American Assets Trust, Inc. (AAT) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2013 American Assets Trust Earnings Conference Call. My name is Karen, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Adam Wyll, Senior Vice President and General Counsel. Please go ahead.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust's Second 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 second quarter 2013 supplemental disclosure package provides a significant amount of invaluable 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 cost of construction. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our 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 second 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'll now turn the call over to our Executive Chairman, Ernest Rady, to begin our discussions of second quarter results. Ernest?

Thanks, Adam. And good morning, everyone. Thank you for joining American Assets Trust Second Quarter 2013 Earnings Call. We have stated frequently that we own and operate the premier portfolio of retail office and multifamily assets in the REIT sector on the West Coast. Our FFO per share increased approximately 23%, and same-store cash NOI increased 10% year-over-year for the 3 months ended June 30, 2013. As I stated on our last earnings call, our strategy and portfolio continues to produce a continuous growing stream of cash flows. We successfully obtained the final regulatory approval this past quarter for both our Sorrento Pointe and Lloyd District development endeavors, as John will describe in more detail shortly. This development pipeline will provide internal growth for our shareholders as the market allows for many, many years to come. Our multifamily properties are doing extremely well. Same-store NOI was up 31.6% for the quarter compared to the same period last year, truly amazing. Our properties' NOI continue to exceed our expectations. Waikiki Beach Walk experienced growth in sales, rent and hotel revenue; an asset we believe we are only seeing the beginning of a great future. 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. As mentioned on our last call, 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 92.9%, as of June 30. Same-store cash NOI rose 4.8% for the 3 months ended June 30, compared to the same period in 2012. Our San Francisco portfolio is 97% leased, and the market continues to experience positive rent growth. The technology sector remains the driving force in that market accounting for 45% of completed lease transactions. In San Diego, construction continues on Phase III of Torrey Reserve, on track and on-budget. Lease negotiations are well underway for Building 6 scheduled for an August completion. On May 8, we received our final regulatory approval for Sorrento Pointe, a 2-building approximately 88,000 square foot project. Preparation of construction documents is underway. Groundbreaking, subject to market conditions, is targeted for the summer of 2014. The leased building area of our retail portfolio increased to 96.6% from 96.1% last quarter. The increase was due to a new lease with U Gym at the Waikele Center in Hawaii. 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 second quarter at 99.5% leased. Our multifamily assets had another great quarter with same-store growth coming in at a tremendous 31.6% on a year-over-year basis. Although leasing levels at the end of the second quarter 2013 versus the second quarter 2012 remained unchanged at 97.7%, we had significantly higher occupancy in the second quarter of 2013 in comparison to the same period in 2012. Ending rents for the multifamily portfolio on a year-over-year basis were up 7.4%. We expect the multifamily results to continue strong throughout the rest of the year. The Hawaii economy continues to show positive growth in both spending and arrivals at the end of the second quarter of 2013. Total visitor arrivals in May grew to approximately 645,000, a 3.7% increase year-over-year. The following percentages are all year-over-year for the month of May. Arrivals by air increased 6.9% to 857,000. Notably, arrivals from China and Korea rose nearly 25.4%, Japan grew 5.9%, U.S. West rose 1.8%, and U.S. East grew 29.6% with new daily service from New York and Washington, D.C., and increased service from Houston. Waikiki Beach Walk was 93.8% leased at the end of June. Retail full-service and quick service restaurants at Beach Walk continue to show strong upward trail sense. Our shops on Kalakaua remain 100% leased and occupied. Our Hawaiian retail portfolio was 97.6% leased at the end of the second quarter. Our Embassy Suites at Beach Walk continues to exceed our competition in ADR and RevPAR measurements for the quarter. For the month of June, the properties' ADR and RevPAR index were 130.0 and 124.3, respectively. The outlook for the second half of 2013 remains consistent with our expectations facing ahead of 2012. Now a brief update on our development activities in Portland, Oregon. As Ernest has just mentioned, we received the final regulatory approval from the City of Portland Design Review Board just last week. Our permitting efforts are well underway, and we now anticipate breaking ground in the middle of next month. The project will be LEED certified and has been defined to include approximately 47,000 square feet of retail and commercial area, 657 multifamily units in addition to the existing 238,000 square foot office tower. The project will also include approximately 1,200 stalls of underground parking. Construction is expected to take 24 months. The project will be LEED certified and contain state-of-the-art rain 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 apartments will be a mix of all market rate studios 1, 2 and 3 bedrooms ranging from walk-up flats to penthouse units. Total project costs including hard and soft costs are currently estimated at $190 million. The stabilized cash-on-cash return is anticipated to initially commence at approximately 6.25% to 7.25% and is anticipated to grow steadily. Currently, the apartment vacancy in the Lloyd District submarket is approximately 3%, the best in the Portland metropolitan statistical area. 