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Edited Transcript of AAT earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 American Assets Trust Inc Earnings Call

San Diego May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of American Assets Trust Inc earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Wyll

American Assets Trust, Inc. - Senior VP, General Counsel & Secretary

* Christopher E. Sullivan

American Assets Trust, Inc. - VP of Retail Properties

* Ernest S. Rady

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

* 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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* Corey R. DeVito

JMP Securities LLC, Research Division - Associate

* Haendel Emmanuel St. Juste

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

* Jason R. Idoine

RBC Capital Markets, LLC, Research Division - Associate

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Justin Thomas Devery

BofA Merrill Lynch, Research Division - Associate

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Vince Tibone

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q1 2019 American Assets Trust, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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Adam Wyll, American Assets Trust, Inc. - Senior VP, General Counsel & Secretary [2]

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Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2019 First Quarter Earning Conference Call. Joining me on the call are Ernest Rady and Bob Barton. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

Our 2019 first quarter supplemental disclosure package provides a significant amount of valuable information with respect to the Company's operating and financial performance. The document is currently available on our website.

Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our future operations and our actual performance may differ materially from the information contained in our forward-looking statements, and we can give no assurance that these expectations will be attained. Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions and the risks and costs of construction.

The earnings release and supplemental reporting package that we issued yesterday in our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations.

Additionally, this call will contain non-GAAP financial information, including funds from operations, or FFO; earnings before interest, taxes, depreciation and amortization, or EBITDA; and net operating income, or NOI.

American Assets is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data for the first quarter of 2019 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 to our Chairman, President and CEO, Ernest Rady, to begin our discussion of first quarter results. Ernest?

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

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Thanks, Adam, and good morning, everyone. Thank you for joining American Assets Trust's first quarter 2019 earnings call. We continue to make 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.

At American [Assets] (added by company after the call) Trust, we focus on, first of all, 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.

Number two, diversification by asset class. We believe that ownership of a combination of office, retail and multifamily properties as opposed to focusing on a single asset class provides for superior positioning opportunities, which allow us to create long-term wealth for our stockholders.

Three, consistent growth, both organically and opportunistically. We believe that our NAV annualized growth rate, over the last years -- last 8 years since we became a public entity, has been approximately 12%. Our annualized shareholder return over the last 8 years has also been approximately 12%.

We maintain -- four, we maintain a conservative balance sheet and debt profile. And we have been dedicated for all these years to transparency and excellence in all that we do.

During the first quarter, 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 negotiating LOIs with various prospective national retailers. The Safeway store at Waikele Center remains on track to open in the fourth quarter of '19.

Our renovation of the existing smaller office building at Oregon Square in Portland is almost complete, and we are optimistic on the leasing front as we have begun negotiating LOIs with prospective with a full building user. We continue to reinvest and improve our existing assets and remain optimistic about the future of this portfolio and our ability to narrow the price to net asset value gap.

On behalf of all of us at American Assets Trust, we do thank you for your confidence in allowing us to manage your company, and we look forward to your continued support.

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

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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 first quarter 2019 FFO of $0.56 per share and net income attributable to common stockholders of $0.24 per share for the first quarter.

The Company's Board of Directors has declared a dividend on its common stock of $0.28 per share for the quarterly period ending June 30, 2019. The dividend will be paid on June 27, 2019, to stockholders of record on June 13, 2019.

Our retail portfolio ended the quarter at 97.1% leased, with the highest annualized base rents amongst our peers. On a comparative year-to-year basis, our retail occupancy increased approximately 43 basis points over the first quarter of 2018, leaving approximately 89,000 square feet vacant in our 3 million-plus square foot retail portfolio.

During the trailing 4 quarters, 73 retail leases were signed, representing approximately 429,000 square feet or 14% of our total retail portfolio. Of these leases signed, 57 leases consisting of approximately 244,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 5.9% over the prior leases.

Our office portfolio ended the quarter at approximately 92.3% leased, an increase of approximately 102 basis points on a comparative year-over-year basis primarily due to an increase in occupancy at Torrey Point in San Diego, partially offset by a decrease in occupancy at Lloyd 700 in the portfolio, leaving a vacancy of approximately 7.7% or 205,000 square feet of our 2.7 million square foot office portfolio.

