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Edited Transcript of AAT earnings conference call or presentation 30-Oct-19 3:00pm GMT

Q3 2019 American Assets Trust Inc Earnings Call

San Diego Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of American Assets Trust Inc earnings conference call or presentation Wednesday, October 30, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Abigail Rex

American Assets Trust, Inc. - Director of Multifamily, San Diego

* Adam Wyll

American Assets Trust, Inc. - Executive VP & COO

* Christopher E. Sullivan

American Assets Trust, Inc. - VP of Retail Properties

* Ernest Sylvan Rady

American Assets Trust, Inc. - Chairman, President & CEO

* Jerry Gammieri

American Assets Trust, Inc. - VP of Construction & Development

* Robert F. Barton

American Assets Trust, Inc. - Executive VP & CFO

* Steve Center

American Assets Trust, Inc. - VP of Office Properties

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Conference Call Participants

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* Elvis Rodriguez

BofA Merrill Lynch, Research Division - Research Analyst

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* Jason R. Idoine

RBC Capital Markets, Research Division - Associate

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Tamara Jane Fique

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 American Assets Trust Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speak today, Mr. Adam Wyll. Thank you. Please go ahead.

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Adam Wyll, American Assets Trust, Inc. - Executive VP & COO [2]

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Thank you. Good morning, everyone. Welcome to American Assets Trust Third Quarter 2019 Earnings Call. Yesterday afternoon, our earnings release and supplemental information were filed on a Form 8-K with the Securities and Exchange Commission. Both are now available on the investors section of our website, americanassetstrust.com. An audio webcast of this call will also be available for replay by phone over the next week as well as on the investors section of our website.

During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our earnings release and supplemental information. We will also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings. You are cautioned not to place undue reliance on these forward-looking statements, actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update. And with that, I will turn the call over to Ernest Rady to begin the discussion of our third quarter results. Ernest?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [3]

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Thank you, Adam, good morning, everyone. And thank you all for joining American Assets Trust Third Quarter 2019 Earnings Call. We are making great progress on all fronts as we continue to focus our efforts on earnings growth combined with growth in net asset value for our shareholders. The company's Board of Directors has declared a dividend on its common stock of $0.30 per share for the quarterly period ending December 31, 2019, which is a $0.02 per share increase and an approximately 7% increase over the prior quarterly dividend. The dividend will be paid on December 26, 2019, to stockholders of record on December 12, 2019. And we are all delighted to share financially some of the success that we've enjoyed over the last years.

I'm also pleased to announce that the Board has named Adam Wyll as our Executive Vice President and Chief Operating Officer. Adam is and has been a valuable member of our management team. And this title better describes the breadth of responsibility he has successfully taken on and will continue to manage since our IPO, as well as the confidence our Board has in him. And there is no change in reporting function, and he has been a very important part of our management team, and we appreciate what he's done and look forward to working with him in the future.

We are fortunate to have such a great management team, and a group of employees at AAT, all whom work together, as we continue as a best-in-class real estate investment trust.

I'm going to keep my introductory comments short since Bob is going to introduce our 2020 guidance, which will focus on the growth and resilient strength of our high quality coastal West Coast, high barrier to entry portfolio. Again, on behalf of all of us and the management with us, 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. Okay, Bob, take it from here.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [4]

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Good morning, and thank you Ernest. Last night, we reported third quarter 2019 FFO of $0.50 -- $0.57 per share and net income attributable to common stockholders of $0.22 per share for the third quarter.

Third quarter results are primarily comprised of the following. First, actual FFO increased in the third quarter by approximately 27% or 11.7% on an FFO per share basis to $0.57 per FFO share compared to the second quarter of 2019, primarily from the following 5 items: first, the acquisition of La Jolla Commons on June 20th added approximately $0.085 of FFO per share; second, the Embassy Suites of Waikiki Beach added approximately $0.014 of FFO per share, due to the seasonality over the summer months; third, the Landmark at One Market in San Francisco added approximately $0.037 of FFO per share, resulting from the lease commencement on July 1st of the remaining 5 of the 7 floors now occupied by Google under their lease agreement that was entered into in Q4 2018; fourth, an equal increase in both G&A and interest expense reduced FFO by approximately $0.015 per FFO share; and fifth, a decrease of approximately $0.06 of FFO per share as a result of the increase in the weighted average shares resulting from the equity raise in connection with the acquisition of La Jolla Commons in Q2 of this year. Secondly, as Ernest previously mentioned, we've increased the quarterly dividend by $0.02 per share beginning on December 26 to stockholders of record on December 12, an approximately a 7.1% increase over the prior quarterly dividend.

And third, our 2020 guidance ranged midpoint of $2.42 is approximately a 9% increase over the revised 2019 guidance midpoint. However, excluding 2019, nonrecurring termination fees of approximately $5.2 million recorded year-to-date, the majority of which was noncash, the 2020 guidance midpoint would be approximately 13% increase over 2019. And we believe it reflects the true FFO growth of 2020.