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, the pricing of assets equal to or greater in quality than our existing portfolio provide returns of unacceptably low levels. Disciplined investing is a core metric at American Assets Trust. If it is dilutive to shareholder value, we won't do it. Nonetheless, we continue to evaluate opportunities to recycle capital with 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 second quarter FFO of $0.37 per share. Net income attributable to common stockholders was $0.08 per share for the second quarter. The company's Board of Directors has declared a dividend on this common stock of $0.21 per share for the quarterly period ending September 30, 2013. The dividend will be paid on September 27 to stockholders of record on September 13, 2013. American Assets had a solid second 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 second quarter increasing by 50 basis points to 96.6%, primarily due to a new lease with U Gym at Waikele Center in Hawaii. Total office portfolio occupancy decreased quarter-over-quarter by approximately 100 basis points, primarily due to 2 tenants leaving, one of which was Skyy Spirits at One Beach Street in San Francisco and the other was a smaller tenant at Torrey Reserve. Skyy Spirits' lease was a below-market lease at a rate less than $30 per square foot. The market rent for that space with unobstructed views of Alcatraz, on the North Waterfront in San Francisco, is somewhere in the 40s. We are looking forward to re-leasing that space. For purposes of our operating model, we have left it vacant for the remainder of the year. All of our other same-store office buildings in our portfolio continue 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 10.5% on a cash basis and 4.8% 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 in late June 2012 and began paying rent at that time. A new lease with Petco at South Bay Marketplace. Retail leasing spreads are also a testimony to the quality and location of the retail product available for lease, as spreads on 11 comparable retail lease renewals increased at an average of 8.9% on a cash basis and 17.6% on a GAAP basis, as shown in the supplemental. Same-store or office NOI for the quarter increased 4.8% on a cash basis and reflects the strong salesforce.com rent being received at our Landmark property in San Francisco compared with last year's free rent period through May 2012. On a GAAP basis, same-store office NOI decreased by 1.7%, reflecting the lower occupancy of Lloyd in Portland and One Beach in San Francisco on a year-over-year basis. Office leasing spreads on 12 comparable office lease renewals decreased an average of 3.8% on a cash basis, but it did increase 5.4% on a GAAP basis as shown in the supplemental. The decrease in the office leasing cash basis spreads was mostly attributable to 1 tenant who signed a lease at the top of the market in 2007. Same-store multifamily NOI, which comprises of approximately 6% of our total NOI, increased 31.6% on both the GAAP and cash basis, primarily reflecting continued strong occupancy gains combined with increased rents on a year-over-year basis. Multifamily occupancy remains strong at 97.7% leased overall at the end of the second quarter. Waikiki Beach Walk, our mixed-use property, which represents approximately 13% of our NOI, continues to outperform with strong same-store growth of 12.2% on a cash basis and 9.5% on a GAAP basis. The Embassy Suites just by itself had 20.5% same-store NOI growth on a year-over-year basis for the second quarter. It really demonstrates the high quality of this asset 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 second quarter FFO was $0.37 per diluted share, which was approximately the same as the previous quarter. There was nothing that really stood out other than the following 3 items: One, the expected seasonality of the Embassy Suites Hotel decreased FFO by approximately $0.01 per FFO a share. Secondly, G&A increased slightly to $4.4 million during the quarter. But we continue to focus on an overall run rate of $4.2 million per quarter going forward. And third, during the second quarter, we had nonrecurring income related to a property tax refund at Alamo and a bankruptcy liquidation distribution from borders that combined, netted approximately a little less than $0.01 of nonrecurring income. Now as we look at our balance sheet and liquidity at the end of the second 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 second quarter, we had approximately $291 million in liquidity comprised of $63 million of cash and cash equivalents and $228 million of availability on our line of credit. At the end of the second quarter, our total capitalization was 36.9% and our net debt to EBITDA was approximately 6.8x. 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've mentioned before, we do have an internal roadmap to approach 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 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 $1.47 to $1.50 per FFO share with the midpoint of $1.485. From our prior guidance of $1.42 to $1.49 per FFO share with a midpoint of $1.45. I should also point out that the $25 million in equity that we raised through the ATM during the second quarter at a premium to our NAV with our weighted average price of $35.09 was dilutive to full year guidance by approximately $0.01 per FFO share. However, as a result of the strength of the portfolio and impressive same-store growth, we are increasing the upper range by an additional $0.01 per FFO share and tightening up the lower range of our guidance as well. The primary driver for the updated guidance is the nonrecurring income for the retail portfolio in the second quarter; the continued out-performance of the mixed-use asset in Waikiki, Hawaii; and higher than anticipated occupancy for our multifamily portfolio. Our updated 2013 guidance midpoint of $1.485 per FFO share is approximately a 10% growth rate over our 2012 actual of $1.35 per FFO share. And is based on the following 4 assumptions for same-store growth on a cash basis: one, the retail portfolio is now expected to increase by approximately 4%; two, the office portfolio is expected to be flat to slightly down due to the sale of King Street, reduced occupancy at Lloyd and the assumption that the Tax and Treasury Department vacates First & Main in Portland, Oregon, which we factored in to our original underwriting of this property; third, multifamily is now expected to increase 10% due to higher occupancy in the second half of the year versus 2012; and lastly, mixed-use is now expected to increase 10% due to the continued out-performance of the Embassy Suites Hotel in Honolulu, Hawaii. Our guidance excludes any impact from additional acquisitions, dispositions, equity issuances or repurchases or debt refinancings. 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 present themselves over the coming quarters. Operator, I'll now turn the call over to you for questions.

