American Assets Trust Inc (AAT) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Assets Trust Incorporated fourth quarter and year end 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to hand the floor over to Adam Wyll, Senior Vice President and General Counsel. Please go ahead, sir.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2016 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 2016 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 in our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations.

Additionally, this call will contain non-GAAP financial information including funds from operations, or FFO; earnings before interest, taxes depreciation and amortization, or EBITDA; and net operating income, or NOI. American Assets is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data for the fourth quarter of 2016, furnished to the Securities and Exchange Commission, and this information is available on the Company's website at www.American Assets Trust.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, everybody, and welcome. Thank you for joining American Assets Trust fourth quarter 2016 earnings call. Our focus in 2017 continues to be in the growth of the net asset value for our shareholders, which we believe will result in increasing cash flow and dividends paid out to our stockholders.

We are very pleased with our FFO growth that increased 5% for the year ended December 31, 2016. Our same-store cash NOI also increased 5% for the year ended December 31, 2016. We believe that 2017 will be a year of repositioning, investments and growth. Specifically, we have three projects that we look to enhance and reposition.

The first project being our Torrey Plaza building at Torrey Reserve in San Diego, where a 70,000 square foot tenant lease has expired and the tenant has vacated, as expected. As a result, we look to renovate Torrey Plaza over the next eight months to a new light, bright energetic workplace that will be well-positioned for the current marketplace in terms of finishes, style and amenities and that we believe will therefore support higher rental rates.

The second project is Oregon Square, which consists of four city blocks. In one block we're in active lease negotiations with a full building tenant for one of our existing buildings. Another city block, we're one of two or three finalist to develop a build-to-suit building for an investment grade credit tenant. And the remaining two blocks we continue to work to create the highest and best use for the remaining two city blocks in Oregon Square having recently obtained our entitlements in such regard at a most recent design review hearing.

The third project is our Waikele Regional Shopping Center in Oahu, Hawaii. Kmart has gone dark and closed its doors in December, as expected, but remains liable for its lease obligations through June 2018. In the meantime, we are actively working with tenants and architects to reposition this 120,000 square foot building. We have had several expressions of interest already from tenants that recognize the opportunity of this location that fronts a half-mile of frontage along the H1 and is 42 acres and complements the Waikele Premium Outlets center adjacent to our property.

As Bob will discuss in more detail, we are very pleased with the net effective interest rate on the debt private placement commitment that is scheduled to close and fund in early March. Additionally, we have recently hired a dedicated acquisition associate that is focused on finding new deals that will create value and be accretive to our shareholders. We expect to have approximately $100 million of cash on the balance sheet by the end of the first quarter and we are actively looking for accretive deals in both the retail and multifamily sectors in coastal West Coast markets.

We believe the overall quality of the portfolio will continue to outperform regardless of where we are in the real estate cycle. Now that interest rates have begun to increase, we're hoping to find some dislocation in the marketplace and capitalize on those opportunities that present themselves. Again, on behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage our Company and we look forward to your continued support.

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

Good morning and thank you, Ernest. Last night we reported fourth quarter 2016 FFO at $0.48 per share, net income attributable to common stockholders was $0.19 per share for the fourth quarter. The Company's Board of Directors has declared a dividend on its common stock of $0.26 per share for the quarterly period ending March 31, 2017. The dividend will be paid on March 30, 201[7] to stockholders of record on March 16, 201[7].

Our retail portfolio ended the quarter at 96.6% leased, combined with the highest annualized base rents amongst our peers. On a year-over-year basis, our retail occupancy was down approximately 200 basis points from the fourth quarter of 2015, leaving approximately 104,000 square feet vacant in our 3 million-plus square foot retail portfolio. The increase in retail vacancy is primarily attributed to the Sports Authority bankruptcy and rejection of its lease at our Waikele property, which consisted of approximately 50,000 square feet.

During the trailing four quarters, 76 retail leases were signed, representing approximately 289,000 square feet, or 9% of our total retail portfolio. Of these leases signed, 66 leases consisting of approximately 259,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 6.6% over the prior leases.