Let's discuss these highlights in more detail. Our retail portfolio ended the quarter at 98% leased combined with what we believe are the highest annualized base rents amongst our peers. During the trailing 4 quarters, 73 retail leases were signed, representing approximately 313,000 square feet or 10% of our total retail portfolio. Of these leases signed, 61 leases consisting of approximately 181,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 3.7% over the prior leases and on a straight-line basis, increased 10.6% over the prior leases.

Our office portfolio ended the quarter at 94.7% leased, specifically as it relates to La Jolla Commons, we have made great progress. As of the date, we acquired that asset on June 20th, it was 88% leased. 10 days later, on June 30, it was 95.9% leased. And as of September 30, it was 96.6% leased. We believe it continues to be in the path of future growth and in a dynamic market where the vacancy is approximately 3%. Steve Center, our Vice President of Office Properties has done a tremendous job in overseeing these assets leasing momentum, setting what we believe our new high watermarks for office rents in the UTC submarket.

It's also important to note that we believe our in-place rents for the entire office portfolio are approximately 18% below market. During the trailing 4 quarters, 71 new office leases were signed, representing approximately 679,000 square feet or 20% of our total office portfolio. Of these leases signed, during the year, 47 leases consisting of approximately 494,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 45% over the prior leases and on a straight-line basis, increased 69% over the prior leases. The increase in the straight-line rent in both retail and office reflects the cash NOI growth that is locked in, and we expect to see beginning in 2020.

At first glance, overall same-store cash NOI was somewhat confusing to expectations. But with a deeper dive into the numbers, it is simply comprised of same-store retail cash NOI decreasing in the third quarter by 5% or approximately $800,000, resulting from a decrease in retail termination fees received in 2019 over 2018 from 2 Aaron Brothers stores, one of which has been re-leased in 2019. And we recorded a bad debt expense for one Forever 21 store closing, we have at Del Monte Center in Q3 '19. That is the only Forever 21 store we have in the portfolio.

When we acquired the Forever 21 building in Q3 of 2017 for approximately $5 million, we modeled our acquisition to reflect the natural expiration of the Forever 21 lease as of July 31, 2020. Now we have the opportunity to renovate that building much sooner and make it relevant to the current marketplace. We received their October rent and have reserved their fourth quarter rent for approximately $250,000. It is already factored into our 2020 guidance as well, which we will share with you in just a moment.

Same-store cash NOI increased 10.5% in the third quarter, primarily due to additional revenue from new leases signed at City Center Bellevue, and we received the termination fee of approximately 700,000 from a tenant at City Center Bellevue for approximately 37,000 square feet, terminating in the third quarter of 2019. VMware has since entered into a lease that expands into all of this tenant's former space effective in 2020 at higher rates. Same-store multifamily cash NOI for all multifamily properties on a combined basis decreased approximately 4.8%, primarily due to a decrease in cash NOI of approximately 8% in our San Diego multifamily portfolio, primarily due to a reduction in the occupancy percentage combined with higher repair and maintenance expenses at Loma Palisades.

Cash NOI increased 8% at our Hassalo on Eighth multifamily properties in Portland. Although the occupancy percentage for Hassalo on Eighth remained consistent at approximately 91% compared to the same property -- same period in 2018, rental expenses decreased approximately 6% providing for the increase in cash NOI.

Moving onto our mixed-use property. As previously announced, Waikiki Beach Walk, our mixed-use property consisting of the Embassy Suites hotel and Waikiki Beach Walk - Retail was moved out of same-store designation beginning in Q1'19, as the mixed-use property undergoes a significant renovation, which began at the beginning of the year, including spalling work on all outdoor balconies and exterior painting of both towers. As an update to the renovation, work on the first tower is now complete, and we are now working on the second hotel tower. The spalling work and exterior painting is estimated to be completed before the end of Q2 next year. The room refresh project is expected to begin in mid-March and be completed for both towers by the end of May 20. As the renovation work is ongoing for the third quarter of 2019, our mixed-use properties reported a combined increase in cash NOI of approximately 2%. Looking at the results separately, the Embassy Suites cash NOI remained flat despite the ongoing renovation work. The Embassy Suites saw an increase of 3% in RevPAR for the quarter, which was offset by an increase in room operating expenses and an increase in sales and marketing expenses. At Waikiki Beach Walk - Retail, cash NOI increased 4%, primarily due to increases in base rent and parking income, partially offset by an increase in real estate taxes. Tenant sales remained high at $1,060 per square foot for the rolling 12 months as our tenants continued to benefit from the excellent location and a good economy.

Now if you look at our balance sheet and liquidity at the end of the third quarter, we had approximately $466 million in liquidity, comprised of a $116 million of cash and cash equivalents and $315 million -- $350 million of availability in our line of credit. Our leverage, which we measure in terms of net debt-to-EBITDA was 5.5x. And our focus is to maintain our net debt-to-EBITDA at 5.5x or below.

On July 30, we entered into a note purchase agreement for the private placement of a $150 million unsecured 3.91% senior guaranteed notes with an 11-year maturity. The effective interest rate, net of the settlement of a treasury rate lock contract of 3.88% for 10 years. As we approach the end of the year, we're updating our 2019 guidance by tightening the FFO per share range to $2.20 to $2.24 per FFO share from our prior guidance range of $2.18 to $2.26 per FFO share, with the same midpoint of $2.22 per FFO share.

