American Assets Trust Inc (AAT) 2016 Q3 法說會逐字稿

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

I would like to introduce your host for today's conference, Adam Wyll, Senior Vice President and General Counsel. Sir, you may begin.

Good morning. I would like to thank everyone for joining us today for American Assets Trust's 2016 third-quarter earnings conference call. Joining me on the call are Ernest Rady and Bob Barton. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

Our 2016 third-quarter supplemental disclosure package provides a significant amount of valuable information with respect to the Company's operating and financial performance. The document is currently available on our website.

Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our future operations and our actual performance may differ materially from the information contained in our forward-looking statements. 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 risk and cost 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 performance or financial conditions and results of operations.

Additionally, this call will contain non-GAAP financial information including funds from operations, or FFO, earnings before interest, taxes, depreciation, and amortization, or EBITDA, and net operating income or NOI. American Assets is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data for the third-quarter 2016 furnished to the Securities and Exchange Commission. This information is available on the Company's website at www.AmericanAssetsTrust.com.

I will now turn the call over to our Chairman, President, and CEO, Ernest Rady, to begin our discussion of third-quarter results. Ernest?

Thanks, Adam, and good morning, everyone. Thank you for joining American Assets Trust third-quarter 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 dividend paid to our stockholders.

We are very pleased with the FFO that increased 7% in the third quarter on a year-over-year basis. Our same-store cash NOI also continues to be strong, with an 8% increase in the third quarter on a year-over-year basis.

As we look forward to the remainder of 2016 and into 2017, we view this to be a transition year where we continue to invest in our portfolio. We have two projects that we look to enhance and reposition: one being our Torrey Plaza building at Torrey Reserve, where one 80,000 square foot tenant has vacated as expected, and we look to renovate Torrey Plaza over the next eight months to a new light, bright, and energetic workplace that will be well positioned for the current marketplace in terms of finishes, style, and amenities that will therefore support higher rental rates.

The second project is Oregon Square, which consists of four city blocks. In one city block we are in active lease negotiations with a full building tenant for one of our existing buildings. Another city block, we are one of the finalists to develop a building-to-suit, an office building. In the remaining two blocks we continue to work to create the highest and best use, but with those remaining two city blocks at Oregon Square having recently obtained our entitlement in such regard at our most recent design review hearing.

We believe the overall quality of the portfolio will continue to outperform, regardless of where we are in the real estate cycle. If -- and maybe I should say when -- interest rates begin to increase, we are hopeful to find some dislocation in the marketplace and capitalize on those opportunities that present themselves.

Lastly we continue to look at all opportunities, but pricing continues to be an obstacle. In the meantime we are continuing to focus on creating net asset value for our shareholders.

Again, on behalf of all of us at American Trust we thank you for your confidence in allowing us to manage your Company, and we look forward to your continued support. I will now turn it over to Bob Barton, our Executive Vice President and CFO. Bob, please.

Good morning and thank you, Ernest. Last night we reported third-quarter 2016 FFO of $0.47 per share. Net income attributable to common stockholders was $0.19 per share for the third quarter.

The Company's Board of Directors declared a dividend on its common stock of $0.26 per share for the quarterly period ending December 31, 2016. The dividend will be paid on December 22 to stockholders of record on December 16 -- or December 8, 2016.

Our retail portfolio ended the quarter at 97% leased, combined with the highest annualized base rent amongst our peers. On a year-over-year basis our retail occupancy was down approximately 130 basis points from the third quarter of 2015, leaving approximately 92,000 square feet vacant in our 3 million-plus square foot retail portfolio. The increase in retail vacancy is primarily attributable to the Sports Authority lease at our Waikele property, which consisted of approximately 50,000 square feet.

During the trailing four quarters, 81 retail leases were signed, representing approximately 349,000 square feet or 11% of our total retail portfolio. Of these leases signed, 65 leases consisting of approximately 310,000 square feet were for spaces previously leased. On a comparable basis the annual cash basis rent increased 6.3% over the prior leases.

Our office portfolio ended the quarter at approximately 89.9% leased, down approximately 330 basis points on a year-over-year basis primarily due to the following two factors: first, the completion of our redevelopment project at Torrey Reserve during the second quarter of 2016, which resulted 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 entitlement efforts, resulting in approximately 121,000 square feet of vacancy at Oregon Square.

