American Assets Trust, Inc. (AAT) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 American Assets Trust Earnings Conference Call. My name is Gwen, and I'll be your operator for today. [Operator Instructions] I would now like to turn the call over to your host today, Mr. Adam Wyll, SVP and General Counsel. Please proceed.

Good morning. I'd like to thank everyone for joining us today for American Asset Trusts First Quarter 2013 Earnings Conference Call. Joining me on the call are Ernest Rady, John Chamberlain 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 first quarter 2013 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, 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 tax 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 2013 furnished to the Securities and Exchange Commission, and this information is available on the company's website at www.americanassetstrust.com. I will now turn the call over to our Executive Chairman, Ernest Rady, to begin our discussion of fourth -- first quarter results. Ernest?

Thanks, Adam, and good morning, everyone. Thank you for joining American Assets Trust First Quarter 2013 Earnings Call. We have stated repeatedly that we own and operate a premier portfolio of retail, office and multifamily assets in the REIT sector. We believe that our integrated low-risk operating and growth strategy, capitalizing on the infill nature and strong demographics of our properties, will continue to allow us to take advantage of a stable of core portfolio assets that produce a continuous growing stream of cash flows. It is our belief that our investment strategy should continue to demonstrate a strong platform of core operating property income that continues to provide consistent internal growth. Our development and redevelopment pipelines appear full for the foreseeable future and should continue to demonstrate our ability to produce strong earnings and value creation. While we continually search, we are not dependent on external acquisitions to grow, and we anticipate that our internal activities will provide solid risk-adjusted returns, value creation and are appropriately sized relative to our stabilized operating portfolio. We use an abundance of common sense or judgment. It is something that management emphasizes every day, both to ourselves, as well as to all of our associates. It's a very simple rule but one that carries with it a guiding principle in the execution of our focused investment strategy, a strategy that produced common stock returns in excess of 40% in 2012. It is a rule that we will continue to live by now and over the decades to come. Our strategy of operating this portfolio has been proven to be the right one based on the returns that we produced over the last year. On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage your company, and we look forward to your continued support. I would now like to turn it over to our President and CEO, John Chamberlain. John, would you please take it from here?

