American Assets Trust Inc (AAT) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Assets Trust Fourth Quarter and Year End 2018 Earnings Call. (Operator Instructions) As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference, Mr. Adam Wyll, Senior Vice President and General Counsel. Sir, please go ahead.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2018 fourth quarter and year-end earnings conference call. Joining me on the call are Ernest Rady and Bob Barton. These and other members of our management are available to take your questions at the conclusion of our prepared remarks.

Our 2018 fourth quarter and year-end 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 condition 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 and year-end 2018 furnished to the Securities and Exchange Commission, and this information is available on our website at www.americanassetstrust.com.

I'll now turn the call over at our Chairman, President and CEO, Ernest Rady, to begin our discussion of fourth quarter and year-end results. Ernest?

Thanks, Adam, and that was really eloquent. Well, good morning, everyone. Thank you for joining American Assets Trust fourth quarter and year-end 2018 earnings call. We continue to make great progress in all fronts as we continue to focus our efforts on earnings growth combined with growth in net asset value for our shareholders.

At American Assets Trust, our strategy is focused on these 7 things: one, coastal West Coast markets, from San Diego to Seattle and Hawaii, which have dynamic high barrier-to-entry attributes where the demographics, tenant demand and local economies are strong and that we believe, outperform other markets over time. Two, diversification by asset class. We believe that the combination of office retail and multifamily properties as opposed to focusing on single asset class provides for superior positioning opportunities. Three, consistent growth, both organically and opportunistically. We believe that our NAV annualized growth over the last 8 years has been approximately 12%. Our annualized total shareholder return over the last years has also been approximately 12%, speaking to the quality of our portfolio. Four, we maintain a conservative balance sheet and debt profile. Five, environmental sustainability and social responsibility. We use prudent and conservative methods to reduce carbon emissions, minimize our environmental impact and preserve natural resources for our future generations. Additionally, we firmly believe that our success is directly related to the success and health of our communities in which our properties are located. Six, technology. We expect that bringing cutting-edge technology into our properties and our business operations attract higher credit tenants and create some material operational cost savings. Seven, dedication to transparency, excellence and success in all that we do.

During the fourth quarter, we signed a significant lease with Google at our Landmark at One Market in San Francisco, which will contribute significantly to our earnings in 2019 and beyond. The office market in both San Francisco and Bellevue, Washington remained quite strong.

We continued our renovation of the former Kmart building at our Waikele Center in Hawaii and remain optimistic on the leasing front as we have commenced lease negotiations and begun negotiating LOIs, letters of intent, with various prospective national retailers. The Safeway store at Waikele Center remains on track to open in fourth quarter '19.

Our renovation of one of the existing smaller office building at Oregon Square in Portland is almost -- been complete, and we are optimistic on the leasing front as we have negotiations with LOIs with prospective full- building users. We continue to reinvest and improve our existing assets and remain optimistic about the future of this portfolio and our ability to improves -- prove the price NAV GAAP. On behalf of all of us in American Assets Trust, we thank you for your confidence. We work hard to earn it, and allow 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. Thanks. Bob, you got it.

Good morning, and thank you, Ernest. Last night, we reported fourth quarter 2018 FFO of $0.47 per share, and net income attributable to common stockholders of $0.14 per share for the fourth quarter.

Fourth quarter results are primarily comprised of 4 highlights, which are as follows: first, FFO miss consensus by approximately $0.01 in Q4, primarily from the onetime expensing of the demolition cost related to the redevelopment of the former Kmart building at our Waikele Center.

Secondly, as Ernest mentioned, at our Landmark at One Market Street in San Francisco, we signed a 10-year lease with Google as prevailing market rates in terms for approximately 253,000 square feet, replacing Salesforce.com. Google began paying rent on 2 floors on January 1, 2019, and will begin paying rent on 3 additional floors on July 1, 2019. And on the remaining 2 floors, for a total of 7 floors on June 1, 2020, with straight-line rent beginning in Q3 '19.