During the trailing four quarters 71 new office leases were signed, representing approximately 259,000 square feet or 10% of our total office portfolio. Of these leases signed during the year, 54 leases consisting of approximately 205,000 square feet were for spaces previously leased. On a comparable basis the annual cash basis rent increased 7.3% over the prior leases.

Let's talk about same-store NOI for a moment. Same-store retail cash NOI increased in the third quarter to 2.9%. The increase was primarily due to new tenants in our Carmel Mountain Plaza property. Last quarter we mentioned that we were in discussions with possible replacement tenants for the Sports Authority stores at our Carmel Mountain Plaza and Waikele properties. I am happy to report that Dick's Sporting Goods has signed a lease at our Carmel Mountain Plaza property that extends the term over the previous Sports Authority lease by 10 years, with an increase in the annual cash basis rent.

We are also engaged in ongoing discussions with prospective tenants at our Waikele property in Hawaii., and we are hopeful that a new tenant or tenants will be signed in the near future. For those of you that were unable to attend the recent investor tour that we held in Hawaii, our Waikele shopping center on the island of Oahu is approximately 50 minutes north of Waikiki, Honolulu, and consists of approximately 42 acres fee simple and a half a mile of frontage along the primary H1 Highway and is adjacent to Chelsea Premium Outlets. It is a great asset and a great location.

Same-store office cash NOI was up 13.1% in the third quarter primarily due to increases in rent at our Landmark building in San Francisco and a tenant expansion, as well as rent increases at our First & Main property in Portland.

Same-store multifamily NOI was up 10.6% on a cash basis for the third 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 8.9% for the third quarter. For Embassy Suites Hotel, same-store cash NOI increased 11% as ADR and RevPAR and occupancy percentages have all increased over the prior year.

For Waikiki Beach Walk Retail same-store cash NOI increased 6.1%, primarily due to higher rental revenues. Tenant sales at WBW Retail were at approximately $1,061 per square foot for the rolling 12 months, as our tenants continue to benefit from the excellent location and a good economy.

Turning to our third-quarter results, FFO increased approximately $1.5 million or $0.023 cents to $0.47 per FFO per share compared to the second quarter. The third-quarter results include the following activity.

Number one, Embassy Suites at Waikiki Beach Walk increased approximately $1.5 million in Q3 over Q2, adding approximately $0.023 of FFO due to the seasonality over the summer months.

Number two, Hassalo on Eighth leased occupancy continued to increase during the third quarter, adding approximately $0.01 to the third-quarter FFO.

Number three, Kmart's bad debt reserve, approximately $0.01 per FFO share against the remaining straight-line rent reserve, so that by year-end we will be 100% reserved on the straight-line rent. In the third-quarter Kmart listed Waikele as being one of the shopping centers that they would close their store by year-end; and accordingly we made the decision to increase the bad debt reserve against the straight-line rent receivable. Absent this reserve we would have exceeded the Street consensus of $0.48 per FFO share.

Now as we look at our balance sheet liquidity at the end of the third quarter, we had approximately $312 million in liquidity comprised of $62 million of cash and cash equivalents and $250 million of availability on our line of credit. Our leverage at the end of the third quarter remains low at a 28% total debt to total capitalization, and a net debt to EBITDA of 5.8 times. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.6 times.

Let's talk about 2016 and 2017 guidance. We have tightened our 2016 guidance range and are introducing our initial 2017 guidance. Let's talk about 2016 guidance first.

We are tightening our guidance range for our full-year 2016 FFO per share to a range of $1.84 to $1.86 per FFO share, without changing our original midpoint of $1.85 per FFO share from original guidance of $1.82 to $1.88 per FFO share. As I mentioned in the third quarter we were notified that the Kmart store at our Waikele shopping center was on the list of closures; and as a result we took a bad debt reserve against our straight-line rent receivable of approximately $0.01 per FFO share.

Also as you might recall, in the second quarter we took another charge of approximately $0.01 since per FFO share resulting from the Sports Authority's bankruptcy. Even with all of these unexpected events I'm pleased that we were able to maintain our guidance range and midpoint throughout the year.

