working on now, which could result in an investment of $800 million to $1 billion. I'd say we've got enough on our plate. And we are willing to fine-tune that, but certainly any additional significant financial commitment to that area would have to be put in abeyance until we finish with what's on our plate.

You know, the shopping center next door to us -- the company that is repositioning it is spending, I think, what, $50 million for repositioning of that? The park has been upgraded. Other developers have bought land in the area. So we've got plenty on our plate.

You know, there's an old expression: bulls make money, bears make money, and you know what happens to pigs. So we're going to digest what we have, maximize the return. We are grateful for what we have, and we're excited about our future in that area.

Okay, great. Thank you.

Thank you, sir.

Richard Hill, Morgan Stanley.

Hey this is Ronald Camden on Richard Hill's line. Just a really quick one for me, going back to the office portfolio, specifically San Francisco. Just kind of an update -- what are you guys hearing on the ground, maybe from 3 to 6 months ago in terms of jobs and hiring, and what the demand for office looks like? Just curious to see what you guys are hearing.

You know, Ron, there's lots written on San Francisco. It seems -- the San Francisco office market. And we've been told there is some sublet space available. It's not a recession like took place some years ago, but I think the market has probably leveled out somewhat, in my view. But I think a decline would not be an accurate description. Jim, do you have a viewpoint on that?

I would agree. I see rents flattening a little bit, but I don't see any imminent danger of massive drops like we had back in 2000, 2007, and 2008. So obviously the portfolio that we own there is fully leased; it's 100% leased. No significant rolls coming up anytime in the next 12 months. So I think we're in a good position in that market, and we're sitting tight.

And also our impression is that our rents in place are significantly lower than the current market. So even if there was the decline in the current market rents, it's doubtful that they would come back to the level of our rents in place. Would you agree with that Jim?

I would agree.

Yes, Ron, our in-place rents are approximately 35% below market in San Francisco.

Okay, great. That's all I got from my end. Thank you.

Thank you, Ron. Thanks for your interest.

Rich Moore, RBC Capital Markets.

(Operator Instructions) I'm showing no further questions at this time. I would like to turn the call back over to Mr. Rady for closing remarks.

Okay. Once again, all of you, thank you for your interest. We're excited about what we've achieved over the last five years in more than doubling our NAV. We're going to work as conscientiously as possible to produce results that are enviable. And we have a great portfolio, and we are truly blessed to have great stockholders. So thank you for your interest.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.