Our office portfolio ended the quarter at approximately 90.1% leased, down approximately 230 basis points on a year-over-year basis, primarily due to the planned winding down of approximately 121,000 square feet of leases at Oregon Square located in Phase 2 of our Lloyd District Portfolio, to accommodate future plan development. During the trailing four quarters, 68 new office leases were signed representing approximately 282,000 square feet or 11% of our total office portfolio. Of these leases signed during the year, 50 leases consisting of approximately 217,000 square feet were for spaces previously leased. On a comparable basis, the annual cash base rent increased 12% over the prior leases.

Let me provide you with a quick update on our City Center Bellevue office tower in Bellevue, Washington, 20 minutes east of Seattle in the heart of the central business district. 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 2016 adding approximately 1 million square feet of office space. Of that amount, approximately 72% has already been leased according to Broderick Commercial Real Estate Group in Seattle.

The Eastside market continued the same trend in the fourth quarter toward lower vacancies and rental rate increases throughout all submarkets. At the close of 2016, the Bellevue CBD vacancies stand at 9.6%. Earlier in 2016, we discussed how City Center Bellevue has 15 of its 27 floors expiring through the end of 2018. As of the end of 2016, 7.5 of those 15 floors have either been renewed or new leases have been executed, and that is just in the last four months. Of the remaining 7.5 floors, we have four floors with proposals out for renewal, and the remaining 3.5 floors we know are not renewing. Jim Durfey, our Vice President of Office [Properties], continues to do a great job addressing the lease expirations in advance and keeping our buildings full.

As long as we're talking about our office sector, let me update you on Torrey Point, our San Diego office development, that will be approximately 88,000 square feet, have unobstructed views overlooking Torrey Reserve State Beach adjacent to Torrey Pines Golf Course and which took 17 years to get the entitlement.

Our initial completion date was by the end of Q1 2017. Due to the heavy rains that Southern California has experienced in the last month, which I understand has ended our seven-year drought, our completion date is being pushed into Q2 2017. Additionally, based on insight from some of the prospective tenants that have toured the building in the last quarter, combined with lease proposals that have been submitted, we are decreasing our estimated yield range by approximately 50 basis points, due to a $35 per square foot increase in our estimate of the expected tenant improvements for first-generation tenants in the building to approximately $100 per square foot. This is likely to increase our estimated project costs by approximately $3.5 million to $55.8 million and decreased our yield to a range of 7% to 8%. These changes will have no impact on our 2017 guidance.

Let's talk about same-store NOI for a moment. Same-store retail cash NOI decreased in the fourth quarter to a negative 4.5%. The decrease was primarily due to the Sports Authority lease rejection at our Waikele shopping center on Oahu, Hawaii.

We are pleased to report that we now have a signed letter of intent with a national grocer for the space that was vacated by Sports Authority. Due to the confidentiality provisions of the letter of intent, we're not able to share either the name of the tenant or the terms of the deal. For those of you that were unable to attend the investor tour that we held in Hawaii last fall, our Waikele shopping center on the island of Oahu is approximately 15 minutes north of Waikiki, Honolulu, and consists of approximately 42 acres fee simple and half a mile of frontage along the primary H1 highway, and is adjacent to Waikele Premium Outlets. It's a great asset in an irreplaceable location.

In addition, as you may recall last quarter, we were happy to report that Dick's Sporting Goods had signed a lease at our Carmel Mountain Plaza property in San Diego that extends the term over the previous Sports Authority lease by 10 years with an increase in annual cash basis rents.

Same-store office NOI was up 10.2% in the fourth quarter primarily due to increases in our rent at our Landmark building in San Francisco and a new tenant and a tenant expansion at our First & Main property in Portland, Oregon.

Same-store multifamily NOI was up 3.2% on a cash basis for the fourth quarter. Higher year-over-year rents is the main driver of the same-store growth in 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 retail, reported a combined decrease in same-store cash NOI of negative 5% for the fourth quarter. Let me break this out and give you some more color.

For the Embassy Suites Hotel, same-store cash NOI decreased 14.7% or approximately $450,000 decrease as both ADR and RevPAR were down in the fourth quarter over the prior year. The primary reason for this decrease was the planned renovation of all 369 of our rooms in December. The yearend period brought our ADR in excess of $495 rates per day reaching a peak ADR over $500 per day in the final week of the year. According to Smith Travel Research monthly performance analysis for the year through December 2016.