Now let's talk about 2020 guidance. We are introducing our 2020 FFO per share guidance range of $2.38 to $2.46 per FFO share with a midpoint of $2.42 per FFO share, which is approximately a 9% increase in FFO over the revised 2019 midpoint or an increase of approximately 13%, excluding nonrecurring termination fees, received year-to-date through September '19. That totaled approximately $5.2 million or $0.07 of FFO per share.

Let's walk through what makes up the 2020 guidance.

First, same-store retail cash NOI is expected to increase approximately 4% or $0.035 per FFO share. This is primarily due to increases in cash NOI at Carmel Mountain Plaza, as we received full year's rent from the At Home lease and rent continues on 2 new leases recently signed at Solana Beach Towne Centre. Secondly, same-store office cash NOI is expected to increase approximately 14% or $0.14 per FFO share. The increase in same-store office cash NOI is mostly attributable to the following: first, at Torrey Reserve, we expect to receive a full year's rent from newly signed tenants that is estimated to increase cash NOI approximately $0.04 per share of FFO. At Torrey Point, we expect to receive a full year's rent from newly signed tenants. The increase in cash NOI is estimated to be $0.02 per share of FFO. At the Lloyd District, we expect to receive a full year's rent from newly signed tenants, including rents to be received from our newly redeveloped Oregon Square building as well as rent increases from contractual increases specified in existing lease agreements.

The increase of -- to cash NOI is estimated to be approximately $0.07 per share of FFO. At City Center Bellevue, we expect to receive a full year's rent from newly signed leases as well as rent increases from contractual increases. The increase to cash NOI is estimated to be approximately $0.03 per FFO share.

At First & Main, we are currently negotiating lease renewals with the GSA, which we are optimistic that it will occur. A decrease in cash NOI is anticipated, based on current negotiations, which include rent abatements and the giveback of one floor. We're estimating a decrease to cash NOI of approximately $0.02 per share. What's interesting is that this growth in the same-store office cash NOI is not coming from Landmark at One Market. The reason is that Google, which is a tenant at Landmark, has partial rent abatements of approximately 35% of its base rent through the second quarter of 2022.

The same-store office cash NOI growth in 2020 is mostly from positive momentum at City Center Bellevue, Torrey Reserve Campus and the Lloyd District portfolio. Same-store multifamily cash NOI is expected to increase approximately 3.5% or $0.01 per share of FFO.

Number four, our non-same-store guidance includes the following 4 properties: first, a full year of operations at -- in 2020 at La Jolla Commons is expected to increase our cash NOI approximately $0.18 per share of FFO; secondly, a major tenant's lease at the One Beach Street property in San Francisco is scheduled to expire at the end of 2019.

Beginning in 2020, we will remove One Beach from the same-store metric, as we anticipate undergoing a significant redevelopment project of the interior of the building and adding a rooftop deck with elevator access and panoramic views of Alcatraz up the north waterfront in San Francisco. The current in-place rents of the expiring tenant are approximately $39 per square foot in a dynamic market that we be -- we believe is in excess of $70 per square foot and justifies the rest -- reinvestment in the building. The decrease in cash NOI is estimated to be approximately $0.04 per share of FFO in 2020.

Third, Waikele Center in Hawaii was removed from same-store in 2019 with the demolition of the former Kmart building. We anticipate that Waikele Center will remain a -- as a non-same-store property, as we continue to work with prospective tenants. We do not anticipate commencing construction on a new building -- retail building space until we have a signed lease with a lead tenant. Meanwhile, the new Safeway store at Waikele Center is scheduled to open before the end of 2019, a space formerly occupied by the Sports Authority. Lease revenue from Safeway is expected to increase cash NOI approximately $0.02 per share of FFO in 2020.

Fourth, our mixed-use property consisting of the Embassy Suites and Waikiki Beach Walk - Retail properties were also taken out of the same-store metrics in 2019 due to previously mentioned paintings, spalling and room refresh work intended to maintain the high level of customer experience that keeps our Embassy Suites, the #1 performing Embassy Suites in the world. We hope to have everything completed by the end of the second quarter in 2020. We expect the results of our mixed-use property will remain flat in 2020 with no change to cash NOI for 2020.

Fifth, G&A is expected to increase to approximately $26.2 million, which will decrease FFO by approximately $0.02 per share of FFO. Interest expense is expected to decrease by approximately $2 million, primarily due to the capitalization of interest cost related to the anticipated development at the La Jolla Commons property. We currently are actively planning and getting ready for the development of the 224,000 construction gross square feet Class A office tower mentioned above. However, at this time, there is no definitive date with respect to the start of construction, nor is there any assurance that the project will be developed. The reduction of interest expense related to the capitalization of interest cost is expected to increase our FFO per share by approximately $0.025.

Seven, straight-line revenue combined with above- and below-market revenue adjustments is estimated to remain flat at approximately $20 million in 2020, the majority of which relates to Landmark, La Jolla Commons and the Lloyd District office portfolio.