[Operator Instructions] First question comes from the line of Todd Thomas of KeyBanc Capital Markets.

Jordan Sadler is on with me as well. First question, John, you mentioned in your remarks about acquisitions that the pricing for high-quality deals is unacceptably well. I was just wondering if there's any evidence that in the low cap rates in the markets that you're targeting are being impacted at all by rising rates. Are you seeing sellers adjust to expectations at all in the last few weeks or so?

No, we have not seen any sign of cap rates rising in the markets that we're focused in. That's not to say that there isn't movement in B and C property types, but in the A+ properties that we focus on, we haven't seen any movement.

Has the company changed its return thresholds at all?

No.

Okay. And then, I saw on the press that there's some retail for sale, Waikiki, the Hard Rock and some other retail there along the Beach Walk for around $60 million. I was just wondering if you're interested in that property. I just wasn't sure if that was being offered on a fee simple basis or if it was just a leasehold interest?

The 2 properties you're referring to are both leasehold. If you were to compute the price per square foot being asked for those properties and related to our shop space on Kalakaua, we would have a building valuation of approximately $57 million. And this is for a property that we contributed to the REIT at approximately $20 million. So pricing in Hawaii, in Waikiki on Kalakaua is so ridiculous. These are properties we will not consider.

Okay, that's helpful. And then, I was just wondering what the current thinking is around the ATM and sort of -- and where the stock is today. I guess should we expect that you'll not be issuing stock below the $33.50 internal NAV estimate that you published? Is that the threshold that we should think about with regard to ATM issuance?

I think what both John and Bob said, this is Ernest, that our focus is on accretion to our NAV and accretion to our cash flow. So those decisions we make on a day-to-day basis. One has to consider also that the development opportunities that John outlined are accretive. We want to fire-advance those on a conservative basis, and we're going to take all those factors into account on what we decide to do about the ATM. But again, I want to reiterate that our focus is on accretion to cash flow and NAV.

Okay. And then just one last question -- I'm sorry.

Todd, Bob. One thing I want to add to that is that, too, with our balance sheet, we do have a strong balance sheet. So even if we didn't raise anything else on the ATM, we got -- we have cash on the balance sheet, we have a line of credit, the property's unencumbered, but we've got plenty of ways to go. We're very disciplined in our balance sheet management.

Sure. Okay. And then just one last question regarding the development at Sorrento Pointe. I was just wondering if you could give us some ranges around the expected cost and returns of that project?