In comparison to the competitive set, the Embassy Suites Waikiki achieved an occupancy index of 94.5%, ADR index of 131% and a RevPAR index of 124%. It is our understanding that the Embassy Suites Waikiki remains the number one performing hotel in North America in 2016 compared with 223 Embassy brand hotels. Our booking pace at the Embassy Suites for 2017 seems to be running ahead of 2016 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 Q2.

Waikiki Beach Walk Retail same-store NOI increased 3.7% primarily due to higher rental revenues. Tenant sales at WBW - Retail were approximately $1070 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 fourth quarter results, FFO increased just shy of $1 million to $0.01 to $0.48 per FFO per share compared to the third quarter.

The fourth quarter results include the following activity. The Embassy Suites at Waikiki Beach Walk decreased approximately $1.8 million in Q4 over Q3 reducing FFO by approximately $0.029 due to the seasonality of the hotel in the fourth quarter combined with the betting installation we previously talked about. Typically, we are down approximately $0.02 in FFO in the fourth quarter compared to the high season over the summer months.

Number two, straight-line rent adjustments increased in the fourth quarter, adding approximately $0.02 in the fourth quarter FFO per share. And thirdly, an additional $0.02 of FFO resulted from a combination of the following three items. A, a reduction in income tax expense related to the annual true-up of the Embassy Suites Hotel taxable income. B, a decrease in interest expense resulting from the repayment of $23 million in secured debt during the fourth quarter. And C, an increase in Waikiki Beach Walk - Retail's cash NOI due to higher percentage rents.

Now, as we look at our balance sheet and liquidity at the end of the fourth quarter we had approximately $275 million in liquidity comprised of $45 million of cash and cash equivalents and $230 million of availability on our line of credit. Our leverage at the end of the fourth quarter remains low at a 28% total debt to total capitalization and a net debt to EBITDA of 5.9 times. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.7 times.

Let's talk about our 2017 guidance. We are reaffirming our 2017 FFO guidance range of $1.98 to $2.06 per share with a midpoint of $2.02 per share which is approximately a 9.2% increase in FFO over our 2016 FFO of $1.85 per diluted share. However, I do want to point out that a few of the items that make up our guidance have changed as follows.

If you start with our 2017 midpoint of $2.02 per FFO share, and make the following adjustments, number one, we have adjusted our 2017 pro forma on Hassalo down by approximately $0.02 per share of FFO. In our model, we're lowering our estimated occupancy for the year from 95% to approximately 92.8%. Note that as of today, Hassalo is 88.1% occupied and 93.2% leased. We're also lowering the average base rental rate per square foot from $2.55 in our initial guidance to $2.40 per square foot. Hassalo was flat for the fourth quarter over all.

We have seen some softening in the fourth quarter. Q4 started at a slower pace overall both at Hassalo and in the general Portland multifamily marketplace, primarily due to seasonal weather changes earlier than anticipated. October brought heavy rain earlier than past years, which we credit for the slower season starting in October rather than its typical November. To put it in perspective, October and November combined saw only 37 leases, with December picking back up with a total of 36 leases. Followed by January with 43 leases and now February with 30 leases prior to midmonth. So you can see how our leasing velocity is increasing once again.

Along with the slower leasing velocity in Q4 came higher concessions to create more leasing velocity. Concessions have since dropped in half as we enter into Q1 going from an average of two months free in November and December to one month free in Q1. Hassalo has led the market in leasing traffic and actual leasing numbers. It is our understanding that our competitors are seeing an average of 8 to 10 tours a week with an average of four leases, while Hassalo is seeing an average of 20 tours per week coupled with an end average of 12 signed leases per week which approximates a 60% closing ratio.

Our Portland management team reviewed the numbers again in January and thought it would be best to take a slightly more conservative forecast and adjust our initial NOI down by approximately $0.02 of FFO per share. We will continue to keep you informed how we're progressing. It is our goal to be as realistic as possible, but if we're going to err, we want to err on the side of conservatism. Our conservatism may just be the result of our recent experience through Q4.