Number eight, in connection with the acquisition of La Jolla Commons, we did a follow-on equity offering in June 2019. As a result, we estimate that our outstanding weighted average shares of common stock used in the calculation of FFO per share for 2020 will increase by approximately 5.3 million shares. We have estimated that the increased number of outstanding weighted average shares of common stock will result in a dilutive effect of approximately $0.15 of FFO per share for 2020.

These adjustments should approximately reconcile our revised 2019 midpoint revised guidance of $2.22 with our 2020 guidance of $2.42. Retail same-store occupancy is expected to end 2020 at approximately 95.8%, and office same-store occupancy is expected to end 2020 at approximately 96%.

Operational CapEx in 2020 are again expected to be in the $80 million to $85 million range, which is consistent with our 2019 estimate. Our estimated operational CapEx in 2019 and 2020 are higher than our historical $30 million to $40 million per year, due to the increased leasing activity, resulting in higher tenant improvement and leasing commission expenditures.

As always, our guidance in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we have 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Haendel St. Juste with Mizuho.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [2]

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I was wondering if you could talk a bit more about the 2020 guidance, appreciate the color here. But maybe a bit on some of the factors that you contemplate at the upper end and then the lower end of the guidance range?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [3]

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Well, in terms of the range of the guidance, Haendel, I think it's not likely we're going to hit the lower end of the range, first of all. But we've generally put a range out, keep in mind, we're 15 months out from -- by the end of 2020. So we're making our best guesstimate at this point in time. But from our vantage point today, at least from my perspective, is that I don't think it's likely we're going to hit the lower end of the range. I think we're seeing positive momentum -- positive leasing momentum that will give us the opportunity to accomplish the upper end of the range. But this -- who knows what the future sees in the next 15 months. But we're very positive of the markets that we are in.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [4]

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Got it. Maybe a bit more clarity on the Waikiki spalling project because at the start of the year, you had stated $0.05 of drag. So maybe you could parse out a little bit about what is, I guess, the current expectation for the drag in this year? And then what's embedded in the guide for next year? And by the way was that contemplated to be -- previously to be completed this year and is now, I guess, spilling over to next year? Or was it always the case, it was expected at midway '20 completion?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [5]

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It's really spilling over to next year in Hawaii. Things take longer because you have to ship everything to the island. So I would say it's -- our goal initially was to have that finished by the end of Q3, and the furniture is coming from Vietnam for the room refresh. I mean it's just a whole lot of logistics and timing trying to get that done. So we're hopeful that by the end of Q2 that we'll have this finished. So to answer your question, yes, it's spilling over into 2020.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [6]

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But if you compare this to comparable jobs, we think we're making very good progress and in very good time.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [7]

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Okay. So -- and then back to the, I guess, the first part of my question. The full year estimated impact of that drag at that project this year, I guess, embedded in that is, how did the hotel perform during the year versus your expectations when you said that $0.05 drag outlook at the start of this year? And then maybe quantifying a bit the drag that's embedded within the guidance on a FFO basis for that project next year.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [8]

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Yes. We've put a reserve at the beginning of the year, and that -- part of that may rollover, but we -- what's happened is that the Embassy Suites hotel, the sweet spot is to run that at about 88%, 87% occupancy with a RevPAR north of $300, significantly north of $300. And what we've experienced is, we've had to increase the occupancy on that and try to make up for that because the ADR has been reduced somewhat because of the spalling. Keep in mind when we say spalling, you have scaffolding on the exterior of that building. And when you go to Hawaii, you're on vacation, and you don't anticipate opening the curtains and seeing scaffolding out there. You expect to see palm trees and water. So we've had to adjust the rate. It's -- it hasn't been -- the impact to the NOI hasn't been as significant as we thought it was, but there was some adjustment to that.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [9]

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Okay, fair enough. And then maybe some color on Loma Palisades, the weakness there. I'm curious if it's asset-specific, some market-specific issue in what seems to be an otherwise strong multifamily market in Southern California? And then expectations for that asset into next year.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [10]

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Loma Palisades is in need of a facelift, and we're in the process of providing that. In the meantime, the market has been a bit softer than we would have liked for apartments in San Diego. And we still think it's a great piece of property, right, overlooking SeaWorld, Mission Bay, it's -- it was tired, and it needs some improvement, and we're providing that improvement. Abigail, do you want to add something to that? Abigail, just put her thumb up, didn't put her center finger up.

That's a great piece of property, Haendel, extremely valuable. And just -- in order to maximize the returns from it, we've got to give it a facelift. And we've done the roofs. We are starting to work on the landscaping. We've done the plumbing, the sewers, and we're doing it one at a time. And it'll happen, and it'll be a beautiful property when it's finished. It just needs a facelift.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [11]

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And just to be clear, is that within your same-store multifamily projection for next year? Or is that excluded?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [12]

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And I think Bob's...

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [13]

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Yes. We've not taken that out of same-store. That's still in the same-store.