It's also important to note that we believe our in-place rents for the office portfolio are still approximately 21% below market.

During the trailing 4 quarters, 64 new office leases were signed representing approximately 654,000 square feet or 25% of our total office portfolio. Of these leases signed during the year, 41 leases consisting of approximately 544,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 44.8% over the prior leases.

Same-store retail cash NOI decreased in the first quarter to negative 3.2%. The decrease primarily relates to rents at Carmel Mountain Plaza and Solana Beach Towne Centre. Same-store office cash NOI increased 1.4% in the first quarter primarily due to rental abatements burning off on new or renewed tenants at City Center Bellevue, partially offset by reductions of cash NOI in the Lloyd District Portfolio, as the Genentech's rent abatement expires at the end of April.

Same-store multifamily cash NOI increased 7.3% primarily due to improved operating results at Pacific Ridge Apartments in San Diego and Hassalo on Eighth in Portland. Total revenue of Pacific Ridge Apartments continues to increase again in 1Q 2019 by approximately 7% primarily due to increased base rent.

At Hassalo on Eighth on Portland, Oregon, total revenues were up slightly, while our rental expenses decreased approximately 9% primarily due to year-over-year reduction in facilities, services, payroll and insurance expenses. The remainder of our multifamily portfolio performed well with an increase of cash NOI of approximately 2%.

As previously announced, Waikiki Beach Walk, mixed-use property, consisting of the Embassy Suites hotel and Waikiki Beach Walk Retail, was moved out of same-store designation as the hotel undergoes significant renovation, which began at the beginning of this year, including spalling work, repair on all outdoor balconies, exterior painting of both towers and a complete room refresh of all suites. As the renovation work is ongoing, for the first quarter, our mixed-use properties reported a combined decrease in cash NOI of negative 2.5% for the first quarter mostly attributable to the Embassy Suites hotel and the renovation project, resulting in a year-over-year decrease in occupancy of 2.5% and a decrease in RevPAR of 1.4%.

At Waikiki Beach Walk Retail, the change in cash NOI year-over-year was relatively flat. Nevertheless, tenant sales remained high at $1,066 per square foot for the rolling 12 months, as our tenants continued to benefit from the excellent location and a good economy.

Turning to our first quarter results. FFO increased approximately $0.09 to $0.56 per FFO share compared to the fourth quarter. The first quarter results include the following activity. First, the former Sears building ground lease at Carmel Mountain Plaza was terminated, and in connection therewith, the former ground lessee conveyed title to the Sears retail building. Accordingly, we recognized the noncash lease termination fee of approximately $4.5 million. With respect to the noncash termination fee, FFO increased approximately $0.07 per FFO share.

Secondly, the first quarter had a reduction in Salesforce.com lease termination cost at the Landmark at One Market in San Francisco, which resulted in an increase in FFO for the first quarter of approximately $0.01 per FFO share.

Third, our multifamily properties in San Diego and Portland experienced an increase in rental revenues contributing to an increase in FFO of approximately $0.01 per FFO share.

Now as we look at our balance sheet and liquidity at the end of the fourth quarter, we had approximately $317 million in liquidity, comprised of $55 million in cash and cash equivalents and $262 million of availability on our line of credit. Our leverage, which we measure in terms of net debt to EBITDA, was 6.3x, although our continued focus is to get our net debt to EBITDA back down to 5.5 or below.

Lastly, we are reaffirming our 2019 FFO guidance range of $2.18 to $2.26 FFO per share with a midpoint of $2.22 per FFO share. When I compare second quarter 2019 consensus of $0.0527 of FFO per share on my Bloomberg screen to our internal model, we are lower by approximately $0.03 of FFO per share. We believe this difference is due to the following 3 items. First, the ongoing renovation and repair work for the Waikiki Beach Walk, Embassy Suites is planned to increase during the second quarter of 2019, which is expected to reduce cash NOI by approximately $0.015 of FFO per share in Q2.