Good morning, and thank you, Ernest. Overall conditions in our core markets, Seattle, Portland, San Francisco, San Diego and Oahu, continue to show significant signs of strengthening in all 3 of our asset classes. We expect this to continue into the foreseeable future. Our office properties continue to perform extremely well relative to their respective submarket competitors. Portfolio-wide, the overall leased building area was 95% as of March 31. Our San Francisco portfolio is 100% leased, and the market, whilst slowing somewhat, continues to experience positive rent growth. In San Diego, construction continues on Phase III of Torrey Reserve, a 3-building, approximate 40,000-square-foot expansion. Phase IV, an additional approximate 40,000, 2-building expansion, is on schedule to commence in July 2013. In Bellevue, Washington, we renewed an approximate 29,000-square-foot lease with Cisco Systems at $36.75 per square foot, an approximate 24% increase over their previous rental rate. The leased building area of our retail portfolio decreased to 96.1% from 97% last quarter. The decrease was due to Ross leaving Lomas Santa Fe Plaza, which was anticipated. We believe this space will be re-leased by the end of Q3. Other leasing and repositioning activities continue in full swing, with several significant executed letters of intent in place. Our Monterey, California property, the Del Monte Shopping Center, continues to operate very well, finishing the first quarter at 99.2% leased. Our multifamily assets saw significant improvement in leasing levels at the end of Q1 as compared to Q1 2012. Our portfolio was 94.3% leased, up 5.9% over the prior year. This was accomplished with little to no rental concessions. We feel we are poised for a strong year in our multifamily portfolio. The Hawaii economy continues to show positive growth in both spending and arrivals at the end of Q1. Total visitor arrivals in February grew to approximately 675,517, a 7.8% increase year-over-year. The following percentages are all year-over-year for the month of February. Expenditures by visitors increased 9.9% to $1.22 billion. Arrivals by air increased 10% to 844,874. Notably, arrivals from China nearly tripled in growth to 14,188. Japan grew 3.5%. U.S. West rose 7.7% and U.S. East grew 3.7%, with new daily service from New York and Washington, D.C. Waikiki Beach Walk was 95.5% leased at the end of March. Retail full service and quick service restaurants at Beach Walk continue to show strong upward sales trends. Our shops on Kalakaua remain 100% leased and occupied. Our Hawaiian retail portfolio was 95% leased at the end of the quarter. Our Embassy Suites at Beach Walk continues to exceed our competition in ADR and RevPAR measurements for the quarter. For the month of December, the property's ADR and RevPAR index -- excuse me, for the month of March, the property's ADR and RevPAR index were 126.2 and 124.3, respectively. Year-to-date, room revenue exceeds last year by $1,184,000 or 15%. The outlook for the first half of 2013 remains consistent with our expectations, pacing ahead of 2012. Now a brief update on our development activities in Portland, Oregon. Our firming efforts are well underway. Our development program has been defined to include approximately 47,000 square feet of retail and commercial area and 657 multifamily units, in addition to the existing 238,000-square-foot office tower. The project will also include approximately 1,218 stalls of underground parking. We currently anticipate securing the necessary permits and commencing construction July 1. Construction is expected to take 24 months. The project will be LEED-certified and contains state-of-the-art green features, including a living machine that is projected to reduce water and sewer costs by as much as 75%. The retail will be anchored by a specialty grocer and provide services and amenities for the apartment residents, office tenants and neighborhood alike. The project will be a mix of all market rates: studios, 1-, 2- and 3-bedroom apartments, ranging from walk-up flats to penthouse units. Total project costs, including hard and soft costs, are currently estimated at $192 million. The stabilized cash-on-cash return is anticipated to initially commence between approximately 6.25% and 7.25% and is anticipated to grow steadily. Currently, the apartment vacancy for the Lloyd District submarket is approximately 3%, the best in the Portland metropolitan statistical area. Regarding Sorrento Pointe and Solana Beach 101, our entitlement efforts continue. Sorrento Pointe is scheduled for a final approval from the California Coastal Commission on May 8. Assuming we are approved, we are poised to immediately begin the preparation and processing of construction documents. Groundbreaking would be targeted for Q2 2014. Solana Beach is currently tracking for a 2014 to 2015 approval. As you know, each of these potential development and redevelopment opportunities are subject to market conditions and may not ultimately come to fruition. We will certainly keep you updated. Our acquisition efforts remain in full swing. However, we continue to be very disciplined. All opportunities are of high quality, located in our existing core markets and include, primarily, retail and multifamily assets. And currently, we continue to evaluate opportunities to recycle capital where the probability to increase internal growth exists. I would now like to turn the presentation over to our Chief Financial Officer, Bob Barton. Bob?