As noted in our earnings release and supplemental, the cash basis and straight-line percentage change in our comparable new and renewal office leases signed in Q4, were approximately 64% and 96%, respectively, with a large part of that driven by the Google lease.

Third, the former Sears store at Carmel Mountain Plaza shopping center in San Diego closed its doors in late November 2018 after filing for bankruptcy. This reflects the drop in our leased occupancy from 98.8% at Q3 to 77.4% at the end of Q4. As you may recall, we own the underlying land, which we ground leased to a third-party ground lessee. In late December, 2018, we reached a lease termination agreement with the ground lessee for it to surrender the former Sears building, which it owned, in exchange for the release of its remaining obligations under the ground lease. This transaction closed in January 2019, with the recording of the grant deed, which legally transferred title of the building back to American Assets Trust, resulting in a $4.5 million termination fee to be recorded in Q1 '19. That termination fee was calculated based on the discounted cash flow analysis of the then remaining ground lease rent schedule.

But wait, the story doesn't end there. Less than 3 weeks later, we signed a 10-year lease for the entire former Sears building, approximately 108,000 square feet with the national retailer in the home decor space, which we understand is making its debut entry into California. This brings our retail leasing occupancy backup approximately 98% in Q1 '19. We anticipate this retailer will be well received in this high demographic area and will make a significant impact at Carmel Mountain Plaza by activating the eastern end of the shopping center, which is long been in need of a renovation as it was previously under control by a third party.

Rent is expected to begin in Q4 '19 with straight-line rent commencing in Q3 '19. We expect this new tenant to increase FFO on an annual basis by approximately $0.013 over what we were receiving from the formal ground lessee. Tenant improvements are minimal. Number four, we increased our 2019 FFO guidance by $0.06 at the midpoint, primarily as a result of the $4.5 million termination fee, previously discussed, to $2.22 per FFO share. We also believe, now more than any time in the last 3 years, there is a clear path to organic growth over the next several years with our high-quality coastal West Coast focus. From our vantage point, we expect to see in excess of 6% organic growth in FFO in 2019, and in excess of 8% organic growth -- organic FFO growth in 2020. We expect similar organic growth in our EBITDA, as Google comes on line for full year beginning 1/1/20, which we believe will produce well in excess of 12% growth in EBITDA in 2020 compared with the year-end 2018, resulting in a net debt-to-EBITDA that we expect will be closer to 5.5x, strictly through organic growth. And we believe the existing organic growth also allows us to grow further through smart accretive acquisitions and other opportunities that create -- that can create long-term shareholder value that we hope will close the price to NAV GAAP.

Let's take a deeper dive into the details behind these highlights. As it relates to retail, during the trailing 4 quarters, 78 retail leases were signed, representing approximately 317,000 square feet or 10% of our total retail portfolio. Of these leases signed, 63 leases consisting of approximately to 239,000 square feet were for spaces previously lease. On a comparable basis, the annual cash basis rent increased 3.6% over the prior leases.

As it relates to office, our office portfolio ended the quarter at approximately 90.9%, an increase of approximately 250 basis points on a comparative basis year-over-year, primarily due to an increase in occupancy at our City Center Bellevue and Torrey Reserve Campus in San Diego, leaving a vacancy of approximately 9.1% or 242,000 square feet of our 2.7 million square-foot office portfolio. It is also important to note that we believe our in-place rents for the office portfolio even after signing the Google lease are still approximately 23% below market.

Let's talk about same-store NOI for a moment. Same-store retail cash NOI increased in the fourth quarter to 3.8%. The increase primarily relates to increased rents at our Carmel Mountain Plaza, Loma Santa Fe and Alamo Quarry Market shopping centers combined with the decreased rental expenses at the Gateway Marketplace shopping center, which was acquired in 2017.