Second, we've pushed out a speculative lease that we anticipated commencing in the second quarter to the third quarter, resulting in approximately reduction of $0.01 of FFO per share. We are still optimistic that it will be signed.

And third, the issuance of approximately 30 million of common stock under the ATM equity program in the first quarter, including shares that settled in the beginning of the second quarter will have a dilutive effect of approximately $0.015 of FFO per share in Q2.

As always, our guidance in these prepared remarks exclude any impact on 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 and 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) And our first question is from Vince Tibone from Green Street Advisors.

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Vince Tibone, [2]

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Can you provide an update on same-property NOI growth guidance for the full year? Just curious if any of your expectations have changed relative to the inaugural guidance given on the third quarter call.

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

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Yes. I think we're pretty much in line other than the retail, I think we said was flat, is down 0.3% in the first quarter. So it will be -- won't be down that far for the year. But the reason we're down 3% in the first quarter is really because we didn't get the ground lessee's rent payment in the first quarter of 2019. So if you recall, we received back the Sears building and received a noncash termination fee of $4.5 million, and in result, we had downtime of probably 2 to 3 months, and that's why we were down. It was a couple of hundred thousands.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [4]

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But that whole transaction, Vince, is very positive, and we're delighted with the outcome.

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Vince Tibone, [5]

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No, the transaction was definitely a win. I'm just curious just to go through some rough math, [do you think Del] put only 50 bps of the kind of retail same-property decline? Is there any other kind of unexpected move-outs or rent roll-downs either at Carmel Mountain or Solana Towne Centre that contributed to the decline?

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [6]

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We had about 100,000 or so with the move-out of Aaron Brothers at Solana Beach Towne Centre. That was the only impact that we saw.

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Vince Tibone, [7]

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Okay. Got it. Just one last one for me kind of switching gears a little bit. Just curious if your views on acquisitions have changed at all given that your cost of capital is a little better and issuing equity could be a viable funding option for any opportunities.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [8]

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Vince, we're always looking, and we'd love to find an opportunity to grow the company with the same quality of assets that we have and the same prospects for growth. So our views have perhaps become a little more optimistic since the price for our stock has moved within shooting range of our NAV, but it's still a difficult task because we value our portfolio so highly, and the stock market never seems to agree with the value we put on it. So it's a tough road to follow, but we continue to try and make something that will -- to affect something that will grow our NAV and grow the wealth to the stockholders.

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Operator [9]

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Our next question is from Jeff Donnelly from Wells Fargo.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [10]

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I was just curious just touching on the last point. I mean you had issued equity at $45 a share or so this past quarter, which is below where you had last published your NAV. I'm just curious for someone who has always been so focused on preserving and growing that NAV, what drove the decision to issue at a bit of a discount? Is that kind of a function of where you see it headed? Or is it just that the investment opportunity was compelling? I'm just curious for your take.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [11]

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We just got a little uncomfortable with the level of debt relative to the opportunities we have to spend money to improve our property. We're spending a significant amount of money on TIs. And if we're going to have an opportunity to acquire, the fact that we have more debt on the balance sheet than we would like is not going to give us the encouragement we'd like to make a positive transaction. So it was a tough call, but we did it, and we hope that it would -- we know the money was spent in a very, very worthwhile fashion, and we hope that this little breathing room gives us more opportunity in the future.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [12]

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Jeff, let me add to that, is that when we raised the equity on the ATM, it was just slightly below and slightly above $46. And then secondly, what we used that for, we paid down -- we used $20 million of that $30 million to pay down legacy CMBS debt at 7.5%. So we thought that was a good use of the funds. And then the rest of it is on -- being applied towards development costs, which we think are accretive relative to the cost of that equity.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [13]

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And just one follow-up, and I apologize if I missed this in your opening remarks, but on Torrey Reserve, I think you finished the quarter at roughly 86% occupancy. Do you still feel that it's achievable to get into the low 90s by year-end? Or how are you guys feeling about that?