Thank you, John, and good morning, everyone. Last night, we reported first quarter FFO of $0.38 per share. Net income attributable to common stockholders was $0.08 per share for the first quarter. The company's Board of Directors has declared a dividend on its common stock of $0.21 per share for the quarterly period ending June 30, 2013. The dividend will be paid on June 28, 2013, to stockholders of record on June 14, 2013. American Assets had a solid first quarter performance based on steady leasing and increased pricing power due to consistently strong occupancy in retail and office, with retail occupancy at the end of the first quarter decreasing 90 basis points to 96.1%, primarily due to the loss of Ross at our Lomas Santa Fe Shopping Center in San Diego. We anticipated Ross would vacate their space, and we believe that the space will be re-leased by the end of the year. We see this as another opportunity to enhance the overall tenant mix of the center. Great real estate and great infill locations with strong demographics is the ingredient needed to create a long-term sustainable portfolio that will continue to deliver growth year-over-year. The Lomas Santa Fe Plaza in San Diego, California is an infill location with freeway frontage and has one of the highest demographics in the country, being right next door to Rancho Santa Fe. Total office portfolio occupancy increased quarter-over-quarter by approximately 50 basis points, primarily due to increased occupancy for office properties in Seattle and Portland. Our Lloyd District property ended the quarter at 86%, and leasing activity appears to be on the upswing for the Lloyd property. All of the other same-store office buildings in our portfolio continued to maintain strong occupancy statistics, as shown in the supplemental. Let's talk about same-store NOI for a moment. Same-store retail NOI for the quarter continue to have very impressive growth at 6.5% on a cash basis and 5.8% on a GAAP basis. This growth reflects not only in-place contractual bumps on existing retail tenants, but also the addition of Nordstrom Rack leases at both Carmel Mountain Plaza and Alamo Quarry, H&M at Del Monte Center also opened late June and began paying rent and a lease with Petco at South Bay Marketplace as well. Retail leasing spreads are also a testimony to the quality and location of the retail product available for lease, as spreads on 9 comparable retail lease renewals increased at an average of 6.8% on a cash basis and 11.6% on a GAAP basis, as shown in the supplemental. Same-store office NOI for the quarter increased 8.1% on a cash basis and reflects the strong Salesforce.com rent that we continue to receive at our landmark property in San Francisco compared with last year's free rent period. On a GAAP basis, same-store office NOI decreased by approximately 2.5%, reflecting the lower occupancy at Lloyd on a year-over-year basis. Office leasing spreads on 8 comparable office lease renewals rose at an average of 9.8% on a cash basis and 19.6% on a GAAP basis, as shown in the supplemental. Same-store multifamily NOI, which comprises approximately 6% of our total NOI, increased 9.2% on both a GAAP and a cash basis, primarily reflecting strong occupancy gains, combined with the increased rents on a year-over-year basis. Multifamily occupancy remains strong at 94.3% leased overall at the end of the first quarter. Waikiki Beach Walk, our mixed-use property, which represents approximately 15% of our NOI, continues to outperform with same -- with strong same-store growth of 13.1% on a cash basis and 13.8% on a GAAP basis. The Embassy Suites just by itself had 26.5% same-store NOI growth on a year-over-year basis for the first quarter. And if you remember from the last earnings call, the Embassy Suites just by itself had 20% same-store NOI growth year-over-year for the fourth quarter of 2012. It really demonstrates the high quality of these assets. With the right product in an extremely high-barrier-to-entry location that is favored by tourists, we expect this mixed-use asset to only get better over time. Turning to our results. 2013 first quarter FFO was $0.38 per diluted share, which was approximately the same as the previous quarter, but a 22% increase on a year-over-year basis from first quarter '12 of $0.31. There is nothing that really stood out other than the following 3 items: first, the expected seasonality of the Embassy Suites Hotel increased FFO by approximately $0.021; the sale of 160 King Street last December reduced FFO by approximately $0.013 per FFO share in the fourth -- in the first quarter; G&A increased by approximately $0.006 to $4.2 million, which, again, is what we continue to believe our run rate will be on a quarterly basis. Now as we look at our balance sheet and liquidity at the end of the first quarter, we are well positioned to continue to execute on our strategy of selectively acquiring or developing accretive high-quality assets in our core West Coast markets. At the end of the first quarter, we had approximately $270 million in liquidity, comprised of $44 million of cash and cash equivalents and $226 million of availability on our line of credit. At the end of the first quarter, our total debt to total capitalization was 36.4%, and our net debt to EBITDA was approximately 6.9x. We are focused on keeping our leverage ratio at 45% or less and positioning our balance sheet so we have the ability to approach investment-grade market in 2015. As I have mentioned before, we do have an internal roadmap to approach the investment-grade debt market in 2015. In order to do so, we recognize that we need to get our secured debt ratio less than 30%. Part of our plan is to refinance our fixed-rate CMBS maturities in 2014 with unsecured debt subject to economic market conditions at that time and then approach the investment-grade market in 2015 to refinance our fixed-rate CMBS 2015 maturities. We always have several ways to go and are focused on conservative and disciplined balance sheet management. We are not only focused on our long-term NAV growth for our shareholders, but also on positive same-store NOI growth on a relative basis, which we believe will ultimately translate into organic FFO growth and increasing shareholder value. Lastly, we are increasing our full year 2013 guidance to a range of $1.42 to $1.49 per FFO share, with a midpoint of $1.45, from our initial guidance of $1.38 to $1.46 per FFO share with a midpoint of $1.42. The primary driver for the updated guidance is the outperformance of the mixed-use asset at Honolulu and higher-than-anticipated occupancy for our multifamily portfolio. Our updated 2013 guidance midpoint of $1.45 per FFO share is approximately a 7.4% growth rate over our 2012 actual of $1.35 per FFO share and is based on the following assumptions for same-store growth on a cash basis. The retail portfolio is expected to increase by approximately 3.5%. The office portfolio is anticipated to be flat to slightly down to the sale of King Street and reduced occupancy at Lloyd and the assumption that the tax and treasury department vacates at 1st of May in Portland, Oregon, which we factored into our original underwriting of this property. Multifamily is expected to increase 8% due to higher occupancy in the first half of the year versus 2012. Mixed use is also expected to increase 7% due to the continued outperformance of the Embassy Suites Hotel in Honolulu, Hawaii. Our guidance excludes any impact from additional acquisitions, dispositions, equity issuances or repurchases or debt financings. We will continue our best to be as transparent as possible and share with you how we are thinking about our quarterly numbers. We are well prepared with a strong balance sheet to capitalize and execute on the opportunities that we believe will continue to present themselves over the coming quarters. Operator, I'll now turn the call over to you for questions.