Now let's talk about our 2017 guidance. We are introducing our 2017 FFO guidance range of $1.98 to $2.06 per share, with a midpoint of $2.02 per FFO share, which is approximately a 9.2% increase in FFO over the 2016 midpoint. Our 2017 guidance is based on the following eight assumptions.

Number one, we are anticipating that our 2017 same-store retail cash NOI will be flat compared to the prior year, primarily because of the loss of Sports Authority at our Waikele regional shopping center in Hawaii. Occupancy is expected to be approximately 96.4% at the year-end 2017.

As previously discussed Kmart intends to close its store located at our Waikele property by the end of this year. Our current lease with Kmart expires on June 30, 2018. Our guidance assumes that we will continue to receive lease payments from Kmart under the terms of their lease.

Number two, we are anticipating a 1.6% increase in same-store office cash NOI. The increase in same-store office cash NOI will increase FFO per share by approximately $0.01.

Same-store office occupancy is expected to be approximately 97.5% at year-end 2017. The increase in office occupancy is in part due to adding the Lloyd office buildings, including Lloyd Center Tower and the L 700 building in Portland, Oregon, into the same-store office pool beginning in 2017.

As long as we are talking about the office market, let's talk about our City Center Bellevue office tower in Bellevue, Washington, 20 minutes east of Seattle in the heart of the Central Business District. As noted in our supplemental, we have approximately 12 floors with leases that expire in 2017, representing approximately 230,000 square feet. Of these and based on our current and ongoing discussions with tenants, our 2017 guidance assumes that approximately 140,000 square feet or 62% of the expirations will renew with the same tenant at an increased rent. Additionally, we have assumed that approximately 80,000 square feet or 34% of the expirations will be backfilled by the tenants in place that are subleasing existing space, again at an increased rent.

The remaining expirations amount to about approximately 8,000 square feet or 3% of the total expirations, which we consider to be speculative leaseups. We believe our weighted average in-place rents are still below the market; and as a result we expect approximately a 10% increase in rental rates during the first year. On a cash basis our same-store cash NOI is expected to be tempered as a result of some expected free rent in connection with these renewals.

Now as it relates to the overall Bellevue office market, we entered into 2016 expecting two new high-rise office buildings being delivered into the marketplace at the end of this year, adding approximately 1 million square feet of office space. Of that amount, 70% has already been leased according to Broderick Commercial Real Estate Group in Seattle. Another 100,000 square foot building is being delivered in 2017, and that is already 100% leased or pending.

The majority of the construction is close to achieving leaseup. According to Broderick Commercial Real Estate Group, the Bellevue Central Business District has quickly swung from a market that some predicted to be overbuilt to one that appears as if it will be extremely tight in the coming three years.

In the past Microsoft has been the major driver of absorption. But this market is instead being driven by other new and expanding technology firms attempting to create top-quality offices to compete for the best and brightest talent. The Broderick Group projects 10% increases in rental rates across the Eastside Office Market, where Bellevue is, over the next 12 months.

Getting back to 2017 guidance now. Number three, we are anticipating a 2.9% increase in same-store multifamily cash NOI. Occupancy is expected to be approximately 96.2% at year-end 2017. The increase in same-store multifamily cash NOI will increase FFO per share by approximately $0.01.

Number four, we are anticipating that our same-store mixed-use cash NOI will be flat compared to the prior year. Mixed use retail occupancy is expected to be approximately 99.4% at year-end 2017.

Number five, Hassalo on Eighth multifamily and retail in Portland Oregon is expected to contribute approximately $9.5 million of FFO, an increase of approximately $4.7 million from the prior year, and an increase in FFO per share of approximately $0.07.

Number six, G&A expense is expected to increase by approximately 5.6% to $19 million, which is expected to decrease FFO per share by approximately $0.01.

Number seven, interest expense is expected to decrease by approximately $1.6 million as a result of a fully amortizing loan-to-market adjustment made at the time of property acquisitions. The reduction of interest expense is expected to increase FFO per share by approximately $0.02.

Number eight, 2017 GAAP income adjustments for straight-line rents and above and below market adjustments are budgeted to be approximately $6.5 million and are expected to increase FFO by approximately $0.07 per FFO share.