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [14]

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Well, if I can believe Steve Center, who is an excellent property manager in the office category, I think that we're going to be 110% occupied before long. But I'm going to let Steve speak for himself. Steve, do you want to share your view?

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Steve Center, American Assets Trust, Inc. - VP of Office Properties [15]

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Sure. Looking at Torrey Reserve and Torrey Point, for that matter, activities picked up at Torrey Point, where lease is on 14,963 square feet in proposal and then another 9,700 feet and then we had a tour on Monday that's going to lead to an RFP for another 15,000 feet. So very encouraged with the activity we're seeing there. We've just made a 15,000-foot proposal for the big block of space we have available at Torrey Plaza. That went out last night. So activity has picked up. We're seeing activity from life science and medical device companies right now. And to add to that, in the first quarter, we absorbed almost 20,000 feet, and the Class A market in Del Mar Heights absorbed 11,000 feet. So we did 2x the net absorption versus rest of the market. So we are encouraged and optimistic, and we've got a good team around, which is doing good things.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [16]

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We do have a good team around us. And in case that this optimistic viewpoint does not come about and you become angry, I want to tell you how you spell Center's last name. I'll be getting to him first, but you can have second crack at him.

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Operator [17]

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Our next question is from Richard Hill from Morgan Stanley.

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

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This is Ron Kamdem on for Richard Hill. I was just thinking about taking a step back. You guys have put out a great presentation kind of building a bridge to 2021 as well as some of the aspirations to sort of grow the portfolio. Sort of as you're sitting here today, just kind of curious, when you're thinking about property types, which ones are sort of the most attractive? And is there one that you maybe were shying away from?

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

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Well, you certainly can see that the office portfolio appears to be, if not buoyant, certainly on an upward trajectory. You can also hear from the tone of our remarks that retail has its headwinds, but we have a great portfolio, and it's going to come out being as good or anybody in the industry. And apartments, if we could acquire more apartments at an attractive price, it's something we'd like to do. In the meantime, the portfolio we have is as good as we can find in our markets. So, Ron, thanks very much, and as usual, direct questions.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [20]

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My second question, if I may, would be just on Hawaii. Obviously, there are some articles about potential tax legislation. What are you guys thinking there? And how do you guys read that situation?

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [21]

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We don't greet enhanced taxes with enthusiasm, and we're doing everything we can in concert with the industry to minimize the impact. But there's nothing we can do. I mean as you know, almost all the properties like 99% of what we have is on fee simple. I wouldn't trade any of them for any other property in Hawaii or any other property anywhere else. And taxation is a fact of life throughout the American economy and the real estate industry. So it's just one of those things you have to bear and, hopefully, that eventually the quality of the property will produce upward movement in rents, which will more than compensate for the increased taxes.

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [22]

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Ron, let me add to that is that we've been following that for several years. In fact, there is a coalition that's organized by NAREIT with several, if not all, of the REITs that own assets in Hawaii participate in that. And we always want to pay our fair share of the taxes, but on the issue of the DPD, which stands for dividend paid deduction, if that gets passed, the impact to us is a portfolio that's probably $0.01 of FFO. So we're looking at that -- we don't agree with that additional tax, but we're aware of it, and we know what the impact is.

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Operator [23]

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Our next question is from Michael Carroll from RBC Capital Markets.

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Jason R. Idoine, RBC Capital Markets, LLC, Research Division - Associate [24]

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Jason on for Mike. I have a question on the Oregon Square development. I was wondering if outside of the office space you guys were prepared to tell us anything about maybe breaking ground on a second building.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [25]

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Well, I think that we're about to work -- begin work on the improvement of the second building that stands -- the second office building. And as we have said many times, unfortunately, rents in Portland have been flat and construction costs have soared, so we continue to look into the opportunity, but we just don't see it with the present economics that are available.

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Jason R. Idoine, RBC Capital Markets, LLC, Research Division - Associate [26]

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Got you. Okay. And then I was wondering if you could provide a little more color around the interest that you're seeing at the Kmart space?

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [27]

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Okay. Chris Sullivan is going to take that, and he's going to give you the truth, nothing but the truth, and I'm going to spell his last name too in case you feel misled. Go ahead, Chris.