Not at this time. We are just in the process of preparing construction documents and going through the design development process. We should have that completed by year end, and we'll likely offer some guidance in that regard on our fourth quarter earnings call.

I would like to -- this is Ernest again. I would like to mention though that, that property we -- is considered by us as a premier office location in San Diego County. It sits up on a knoll overlooking a nature preserve, the ocean, freeway access, so we are very excited about it. And it took us 15 years to get all the entitlements. So that, again, is representative of the quality of our portfolio. Very, very difficult to replace. And when you get it, the entitlement and you do own the property, it is a premier asset for our shareholders.

Next question comes from the line of Jason White of Green Street Advisors.

I have a quick question. Initially about the Ross that went dark, what's it looking like for re-leasing that space?

We have an executed a letter of intent. We're going through a lease documentation process and expect to have that store reopened by the end of the first quarter next year.

Okay, can you speak to what type of tenant it is? Like soft goods or [indiscernible] no?

Soft goods.

Soft goods, okay. And then Sorrento Pointe, what's the delay to start next year. Is it just local approvals, or anything like that?

It's not approvals, it's to prepare construction documents and obtain permits. It's about a 12-month process in San Diego. San Diego is one of the most difficult municipalities to obtain construction permits.

But I just read in the paper this morning, we may be getting a new mayor.

We may have a new mayor, so things may change.

The process may accelerate.

Okay. Final question then. If you were to strip out the 3 borders releases from your same-store NOI, the cash metric, do you have a sense of about what that would be?

No. Jason, this is Bob. I don't have that number in front of me. But I think that the bigger picture is, is that we're -- from my understanding, we're one of the few REITs out there that have replaced all 3 borders at north of 25% increase over the prior tenants. And if you look at the leasing REIT spread, the spreads going forward, we've continued to show strong leasing spreads on each of our retail portfolio. So we're very positive about that retail portfolio. But I don't have that number that you've asked for.

Next question comes from the line of Craig Schmidt of Bank of America.

Glimcher recently sold their interest in the Lloyd Center, and it sounds like there's going to be a need for significant reinvestment and a potential change of anchors given that Nordstrom only has a few years on its operating covenant. I wondered if you had a sense of the direction the new owner is taking that mall? And if that presents any opportunities or has any impact on the Lloyd District Portfolio?

Well, we're very excited that the mall has changed hands. The group that acquired the mall is really a specialist in repositioning and redeveloping retail assets. If you go to their website, it is I think very representative of what they're capable of doing. So my guess would be, if I were to place a wager, is that their plans to reposition that mall will likely result in Nordstrom's wanting to stay. Nordstrom's just completed a significant remodel of the interior of their store at their expense. So I don't think they're looking to exit. I do think that the mall is now in proper hands, and it's going to be a real benefit for the neighborhood and the immediate community and a benefit to what we have planned up there. So we're excited, and we wish them the best of luck.

Okay, great. If you look at the overall Lloyd District with what we're bringing to the district, what the new owner of the mall brings to the district, what the new transportation that recently opened up through the district, it's going to be a significant improvement in the short run and the long run for all the investors in the Lloyd District. So we're pretty darn excited about it, frankly.

Next question comes from the line of Brendan Maiorana of Wells Fargo Securities.

So just first question, can you give an update on what the prospect list looks like for replacing tax and treasury at First & Main? And then maybe kind of same question for Skyy at One Beach Street?

Well, Skyy, my guess is it's going to be technology that replaces them. We've had a number of tenants looking at it. We're actually going through some programming right now for one of the tenants. At First & Main, it is going to go 1 or 2 ways. It's either going to be a law firm or 2 law firms, or it's going to be technology.

Jim, do you want to chime in on that? I know that you've been handling the negotiations.

Sure. We've had approximately 5 tours at First & Main already, and it ranges the gamut from some technology to some legal and actually some of the engineering architectural types have kind of chimed in also. But it's too early to tell what the actual answer will be, but that's our expectation of probably tech or legal or a combination of both.

I think the quality of those portfolios assures that we will get a tenant to replace them. The question of the quality, the type and the timing and the rent rate is still open, but the outcome is certain.