Same-store office cash NOI increased 4.9% in the fourth quarter, primarily due to rental abatements burning off unused tenants at City Center Bellevue.

Same-store multifamily cash NOI increased 9.1%, primarily due to improved operating results at -- of the Pacific Ridge Apartments in San Diego. Total revenue of Pacific Ridge Apartments continues to increase again in 4Q 2018 by approximately 8%, primarily due to increased base rent. In addition, rental expenses decreased 3% as our restructured multifamily management team continues to focus on operating expenses and efficient operating margins to drive solid results. The remainder of our multifamily portfolio performed well with an increase of cash NOI of approximately 3%, primarily attributable to an increase in base rent and other property income at Hassalo on Eighth in Portland combined with a decrease in rental expense.

Waikiki Beach Walk, our mixed-use property consisting of the Embassy Suites hotel and Waikiki Beach Walk retail reported a combined increase on same-store cash NOI, excluding redevelopment of 1.8% for the fourth quarter. Broken down further, this represents an increase at the Embassy Suites hotel of approximately 14%, offset by a decrease at Waikiki Beach Walk Retail, down approximately 8%. The increased cash NOI at Embassy Suites can be attributed to an increase in ADR year-over-year of approximately 5.8%.

At our Waikiki Beach Walk Retail center, the decrease in same-store cash NOI was primarily due to a reduction in the percentage rent, as well as an increase in repair and maintenance expenses. Nevertheless, tenant sales remained high at $1,112 per square foot for the rolling 12 months, as our tenants continue to benefit from the excellent location and good economy.

Turning to our fourth quarter results. FFO decreased approximately $0.06 to $0.47 per FFO share compared to the third quarter. The fourth quarter results include the following activity: first, with respect to the signing of the Google lease, which resulted in the early termination of the Salesforce lease, the useful life of the assets related to Salesforce lease were adjusted to reflect the remaining lease term. The acceleration of the write-off of these assets decreased FFO by approximately $0.02 per FFO share. Second, G&A expenses increased by approximately $0.02 per FFO share as a result of our achieving better-than-expected year-end performance objectives, based on the positive results achieved in operations and leasing activities for the entirety of 2018. Third, Embassy Suites seasonality and operations decreased fourth quarter FFO by approximately $0.01. And fourth, at our Waikele Center, onetime demolition expenses were incurred with respect to the building formerly occupied Kmart, resulting in a $0.01 decrease in FFO per share.

Now as we look at our balance sheet and liquidity at the end of the fourth quarter, we had approximately $334 million in liquidity, comprised of $48 million of cash and cash equivalents and $286 million of availability on our line of credit. Our leverage, which we measure in terms of net debt-to-EBITDA, was 7.2x, although, our continued focus is to get our net debt-to-EBITDA back down to 5.5x or below. We believe that our existing organic growth in EBITDA will reflect the following approximate net debt-to-EBITDA ratios quarter-by-quarter in 2019. Q1 '19, it will drop to 6.1x due to the termination fee related to the former Sears ground lease. Q2 '19, we expect it to go back up to approximately 7x. Q3 '19, it will drop again to 6.6x with the straight-line revenues being recorded on the Google lease. Q4 '19, we expect it to be 6.0x and 5.7x by Q4 '20, again, all of this is through existing organic growth.

And as always, our guidance in this prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases. Future debt refinancings or repayments, other than what we've already discussed. We will continue our best to be as transparent as possible and share with you our analysis interpretations of our quarterly numbers.

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

(Operator Instructions) Our first question comes from the line of Craig Schmidt with Bank of America.

I saw that -- recognizing the $4.5 million in leased term fees and then looking at your corporate guidance page in the supplemental, the net income essentially stay the same, but you picked up around $4 million in depreciation and amortization. Could you walk me how the $4.5 million raised your guidance?