These adjustments should approximately reconcile our 2016 midpoint guidance with our 2017 midpoint guidance. When I compare our 2017 midpoint guidance to the 2017 consensus that I see on my Bloomberg screen of $2.06 per share, we are different by approximately $0.04 or approximately $2.7 million of FFO at the midpoint.

I believe the difference is due to the timing of leaseup for our newly developed office property at Torrey Reserve and Torrey Point, as well as the re-leasing of the office space recently vacated by ICW at Torrey Reserve. In our guidance we anticipate having the newly developed properties and vacated space leased up or re-leased by the fourth quarter of 2017.

This coincides with consensus for the fourth quarter of 2017. Before then, I believe it is a timing difference that is creating the discrepancy with the annual consensus.

Lastly, our operational capital expenditures for 2017 are budgeted to be approximately $37 million. We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly number. We are well prepared with an even stronger balance sheet than in prior years to capitalize and execute on the opportunities that we believe will present themselves over the coming quarters.

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

(Operator Instructions) Paul Morgan, Canaccord.

Just can you give us a bit of an update on the north San Diego office market? I mean you've got -- that is a lot of it your delta as you look at next year, as you mentioned, in terms of the guidance. You have got space between the developments and the ICW.

What are you seeing in terms of absorption? ICW, how quickly is that space going to be renovated and ready? And then what are the prospects in terms of just the traffic that you are seeing?

This is Ernest, Paul. Bob outlined that eight months from now we'll have repositioned the ICW building. And there is no question that leaseup of the rest of the space has been a bit behind schedule. On the other hand, the leasing is really busy at the moment. Maybe you want to expound on that a bit, Jim.

Hi, Paul. This is Jim Durfey. Of the two new buildings we have got a couple leases out for signature (technical difficulty). So within the next 30 days we will be 50% leased on those buildings, with prospects of a good portion (technical difficulty).

The other vacant building which we call Building Five, a 4,500 square foot freestanding building, also has a lease out for signature. So of the three new buildings, two of them are going to be half leased, one of them is going to be completely full. And we see those leasing activities very (technical difficulty).

Relative to this building, good leasing activity on this building. Obviously we have the ability to do a large lease, and there aren't a whole lot of places in Delmar Heights where you can do a 20,000 or 30,000 foot lease, so we have that advantage going for us.

And as Ernest mentioned we are going to reposition the building in terms of just some renovating and remodeling in the common areas, which we think will be very beneficial (technical difficulty)

So, to sum it up, we are a bit behind schedule but we are very optimistic about what is going to transpire over the next 12 months. Jim is complaining to me about how busy is, and that is a very good sign.

Okay. That is a good thing. Going over to Waikele, how should we think about Kmart in 2017? I mean, you said you are including the revenue and they are going to leave the space.

Do you think what is actually going to happen is going to be there will be like a first-quarter termination fee or something like that? Just from a modeling perspective how should we think about it?

I don't think we know. Does anybody want to make a guess, or should we just leave it (multiple speakers)?

Yes, Paul, Bob here. We have -- this is early in the period regarding Kmart. We were notified that the store will be closing by the end of the year, and that is really all we know at this point in time.

So our guidance is assuming that we're going to get all of that rent during 2017. We have no other reasons or nothing that would lead us to indicate that we wouldn't get that at this point in time.

In the meantime we are actively working on positioning that building to what I think will be a better occupancy (technical difficulty) the project (technical difficulty).

So you think in terms of the space there that, because of where the location is, that might be something that you look to re-devise into smaller junior anchors?

We are going to look at every option. And Chris is going to answer that too -- I know he is going to answer it because he is leaning forward.

Hey, Paul. Yes, we have been active -- so all folks know we have been actively working on the repositioning of the Kmart for several years (technical difficulty) if you looked at -- it's really no surprise. We knew Kmart wasn't going to be a long-term player there.

If anything we just got the news a little sooner that they will be closing. So we're still on the hook, we're still in the process of putting the usual suspects together. As I tell people, going forward I think the worst thing that could have happened (technical difficulty) had Kmart there as a long-term tenant. Kmart really isn't a very viable tenant anymore for that center.