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Christopher E. Sullivan, American Assets Trust, Inc. - VP of Retail Properties [28]

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Jason. So in Kmart, as you know, that's about 100,000 feet what the old Kmart was. So we're negotiating LOIs now with a couple of the national retailers. They point out to people, keep in mind -- have you been to Waikele? Do you know it, Jason?

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Jason R. Idoine, RBC Capital Markets, LLC, Research Division - Associate [29]

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What's that...

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Christopher E. Sullivan, American Assets Trust, Inc. - VP of Retail Properties [30]

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My question, Jason, to these, as I describe it, have you been to Waikele? Do you know the center?

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Jason R. Idoine, RBC Capital Markets, LLC, Research Division - Associate [31]

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I've not -- no.

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Christopher E. Sullivan, American Assets Trust, Inc. - VP of Retail Properties [32]

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So think about it, it's in the center of Oahu. So it's the dominant center there on the H1. And then just right next door is the Waikele premium outlet. So the center is 100% occupied outside of where the Kmart was. So the traffic there is still tremendous. We're getting -- it's kind of where everybody wants to be. We've got Safeway under construction there that will open up towards the end of the year. So in the process of getting through that. So got good activity. We're negotiating a couple LOIs. So I see it getting better. Right now, we've just got to get through this choppy situation getting Safeway open and getting the center turn back on in that piece of it. Does that help you?

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

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To give you some additional background color, it's 43 acres, fee simple, half a mile frontage on the H1. And we believe that when the Safeway store opens up, the traffic, which is already elegant, as Chris has pointed out, will grow again.

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Operator [34]

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Our next question is from Haendel St. Juste from Mizuho.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [35]

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Just going back to the equity issuance here. I guess I would want to be clear. Am I correct -- did I hear you correctly in that you would consider issuing equity -- more equity if you could find more compelling investments? Or was it primarily done to lower your leverage? And then how do you weigh the decision to sell equity at a near 10% discount NAV versus perhaps selling an asset?

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

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We weigh challenge of issuing equity at a discount with great pain and remorse. So we would have to find something that was substantially accretive. I don't know that we'll find something, if we are successful at looking, that we'll be substantially accretive in the short run, but we have to measure the long run performance of whatever we acquire with the long run performance of the existing portfolio. So it's a constant examination and reexamination of the metrics and the opportunities. I hope that didn't answer your question.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [37]

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No, no, I don't think it's in the core of -- like I certainly appreciate, historically, you're focused on NAV and cash flow growth and understanding some of the dynamics perhaps behind not perhaps wanting to sell an asset given perhaps some tax considerations. But certainly, pointing out the NAV discount, but then issuing equity below NAV is something that's been a bit difficult for certain investors to accept.

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

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Yes. Well, it was a modest, modest amount, and we're spending significant amounts on our -- improvement of our existing properties, and the result is negligible, but on the other hand, the fact that it gives us a clear head to look at our leverage and look at our opportunities I thought was worthwhile. Bob, you're ready to...

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Robert F. Barton, American Assets Trust, Inc. - Executive VP & CFO [39]

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Yes. I mean, Haendel, we -- mathematically, we actually calculate that out. And so if you look at an -- from an acquisition standpoint, we'll factor in what the cost is of raising equity compared to what we think the NAV is. And whatever that cost is, that's an added cost to the price of the acquisition. And if we can still come out with an unlevered IRR relative to our weighted average cost of capital growing, then it still makes sense or we take a look at how quick it gets to the point. So if we go in lower than our weighted average cost of capital and we can recoup that in a very short period of time, then that still makes sense. It's like a bond premium. So we're very conscious of it. And if we're not so conscious of it, we would not have had a 12% compounded annual growth rate in our NAV over the last 8 years. So we're very sensitive to that.