Great. It's a very good question. I've had several questions on that and the optics don't look good when you're looking at that. Let me walk you through it. So the difference between our 2 midpoints in FFO is $3,671,000, and the termination fees that we recorded -- or will record in Q1 are $4.5 million. What we've done is, we've taken the $4.5 million and reduced that by approximately $800,000 in change, to reflect pushing out some of the speculative leasing that we had in our original guidance to later quarters in 2019. So that net, the $4.5 million, less pushing out some of that speculative leasing, gets you down to $3,671,000. The other question is that on the depreciation, the -- what we know is that the depreciation is accurate, the FFO is accurate on both the original or the prior Q3 guidance and the current -- the revised guidance. What we're looking into is that -- we think that the original Q3 guidance should be increased to what we see today, $88,191, which would reduce your -- which would increase your depreciation and decrease your net income. Again, this is all just for guidance on the guidance sheet of the supplemental, Page 9, and we'll run that to ground.

Great. And that was a great question, especially, when you consider the complexity of the answer. So good for you. Thank you, Craig.

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

First question. Bob, you mentioned, so $0.013 pickup from Carmel Mountain Plaza, is that the annualized impact? Or is that the impact in the second half once straight-line rent commences? And then, I was curious if you can talk a little bit about how the rent stacks up versus the $30 square foot average for the center, I realized it's a big box there. But can you just describe the rent a little bit and the economics in general?

Yes. Your first question, the $0.013 that increase over the -- what we're receiving from the ground lessee, that's on an annualized basis. So you're not going to get that full impact in '19. In terms of where the rents are, I believe it's similar to what we received on some of the other big boxes. But Chris, why don't you talk to that?

Yes. So keep in mind that Sears box is 107,000 square feet. So it's an enormous box. The other boxes in the center are in the 25,000 to 30,000, I think, the other large box we have out there is 40,000. I don't have my sheets in front of me but I believe the rent was in the $15, $16 rent, plus triple nets, which is absolutely market for a box of that size. So that's why on a per square foot basis, it may look a little less compared to other boxes. Now $30 square foot number you have there also probably includes some of the shops to bring that number up.

That's helpful.

Todd, and I also think too, is that with the TIs being minimal on this, so you could take that box and carve it up into 3 or 4 different boxes. But the landlord cost to demise that and create those new boxes, plus higher TIs, would probably get you a higher rate. But on a net present value basis, you're probably better off with what we've got. And I think that the type of tenant coming in there is really going to activate that center and well received in the marketplace.

Plus, of course, there's no downtime.

Exactly.

Sure. And when did the ground lease expire? And did you previously have ground lease income factored into the 2019 guidance?

Yes, we did. It expired in January -- end of the year January. And we did have that in guidance, but that was like slightly less than $0.01.

Okay. So the ground lease expired in January. How do you arrive -- well, how did you arrive at the $4.5 million terminal value? It sounded like it was sort of a discounted or a net present value of the remaining lease term.

Yes. There is specific guidance on how you determine what that termination fee is and really what we look at is to the discounted value of what we gave up. And what we gave up was the remaining obligation under that ground lease, which their lease ended in, I believe, 2023. And what we got in exchange was 108,000 square-foot building, and the best way to value that was looking at what we gave up.

I believe you had extensive discussions with our outside auditors to make sure that we're doing the accurate presentation.

Oh, yes.

Got it. So the Sears lease expired at the end of '18. The ground lease went through 2023?

That is correct.

Okay. And then, sort of a bigger-picture question for you, maybe Ernest can chime in. The Google lease dramatically increases your office NOI, and you've talked previously about keeping office below certain threshold, I think, 40% as a percent of the company's portfolio. It seems like it'll be above that 40% threshold once the Google lease kicks in. How are you thinking about rebalancing the portfolio from here? What are your current thoughts there?