So this is the time where you get to reposition in it. You know probably who the usual suspects are. And you can have a much better center going on than if a Kmart's sitting there [still] on the property.

It is a great piece of property, 42 acres, fee simple, half-mile frontage on the H1. We are glad to have that property going into the next couple of years for sure.

Great, thanks. Then just last for me, how should we think about the rents at Hassalo as we roll into the fourth quarter and any kind of impact in terms of those larger corporate units that you have put on in -- I think it was in June?

The corporate units are gone, Paul. We think that the rental base we have now is quite certain over the winter months, in which renting usually slows down. This is our first season like this, so we are learning the marketplace.

Our objective now is to keep the occupancy up and get the rents up, and we are working on that. The timing of that we'll know better after we have been through one rental season -- or one more year actually of activity in that marketplace.

But the project continues to receive recognition as one of the best projects of its type in the Northwest. So we are pleased with the project; we are proud of the project.

And what we do with Oregon Square next door can only but enhance it, so I think it's going to get better. How fast? I don't know. How much? I don't know.

But believe me, we have a history of doing the best we can and trying not to leave money on the table.

As you have been trying to re-lease those corporate units, are you getting close to where they were? I know you talked about it being above-market, as they typically are for short-term leases. How close are you getting in terms of replacement multiple?

They are a small number of units, relative; and it is the two-bedrooms. The two-bedrooms are not renting as well as the smaller units.

So the rental rate on the two-bedrooms as they are re-leased have not been as much as the rental rate on the short-term unit. We are just going to have to (technical difficulty).

But you know, I have seen that over the years. Sometimes two-bedrooms are hot; sometimes bachelors are hot; sometimes one-bedrooms are hot. Right now two-bedrooms are cold. We will have to see how this evolves.

But we are very happy with the mix, and we think over the long run it is going to be the right mix for the project.

Great, thanks.

Todd Thomas, KeyBanc.

Good morning, guys. This is Drew Smith; I am on for Todd today. Just to follow up on Hassalo a little bit, I am just curious on what you are expecting for 2017 in terms of the NOI yield and what the trajectory is going to look like, and if that is in line with your original expectations.

Then also on Hassalo if you could just talk about the retail mix a little bit. I saw a new tenant in the supplement this quarter; just wanted to see what you were thinking about the tenant mix from a retail perspective.

Well, Bob, what have you got in for Hassalo for the coming year?

Yes, for guidance purposes we are over the year at a 6% yield on that. That is our strategy; that is our goal. And we will continue to push the market hopefully beyond that.

It depends on the market up there. Sometimes, like Ernest was saying a few minutes ago, sometimes one product is hot; one product is moving just a little bit slower. But we're going to push it for every dollar we can, and our goal is to get that 6% yield.

The biggest cost of real estate is vacancy. So our strategy is to reduce the rent on the apartments, the two-bedrooms that are not renting as well as we'd like, and try and make up for that -- and then some -- with the other units.

So it is a question of balancing and rebalancing. We'll find how that plays out over the year.

As far as the retail goes, Chris, do you want to answer that? I know we are 70% rented.

Yes. We are approximately 70% rented. The space that is remaining is at 9th and Multnomah. Drew, have you been up to the site?

No. No, I have not.

So imagine this is the hard corner on your best intersection. So this is the corner that we are trying to secure a better restaurant for. It is approximately 3,000 square feet, so that piece is really a key piece.

So we are trying to secure the right tenant, somebody we would be proud of in the restaurant.

But have in mind, everything we do at Oregon Square is going to enhance both the retail and the residential. So think of that as a -- I don't know if you want to use the word long-term, but certainly a mid-term substantial addition to NAV and FFO per share.

(technical difficulty) happen this month, next month; (technical difficulty) happen next decade. That is going to be a giant (technical difficulty).

Great, thank you. One last quick one for you, Ernest. You mentioned last quarter that Torrey Point was getting some pretty intense interest from brokers. Are you guys still seeing that level of interest? And what you think of that moving forward?

Jim, do you want to take that?

We are. We're in discussions with a large tenant, take a nice size [bucket] space. And we have other activity up on Torrey Point. So we still good activity.

Great, thanks, guys.

Craig Schmidt, Bank of America.