What we do believe is that Hassalo is the best as I can our Portland multifamily marketplace and, long-term, this development will continue to create value for our shareholders. The good news is that Q1 is already seeing recovery from the slower Q4 season as we have seen approximately a 2.4% increase in occupancy from Q4 and a leased rate of approximately 3.96% higher than Q4. Keep in mind, we are only 40 days into the quarter.

Number two, we have added $0.023 of FFO per share as a result of our perspective, unsecured private placement. Our initial guidance factored in an all in rate of 4.32% on $250 million. In January 2017 we locked rates on a $250 million unsecured private placement that is scheduled to close and fund in early March at a net effective interest rate of approximately 3.73%. After taking into effect forward starting swaps that we put in place during the first and second quarters of 2016.

The anticipated proceeds from the private placement will be used to repay approximately $130 million of our CMBS debt secured by Waikiki Beach Walk - Retail at 5.39% and approximately $35 million secured by Solana Beach Corporate Centre 3 and 4 at 6.39%. The balance of the proceeds will be used for general corporate purposes including possible acquisitions that we continue to look closely at as opportunities present themselves.

Number three, at the beginning of January 2017, we issued 700,000 shares on the ATM for approximately $30 million in cash proceeds. The dilution will reduce our FFO per share by approximately $0.022 per FFO share for the year, or about $0.005 per quarter. These three items combined will reduce our midpoint guidance by $0.019 from $0.0202 per FFO share to $2.00 per FFO share. Still within our range of $1.98 to $2.06 per FFO share.

On top of that, we expect to have approximately $100 million on the balance sheet from the remaining proceeds of the private placement combined with the proceeds raised on the ATM for potential acquisitions that we think will be a good fit with our existing portfolio, and create long-term value for our shareholders. We are actively looking to put the excess cash on the balance sheet to work.

As always, our guidance excludes any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancing or repayments other than what we have already discussed. Our guidance also assumes that we will receive all of Kmart's lease revenue obligations at our Waikele shopping center in accordance with the terms of its lease during 2017.

Now as I look at the current Bloomberg consensus for Q1 2017, I am seeing $0.494 of FFO per share. Our current expectation is that Q1 2017 FO will be closer to $0.45 per FFO share. I believe the $0.04 per share FFO difference is due to the following.

Number one, I believe the consensus NOI for Hassalo is approximately $1.1 million higher than what we are expecting in Q1 2017 and accounts for approximately $0.02 of the overage.

Number two, I believe Bloomberg consensus models may still be including approximately $700,000 of net rental income in Q1 2017 relating to the ICW lease at Torrey Plaza in Torrey Reserve that ended on December 31, 2016, and accounts for approximately $0.01 of the overage.

Number three, approximately $0.005 of the overage relates to the dilution from the issuance of the shares through the ATM in early January 2017 and the remaining $0.005 of the overage relates to miscellaneous starting dates of lease income and speculative leases.

I hope this is helpful for those of you that are trying to update your models on AAT. We will continue our best to be as transparent as possible and share with you our analysis and interpretations of the quarterly numbers. We're 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'll now turn the call over to you for questions.

(Operator Instructions) Todd Thomas, KeyBanc.

Good morning. This is Drew on for Todd today. Just a quick question on Waikele Center now that you have the LOI with the national grocer. Would be curious if you have any insight about rents on that space and how you are thinking about positioning the rest of the center moving forward given Kmart and as well as, I believe, Lowe's lease expires in mid-2018? So just curious on how you are thinking about the Center more broadly. Thanks.

Hey, Drew, what we're going to do is we're going to have Chris who oversees that Centre from a leasing standpoint give you an update on that asset.

But the whole thing is in process, so any definitive comment is not possible but there's lots of interest, Chris, would you take it from there?

Yes, hi, Drew. So on the LOI with our national grocer I can't go into any details with that but we are working our way through it and we should push through the process and hopefully get that thing wrapped up in short order. On Lowe's, we're in the process of working out a renewal with them; that's been going on, so they are not going anywhere from the site.

And then on Kmart, where everybody has always gotten very antsy, from our standpoint, Kmart was always, in the nicest way I can say it, a lesser tenant in the Centre and so you come along these opportunities, you're going to have to pull that tenant out and redevelop the building, get some more active and relevant tenants in there. So we've got a lot of interest; it's just going to take a while to get everybody in their proper seat and then put a new look onto the Centre. So I hope that answers your question.