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Operator [14]

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And our next question comes from Richard Hill with Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [15]

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You've got Ron on for Richard. The first question -- just looking at the investor presentation you guys had out with the potential FFO, it looked like it was $2.45 for 2020. So I guess I'm just wondering thinking about the guidance for next year and appreciate a lot of the color that you provided, but it feels like it's a little bit conservative if La Jolla coming in better than expected, and you're going to have sort of a benefit from interest expense as well. Maybe you just talk about maybe -- I'll ask that another way. Is it possible that high end of the range may be -- may even be too low?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [16]

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First of all, Ron, there's always that possibility. But keep in mind, so we had that question from several investors along the way. So during 2019, we've been on the road meeting with investors and in our presentations through August, we had the bridge, which reflected a midpoint or what we thought was a -- realistic at that time that we were comfortable with the $2.42. So through 8 months of the year, we showed $2.42. In September -- in our September presentation, we increased that mid -- not midpoint, but we increased that to $2.45. And through our guidance and our budgeting process, we rolled it up. And when we take a look at the ranges and the possibilities, we always like to put a range around it. That's just prudent to do when you're 15 months out from the next -- the end of the next year. So while we're not saying that you can't achieve $2.45, what was more important to have a midpoint that reflected the midway between the rock bottom and the potential way up above. And I think the $2.45 -- we put the upper range at $2.46. I think there is -- we're very positive on the potential on this portfolio, and so it's not to say that we can't achieve the $2.45. But we think the right thing to do was to put the midpoint at $2.42, which is what we had shown throughout most of the year.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [17]

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If we had our choice of a strategy, it would be underpromise and overdeliver. In this case, it's our best guess, and we certainly hope to overdeliver. But we don't want to make promises, and then disappoint. We'd sooner make promises and meet them and perhaps exceed the results of that promise.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [18]

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Great. That's helpful. Maybe can you give an update on what the acquisition environment is like? Maybe cap rates of assets that you're looking at? What property types looks most interesting to you right now?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [19]

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Ron, there is so much money around, that the value of properties that we looked to acquire has been high. And we had a run at several, mostly office properties. We have come to realize that if you own good office in the path of growth, it can be very significantly profitable. But the competition for quality properties, such as ours, is intense that would lead to the conclusion that what is the value of what we have, if what we acquire is so expensive. So we're very pleased with what we have, and we continue to be beat the bushes to try and find more of the same quality with upside as well.

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Operator [20]

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And the next question comes from Michael Carroll with RBC Capital Markets.

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Jason R. Idoine, RBC Capital Markets, Research Division - Associate [21]

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Jason on for Mike. So just wondering, given all of the noise around WeWork, how are you guys feeling about that lease? And they're also continuing to build out the space at 830?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [22]

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Yes. We're watching it. I'm not concerned about it. WeWork seems to have a path for at least a midpoint recovery. We do have security for the lease we have. They continue to work on upgrading the building that we provide them. And so we also believe that if, God forbid, something happens to WeWork, that we have an excellent and improved property in a market that has interest in this product, and frankly, I'm not losing any sleep over it. Steve, you losing any sleep?

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Steve Center, American Assets Trust, Inc. - VP of Office Properties [23]

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No, I can add to that, that it's a 55,000-foot building, and they're now marketing 14,000 feet for lease. So they've accounted for all but that 14,000 feet in 6 small spaces. So it appears that they're doing very well even prior to completing TIs.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [24]

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And you asked about the other building. That we're also in the process of beginning to upgrade it. And should WeWork not be present for some reasons or other, we'll manage it ourselves.

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Jason R. Idoine, RBC Capital Markets, Research Division - Associate [25]

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[It's not the 710]

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [26]

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Yes. It's money well spent in a market where the demand seems to be there for the product we are producing.

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Jason R. Idoine, RBC Capital Markets, Research Division - Associate [27]

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Got it. And then I was also wondering if you guys could just provide an update on the Torrey Point asset, and what kind of leasing activity you're seeing there?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [28]

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Steve, I'm going to leave that to you. It's the -- we're making some progress, but certainly it's been slower than we'd wished for.

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Steve Center, American Assets Trust, Inc. - VP of Office Properties [29]

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Now we've recently signed a 15,000-foot lease with Neurelis, which is a life science company. They were an existing customer at 3,900 feet, and they grew up to 15,000 feet. And we've got proposals out for another 12,000 feet. So we're chipping away at it, the market's coming in our direction, UTC and Torrey Pines are virtually full. UTC is Class A, vacancy [they're at] is 2.3% at the end of Q3. So we're seeing a lot of life science prospects not only at Torrey Point, but also at Torrey Reserve as well. So the market's improving, and we feel good about the future.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [30]

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It's seems to be in the path of the growth, and we're hopeful if not optimistic.

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Operator [31]

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And our next question comes from Mitch Germain with JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [32]

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So the UTC development, I'm curious, where that stands from a planning/entitlements perspective? Number one. And then number two, what does it take for you guys to commence it? And then, I guess, number three, how are you planning to fund it?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [33]

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I'm going to ask Jerry Gammieri who's in charge of that entitlement. And he knows the answer because I ask him that question almost daily.

