American Assets Trust, Inc. (AAT) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to your Q1 2014 American Assets Trust Earnings Conference Call with Adam Wyll. My name is Marie, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. But now, I'd like to hand the call over to Adam Wyll, Senior Vice President and General Counsel. Please proceed.

Good morning. I'd like to thank everyone for joining us today for American Asset Trust's First Quarter 2014 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 2014 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 operating -- 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 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 first quarter of 2014 furnished to the Securities and Exchange Commission, and this information is available on the company’s website at www.americanassetstrust.com. And now I'll turn the call over to our Executive Chairman, Ernest Rady, to begin our discussion of first quarter results. Ernest?

Thanks, Adam, and good morning, everyone. Thank you for joining American Assets Trust's First Quarter 2014 Earnings Call. As we pointed out in our annual report, American Assets Trust ranked #1 amongst our peer set with a total return of 69.5%, assuming the reinvestment of all dividends for its first 3 years as a public company. Our focused, disciplined investment and development strategies continue to deliver consistent, reliable and proven results. In 2013, our common stock had a total shareholder return of 15.6%, assuming the reinvestments of all dividends. And we significantly outperformed the FTSE NAREIT All Equity REITs Index, which had a total return of 2.9%, again, assuming the reinvestment of all dividends. We like that distinction, and we hope to maintain it in the future. And we're working very hard to continue that performance. The performance of our premier portfolio of all of retail office and multi-family assets are off to a strong start this year. Our FFO share increased 3% to $0.39 per diluted share for 3 months ended March 31, 2014, compared to the same period in 2013. Office and retail leasing remained active, including 24 signed leases, totaling approximately 91,500 square feet. The Portland, Oregon Lloyd District development and the San Diego, California Torrey Reserve developments are well underway. Sorrento Pointe, also in San Diego, is not far behind. We're pleased that these development projects and others in our pipeline should allow us to increase our NAV and be accretive to shareholders for many, many years to come. Our focus remains on creating long-term values for our shareholders. Again, we're not seeking to be the biggest, we just want to continue to be the best. Our multi-asset class strategy continues to demonstrate that diversity is additive to our ability to provide consistent growth, strong returns and value creation. Again, 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'd now like to turn over to our President and CEO, John Chamberlain. John, would you please take it from here? And thank you.