But, Drew, from my perspective -- it's Ernest -- the absence of Kmart is a plus. The interests of these other tenants takes this Centre from one level of excellence to a higher level of excellence. So we're not displeased with the fact that Kmart has given us the opportunity to reposition that Centre in a more effective way for the long-term.

Great, thank you. That's very helpful, guys. Just another quick one. You mentioned acquisitions in your prepared remarks. Just curious, the $100 million of cash you plan to have on the balance sheet at the end of the quarter, is that kind of the right amount of acquisitions we should be thinking about for 2017? And is there any timing or is there anything on the plate right now that you guys are interested in? Any color there would be really great. Thank you.

You know, Drew, we've seen -- we see, thanks to the Internet and the fact that we have a presence in our marketplace, almost every deal that does come to market and we're starting to take a look at them. There has been an easing in the acquisition fervor over the last little while with rising interest rates. So we haven't got anything tied up, but we have a number of significant opportunities that we're looking at and as soon as we do have them in place, we will certainly share that with all our stockholders.

Thanks, you guys. Really appreciate it.

Michael Carroll, RBC Capital Markets.

Yes, thanks. Kind of just off the last question, what type of deals are you thinking about pursuing? Are these just going to be stabilized assets or development opportunities?

Well, we're prepared to look at both. Obviously, on a short-term point of view, we are better off to buy stabilized assets but the stabilized assets have to present a return that is a positive for our stockholders. If we see development opportunity that we can add more NAV for our stockholders, we would certainly consider that too. But we're certainly open to every opportunity, and as Bob has pointed out on prior comments, that over the last six years since we been public, we've increased our NAV by 16% a year including paying dividends. And we'd like to try and at least continue that, those results. So we're looking, we'll do the best we can.

We have no history of making deals that don't work out. But one of these days, we probably will, but I don't see it. Right now we think there is opportunities that were not available over the last couple of years when the marketplace was so heated that we just couldn't compete on a basis that would be accretive for our stockholders.

And should we think about these deals being in your existing markets or are there other markets you are looking at too?

In our existing markets, coastal West Coast; that's where we're going to stay. We have no plans at the moment to go into additional markets other than those that we're already in. So think coastal West Coast. Coastal West Coast, as I have said on many occasions, is the best way, I believe, to create wealth for stockholders in real estate because people want to live on the coastal West Coast and the entitlements are very difficult to come by. That strategy has worked well for us and we continue to pursue it.

Okay, great. And in my final question is, can you give us some color on the timeframe of breaking ground on the next phase in Portland? What do you want to see before you are willing to start new projects over there?

Well, we can't give you the timeframe right now, but we are proceeding on the apartment part of it to create -- to head towards the working drawings; that's probably -- if we were to break ground a couple years out, the lease negotiations with the tenants are in process and they are factors that are beyond our control. But needless to say, as soon as we can, we want to convert that virtually now vacant property into income producing and we'll try and do that as quickly as we can.

Great. Thank you.

Craig Schmidt, Bank of America.

Hey, thanks. Looking at Torrey Point I see it stabilizes in 2018, but when do you think you will start to get rent paying tenants into that building?

You know, we're not -- we don't really know; that's a great project. We've got lots of interest. As Jim will point out, this is -- the market in San Diego is not a prelease market. People want to see it finished. And then we've been held up by the rains. So, Jim, do you want to comment on that?

Well, I really wouldn't fathom a guess on when the first tenant would move in. My goal is to have somebody in there -- the first tenant by the end of the year. But in terms of the quantity of square footage and the exact timing, I really couldn't put a finger on it for you, Craig.

We wish we could.

Okay.

Craig, we've had a lot of activity and showings that Jim has brought tenants along with the brokers and so there's a lot of interest. But as Ernest says is that we need to get that finished which we're very close to doing. From a guidance perspective, we left about zero income coming in 2017.

It's a magnificent property. With a fantastic freeway exposure and fantastic views over a nature preserve and towards the ocean. So there's nothing the matter with the property. We just have to get the leases signed and -- finish it first and get the leases signed. So we're working on it as quickly as we can, Craig, and thanks for the question.