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Jerry Gammieri, American Assets Trust, Inc. - VP of Construction & Development [34]

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We are in the process right now with the city of San Diego to protect our entitlements and submit under the code. There's a code change coming in 2020. We are -- we expect to be into the city this year to basically protect ourselves for the next 4 years. So we have some runway in front of us allowing us an opportunity to pre-lease the building before we go to construction. But our hope is to be permit-ready by the first quarter of 2020.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [35]

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Let me be just clear to those people listening is that the entitlement to build is protected. It's vested. But what Jerry is talking about is that if you can get into the city of San Diego and get the permit number, then we don't have to do the upgrade in the -- from the 2016 code to the 2020.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [36]

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Is it an upgrade or just a change, Jerry?

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Jerry Gammieri, American Assets Trust, Inc. - VP of Construction & Development [37]

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It's a change in code.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [38]

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It's a change. It's not necessarily an upgrade. But a change in code means more time delays.

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Jerry Gammieri, American Assets Trust, Inc. - VP of Construction & Development [39]

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But the entitlement is vested.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [40]

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And then whether we're going to build it, it's much more likely than not we would build into a market with 3% vacancy. And as the financing goes, as Bob pointed out in his presentation, we have a $110 million (sic) [$115.6 million] cash on the balance sheet, and as the time approaches, we'll consider other methods of financing.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [41]

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Yes. And Mitch, the cost of that building -- I mean we don't -- we haven't bid it out yet, but just back-of-the-napkin, it's probably 16 -- it's under $200 million for my back-of-the-napkin math. And probably $160 million to $180 million somewhere in that range. But that's -- it's only like a 4% -- it's less than a 4% expansion of our balance sheet. So it's the right thing in the right market, in a very low vacancy market in UTC. And that's on the forefront of growth.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [42]

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We'd like to buy another one just like it.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [43]

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That sounds wonderful. So Bob, while I have you, talk to me about from 3Q to 4Q. So it looks like you have a term fee this quarter that is -- that comes out of the numbers -- obviously, Forever 21 comes out. How do I get from 3Q to 4Q in terms of the bridge to hit your guidance range?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [44]

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Bridge to hit my guide. So you're looking for the bridge going forward to ['22]

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [45]

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Yes. No, I'm just talking about -- just what -- No I'm talking about from 3Q to 4Q, what -- just -- I guess just a couple of negatives in the number, right? There's a couple of -- how much was the charge that you took for Forever 21?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [46]

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We took approximately $250,000, and we did -- actually, we got paid for November. I just heard about that this morning. So that may be a little bit [stiff].

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [47]

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I think it's likely [indiscernible]

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [48]

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Got it. And then you had a term fee that you received in the office sector, right?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [49]

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Term fee. We received about 700,000 in the office sector in Q3.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [50]

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So netting those 2, it's about $500,000 positive, right? Is -- that comes off?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [51]

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At approximately, yes.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [52]

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Yes. And then is there anything, kind of that we should be cognizant of in the 4Q that wasn't in 3Q?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [53]

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No. Nothing really sticks out on that. We're on track to hit our midpoint.

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Operator [54]

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And our next question comes from Craig Schmidt with Bank of America.

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Elvis Rodriguez, BofA Merrill Lynch, Research Division - Research Analyst [55]

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This is Elvis for Craig. Congratulations to Adam. Just a quick question, because there's a lot of moving pieces in and out of the same-store pool. How should we think about that cash same-store NOI as you reported or as you think you will report it, call it, in the end of 2020 for the entire portfolio?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [56]

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Well, in the remarks, Elvis, I think we said it was 4% growth in retail and, what was it, 14% growth in office. And frankly, when I look at the office into the next couple of years, we're expecting in excess of 10% in the office sector on same-store. I mean that is a strong sector for us. And then multifamily should be about 3.5%.

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Elvis Rodriguez, BofA Merrill Lynch, Research Division - Research Analyst [57]

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So Bob, the 9% includes redevelopment or excludes redevelopment?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [58]

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It excludes redevelopment.

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Elvis Rodriguez, BofA Merrill Lynch, Research Division - Research Analyst [59]

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Okay. So including redevelopment, where would that be trending? Do you think, call it, through 2020?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [60]

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It's not going to be -- I mean multifamily isn't impacted. Retail would be impacted slightly. If you look at it, what it is today on the supplemental, excluding redevelopment and including it, it's not that big of -- and we break it out in there. So I'll be glad to answer -- give you more color on that after the call. But I don't think it's that big of an impact.

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Elvis Rodriguez, BofA Merrill Lynch, Research Division - Research Analyst [61]

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Okay. That would be helpful. And just another question. So as you commence or potentially commence the La Jolla project, you're going to probably trend to be more than 50% office. How do you think about your diversified portfolio going forward? And will you rebalance in the future with more multifamily or retail? Or is office sort of the stock that you think you'll have longer term?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [62]

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What you -- what we tell investors is you guys don't pay me to come to work to build an office, a REIT, a shopping center REIT or a residential REIT. You pay me to build wealth. And if the opportunity to build wealth is in office, we're going to emphasize that. At the same time, we're going to try and build wealth in the other categories too. So we don't think of ourselves as one character only. We think of ourselves as wealth builders. Right now the opportunity that is in office, and we're fortunate to have been in that, to be able to take advantage of best opportunities.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [63]

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Yes. Elvis, just to add to that. So I think that's a great way that Ernest stated about creating wealth. Where we are right now, we're not looking to add retail. We're looking to add office, and multifamily to a lesser extent.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [64]

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And if you look at this strategy ever since we went public over the last 8 years, we've increased our dividend every year, and our compound return has been, what, 13% or 14% a year. I used to apologize for being a multi-strategy REIT and I stopped apologizing because the statistics are -- we're as good as anybody in the industry and better than the vast majority. And we hope to be able to continue that track record.