Our first focus is on increasing that asset value and cash flow for the stockholders. It's not as important to us that we maintain the absolute proportions that have existed in the past. So we'll be looking at this from an entrepreneurial point of view to say how can we continue to increase our net asset value? We're not going to focus on a split that we had before for you. Fortunately, the diversification has allowed us to have a significant upswing from office. And it's nothing that, I say, gosh, I wish, we didn't have all that office. But wish we had more.

Our next question comes from the line of Rich Hill with Morgan Stanley.

Thanks for that clarification on the ground lease. I think it makes it pretty clear to me what you own at this point. Want to, maybe, be a little bit more high-level at this point and talk about San Diego. Obviously, there's 2 big catalysts there. Ernest, in the past, you've said you're very confident in that lease or getting those leases done. But maybe could you give us an update on what the San Diego office market looks like? And are you more optimistic, less optimistic than you used to be on the timing of those lease executions?

Well, I'm optimistic on the timing of the lease executions in San Diego. But certainly, any comparison between San Francisco, even Portland and Seattle and San Diego is purely coincidental. San Diego is much more competitive, but Steve Center, who heads up our office leasing in San Diego was doing an excellent job. So I continue to be optimistic. But it's not like rolling off a log. And there's a lot of competition. You want to add something to that, Steve?

Sure. Just to get a little more specific. Torrey Plaza -- the real needle movers in San Diego Torrey Plaza and Torrey Point. In Torrey Plaza, the building that we renovated, we need to lease -- and I'm looking at, again, to a stabilization of 92%. So we need to do about 38,000 feet of net absorption in this building to hit 92%, and we're in active proposals on 26,000 feet of that. So the activity is good, the reception of the renovations is very, very good. We have been proactively building spec suites, and they are bearing fruit as well. So we have got good momentum, and we expect to have positive things to report in future quarters. Torrey Point, we just signed a new lease with the company called, eMolecules, for 7,300 feet. So that basically fill the second floor of the three-story. And we've got a couple of larger deals that we're in discussions with 4 other components of that project. So good momentum. We think once we get the TIs built with RSM, which is a recent deal for 13,500 feet, and eMolecules coupled with the other tenant -- the other building, get that activity there and activity begets activity. And we think we're going to finish strong there.

We can see why I was optimistic on San Diego. That was a good report, Steve. Thank you.

Yes. No, no, it was very helpful. Steve and Ernest, that's maybe a lot more concrete details than we've received in the past. Is that fair?

Yes, I think that's fair. Don't forget -- we've been involved in lot of renovation. And so it's taken a little longer because I think the product we have was not consistent with what the market demanded. We've now remodeled, and we have one more remodel going on, and we're now providing the product that the market wants. And I think we can compete more than effectively.

Our next question comes from the line of Haendel St. Juste with Mizuho.

So I've got a couple of questions. I guess, how long the lease just signing with the new home furnishing store and does it contain rent bumps? And did I hear you correctly about saying, what you said, that the tenant takes occupancy in the third quarter and that the actual cash flow starts in the fourth quarter?

Chris, why don't you handle that since you...

So I believe it's a 10-year term, and you get a bump there every 5 years, so that equal with big-box anchors. I believe our tenants are going to be starting the TIs...

This Friday.

There we go, Haendel, you know Jerry, he said, it's this Friday, they're pulling permits. So they'll start -- there you go, this Friday. So figure of about 4, 5-month TI picture, and then they'll open and the way they go.

Yes, Haendel, we're factoring in straight-line rent coming in, in Q3 -- beginning Q3 and then cash coming in, in Q4.

Got it. Okay. And Bob, I guess -- no, Ernest, maybe you. Just a follow-up on the decision to retenant the former Sears box with another large box tenant. I guess, I understand the dollars incentive getting someone in there today at a similar rent but wouldn't the better long-term decision from an NAV perspective had been to redevelop the box into smaller spaces at higher rents, which would not only then add cash flow benefits but also cap rates benefits?

Just Chris Sullivan is chopping (inaudible). He wants to answer that question. I can't deny him the opportunity. Chris?