Okay, and then what is -- just on the redevelopment, development pipeline, roughly what's the stabilized period for those four projects?

You mean on Oregon Square?

Yes.

You know, we're just in the process now of finalizing, first of all, the architectural plans. The planning for the product that we're going to put in there, the tenants that were negotiating with we don't have any control about when they are going to step up to the plate. So all I can tell you is, though, that we're working on it as thoroughly and completely as we can and it's out of our control. But it's great property in a great location. We have lots of interest. Hassalo -- the first phase of Hassalo has won 6 architectural prizes, so it's good product. We're very happy with it, but we don't control the timing.

Craig, if you've toured that property, which I think you have, is that the location really is a great location. On one side you've got the state of Oregon, on the other side, you've got the Bonneville Power Dam Authority and you've got Kaiser headquarters for the Northwest up there. You've got 11,000 people a day working in there. I mean it's the place to be on the inner Eastside. And so, as Ernest says, we're doing everything we can to get that thing moving. We're one of three finalists on a build-to-suit building there, and so it's great property, great location.

We're happy to have it.

Okay, and then just one last question. Just what are your expectations for tenant improvements and maintenance CapEx for the office space in 2017 over 2016? Will it be at the same rate as 2016 or could that increase?

It should be about the same rate as 2016. On our Q3 call, I think we put in our guidance that to expect approximately $37 million for operational CapEx across-the-board.

Okay, thank you.

Thank you, Craig. Thanks for your interest.

Haendel St. Juste, Mizuho.

Good morning out there, gentlemen. So I guess a question for you guys on the equity, the ATM issuance in January. I'm curious, why would you want to issue equity I guess so far below your own NAV in January when you guys are planning on sitting on about $100 million of excess cash. And I understand you are in the market looking for acquisitions, but it's proven to be very illusive especially in the West Coast with the type of assets that you want to acquire. So just curious on that capital allocation decision.

That's a very good question, Haendel, and we debated it at length, but we took a discount on our estimated NAV and the issuance of that stock but we think that with interest rates rising and perhaps more turbulence than existed over the last couple of years, we can find an investment for those funds that will be more accretive than the dilution that we experienced. The dilution was painful but minor, but we think that the accretion we can achieve will be joyous and more significant.

Haendel, we do track that monthly, quarterly in terms of our dilution as to the extent that we raise additional equity through the ATM on a year-to-date basis, or since inception. Since we opened up the ATM, I think it was back in 2013, we've raised probably just under $200 million and the collective dilution from that ATM issuing it below what we thought our own NAV was at that time, our collective dilution on that is only approximate $0.26, $0.27.

And if you look at how we've reinvested those proceeds, we created what we look at as between Torrey Point and Hassalo, we've created over $2.00 per square foot of NAV. And then if you look at the dilution of $0.26, that gets you down to about $1.75 of NAV creation, so that's how we think of things. We always want to make sure that on a net basis that we are creating much more NAV than we are through the impact of dilution on the ATM.

I like the idea at this stage in the cycle of having some firepower. There may be an opportunity to make a move that will add to our NAV, perhaps more than the cost of the dilution.

Okay, and I guess I understand that conceptually, but maybe can you give me a sense of what maybe you are seeing in the transaction market? I know people have asked the question before, but maybe just body language psychology, are you finding that more of the sellers are willing to engage in a conversation? We haven't seen much uptick in transaction activity. We haven't seen cap rates move at the upper end, so I'm just curious as to what you might be seeing other than the move in rates, that gives you that sense of confidence.

First of all, it's very premature to say what we can acquire with those funds because we've just really started looking. The acquisition person has been onboard for a short Of time. We are now exploring opportunities and, I just can't give you any guidance. But based on our history over the last half-century, we have a history of taking dollars and turning them into profitable ventures so.

And actually, if you look at it, you've got a -- we've really positioned ourselves for a change in the marketplace and there is some indication there is a change in the marketplace. I'm told that some deals are falling out of escrow now. I'm told that some institutions have decided to lighten up. We're not -- we're in no hurry to spend the money. If we spend the money, it will be something that we say, oh, boy, not oh boy.