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Operator [65]

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And our next question comes from Todd Thomas with KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [66]

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So I just wanted to circle back to acquisitions, you had talked previously about doubling the size of the portfolio over what's now, I guess, a 4-year time frame and you commented that it's a competitive environment. But your cost of capital has also improved, so I'm just curious if your appetite's changed. And Bob, I'm curious if there is anything in the 2020 guidance for investments or capital raising?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [67]

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Our appetite hasn't changed. It's a question of the number of calories in the meal we've had to consume.

So we're going to continue to try and achieve those objectives. But we don't have to achieve them to produce superior results. And Bob you want to take it from here?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [68]

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Yes. Todd, in the 2020 guidance, we've not factored in any acquisitions at all. We're actively looking -- our job is to create value for our shareholders. And that's why we're out looking. We're not looking to get big for the sake of getting big. We're looking to do it accretively, and if we find something and bring it to your attention, it's going to be accretive. It's going to be good for every shareholder.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [69]

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That's well put.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [70]

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Okay. When you had discussed that plan a couple of quarters ago, what's changed since then? Is it just that -- there is been some cap rate compression and more capital coming into the markets that you're targeting? What's changed over the last couple of quarters specifically?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [71]

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Look, nothing's changed except that we continue to look, and we make acquisitions that are significant. To make acquisitions that are significant, it's not like going to the grocery store and filling your basket up with groceries. You got to find something that makes sense. Bob?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [72]

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Yes. I think regardless of where we are in the economy, we still underwrite, we're very consistent on our underwriting. We look for unlevered IRRs, greater than 6%. We look at -- we focus on NAV and we focus on earnings growth. Earnings growth is really important, and we want to make sure it's accretive. You could make an acquisition and get big, and you, through financial engineering -- you could destroy shareholder values and -- or destroy earnings. That's not what we do. And if you look at our history, we've been pretty good at it. The other thing too is that our cost of capital, which I think you mentioned, we're in a -- we continue to enhance our cost of capital and not everybody is at that vantage point. So I think it's our job to look for those opportunities, and we are actively looking.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [73]

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Okay. And then going back to the multifamily portfolio. We saw occupancy decrease a little bit more meaningfully in the quarter across the portfolio, in Portland as well, not just in San Diego. But you are projecting pretty solid recovery in 2020, and I'm just wondering if you could shed some light on what happened in the quarter more broadly? And what gives you confidence that you'll see the same-store growth materialize that you're forecasting.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [74]

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Well Portland has become more competitive. And those are circumstances we haven't any control over. We have excellent product. In San Diego, we have excellent product as well. Loma Palisades needs a facelift as I said earlier. And we're working on that. Pacific Ridge is doing well and has opportunity for upside. It's a changing (inaudible). Do you want to add anything, Abigail?

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Abigail Rex, American Assets Trust, Inc. - Director of Multifamily, San Diego [75]

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Yes. Just to add a little bit to that. I think you know, we've seen a softening in the county in terms of vacancy rates, and while we think about San Diego being a nice healthy place to live and with healthy occupancy across the board in San Diego between 3- and 5-star communities, the average vacancy rate is about 5% to 6%. And that's pretty comparative to what we're seeing in the portfolio here in San Diego. So like Ernest said, we're trying to continue building value. We're investing capital in the communities in hopes that it will continue to target greater leasing and more occupancy in these communities.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [76]

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Okay. Are you increasing your use of concessions? Should we expect to see rents start to come down? So far they've held up pretty well across the multifamily portfolio, but should we expect to see you begin to build a little bit more occupancy in 2020.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [77]

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We'll do what we can to maximize (inaudible).

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [78]

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Todd, [too] is that when I think about that is that you think about the new product that comes online, and for a studio, what I've seen, I think, in their recent papers, studios going for like $2,700. And -- which is very expensive. And I think that the pricing of our product, and the quality of our product is in a sweet spot. People -- if you want a 3-bedroom, let's say it's $4,000 to $4,500. That's $1,500 a person, which is achievable. But when you start mixing that up and it becomes more expensive. It's tough for a sustainable rent to continue at that higher rates. So I think that our product is priced right. And I think that, that growth, we will see it -- continue to see it. I feel positive about our multifamily portfolio here in San Diego. In terms of Portland, we've mentioned on other calls that there is an oversupply of product in -- multifamily product in the Lloyd -- not the Lloyd District, but in Portland. And that is slowly being absorbed. And I can't tell you when that's going away. I'm -- hopefully within the next 2 years, that goes away. But in the meantime, we're staying steady at about 91%.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [79]