Yes, I know. I mean, I can appreciate kind of that you guys don't want to put down exact timing. But can you give us a sense of maybe likelihood of when deals could hit? I know Bob mentioned that. You don't have anything at First & Main in your 2013 guidance, but is this something that we should expect the lease to be executed by, say, end of the year? Or do you think it takes longer?

Jim, what do you think?

I think [indiscernible] it's going to take longer than that I believe for the execution. Again, the space doesn't get vacated until September 30, so -- and it's going to look vastly different for showings when it's vacant versus the way it looks today. We will prep part of the space to make sure that the tours start with great views of the river and work their way around. But my expectation is, it will not be an executed lease in the fourth quarter of this year, it will be next year.

Okay, great. And then I guess kind of similar question with Waikele and Foodland, is there -- I think it's Foodland, is there an update on I believe that's a '14 expiration maybe. What the plans are and what that tenant interest is for that center?

Yes, it's likely to go soft goods. It is likely to be demised into 2 units. We're in discussions with 2 different national retailers to take that space, and we expect to really sort that out and have something to report to you probably, I would hope by the end of the year, but it might be first quarter next year.

Okay, great. Last one, Bob, you've been clear about kind of the roadmap to get to investment grade by 2015. Just curious if the recent rise in rates, do you think as we look at the expirations, the debt expirations in 2014 and '15, which are around your average, 5.25, if you have to issue debt today, do you think that, that is a benefit to cash flow or do think that rates are maybe where you'd issue would be a little bit higher than the expiring rates?

I think it's still a benefit to cash flow. We'd pick up from what we're seeing in the pricing, we'd still pick up a couple of hundred basis points. I know that the interest rates have gone up, the spreads have widened a little bit. But overall, we think it's the right approach, is to approach the investment grade market from the balance sheet management perspective.

What duration would that be on new issuance if you're picking up a couple hundred basis points?

Well, I mean, if you take a look at what's maturing between now and 2015, we have about just under $500 million. We have -- so in January of 2014, we have about $90 million maturing with Alamo. And then at the end of '14, we have about $130 million maturing at Waikele.

Yes, understood. If you're picking up and those I think are sort of midsized interest rate, if you're going to be picking up a couple of hundred basis points of rate, what would be the new debt that you'd be -- what would be the term of the new debt that you'd be replacing it with?

This is Ernest, again. That would be a speculation on interest rates. And if you know the person who has an accurate fix on that, I would appreciate if you will give me his direct line. I think that we will qualify for the best rates available, and I think some of the financing that Bob's talking about is going to be very short term, because it has to get us to that 2015. But we feel -- the quality of the portfolio and the quality of our credit would get us the best rates available.

[Operator Instructions] Next question comes from the line of Rich Moore of RBC Capital Markets.

You might have answered this, John, early in the conversation here, but when you're talking about Hawaii, but there's -- my hotel analyst tells me there's a lot of hotel transactions going on in Hawaii as well. And I'm wondering, do you guys look at the hotel transactions that are going on there, the stuff that's coming to market? And maybe more broadly, do you think about hotels at all in the scheme of acquisitions?

We have looked at several. We have deferred to our partner in Hawaii, Outrigger, for their opinion of some of the opportunities that have presented themselves. And based on their input and their guidance, we have elected not to pursue anything. Yes, hotels are not something we're necessarily looking to grow in the portfolio. But if the right opportunity were to present itself, it would certainly be something we'd consider especially if we had the opportunity to partner with Outrigger. We have a great deal of respect for the people of that company. There are a lot of hotels that have changed hands. There are proposals for new hotels. There is a proposal for a Ritz-Carlton condo hotel right across the street from our Beach Walk property. So it's a very active sector, particularly in Hawaii as we report the levels of activity in Hawaii are very attractive to investors. So I expect that's going to continue. But keep in mind, the biggest hurdles for us in Hawaii is finding property that is fee simple. And most of the hotels in Hawaii, there's one that traded hands that was fee simple, most of them are ground lease.

Outrigger probably stated the risk that they're looking for opportunities throughout the Pacific Rim because the valuations in Hawaii just don't make any sense for them. And I would like to point out too that the Ritz-Carlton that John referred to, as I understand it, abuts our property right on Kalakaua. Again, a vast improvement to our location of what we have.