The first question comes from the line of Craig Schmidt.

It appears that some of your markets have very, very low vacancy, in particularly San Francisco and Hawaii. Is that part of the reason for the push for the higher earnings results?

I think the fact that they're -- the vacancy rates are low allows us to adjust rents as well as we can to maximize the benefit to the stockholders as well as serve our customers.

Craig, this is Bob. I would add to that, that the higher earnings results are largely the result of the higher performance at multifamily plus the outperformance at the Embassy Suites in Waikiki. Our retail continues to be very strong at 3.5%-plus going forward.

Great. And I just wanted to get your opinion of the International Market Place, Taubman's joint venture project in terms of does the competition balance the raising of the profile of the area. Or just what's your thoughts on that?

Well, I think they have a very, very aggressive plan for that property. It is a great location. It's right in the heart of Waikiki. It's about 1 block from our project. And frankly, I think the more synergy that's created along Kalakaua Avenue, the better for everybody, the better for all of the retail tenants. The better for the hotel customers, and we look forward to seeing their success.

I agree.

Our next question comes from the line of Blaine Hecht [ph].

You guys posted an investor presentation on your website from last month that included a detailed NAV that tagged it at $33.50. Given that you're now trading almost $1 north of that, your leverage is at or a little bit above long-term targets on a debt-to-EBITDA basis and you're pacing quite a bit of your development spend, do you think now is a good time to go ahead and tap the capital markets to go ahead and fund some of your future growth?

It's something that we always will consider, how do we serve the best interest of our existing stockholders. Well, as Bob pointed out in his presentation, we have many, many ways to go to fund our development. At the same time, what we posted as NAV, we think, was accurate, if not conservative. So we have to take all these factors in consideration and the Board will take them into consideration and make the decision how to proceed and benefit all of our stockholders as well as possible.

Okay. That's helpful. Then you've mentioned, I think, John, that the initial yield on the Lloyd District development is expected to grow steadily from 6.25% to 7.25%. I think, from past conversations, that's due to your expectations to be able to push around the multifamily portion. Can you guys quantify how much you think you can grow that, say, the first 3 to 5 years?

Well, our expectations for that project is our returns will initially commence in the range of 6.25% to 7.25%. There are a number of variables still outstanding, one are -- actually bidding the construction, buying materials, et cetera. So we're keeping a range that we're offering as guidance. And we believe -- if you look at the Portland market over the last 10 years, I think we can anticipate rent growth of over 3% a year, and obviously, that can change. But right now, the market is operating with a 3% vacancy. We will have little or no competition to our project when it comes online, and we feel we have probably the best location in the northeast area of Portland.

Blaine [ph], from a modeling standpoint, what, we're trying to be consistent with Reis' reports that is a -- that publishes their expectation on growth rates on the -- and what we look at is the eastern side of Portland. We take that and then we will fine-tune that accordingly. So I think what John just said about 3 -- that we're comfortable with the 3%-plus growth rate in the rental rates.

I think when you're building into a market with a 3% vacancy in a location which John described as being excellent, it's a great opportunity. I'm personally very excited about it now and for the future.

Yes, and that definitely sounds great. And then, John, just the last one. You mentioned that you're seeing San Francisco is strong, but beginning to slow a bit. Can you just expand on that comment?

Well, San Francisco, for the first time since the recovery, if you will, saw some negative absorption. And I think that caught everyone a little bit by surprise. There is still an abundance of tenants looking for space in the market. So I think rental rates are going to continue to grow, but it was the first sign of a pause is probably the best way to describe it.

Our next question comes from the line of Mitch Germain.

It's Mitch. Just curious about your interest in the Valley. Is that in a market that you've had some interest in, in the past?

Which market are you referring to?

Silicon Valley, sorry.

We actually are not looking at anything in the Silicon Valley right now. We have -- historically, our predecessor owned a shopping center in that area, so we're very familiar with it. But it's currently not a target market.

Got you. And you had mentioned some retail at the Lloyd District development. There's no lease signed with a shop -- with a supermarket chain, correct? It's just something that you're going to lease after development?