Well, Haendel, in theory -- that sounds good, but remember, it's all market by market. So when you look who is in the Carmel Mountain market, you look who is up across the freeway at Forest Ranch, and you go up to the next intersection at the 78 and down to Miramar, a lot of your boxes are already in place. So when you look at who the available prospects are, what's going to make bang for the buck for the center, that start getting pretty thin. So when you factor in leasing risk, you factor in the amount of time it takes, the costs to redemise the building and everything involved, and you bring it up on a net present value, this deal made a lot of sense to take -- to do this one.

That answer your questions?

A redevelopment would've involved capital cost, it would have taken up time, it would've -- we'd uncertainty. This way, we have no vacancy, we have no capital -- minimum capital costs and we have certainty. All of which adds up to, in my view, if I may describe it, is a home run.

Okay. And I guess, one more for me. Curious on the current outlook for incremental lease term fees. I know they're hard to predict and that there isn't anything incremental embedded in your current FFO guidance, but curious, how you're feeling about engaging tenants today regarding early lease terminations? Are you still open for business for those who are willing to pay you to get out of the lease or you want clients to enforce the leases? I know these are on case by case but just maybe you could walk us through some of your thinking on potential early lease termination discussions.

Case by case, Haendel. I would like to tell you that logic is the most important factor in our consideration. But greed also plays a role. So we have an opportunity, we'll do our best to take advantage, consistent with playing fair with all of our base of tenants.

One other point regarding that, Haendel, is that if you look at the termination fees we had in '18, and the termination fees we have in '19, they're about equal. So the growth, I think it's like 6% in FFO growth or 6%, 7% in FFO growth in '19 is going to be the same with or without the termination fees. So it's not like a onetime.

It's really case by case.

Our next question comes from the line of Michael Carroll with RBC Capital Markets.

I wanted to dive into the Torrey Point and Torrey Reserve projects, again, real quick. I know that you were just talking about there are several large deals looking at the rest of Torrey Point. How -- what's the size of those tenants? And how many more leases do you need to sign to fill up that project? Are you holding it back for one larger user?

I would say, it's going to be 3 to 4. We've got 23,000 feet on the third floor of the three-story. For the right credit, you would divide it in half, which we did on the second floor. So when RSM led the way with 13,500 feet, we divide it down for them, and then the eMolecules came in for most of the remainder. So for the right credit, we break it up. But I see that going full floor. Then you have a 10,000 foot increment on the ground floor of the three-story and 12,000 in the two-story, plus another 4,800. So it could be 3 to 4 leases, maybe 5 tops.

Okay, great. And then do you think that there's enough activity to get that project stabilized by the end of the year?

Yes.

Okay. And then on the Torrey Reserve project, can you remind us how much space you actually renovated there?

Oh, gosh, I'd say, 40,000 feet of spec or white boxing, and we're still doing some more.

And it's not only the renovations in the tenant space, it's the renovation in the public space, and that's what's added to the appeal.

And then, what type of uplift have you been seeing in those rents, given those renovations? Is it fairly meaningful?

Oh, yes. Yes, we're -- we haven't got backwards yet. So we continue to judiciously push while making deals. We're winning more than our fair share of deals versus our competition right now, and so we want to keep that momentum going on. And one way we're doing that, again, we mentioned spec suites earlier, having a suites build and ready to go versus someone who hadn't even contemplated a 6-month process to design a permit and build a space, it makes a huge difference, especially for tenants caught under 7,000 feet. Furthermore, I typically don't give themselves enough time to get all that done with the lease expiring. So we've taken opportunities where timing is an issue and rather than treating it as a typical landlord-tenant relationship, we partner with them, so to speak, and we figure out how to get them in and on time. We just had signed a lease with a group called Marion Wealth Management, they just signed last week and part of the reason we got that done is we were able to meet their ambitious schedule because they had taken longer to get this done. So part of the success is the execution and the vertically integrated team with leasing, with legal, with construction in-house, as well as our operations folks. So long winded answer there. But...