So effectively we're going to keep looking, but we're in a position to look now and you have to get into a position to look -- when it doesn't look like you should be in the position to look and acquire when everybody -- buy them when they -- sell them when they love them and buy them when they hate them, that's our strategy. So maybe we'll get lucky again.

Well, it has worked for you historically. One more question for you if I may. On the signed LOI at Waikele, I think I remember before that the grocer, the talks with the grocer was to take up half of the space that Sports Authority used to occupy. Is that the case? Are they taking half the space or are they taking more of it and maybe you could talk about the other half of they are not taking the other half?

And then some more color more broadly on your plans for this space. I know someone asked it earlier but I didn't really get a sense as to how big a scope of a project you are looking there, what type of cost or even yield expectations we should broadly be thinking.

Chris, do you want to (multiple speakers) --?

Yes, Haendel, this is Chris. No, the grocer is going to be taking the entire Sports Authority space. And then the question on the rest of the redevelopment, the cost and returns on all that, as I said before, we're still trying to get the tenants that we're working with, the retailers there positioned in the right size in that Kmart building and then from there we will have to back into it and figure out the overall cost to put it together. So we're still for the last time you and I met when you are out there on the tour, we're still putting those pieces together; I can't give you a definitive answer yet.

But certainly Kmart was no great asset to the project. We think the tenants that we are negotiating with would add to the quality of that project dramatically.

Okay, and last one. Bellevue, you guys still comping in that 10% increase on the rents, and then maybe some color on the remaining floors, what your feel, demand and the marketplace is, just any color on how you are thinking or expecting the lease-up of that remaining (technical difficulty)?

Just an overview; Jim is going to handle that question, but during the period we have owned it, we've done significant improvements to the project to compete with anything new including elevators, lobbies, restrooms. So we're ready, willing and able to compete with anything that comes in the marketplace. And, Jim, why don't you comment on Haendel's question on the releasing, please?

Good morning, Haendel; this is Jim. On Bellevue, as Bob mentioned, we have 15 full floor equivalents rolling in 2017 and 2018 and we have already either renewed or backfilled 7.5 of those 15. Of the remaining 7.5, we're in discussions with the equivalent of four full floors of existing tenants to renew. The three and a half floors that we know are leaving we actually have proposals out on all three and a half of those floors to new tenants. Now what the expectation is on those three and a half, it's too early to tell. What the expectation is on the renewal of the four floors, it's still too early to tell, but we're optimistic.

And the seven and a half floors, kind of interestingly, we thought that maybe Bellevue was -- a year ago everybody thought it was going to crash and burn and that's clearly not the case. We're still under 10% in terms of vacancy in the CBD. And, interestingly, those seven and a half floors that we either renewed or backfilled are at a 12% increase weighted did over the previous tenants.

So, the rents are quite as high as we had hoped. They are not at the peak we were getting three quarters earlier when the market was going crazy but the market is still very good and we are still very optimistic.

And we love that building.

Haendel, When we bought the building, the weighted average rents in place were approximately $32 a square foot, so Jim has, through the years -- and that was in August 2012 -- over the last several years he's brought the leases, I've seen proposals going out that Jim has done and leases that he has executed that have, I think what, hit $48 at the highest?

$47.

And now it's softening -- it came down a little bit with the additional space, but we're still getting increases over the prior base -- over the prior leases, comparable leases. So and if you look at the internal rate of return, we did analysis on that about a year ago. We had over a 27% IRR on that acquisition since we bought it, so that's a great asset, great location and we think that will continue to reward our shareholders.

(multiple speakers)

That's a great question, Haendel, thank you.

Thank you.

Paul Morgan, Canaccord Genuity.

Hi, good morning. Just a quick follow-up on the Bellevue. Given all the activity there and the color that you've provided, how does that shake out relative to what you had included in your 2017 guidance for City Centre. How's it looking at this point?

Well, yes, Paul; Bob here. Let's do two things -- I'll tell you what's in guidance and, Jim, you can answer the other part of it. Paul, from a guidance standpoint, we factored in -- one of the reasons that our same-store office is relatively flat or significantly down for 2017 is that our assumption on those renewals that were coming up in 2017, what we modeled was that they wouldn't be signed or they wouldn't be moving in until the end of the third quarter and we had five months of free rent.