No, there is no lease signed. But the project has been designed to accommodate a specialty grocery store approximately 25,000 square feet. And obviously, with that as a use, we have to take into account loading and trash and everything else that goes with it. So the project has been designed for one. We're in discussions with several potential tenants, and we're quite confident that once we put a shovel in the ground, we'll be able to sign somebody up.

Great. And last question maybe for Ernest. A couple of months ago marked your 2-year anniversary after you've gone public. This is your 8th quarter now. I'm just curious about how -- looking back at the process, how things unfolded, anything you might have done different over the last few years?

I don't know that we would have done anything different. If I had to do it all over again, I bet[ph] I might have been a little more insistent with the underwriters, that they give us the last $0.50 on the range, but I lost that. And since then, we really enjoyed being in the public marketplace, having a lot of partners that are looking over our shoulder and encouraging us to better -- to do better, and we've got a lot of satisfaction out of creating wealth and value for them. So I think it's been good for our new shareholders. It's been good for our associates. It's been good for the people we do business with, our customers, and it's been good for our financial sources as well. So net-net, I'm very grateful for the blessings that we've enjoyed over the last 2 years. And that's a great question.

Our next question comes from the line of Pat Thompson.

Just a follow-up on San Francisco. I was just wondering are you seeing an impact at all on cap rates in northern California, given the slowdown you saw or I guess, the negative absorption. And does this potentially create investment opportunity for the company?

We have not seen cap rates move. They are, I think, broadly described as at all-time lows. As you're aware, we sold -- we took advantage of where those cap rates were when we sold King Street. We continue to look in that market. It's obviously one that we're very bullish on. But we, at the moment, do not have any current prospects.

Okay. And then switching over to Portland. So the 6.25% to 7.25% stabilized yields, just a couple of questions. First, are you assuming current apartment rents in your stabilized yield expectations? Or are they sort of trended rents over the next couple of years until the project stabilized? And then just a follow-up. I was just wondering, I thought initially that the yields in this project were going to be a little bit higher than that 6.25%, 7.25% range since you acquired the land at a fairly attractive price. So I was just curious if you could comment on whether that yield has come down a little bit now that plans and costs are starting to be finalized a bit?

That's part of it. We want to be very conservative. There are a lot of systems we're incorporating in the project that will result in significant operating costs. We don't know -- we have a range of what those will be. If we achieve the higher end of that range, we're going to -- obviously, that will reflect on the bottom line. So we're being conservative. The project has not been formally bid out. We're dealing with the shoring portion of the bid right now, and the numbers are coming in at very attractive rates. And we will -- I would expect that once we commence construction, we will offer additional guidance on where those returns are likely to end up.

From the point of view of our relationship with the board and our stockholders, we would sooner under-promise and over-deliver. That has always been our mantra, always been our strategy. Again, I'd like to repeat that I'm very enthusiastic about building these apartments into a 3% vacancy market in -- I think John referred to as the best location in the Northeast. So what we are providing today is some guidance, but we're very optimistic and we hope we will do a lot better. And we're going to do the very best we can to produce the returns that you'll be pleased with.

And Todd (sic) [Pat], regarding the rental, yes, we're taking the current rents that we're seeing in the market in the model, and then we are growing them. And what we take a look as -- in terms of the growth rate, we're looking at independent studies by Johnson Reid and others, and then we triangulate that with the Reis reports and what their view is going forward in that tight market.

Okay, that's helpful. And then just lastly. I was just wondering -- I know you don't have any acquisitions embedded in guidance, but I was just wondering if you could -- you touched on San Francisco a little bit, northern California. But I was wondering if you could characterize the environment sort of elsewhere along your target markets and just wondering if competitions let up a little bit or if you're actually seeing it increase and kind of what's happening to pricing overall.

I would say that pricing is holding very steady. There are a lot of -- there's a lot of aggressive money in the market, particularly in the markets that we're in. We haven't seen much change, and frankly, I don't expect that to change in the foreseeable future.

Which is why in the presentation we said that we're looking to the maximization of our existing portfolio and the development opportunities that we have internally to continue to produce results that will be satisfactory for our stockholders.

This is Bob. We are really excited about this Lloyd development. I mean, it's a jewel in terms of having a development -- what we refer to as a transit-oriented development, where you have the MAX line and the light line intersect at our property, and then building into a very tight, low-vacancy market and with cap rates and actually lower-quality product going in the low-4s. So we feel very good about this, and we think that this is going to create shareholder value. And that's what we -- what our focus is.