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Okay. And then just last question. I was just wondering if -- Ernest, I missed your prepared remarks at the very beginning of the call. I came on right as you were finishing though, and I heard you commenting about the appointment of Adam to COO. Ernest, you've been in the Chairman, CEO and President seat for several years and the executive management team's been comprised entirely of you and Bob for quite some time now. So I find this announcement interesting. And I'm just curious if you could talk about what this means for AAT? What Adam will focus on with his new responsibilities here, and if there's anything we should read into that announcement?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [80]

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No, other than its recognition by the board that Adam has made a significant contribution, and that his role has been more than just Chief Legal Counsel. He has really handled a lot of the operations very well, and the Board wanted to acknowledge that with the title. This has never been just Bob and I. It's been Bob and I and all the team in this room including Adam, who has made a great contribution, is extremely capable, and he has the good fortune of being younger than me.

On the other hand, I love what I do, and I'm having fun. And if the Board fired me, I don't know what I'd do for -- to have so much fun. So we're going to continue to work together. It's a great team. We're dedicated to build the wealth for all of our stockholders. Stick with us, Todd.

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Operator [81]

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And I'm currently seeing no further questions in the queue. I like to turn the call back to -- correction, I do see one further question in the queue, would you like to take it?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [82]

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Sure.

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Operator [83]

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Next question comes from Tammi Fique with Wells Fargo Securities.

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Tamara Jane Fique, Wells Fargo Securities, LLC, Research Division - Associate Analyst [84]

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Just wondering, the CapEx that you laid out for 2020, does that include the redevelopment spending that you're planning to do?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [85]

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The redevelopment at which property? That does not include La Jolla Commons at all.

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Tamara Jane Fique, Wells Fargo Securities, LLC, Research Division - Associate Analyst [86]

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Okay. But so like the Kmart space at Waikele like -- I just -- I guess I'm just curious to know what's -- I'm really just looking for a summary of the capital spending that you expect to do, in total, for development and redevelopment projects in 2020?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [87]

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We have, think about $30 million in there for Kmart redevelopment. We're hopeful that Chris, gets the lease signed, and we expect to put probably about $30 million towards that. And then a lot of TIs and leasing commissions on some of the new leases.

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Tamara Jane Fique, Wells Fargo Securities, LLC, Research Division - Associate Analyst [88]

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Okay. So I guess just in total, what are you expecting to spend for the developments and redevelopments in 2020.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [89]

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Tammi, I don't have that broken out in front of me. But I'll be glad to answer that offline.

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Tamara Jane Fique, Wells Fargo Securities, LLC, Research Division - Associate Analyst [90]

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Okay. Great. And then I was just wondering if you could talk a little bit more about the opportunity in that Forever 21 space you mentioned. Renovating that space -- wondering if you'll replace that tenant with another apparel tenant? Or is there a better use? Is there a expansion potential? Just wondering if you could elaborate there a little bit?

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [91]

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Sully, who handles that is stirring, which means that he wants to answer the question. Chris, am I correct that you would like to answer that question?

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Christopher E. Sullivan, American Assets Trust, Inc. - VP of Retail Properties [92]

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So you know the Forever 21 is on a 20,000 feet of the ground floor and 40,000 feet of the second (inaudible) former Mervyn's building in Del Monte Center. So as we look to break up that box and space. It'll be a -- probably a combination of, what I would say, your more typical mall tenants and also a combination of some entertainment uses there.

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [93]

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And we are in the process of exploring...

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Christopher E. Sullivan, American Assets Trust, Inc. - VP of Retail Properties [94]

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Oh yes. We've been working on this for about a year probably now.

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Tamara Jane Fique, Wells Fargo Securities, LLC, Research Division - Associate Analyst [95]

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Okay. Got it. And then do you think that the rents there will go up relative to what Forever 21 was spending? Was a -- yes, I'm sorry -- Forever 21 was -- the Forever 21 rent there.

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Christopher E. Sullivan, American Assets Trust, Inc. - VP of Retail Properties [96]

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I'm going to say I certainly hope so. Forever 21 is on a gross lease. So I've got to [compute it] back to get my triple (inaudible) and the rest of it but I hope to do better.

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Tamara Jane Fique, Wells Fargo Securities, LLC, Research Division - Associate Analyst [97]

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And then just last question. It looks like in the most recent investor presentation, the FFO estimates for 2021 and 2022 were eliminated? And I'm just curious why you decided to take that out?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [98]

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Well, what we are doing is just getting ready for our guidance report on this earnings call. So what we're doing, just focusing in on '19 and '20. And as we get into over 2020, what we'll do is we hope to give you more information on that. The information that we put was not fully [baked] because we only put out what we knew at that point in time. What we do know is that there is growth. And so as we get a clearer picture, we will share it with you as we have consistently in the past.

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Operator [99]

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

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Ernest Sylvan Rady, American Assets Trust, Inc. - Chairman, President & CEO [100]

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Okay. Thanks all of our stockholders and the representatives for allowing us to have so much fun. It's really fun for us to create the wealth we've been able to create for our stockholders over the last 8 years. And we hope the next years are as fruitful. And thank you for your confidence.

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Operator [101]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.