So the five months of free rent was approximately $1.8 million down in cash NOI at CCB. So that's where the model looks. Jim, do you want to add to that?

No, I think my previous points were -- I'm not sure I could elaborate on those anymore, other than to say we're optimistic on the vacant floors. They are potentially vacant and we're optimistic on the renewals, so --.

And the leases that Jim signs all have escalation in them, too. So over the coming years, that's going to be a project that we're delighted to continue to own.

So, I mean in terms of the -- either the cash NOI impact or the GAAP FFO number that you had sort of settled in your guidance for the year versus the activity that you've done from renewals and the discussions on the four floors that are out for renewal now, are you saying right now that you're in the ballpark of what you had originally anticipated?

Where we stand now -- I think we're still in the ballpark. We hope to enhance that but we're not there yet.

Okay. And on Hassalo, it's a little early in the year -- it seems like you've had really good activity this year to date. I'm kind of interested in why you took down occupancy for the year by 200 basis points. Given the progress that you've seen in January and February it would seem, from a seasonal perspective alone, that you would spend a fair amount of the year above where you are right now. Maybe you could average to where you had originally projected. Is there more to -- or was the reduction in the contribution really thinking back of what you experienced in Q4, which it sounds like at least was partly weather driven but I'm just kind of interested in the thought process there.

You know, the project has not been open for a whole year. We provided facilities in that marketplace that are relatively new and different than what's in that marketplace. We're learning the marketplace, so we've been surprised and pleased with the initial reaction and then the weather set in; there was some additional competition opened up. So there was more competition than we expected and the weather was a factor. Sometimes the weather worked in our favor. I couldn't believe it, we'd have snow and maybe rent apartments. We'd have rain and we wouldn't.

We're learning the project, so I think as Bob pointed out, we'd sooner under promise and over deliver. So we want to be conservative. We're very bullish on the project in the long run. In the short run, we're feeling our way to the -- so we can be more forthcoming on the projections. But I think, Bob has hopefully erred on the conservative side, but we'll see. But it's a good project.

Okay, then just lastly on the private placement, so you said $250 million in early March. Is there a timing difference between the use of proceeds to pay off the debt or will that happen -- I think in your supp it had a different amount you could prepay at that point. But you mentioned $165 million of it being used to prepay debt. Should -- from a modeling perspective -- should we think of that as happening at the same time?

Yes, yes, so we -- if you look in the supplemental, I think that the maturity on Waikiki Beach Walk was July 1, so we're -- we have an open prepayment window four months earlier. So we're going to try to hit that on March 1 if we can.

Okay, and then --.

So we'll -- on March 1, what we want to do is pay down Waikiki Beach Walk for $130 million -- $130 million - to $133 million and then I think in April or May --.

April 1.

April 1, pay down Solana Beach Corporate Centre. So we want to take advantage of the reduction of the interest rate as soon as possible.

Yes, so just a quick math suggest that those transactions are sort of neutral, but then on top of that you're still -- you're going to be sitting on $90 million, $100 million of cash. So from your -- kind of the three guidance tweaks you mentioned, that assumes, I think if I understood correctly, no contribution from the $90 million other than maybe sort of a cash account interest, I guess. But no actual acquisitions in guidance, so that $90 million is really just kind of sitting there in terms of (multiple speakers) --.

Correct, So you're absolutely correct. So on the $100 million -- on the $250 million and you take away the $166 million or you take away the $165 million, that should leave you about $80 million plus the ATMs, another $30 million, that's $110 million, probably have some CapEx, so let's say that we have $90 million to $100 million -- we should have $100 million that we want to put to work as quick as possible.

Okay.

But we're not so anxious to put it to work that it would be -- that we would (technical difficulty) say to our stockholders we did good for you.

Yes, okay. Great, thanks.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back over to Ernest Rady for any closing comments.

Okay. Thanks, all, for your interest. We think, again, that the strategy we have of a diversified coastal West Coast portfolio is the best way to create wealth and we intend to continue to take advantage of the positions we have, the properties we have and the folks who work with us to -- for our stockholders. So thank you for your interest.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.