And not just anything about next door to a regional shopping center as well. So if -- when you are looking for an apartment development, this is as good as I've seen it yet.

Our next question comes from the line of Jason White.

Just a quick follow-up on the Lloyd question first for rent. Where are your rents that your underwriting lease up versus where they are today with the growth you're assuming to having there?

This on the Lloyd, Jason?

Yes. You kind of gave the methodology. I was just wondering what's the magnitude of the rent Reis' were between now and lease-up.

Yes. I mean, what we're seeing with the Reis reports coming in are starting probably like 4% growth rate for the rent [ph] -- 4%, 3% through stabilization. And we expect to be stabilized on the first 2 buildings early '15 and then the remaining high-rise building probably by mid '15. So our first full stabilized year will be '16.

Okay, that's helpful. And then some other questions. I saw 3 straight quarters of new lease roll-down on the office portfolio. Is that just kind of small sample set? Or is that a trend that's going on in your portfolio?

On the office portfolio or...

Office, just the new leases, yes.

I think that's probably just a small subset. If you look at where we are -- I mean, I look at our in-place compared to market, and on a weighted average basis, we're approximately 8% below market. And again, that's on a weighted average basis. In San Francisco, I'm using the market which is, again on a weighted average basis, of about 53 and compared to the recent leases that we signed in Landmark at 72, 74. So I would say if we're 8% below market, that's a very conservative number.

Okay. So the new lease spreads, the cash basis are just kind of a flip on the radar then for the last 3 quarters?

That's -- I would say that.

Okay. And then the last question is about the Ross box and the second half of that, Mervyn's box at Carmel Mountain Plaza. Does there need to be any work there to kind of repurpose that Ross box on the types of tenant interest you're seeing? And are there any more prospects for that -- the Mervyns box that's still vacant?

We have signed letters of intent on both boxes. There will be some repositioning costs preparing the space for the 2 new tenants and then providing a tenant improvement allowance. But that's all been anticipated and part of our projection.

[Operator Instructions] Your next question comes the line of Wes Golladay.

Looking at the retail and office deal volume, where are you seeing the most volume? And for the properties you are bidding for, are you materially off versus the winning bidder?

Well, there's a lot more deal flow on the -- in the office sector than anywhere else. I'd put multifamily second and retail a very distant third. We are not actively bidding on office properties right now. Our underwriting on multifamily, we always keep in mind our average cost of capital. And unless we believe we can move -- acquire something at the current cap rates that properties are trading at and move those returns up into something north of a 7, the properties simply don't meet our criteria. So we continue to look, but we are not -- we're skeptical.

Okay. And looking at the Embassy Suites, what type of RevPAR growth do you have embedded in the guidance?

Wes, I don't have that in front of me, but I can get that to you at a later time.

We're very optimistic about the Embassy Suites over the next decade. It's just one-of-a-kind property.

What has been successful, Wes, is that we changed our strategy in terms of the ADR probably halfway through 2012. And what we did is instead of trying to fill the Embassy Suites up earlier, we held off and maintained a $300 per night ADR. And so that's really what's driving this, is that -- and we generally get a glimpse several months out. We can see the reservations that are coming in. And that strategy has actually paid off and increased our -- is driven to the bottom line and increased our ADR. My recollection is, I think, our RevPAR, we ended up with about $264 based on ADR at $300 something.

And looking at those recent transactions in Oahu, do you have any idea which cap rate those went at, the Hyatt?

Which properties again?

There was a Hyatt that's traded recently in Oahu? Blackstone bought it.

Yes. That's really not a comp to us from an investment standpoint because it's on leased land.

Correct. I mean, obviously, you guys will go for a premium over that. But just curious if you had the -- if you guys were involved in it or saw any of how -- the pricing of it.

No. We were not involved. We did not bid. We didn't even underwrite it.

If you'll recall, our entire portfolio is on -- in Hawaii is on fee simple land that we own. And as a matter of policy, we do not bid on properties that are on leased land. So John's reaction is absolutely appropriate, but we wouldn't even bother taking a look at it.

And now I'll turn the call back over to Mr. Ernest Rady for closing remarks.

Thank you, all of you, for attending our call. We're really proud of the results that we've been able to produce for all of our stockholders. It's been an exciting 2 years, as I said earlier, and we look forward to many more quarters, in which we hope you will join us, and we hope and believe that we continue to have very, very good news for you. So again, thank you for your time. Thank you for your interest. Good morning.

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