And the renovation to the common area. People walk and then say, wow.

Okay. And then my last question, real quick, is on the Embassy Suites refresh. When do you plan on breaking ground on that project? Is that still going to go on as you previously described last quarter?

That's a complicated answer, and Jerry, who's been responsible for it will cover it. But we have 3 parts to it. First of all, we have to -- go ahead, Jerry. You're going to...

Sure, so Michael, we have the painting and spalling project, that has already commenced on the Hula Tower. We expect that project to be ongoing throughout '19, and then we'll carry over to the Aloha Tower as well. We anticipate having both projects done in 2019 from a painting and spalling aspect, and we are also working on refreshing the hard goods within the rooms and that project should start in Q3 of 2019, and that will take us through 2020.

It's a sequence. We don't want to do it all at once because we'll have nothing but confusion. So first -- the first couple of phases that Jerry outlined and then we refresh.

Our next question comes from the line of Jeff Donnelly with Wells Fargo.

It might be a two-parter here but I guess, what's the reaction to selling assets in San Antonio and redeploying that into share repurchases because it would seem that, that would sort of intensify that coastal West Coast focus, as you had mentioned, Ernest, and the company would be taking advantage of repurchasing its shares at a nice discount to your own opinion of NAV and taking advantage for tenants to be a very strong 2020 FFO growth? I'm just curious how you guys think about the outlook for San Antonio and may be why that matches your outlook for the West Coast? And maybe Bob, I know why there's a desire to deliver, but at the same time, repurchases could make sense too.

San Antonio is a top-notch property that compares favorably with anything that we've looked that's available on the coastal West Coast. We have been looking for a decade to try and find a 1031 that would bring the whole portfolio to the coastal West Coast, and we've not found anything in coastal West Coast that is as good or as promising as what we have in San Antonio. As far as repurchasing shares, maybe we have a small problem. But we're kind of a midsized REIT on the smaller side. We would like to be more institutional, we would like to get in the game that would not be involved with purchasing -- REIT purchasing our shares and getting smaller. If anything, we'd like to get larger and be more a factor in the marketplace than we presently are. So repurchasing our shares is not on the agenda. But that's a good suggestion, and thank you.

We can debate that. I guess, to switch gears, Ernest, is how do you guys think about the potential impact of the change to prop 13. Obviously, it's kind of getting more press out there and what's your thoughts on it? I know it's still early.

I can -- do you want the honest truth? I don't know. What the legislation will do, I don't know what the reaction of the marketplace will be, I don't know. But the factors that are really important is there is innovation in the coastal West Coast, there is job creation, there is climate and people want to live here. So this marketplace that we are in will overcome, I believe, in the midterm, anything that government inflicts on us, and they will probably do their best to inflict what they can on us. But good is good, and we don't have -- but we have wit and that's the secret to our success.

I like the word inflict. And just one last question I guess, what's the status of your plans with the board. I just think, I believe, California kind of pass some rules about composition of the board, excuse me. And just wondering what changes you anticipate making in 2019 or '20 to the board?

We are nominating a woman to the board who I have a long-term experience with. She was the COO of a bank that I was involved with. She's been in private equity and we're -- she certainly welcome and she has met everybody in the company. She is very interested in the company. Larry Finger, who has been on our board for many years, has agreed graciously to become a consultant instead of a board member. So we will be complying with all the laws that California -- can I use the word, inflict on us again and continue to have the benefit of all the advice we've had from the board in the past, plus this young lady, Joy Schaefer.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Ernest Rady for closing remarks.

Well, again, thank you all for your interest in the company. I think this, our results continue to reflect the strategies that we have, which I believe are the best strategies for real estate in our marketplace, and we hope to continue to perform on all of our shareholders' behalf. Thank you for your interest, and thank you for your time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect.