American Assets Trust, Inc. (AAT) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 American Assets Trust Earnings Conference Call. My name is Denise, and I’ll be your conference moderator for today. [Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Adam Wyll, Senior Vice President and General Counsel. Please proceed.

Good morning. I’d like to thank everyone for joining us today for American Assets Trusts third 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 third 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 in 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 operation 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 third 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 discussion of the third quarter results. Ernest?

Thanks, Adam, and good morning everyone. Thank you all for joining American Assets Trust third quarter 2013 earnings call. The performance of our premier portfolio of retail, office and multi-family, re-assets continues to provide solid results for our shareholders. Our FFO per share increased 8% and 17% to $0.39 and $1.15 per diluted share unit for the 3 and 9 months ended September ‘13. Extraordinary results compared to the same in 2012. We’re increasing our 2013 annual guidance by 2% over the prior mid-point and the board of directors has increased our quarterly dividend 5% to $0.22 per share of stock. The Portland, Oregon Lloyd District development and Torrey Reserve development are well under way and the Sorrento Pointe in San Diego is not far behind. As a matter of fact, if you hear some background noise that’s the Torrey Reserve redevelopment under construction. We believe that these development projects and others in our pipeline should allow us to increase our net asset value significantly and be accretive to shareholders through development for many, many years to come. Our focus remains on creating long-term value for our stockholders. We are not seeking to the biggest, just the best. Our multi-asset class strategy continues to demonstrate the diversity and diversification is additive to our ability to provide consistent growth, strong returns and value creation. 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 I’ve mentioned on every earnings call since our IPO in January 2011, overall conditions in our core markets, Seattle, Portland, San Francisco, San Diego and Oahu continue to show significant signs of strength in all 3 of our assets classes. As before, we expect this to continue into the foreseeable future. In addition to the FFO performance Ernest just mentioned, same-store cash NOI increased 4.2% and 9.1% year-over-year for the 3 and 9 months ending the same period. Bob will provide more details shortly on our increased dividend and 2014 guidance. In San Diego, construction continues on Phase III of Torrey Reserve, both on track and on budget. Building 6, completed in September has been substantially leased to California Banking Trust as an expansion of their operations at Torrey Reserve taking 15,500 square feet of space. They also extended their headquarters lease on space across the street from our office, 19,200 square feet from June 1 of 2019 to March 1 of 2024. The balance of Building 6, approximately 3600 square feet, is in negotiation. Also in San Diego, at Carmel Mountain Plaza, lease negotiations are nearly complete with a 28,000 square foot high quality national soft goods retailer, for the space adjacent Nordstrom Rack. In Bellevue, Washington, we have executed a letter of intent with a technology company for the top 2 floors of City Center, totaling approximately 17,000 square feet. All of these transactions have essentially met or exceeded our expectations. The Hawaii economy continues to show positive growth in both spending and arrivals at the end of the third quarter of 2013. Total visitor arrivals in August grew to approximately 748,000, a 2.5% increase year-over-year. Arrivals by air increased 2.9% to 948,000 year-over-year. Notably, scheduled seats from Japan rose 10.9%, Oceana grew 42.5% with the doubling of seats from Auckland and new services form Brisbane and Melbourne, and increased service from Shanghai and new service from Taiwan boosted Asia by 9.2% all year-over-year. At Waikele, we executed a letter of intent with a national pet supply chain for approximately 5,000 square feet, space previously occupied by the Bank of Hawaii. As mentioned on our 2 previous earnings calls, we will be taking back the Foodland premises at the end of January next year. Our plans are to divide that building in half to create 2 approximately 25,000 square foot units to be leased to 2 national soft good retailers. Those tenants have been identified and negotiations are under way. Our Embassy Suites at Beach Walk continues to exceed our competition in ADR and RevPAR measurements for the quarter. According to Smith Travel Research report, for the month of September the properties ADR and RevPAR index were 125 and 119 respectively. The occupancy index was 95.2, the outlook for the remainder of 2013 remains consistent with our expectations, pacing ahead of 2012. In Portland, Oregon, our project now named Hassalo on Eighth is well under way. We have excavated approximately 325,000 cubic yards of soil, installed 2 of 3 tower cranes and poured a substantial number of footings. We are on track and on budget. The apartment vacancy for the Lloyd District submarket is holding firm at approximately 3%, the best in the Portland Metropolitan statistical area. Last week we held a successful investor tour showcasing this project and our building in the CBD known as First & Main. Our thanks again to those who made an effort to attend. As you know, each of these potential development or 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. Primarily Pension Funds continue to drive cap rates down in our specific markets for institutional properties. 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 where the probability to increase internal growth exists. I’d 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 third quarter 2013 FFO of $0.39 per share. Net income attributable to common stockholders was $0.11 per share for the third quarter. The company’s board of directors has declared a dividend on its common stock of $0.22 per share for the quarterly period ending December 31st, 2013. This represents approximately a 5% increase in the quarterly dividend rate. For the third quarter our dividend payout ratio was approximately 68% of AFFO or FAD. Our target payout ratio is approximately 85% of AFFO or FAD. We believe that our high quality portfolio, combined with strong operating results and solid balance sheet management, will allow us to continue to grow our dividend in years to come. American Assets had a solid third quarter performance based on steady leasing and increased pricing power due to strong occupancy in retail and office. Let’s talk about same-store NOI for a moment. Same-store retail cash NOI for the quarter had strong growth of 3% in the third quarter and is currently up 6.6% for the 9 months ended September 30th, 2013. We are still anticipating full year 2013 retail same-store growth to be approximately 4% as the fourth quarter year-over-year comparables will be impacted by the Ross vacancy at Lomas, Santa Fe and Blast Fitness Gym vacancy at Alamo Quarry. However, despite these vacancies in 2013 we are still on track to finish the year with retail occupancy over 95% which still ranks first amongst our peers. Same-store office NOI was down 3.4% in the third quarter, due to decreased occupancy at Solana Beach Corporate Centre, however it is still up 9.3% for the 9 months ended September 30th. Office same-store NOI was adjusted in the third quarter to exclude Torrey Reserve and Lloyd District from the same-store comparable metrics, as both properties have active developments that materially impact their operations which make them incomparable on a same-store basis. To enhance our financial reporting transparency even further we have added a new page to our supplemental. I believe it is on Page 14. That tracks same-store portfolio NOI comparison with redevelopment. This way you will be able to see the impact of same-store NOI from redevelopment once it meets our definition of same-store comparability. Even though the total project has not been transferred into core same-store comparability. For the full year we are anticipating office same-store cash NOI to be up 4.5% excluding properties that are being redeveloped. And flat to slightly negative when including same-store -- when including these properties. Same-store multi-family NOI, which comprises approximately 6% of our total NOI, was up 12% on a cash basis for the 3 months ending and up 16.9% for the 9 months ending September 30th. Higher year-over-year occupancy and higher rents are the main drivers of the same-store growth for the multi-family portfolio. We have increased our anticipated full year same-store cash NOI growth to approximately 14% for the multi-family portfolio. Waikiki Beach Walk, our mixed-use property which represents approximately 16% of our NOI, continues to outperform, with robust same-store cash NOI growth of 14% for the 3 months ending September 30th and 13.2% for the 9 months ending September 30th. Same-store growth is being driven by significantly higher average daily rates for Embassy Suites in Waikiki. We have increased our full year same-store cash NOI projection to 13% for Waikiki Beach Walk. Turning to our results, the third quarter FFO increased approximately $1.4 million or approximately 6.5% to $0.39 per FFO share, compared to the second quarter, 2013 FFO of $0.37 per FFO share. The increase in quarterly FFO was mostly attributable to increased revenues in operating income at Embassy Suites in Hawaii from their peak summer season. Let’s put this in perspective. For the 9 months ending September 30, 2013, our average daily rate, or ADR, increased approximately 14.8% to $302.00. For the 9 months ending September 30, 2013, our revenue per available room or RevPAR increased approximately 12.6% to $268.00. The Embassy Suites continues to have stellar performance. Now as we look at our balance sheet liquidity at the end of the third quarter we are well positioned to continue to execute on our strategy of selectively acquiring or developing accretive irreplaceable assets in our core West Coast coastal markets. At the end of the third quarter we had approximately $289 million in liquidity, comprised of $65 million of cash and cash equivalents and $224 million of availability on our line of credit. However, I should note that during the first week of the fourth quarter we did draw down on the line of credit for $93 million in order to prepay our maturing CMBS debt secured by Alamo Quarry Shopping Centre. We expect this early repayment of debt to save the company over $800,000 in interest savings in 2013. At the end of the third quarter our total debt to total capitalization was 37.2%. We are focused on keeping our leverage ratio at 45% or less and positioning our balance sheet so we have the ability to approach the investment grade market in 2015. As I’ve mentioned before, we do have an internal road map 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% by 2015. Part of our plan is to refinance our fixed rate CMBS maturities in 2014, with either senior un-secured term loans or the line of credit 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. Lastly we have updated our 2013 guidance and introduced our initial 2014 guidance. Let’s talk about 2013 guidance first. We are increasing our full year 2013 FFO per share guidance to a range of $1.50 to a $1.53 with a midpoint of 1.515. From our most recent guidance of $1.47 to $1.50 per FFO share with a midpoint of 1.485. The 2% increase in the midpoint or approximately $0.03 per FFO share equals approximately $1.7 million in additional FFO for 2013 and is mostly attributable to, number 1, the continued out performance of our Waikiki Beach Walk asset in Honolulu, number 2, stronger than anticipated occupancy levels for the multi-family portfolio and number 3, reduced interest expense from the prepayment of the CMBS debt at Alamo Quarry. Our previous guidance range excluded this refinancing as we did not know for certain the timing of the repayment of the maturity of the Alamo debt. Additionally our operational capital expenditures are expected to finish the year at approximately $18 million to $21 million with our AFFO or FAD coming in a range of $1.19 to $1.23 per share. Now let’s talk about our 2014 guidance. We are introducing our 2014 FFO guidance range of $1.54 to $1.62 per share with a midpoint of $1.58 per share, which is an increase of $0.065 per FFO share or a 4.3% growth over our updated 2013 FFO guidance midpoint of 1.515 cents per FFO share and is based on the following assumptions: number 1, we are anticipating a 2% decrease in 2014 same-store retail cash NOI which is expected to reduce FFO by $0.02 per share. The decrease in same-store retail cash NOI is due to the vacancy of Foodland at Waikele which we have previously talked about and which expires on January 25, 2014. Foodland occupies 50,000 square feet at our Waikele retail shopping center which is approximately 20 minutes west of Waikiki, Hawaii. Foodland’s rent is approximately $2.5 million per year and a component of the rent has been included in above market rent intangibles since we acquired the property. The market for that site is approximately $1.2 million per year. We are basically rolling down from 4.25 to $2.00 per square foot triple that [ph]. Currently Foodland is subleasing their property to the Hope Chapel. As John as previously mentioned, he and our leasing team are focused on splitting the building into 2 25,000 square foot buildings and leasing it to 2 national soft good retailers. For purposes of our corporate operating model and our 2014 guidance we have left the building vacant for the entire year, other than a temporary lease with the Hope Chapel. Excluding the above market lease with Foodland at Waikele, the remainder of our retail portfolio rents are approximately 7% plus below market on a weighted average portfolio basis. In fact, several of our retail properties range from 11% to 20% below market rents. Number 2, we are anticipating a 4% increase in same-store office NOI which is expected to add $0.250 per share to FFO. Our office portfolio continues to be approximately 10% below market on a weighted average portfolio basis. Our properties in San Francisco are over 20% below market versus in place rents. In City Center, Bellevue and Seattle is approximately 17% plus below market versus in place rents. Number 3, we are anticipating our office properties under redevelopment and expansion at Torrey Reserve in San Diego and Lloyd in Portland where will reduce FFO by approximately $0.01 per share due to the developments impact on leasing and operations. Number 4, we are anticipating a 2% increase in same-store multi-family cash NOI, which is expected to add $0.005 per share to FFO. Number 5, we are anticipating a 5% increase in same-store mixed use cash NOI which is expected to add $0.02 per share to FFO. This is actually a 5% increase after our plans to take each tower of the Embassy Suites hotel offline for approximately 8 weeks to complete a $10 million to $12 million remodel during 2014. This is something that we expect to do approximately every 7 years to maintain a consistently high quality guest experience at the Embassy Suites hotel. Absent this remodel, we were anticipating an approximately 10% increase in same-store mixed use cash NOI. Number 6, G&A is budgeted at $17.8 million for 2014 which is expected to reduce 2014 FFO by $1.50 per share. We have not increased our G&A budget for 3 years and we are not forecasting it to increase by approximately $1.0 million or $0.015 per FFO share, primarily related to back office salaries, insurance and other general administrative expenses. Number 7, we are anticipating a reduction in interest expense of approximately $4.0 million from higher capitalized interest from our ongoing developments, and lower interest cost on the Alamo debt which is refinanced in Q4, 2013 using our line of credit, and lower interest costs on 2 months with the repayment of the Waikele debt which matures November 1st, 2014. We expect our interest savings in 2014 to add approximately $0.07 per share to FFO. Number 8, we are anticipating our 2014 GAAP income adjustments for straight line rents at above and below market adjustments to total approximately $4.5 million, which is expected to reduce FFO by approximately $0.01 per share over 2013. Number 9, additionally our 2014 operational capital expenditures are expected to be in the range of $36 million to $40 million. Of this amount, approximately $10 million to $12 million represents our 2014 renovation of the Embassy Suites hotel, which I discussed a moment ago. The remaining operational CapEx is expected to be approximately $26 million to $28 million. Our AFFO or FAD will be in the range of approximately $0.95 to $1.101 per share, factoring in the Embassy Suites’ renovation, or in a range of approximately $1.15 to $1.22 per share, excluding the Embassy Suites’ renovation. The reason I break this out is because upon formation of American Assets Trust at the IPO 3 years ago, $10 million of cash working capital held by the Waikiki Beach Waikele entities was transferred into American Assets Trust, pursuant to the formation transaction documents. So this 10 million was not generated from continuing operations on American Assets Trust, although not considered to be restricted cash, we did set these firms aside internally for any upcoming renovation of the embassy. So the way I think about this, is that this renovation was already paid for at the time of the IPO. A couple of last points regarding 2014 guidance for those that are updating their models on AAT, looking at my Bloomberg screen, I show that the 2014 full year consensus is $1.616, compared with our 2014 mid-point of $1.58 per FFO share, which excludes acquisitions. The difference is primarily assumed acquisitions by various analysts. Excluding the acquisitions modeled by various analysts, the 2014 consensus would be $1.579 or 1.579 compared with our mid-point of $1.58, which is more in line with our 2014 guidance. It’s not to say that we won’t find acquisitions that meet our internal underwriting acquirements. But for purposes of issuing guidance, our guidance excludes any impact of additional acquisitions, dispositions, equity issuances or repurchase, debt financings or repayments other than Waikele in November 2014. We will continue our best to be as transparent as possible and share with you how we are thinking about our quarterly numbers. We’re 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]. Our first question comes from Blaine Heck with Wells Fargo.

So the multi-family same store NOI, if I got it right up 2% is quite a drop from 14% you guys were expecting for 2013. Is this just due to tougher comps or can you comment on what’s going to be causing the difference?

It’s really -- it’s just an estimate of what the market will be like going forward. As you know apartments we rent on a regular basis, we have always tried to make our projections as accurate as possible. We want to err, we’re going to err on the conservative side, this is just our best guess. But the market does look strong in San Diego, and we are optimistic about the coming year. But we don’t want to put that optimism into numbers that might mislead our investors.

Okay sure, fair enough. And then, yes, go ahead.

This is Bob. No, the other point to that to is that we were coming off a lower date -- a lower occupancy in 2012, so when you compare it to 2012, we’re showing a strong same store on the multi-family for 2013. So I don’t expect to see the same 12% growth that we’re having for Q3 or 16% for the 9months. It’ll be a more normalize same store growth for 2014.

Although when your occupancy does rise, it gives you the opportunity to increase your rents, so we’ll just have to see how the year plays out. But believe me, our strategy’s not to leave money on the table, we will do the best we can for our stockholders.

Sure, that’s great color thank you. It looks like there were some move outs in your Lloyd District portfolio during the quarter, did that have anything to do with the renovation and are you guys going to look to re-tenant that immediately or maybe wait until morning, where more is done at the site and you might be able to get a higher rate?

One of the move outs had nothing to do with the project or the re-development, it was a company that essentially folded with the death of the owner of the company. That space is in the Lloyds 700 building, which is directly impacted by the development. Since we’ve started the development, oddly enough, we have had an increase in activity from a leasing standpoint, so we’re going to do the best we can over the next 18-24 months. But we believe when the project is finished we’re going to have a much, much enhanced opportunity for people to lease off a space there. So we’re going to continue our efforts leasing wise but it will have its challenges until we’re finished.

And this apartment project we’re building will have a very significant effect positively on the environment, so we think that building is going to be a significant asset when it’s finished and in the meantime, we’re going to try maximize our returns in the short term.

Sure, that’s helpful, and then maybe one more for Bob, it looks like maybe there was a termination fee for an office in the quarter. Is that right, and if so can you quantify it and maybe give a little color around the situation?

Yes, we -- it was really immaterial, it was over at Solana Beach Corporate center and the real move in the GAAP same store was really from the above and below market rents. So when that was all factored in the termination fee was really immaterial, I wouldn’t say worth talking about. But one thing I do want to touch on is on that Lloyd District question you just asked about, is that we are expecting some change going on at the Lloyd District. As you noticed we had about 40,000 of vacancy drop at the Lloyd District, so the way I look at that is that we’re still getting, even with that drop, we’re still getting around an 8% plus unlevered cash-on-cash yield on that project during development. And we will have some choppiness during that development, which is why we pulled it out of the same store. As part of the development and the excavation, we have demolished part of the parking lot that’s attached to one of the buildings. So there’ll be a little bit of bumpiness along the way, we’re trying to accommodate the tenants. But this is as expected, and the fact that we’re getting 8% plus on the existing office campus during development, is just unheard of.

Our next question comes from Vance Edelson with Morgan Stanley.

Maybe for John, when you mention the unacceptable returns from potential acquisitions and the pension funds driving down cap rates, can you comment as to whether that’s more prevalent in any particular property type in your markets and does that perhaps mean you’re a little bit closer to pulling the trigger in some of the other asset classes?

It is most prevalent in retail, we’re looking at retail properties that are, keep in mind, of our quality consistent with the rest of our portfolio, so I’m talking about the best of the best. Those properties, one in particular in Los Angeles, is going to trade with a cap rate starting at 3. So that, to us, is an unacceptable price metric. As far as the others, generally speaking, office assets that are of our quality are trading somewhere between a mid-4 to a low 5. That is not particularly appetizing, and multi-family assets in our markets are trading consistently in the low to mid-4s. All of this leads us to believe that the opportunities that exist today are more on the development side than on the acquisition side. But again, as I mentioned we continue to evaluate both opportunities that we can recycle internally, as well as acquisitions.

As John mentions, the very low cap rates that he’s coming across and seeing in the marketplace, the other side of that is that really reinforces the specialists of our portfolio in our, in those same markets and the value associated with these profits. You just can’t buy them.

Okay great point.

But it’s not a very attractive return that you would anticipate.

Okay, it makes sense. And then the decrease in maintenance expense on the office side, is there anything that drove that and is that level sustainable or should we view it as more of an aberration?

No, on the maintenance expense there’s a decrease, they’ll be up and down from year-to-year. It’s, I wouldn’t call it an aberration, but I think it’s just ongoing fluctuation and maintenance expenses. It’s usually within a range per square foot depending on the property but there’s nothing really significant to point out.

We are really adverse to deferred maintenance and so we try and keep our properties in the very best possible condition.

Our next question comes from Craig Schmidt with Bank of America.

I wondered, what do you think that the rent differential on the 2 soft good retailers versus Foodland might be?

Well, Craig, Bob here. In my script I mentioned that the roll down is approximately $0.02 per FFO. So we’re getting, at Foodland we’re getting about 2.5 million a year which is about 4.25 per square foot and that’s rolling down to about 2 to 2.25 per square foot. I think for purposes of our guidance we’ve factored in about $2 per square foot.

And Craig, that is again, the typical approach we take where we want to under promise and over deliver. So the discussions on that space are in their infancy. We do have 2 tenants identified that we are speaking with directly. And we’ll have some more clarity on that, probably next quarter.

Craig, one other point is that it’s interesting, going through the numbers, is that while we have a 2% negative 2% same store retail for 2014, if you pull out Waikele or if you pull out the Foodland roll down, we would be north of 4%, so it’s pretty strong.

Our next question comes from Jason White with Green Street Advisers.

I had a sense that you have a lot of leasing going on the retail side of things, had a question about your leasing spreads. I went through some of the peers, you guys appear to be kind of mid-single digits for the year and a lot of peers do as well. But with your high quality portfolio it seems that you guys might be outpacing the group. Is there anything that -- is it just lumpiness or is there anything you can point to that might explain why we -- the expected outperformance that we don’t necessarily see right now?

Well I would say I would start by saying a lot of the leases that we are renewing and have been renewing this year, were leases that were negotiated in 2007. And we pushed rents as absolutely as high as we could then. And as a result, with some of these renewals we’re having some in some cases, some roll downs. But for the most part, anytime we get space back we’re able to re-let it very quickly. And I think that’s a testament to the quality of the portfolio. We have executed exactly what we intended to do on the Mervyn's building we acquired at the IPO. It’s taken us a little longer than we had hoped, to get the building repositioned, but the end result is something that is a fantastic long-term solution. So lumpiness I wouldn’t, I wouldn’t equate it to that. But, Bob, you want to add something?

Well, I mean in the supplemental, we have a page on re-leasing spreads. And if you look at the new leases the re-leasing spreads and the new leases for the third quarter, I mean it's negative 14% on a cash basis for brand new leases. But that’s, that really doesn’t tell the whole story. That negative 14% is only on 3 leases and the majority of that relates to rents for Carmel plaza. And what we did is that we, we replaced a Sprint tenant with Starbucks. So we’ve enhanced the center. Sprint left in Q1, obviously beginning of Q2 and they actually paid a significant go dark fee. And we allowed them to go dark and still pay their rent. And that termination fee, if you actually factored it into the drop in the starting rent for Starbucks would make up for that roll down. Sprint was about $49 a square foot. And -- which was way above market and Starbucks is more at market in the low to mid 30s at Rancho Carmel Plaza. So while the percentages look negative on the new re-leasing spreads, when you see the entire picture it, it - you can’t take one part of it, you'd look at it at context. If you look on the renewals, on a straight line basis its 7.7% for the quarter and 4.5% for the entire 9 months. And I think our releasing spreads are good and also if you compare where our in place is, compared to where market is, which really is a glimpse into what we see coming down as rolls take place. Like I mentioned, earlier is, that if you took Waikele out, or if you took Foodland out, our weighted average portfolio for the retail would be approximately 7.2% below market. So I’m still very bullish on this retail portfolio.

I think you can look across the entire spectrum of the country, leasing activity is very strong in each of our 3 categories.

Okay, that’s very helpful, and I guess just a follow-up on that point. Seems there’s kind of 2 camps in terms of leasing, one camp renewals are cheaper because you don’t have pay for TI’s so that’s one way to attack rolling leases, then the other camp is, just kind of push competition rents as high as possible and you'll pay for TI, but economically long-term it’s a win for the company if the numbers work. And I noticed a couple of your peers that you had kind of comped yourselves to, have much more new leases as a percent of their overall leases than you guys do in your portfolio, and I was wondering if that’s a strategic decision or that just lease by lease how it works out?

To tell you truth Jason, something we never thought about. We look at maximizing dollars in, and regardless of the form they are, we want the most dollars for what we have. And we take into account TI and leasing and again what leaves -- that produces the results for our stock holders. I don’t think we’ve ever even discussed that strategy. Our strategy is max the dollars.

[Operator Instructions] Our next question comes from Wes Golladay with RBC Capital Market.

Sticking with the renewal leasing, as we look out to next year do you have more of the below market leases renewing or do you still have a headwind from the burn off of leases signed at the peak of the market?

Well I mean, we in our supplemental we have a page that lists out the expirations. For 2014, 2014, 2015 I think total expirations are combined against all sectors, multi-family -- sorry retail and office and mixed use. It’s about 500,000 square feet, if I am correct. But if you factor in the renewal of their options, if you assume that they exercise their options to renew, that amount gets cut in half. And Jim Durfey, who heads up our office, and Chris Sullivan who heads up our retail leasing, have both done a terrific job on staying on top of those expirations as they come up. They generally approach the tenant a year in advance and we’ve generally captured a high degree of those renewals. If you look historically, 92% of our retail portfolio has renewed or said another way, our tenant retention for retail portfolio has been 92% historically. And if you look at on the office side historically it’s been 80% to 84%, somewhere in that range so we’re very comfortable with what’s coming down the road.

Okay. And then looking at these acquisitions, is the gap between what you’re willing to pay and where assets are transacting widening, versus say, the beginning of the year?

I would say yes. There’s less high quality product being brought to market and the product that is being brought to market that would satisfy our demands is getting priced at lower and lower cap rates. I’ve never seen retail price at a 3, it’s just crazy.

Wes, that speaks to the wisdom of our strategy, of taking our efforts and putting them behind development. What we’re producing for our stockholders over the next 2 years will produce significant increase in net asset value as opposed to purchases. Purchases produce a short-term benefit, we are producing a long-term significant benefit, by creating value by development. And we are very comfortable with the decision we made to put the emphasis on that strategy over the next 2 years.