Rich, this is Bob. I just want to add to those comments that, and make it clear to the investors and all that are listening that we have no intention of becoming a hotel REIT. And what we have in Waikiki is a mixed-use unit. We have the hotel, which sits on a podium of retail. And so that's the interest is when we can tie it in with the retail is what excites us.

Okay, good point. Okay, and then more broadly on acquisitions, guys, and what you're looking at. Do you see any shift? I mean, because you guys look at so many different property types. Do you see any shift in one or the other property types? Maybe one getting a little better, one getting a little worse, that kind of thing. Any changes? I guess I know all of it is kind of expensive, but any changes that you see?

Rich, when you say changes, are you asking about cap rates or are you asking about property quality?

I was thinking maybe a combination, John. Are you getting a little more encouraged about certain sectors, maybe a little more discouraged, that kind of thing? Based on pricing or based on quality, either.

I would say discouraged. In the markets that we're focused in, the cap rates have not moved. The quality of property that has been brought to market is outstanding. But the pricing of those assets is something that we can't or won't pursue. So lots of high-quality multifamily, lots of high-quality office, very little retail. We'd love to see more retail brought to market. The retail that has been brought to market is, in our opinion, kind of B properties, and that is what it is. On the other hand, the properties in Hawaii that have been brought to market, the retail properties we mentioned earlier, are outstanding. But the pricing for those will likely start with a 3. So that's something that -- 3, and it might grow to a 4 in 10 years. So it's just things that we're not interested in.

Rich, what John says, I just want to add to that, is that it's not so much the cap rate on the going-in cap rate, it's really the internal growth. And if we have same-store NOI that continues to increase and get us so that it's over our weighted average cost to capital, then that makes sense. So and what John just mentioned is that while we'll see these beautiful properties, Class A properties we'd love to have in the portfolio, they're flat. They're flat for 10 years or more. And it's from our perspective, that's destroying shareholder value. So does it look nice, would it fit into our portfolio? Yes, from a picture standpoint. But from an economic standpoint, it does not create shareholder value, and so we're not interested, and we decided to pass on those deals.

If I would have a choice of how you would focus on how we're going to add to our NAV over the next short number of years, I'd like people to focus on the development opportunity we have. We have a $250 million of significant development, which offers upside at a price and a value that is much more compelling than the opposite of trying to acquire. So we have adjusted our focus to take advantage of the opportunities that are available that will be beneficial over the long term.

Rich, one other thing, too, is that I think that's really the benefit of a diversified strategy. So in markets like this, where it gets overheated in various sectors, you'll see one market come back roaring strong while another one may be flat, but we can capitalize on all the opportunities in the various markets that we're in on the West Coast, in high-quality, high-barrier-to-entry markets.

Right. Good, got you, guys. And then looking at San Francisco for a second. I mean, that's obviously been red hot. But what do you guys think? Is that beginning to slow, do you think? Obviously, still good, but are there some chinks in the armor? Or is it just going to keep going?

Well, vacancy is at about 7.5% and declining. Rents are up, what? 14% for the first 6 months of this year. So if things could slow down a little, and it would still be on fire. It's not anything that we believe is going to change much and certainly not over the next 6 months.

As it relates to our properties in San Francisco, our in-place rents in San Francisco compared to where the market is are 20% -- 20% to 25% below market.

Got you. And then the last thing, guys. I guess, Bob, on the ATM, did you do anything, maybe you said and I missed it, but did you do anything post 2Q, I guess in the first month here of 3Q?

No, we have not.

I think what we said in the quarterly report is all that we have done.

I'd now like to turn the call over to Ernest Rady, Chairman, for closing remarks.

Okay. Thank you, all, for listening to our report. I'd like to mention again that we think we have the best quality portfolio on the coastal West Coast. Our objective is that of a decade-long to continue to produce returns of 10% including dividends. We think we can do this by the -- with the portfolio we have, which, as you've seen by these results that we've outlined today, do produce increasing returns. The icing on the cake will be and could be and may be development and/or trades. The development icing on the cake seems to be in place for the next 12 to 24 months, and we continue to work to enhance all shareholder value. I doubt if we'll ever be the biggest, but we are striving and determined to continue to be the best. With that, I say thank you very much for your listening to us today and your confidence in us, and we hope to continue to earn it in the future. Thank you.

Thank you for joining us today. Ladies and gentlemen, that concludes your presentation. You may now disconnect. Have a good day.