Hi, this is actually Justin Devery; I am standing in for Craig Schmidt this morning. We were just hoping you could comment on same-store retail cash NOI. We saw you took down the guidance last quarter. Just curious if there is an update on that for 4Q or ultimately for year-end as it pertains to the retail segment.

No, we are consistent, as I mentioned in our comments. Really the reason for our same-store cash NOI is the Sports Authority at the Waikele property. We are losing about $150,000 a month on that store being vacant.

So right now we're working with several interested parties that will step into that in 2017 that we believe. And we are going to do our best to fill that up.

That is also the reason why our 2017 guidance was flat. It's because we factored in 2017 having that vacant as we make the transition, building out that next tenant coming in there, and getting them up to speed.

So for the entire year that is about $1.7 million. You take $150,000 times 12 months.

Great. Then is there any are there -- could you comment on the type of tenants we are looking at to fill those spaces?

Chris, do you want to mention?

Justin, it's going to be the usual suspects that you would typically see in a big box center.

Okay, great.

I just don't want to lead my punch here. I have got several folks that we're working with, and it will resolve itself.

There is a lot of interest in that space. So we are not concerned about it getting leased. It is a question of the timing now, due to the Kmart circumstance. But Chris is doing a great job in handling the interest in that site.

That seems fair. Thank you.

Richard Hill, Morgan Stanley.

Hey, this is Ronald Kamdem for Richard Hill. Just a couple quick ones for me. The first one is going back to the Oregon Square. Maybe can you just provide more color on how far along are we on the development design?

And also I think you mentioned a little bit about permitting. What is the time frame for that? Are there any roadblocks that you anticipate? Maybe just a little more color.

Well, as far as the timing goes, a lot of it depends on the success we experience over the next short while with the existing apartment project. As far as the leasing of that building that we talked about that is presently located on our Oregon Square, how would you describe the circumstance of that lease now? Close to being signed, out for signature? How would you describe that?

The tenant is reviewing the lease document (technical difficulty).

So that is all we can tell you. But it's great property. I mean, if you want to worry about week by week or day by day, I don't think that's the best thing for our effort. But in the long run as I said earlier, a decade from now that is going to be a much-improved area and a jewel for the Company.

Anybody want to add anything to that? No. I think that is how we all feel. Yes.

Then the other one I had was obviously I saw you guys use the ATM during the quarter when the share price was $45.50. Just curious. With the stock now below $40, how are you thinking about that in terms of acquisition, in terms of (technical difficulty) and so forth?

It is a tough circumstance to mount. We feel that our stock is significantly undervalued, so the use of that -- of our shares to make acquisitions means the acquisition has to be at such a compelling price that the price we acquire it at makes up for the dilution to our existing stock (technical difficulty).

There is one thing I can assure you. We are as a devoted a management team as there is to creating NAV. So doing something that would be destructive to NAV is not anything that we dream of around here, to say the least.

Great. Then the last one for me is just on -- just curious on your commentary. You guys gave us good feedback on development yield and so forth. How are you guys seeing that trending? And what your outlook is, things like construction cost and so forth. Thanks.

Well, I was recently in Honolulu and I was told that construction cost are escalating to about 14% a year in Honolulu. We estimate that in Portland they are escalating at 6% a year. So there is no question that it's a tight construction market.

But this changes. As interest rates go up, construction slows down. It is a fluctuating market.

But this does substantiate is what we have increased the replacement cost dramatically. I mean, if you look at what we've built in Portland so far and then extrapolate the 6.5% increase over the number of years since we bought it out, you are looking at another $30 million to $50 million of replacement cost. And that is kind of our view: that what we have gets better and better; the mountain to climb to create an additional product gets a little more difficult.

Inflation solves that problem over the long run. So it is a constant balancing process to make sure we are doing the right thing to achieve our long-term objective, which is enhanced NAV for our stockholders.

Useful. Thanks so much.

At this time I am showing no further questions. I would like to turn the call back over to Ernest Rady for any closing remarks.

Okay, you guys, thanks again for your confidence and joining us on our call. We will look forward to chatting with you at the next conference call.

And I can assure you that between now and then we'll be working hard to enhance all our shareholders' interest. Thank you and good morning.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect. Everyone have a wonderful day.