Okay. And sticking with asset price would you guys become a seller to possibly fund your development pipeline?

We wouldn’t sell to fund our development pipeline because our development pipeline is already funded. We always do look at, and John can speak to this with more clarity, we always do look at what we have compared to what we could acquire and that's an ongoing process. I think as John mentioned in his presentation.

Yes, we constantly -- look, in terms of dispositions, we’re constantly looking at how we can improve internal growth and if we, if we have an opportunity to acquire something that has a stronger same store NOI than something that’s very currently in the portfolio, we'll sell it. Those efforts continue constantly. So, we’re out there, we’re looking, we’re just not finding much that meets our criteria.

Okay. And how should we look at the deployment of capital to fund this pipeline? Do you guys have a rough amount you’ll spend in the fourth quarter and then through 2014?

Yes, to date we’ve spent -- well as of third quarter we paid about $9.7 million, which was about 6 million on Lloyd and Torrey reserve was about 3.5 million. We’re expecting by the end of 2014, to deploy about a $168 million cost to date, so that would include what we have now. Our forecast for 2014 is that we’ve spent about a 105 million on Lloyd and about another 13 million on Torrey Reserve. But in terms of how that’s broken out quarter-by-quarter I would probably look at that on a binomial distribution, your typical binomial curve. And take probably 10% to 15% over the next couple of quarters and then it peaks and then it starts coming back down.

Funding is of course the whole Lloyd investment is free and clear so we have all kinds of alternatives. Thanks for the question Wes.

Our next question comes from Jason White with Green Street Advisers.

Just a quick follow-up on the transaction environment. It seems like retail pricing is extremely frothy according to John. Is there any reason to hold off on any potential dispositions and, just in terms of the capital recycling standpoint, do you have to be a buyer if you are a seller or if you see prices that are ridiculous, kind of from your standpoint, doesn’t just becoming a seller makes sense to maximize value?

Actually, we want to grow the portfolio, not shrink it, so we do look for opportunities to trade. And that’s really our strategy just to sell a part of our portfolio and become a smaller company. As I said earlier we want to continue to be the best company. But we think there is some advantage to being larger in terms of spreading the overhead or build more assets. So our objective is to create more assets so we'd look for doing a trading which would be accretive. Do you want to add to that John?

That’s exactly correct. We’ve always said, dispositions are driven by acquisitions. And if we have an opportunity to redeploy capital in a manner that creates greater internal growth, we’re going to do it. We’ve often said that there are no sacred cows in the portfolio, so if we find an office asset or a multi-family asset or retail asset that we can sell and roll into something else, we’re going to do it. So we have, as I mentioned before, we look at that confidently.

Okay. So in the current environment looks like someone would over pay you for one of your assets according to the way you view the world. Growing the portfolio has better value ramifications than actually taking that additional value, if someone were to over pay you?

If somebody over pays you, then you have at some point you want to replace that asset. Many of our assets have traded once in 50 years, once in 25 years, a couple of them 2 times in a 100 years. You can’t replace these assets Jason. It’s tough to -- it’s easy to look at it and say you could do this transaction and it would be a wonderful transaction in the short run, but in the long run how you create value, in our view, is to own the best assets and make the most of them over the long run. And that’s our strategy, our strategy is not to do short term trade, our strategy is to create wealth over the long run by enhancing the value of the assets we have and creating value that way.

We have no further questions I would now like to turn the call back over to Ernest Rady.

Okay, ladies and gentlemen, thank you so much again for your interest in American Assets Trust. We've worked hard to earn your confidence. We think that the strategies that we have, and the work we’ve done over the last quarter, will help create long term value. I want to emphasize again, how excited we are about the development, how it's going to add to net asset value and cash flow over the medium and longer term. A much better strategy than a short-term acquisition strategy, which may create value in the short run but not the type of value we’re creating in the long run. So again thank you for sticking with us. We’ll do our best not to disappoint you. Our projections are based on a circumstance that is as accurate as we can be but we’ve always look to beat those projections. So I can tell you that’s our strategy going forward, that’s our objective going forward. Do better than we promised and we’ll do the best we can to produce. Thank you very much again for confidence and interest.

This concludes the today’s conference. You may now disconnect. Have a great day.