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

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I think so that any acquisition that we can make would not be instantly make up for the discount. So we have to look over the medium term for recovery of the discount to NAV that we have to absorb. It's a tricky calculation, but that's what you pay us for, so we do the best we can for you.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [41]

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Got it. Got it. And then one more. You mentioned your office portfolio, I think, 21% below market. What's that figure for San Diego specifically? And then it looks like you have about, I think, 15% of your leases coming up for renewal on the office side by the end of 2020. Can you talk about some of that potential upside for your office portfolio? Is that likely to be more 2021 and beyond? Or can you -- do you think you can harvest some of that before that?

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Steve Center, American Assets Trust, Inc. - VP of Office Properties [42]

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Two big ones in particular are the VA and the IRS in Portland and First and Maine. It's 155,000 feet. Both requisitions have come out. The IRS is going to renew in full space. We haven't done it yet, but the requisition was for the full space. The VA is going to give back probably about 1/3 of the space. But in both cases, those rents are well under market. So we're trying to triangulate right now where we can take those rents given the competition. And we're doing our homework right now on that front. But it will be significant either way.

With regard to rollover in San Francisco, we've got 80,000 feet or so rolling between an architectural firm and a school. That situation is going to be a positive one. We received 2 offers on the space, and we've responded in the last week and we expect responses back this week. So just based upon the offers, which we've countered, we feel we're in good shape there.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [43]

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Would you say that the increases in the counteroffers that you've made were modest in relation to the existing rent, somewhat upward movement or significantly higher?

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Steve Center, American Assets Trust, Inc. - VP of Office Properties [44]

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Along the lines of Google relative increase.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [45]

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I think what Steve just said, if you want the answer, he can't give it to you, but you can Google it.

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Operator [46]

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Our next question is from Craig Schmidt from Bank of America.

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Justin Thomas Devery, BofA Merrill Lynch, Research Division - Associate [47]

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This is Justin Devery on for Craig. Ernest, I believe you've highlighted apartments a while ago as a preferred property type. I was just curious if you could give us an update on the apartment leasing environment in Portland, both the demand that you're seeing there as well as pricing.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [48]

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Well, I can cover it in one word, tough. There's a lot of product, competition is tough. We have a great portfolio. In the long run, it's going to be extremely valuable. The replacement cost is 30% to 40% higher, but in the meantime, the rents don't allow us to realize that in the economy that exists. On the other hand, we're doing a little better because we're now running it more economically.

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Justin Thomas Devery, BofA Merrill Lynch, Research Division - Associate [49]

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That's helpful. Sticking with multifamily, how do you think about adding more multifamily development to the existing properties as a complement to retail and office? And how much could that grow as a percent of NOI?

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [50]

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I don't know how to answer that question, and we have done a lot of development over the years, and we'd consider that again. But our -- frankly, in terms of development and redevelopment, we have a pretty full plate. I mean there's -- we're spending, what, $80 million, $90 million this year improving what we have and that's without any other significant opportunities, which we continuously examine. So I don't think we have to apologize for the level of activity or our focus on increasing our NAV. And I'd love to do another apartment development. It's really a lot of fun. We just don't see the opportunity at the moment. Certainly, in Portland and San Diego, the barriers to entry are significant.

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Operator [51]

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And our next question is from Mitch Germain from JMP Securities.

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Corey R. DeVito, JMP Securities LLC, Research Division - Associate [52]

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It's Corey on for Mitch. I just had a question with regards to Torrey leasing. What industry is that tenant demand coming from?

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [53]

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I think Steve mentioned that, and you were saying what the type of leasing we've got interest in from Torrey.

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Steve Center, American Assets Trust, Inc. - VP of Office Properties [54]

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Yes. Two pharmaceutical companies, one is public, one is pre-public. We have a medical device company that we're in will be in proposal with 15,000 feet. So we're seeing spillover from both UTC Campus Pointe life science and Torrey Pines.

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Operator [55]

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At this time, I'm showing no further questions. I would like to turn the call back over to Ernest Rady, Chairman, for closing remarks.

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Ernest S. Rady, American Assets Trust, Inc. - Chairman, President & CEO [56]

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As always, we thank you very much for your interest and your confidence in our company. We do the very best for you. We will continue to do the very best for you. And if we don't, I know you'll let us know, so please let us know quickly. Thank you very much, again.

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Operator [57]

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