Good morning, and thank you, Ernest. Overall conditions in our core markets, Seattle, Portland, San Francisco, San Diego and Oahu, continued to show significant signs of strength in all 3 of our asset classes. We expect this to continue into the foreseeable future. In addition to the FFO performance Ernest just mentioned, net income available to common stockholders was $4.4 million for the 3 months ended March 31, 2014, or $0.11 per diluted share. Bob will provide more details on our FFO and same-store NOI shortly. In San Diego, we expect construction will be complete in July on phase 3 of Torrey Reserve, both on track and on budget. Building 6 is complete and 100% leased. Our 500-kilowatt photovoltaic installation is complete and is scheduled to attach to the grid on June 1. Phase 4 is well underway and now anticipated to be complete in March of 2015. Also in San Diego, at Carmel Mountain Plaza, Saks Fifth Avenue's Off 5th outlet unit is scheduled to open adjacent Nordstrom Rack in approximately one month on June 1. In Bellevue, Washington, our tenant, VMware, takes occupancy of their 17,000-square-foot premises in July. In Portland, Oregon, construction continues on our Hassalo on Eighth project. Approximately 284,000 accident-free man hours have been expended to date, and the 3 city block subterranean garage is nearly complete. Approximately $53 million of the budgeted $192 million has been expended to date. We are on track and on budget. The apartment occupancies and rent growth for the Lloyd District continue to tighten as does the greater Portland Metropolitan statistical area. As you know, each of these potential development and REIT development opportunities are subject to market conditions and results may vary. We will certainly keep you updated. The Hawaii economy continues to show positive growth in both per-person spending, up 2.6% to $203, and a longer length of stay, up 1.2% to 9.28 days for the month of February. Notably, scheduled seats from Japan rose 9.2%, Oceana grew 13.8% with the doubling of seats from Auckland, and new service from Beijing boosted Asia by 15.7%, all year-over-year. 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 March, the property's ADR and RevPAR index were 120.9 and 121.5, respectively. The occupancy index was 100.5. At Beach Walk, tenant sales continued to increase, up 9.9% for the 3 months ended March 31, 2014, compared to the same period last year. Our acquisition and venture efforts continue 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 just won't do it. Nonetheless, we continue to evaluate growth opportunities and recycling 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 2014 FFO of $0.39 per share. Net income attributable to common stockholders was $0.11 per share for the first 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 June 30, 2014. American Assets had a solid first quarter performance. Our high-quality coastal West Coast diversified strategy continues to have stellar performance. Our retail portfolio ended the quarter with 96.8% occupancy combined with the highest annualized base rents amongst our peers. That represents less than 100,000 square feet of vacancy in a 3-million-plus square foot portfolio. Our office portfolio ended the quarter at approximately 89.5% occupancy, as we expected. Total office vacancy represents approximately 277,000 square feet of a 2.6 million square foot office portfolio. Approximately 50% of the vacancy relates to our development projects at Torrey Reserve Campus and the Lloyd District portfolio due to tenants that have been impacted by ongoing construction activity. For this reason, we continue to exclude these 2 projects from same-store NOI metrics. The Tax and Treasury Administration at First & Main in Portland, Oregon represents approximately 25% of the vacancy and is consistent with our expectations from our initial underwriting when we acquired the property. The remaining 25% of the vacancy relates to general vacancy from smaller tenants. We continue to limit our office NOI to approximately 35% of our total NOI as part of our diversified coastal West Coast strategy. Let's talk about same-store NOI for a moment. Same-store retail cash NOI for the quarter decreased by 3.3% in the first quarter. Q1 year-over-year comparables were impacted by the Foodland vacancy at our Waikele Shopping Center in Hawaii, as we expected. We expect our same-store retail comparables to improve in the third and fourth quarters of this year as Off Saks Fifth Avenue at Carmel Mountain Plaza in San Diego will be open and paying rent towards the end of Q2. It's also important to point out that we have another 57,000 square feet of various retail tenants expiring in 2014, assuming all remaining lease options have been exercised, at a time when our in-place rents are approximately 7% below market on a cash basis. This is also consistent with our re-leasing spread shown in our supplemental filing, which reflects 15 retail leases that were signed during the quarter at a 9.8% cash increase over prior rents and a 20% increase on a straight-line basis over prior rents. For me, this helps paint a picture of a consistently strong performing high-quality coastal West Coast retail portfolio. Same-store office NOI was down 0.8% in the first quarter, primarily because of the Tax and Treasury vacancy at our First & Main building in Portland, Oregon and which is consistent with our initial acquisition underwriting for this property. I can tell you that Jim Durfey, who heads up our office leasing, is closely working with the local brokerage community to fill this 70,000 square foot vacancy. According to recent research reports from JLL, Portland maintains the nation's lowest vacancy, boosted by big tax expansions. During the first quarter, Portland had positive net absorption of approximately 327,000 square feet, ending the quarter with a vacancy of 11%. More specifically, downtown Portland is seeing the most activity and ended the quarter with a 9% vacancy. The vacancy in the federal central business district, where First & Main is located, is even lower. The declining vacancy in downtown Portland is contributing to higher rents, where we are seeing rents up approximately 6.7% over the last year for top-rated Class A office space. As it relates to our First & Main building, which is A+, our in-place rents are approximately 13% below market. This trend is also consistent with our re-leasing spreads, shown in our supplemental filing, that reflects total comparable office leases that were signed during the quarter at a 11% cash increase over prior rents and a 13.8% increase on a straight-line basis over prior rents. On a weighted average basis, our total office portfolio in-place rents are approximately 19% below market. Again, this is a picture of forward-looking growth in a high-quality coastal West Coast office portfolio. Same-store multi-family NOI, which comprises approximately 7% of our NOI, was up 11% on a cash basis for the first quarter. Higher year-over-year occupancy and higher rents are the main drivers of the same-store growth for the multi-family portfolio. Waikiki Beach Walk, our mixed-use property in Waikiki, Hawaii, which represents approximately 14% of our NOI, continues to perform with the same-store cash NOI growth of 3.3% for the first quarter. Most of the year-over-year increase this quarter is attributable to Waikiki Beach Walk retail, which has experienced higher percentage rents and higher parking income. A new Hilton Grand Vacations high-end timeshare, called The Hokulani, recently opened above our endcap retailer, Quicksilver, which fronts Kalakaua Boulevard, the main boulevard in Waikiki, and has increased foot traffic and sales in our retail center. Turning to our results. First quarter FFO decreased approximately $70,000 to $0.39 per FFO share compared to fourth quarter 2013 FFO of $0.40 per FFO share. The decrease in quarterly FFO was mostly attributable to the following 3 items: one, the vacancies of Foodland at Waikele regional shopping center in Hawaii and Tax and Treasury at First & Main decreased FFO by approximately $0.02 per FFO share; the Embassy Suites Hotel in Waikiki, Hawaii increased FFO by approximately $0.017 per FFO share due to the seasonality of the hotel; and the balance of the decrease of approximately $220,000 or less than $0.005 per FFO share is attributable to the dilution resulting from the ATM issuance of approximately 1.4 million shares during the first quarter. Let's talk about the common shares that were issued through to the ATM during Q1 for a moment. During the first quarter, we issued approximately 1.4 million shares of common stock through the ATM equity program at a weighted average price per share of $33.06, resulting in net proceeds of approximately $47 million. These proceeds will be used in funding our development activities at both the Lloyd District in Portland, Oregon and our Torrey Reserve Campus portfolio in San Diego. Although the company's balance sheet is strong and provides ample capacity to fund its in-process and existing development, we thought it was prudent to raise the additional cash on the balance sheet during the first quarter because it allows the company to maintain financial flexibility as we continue to pursue the following 3 things. One is accretive developments within our existing pipeline. Secondly, accretive and opportunistic acquisition similar to the City Center Bellevue acquisition that we acquired before the Bellevue market in Washington heated up. If you recall, we bought that asset for approximately $221 million at approximately a 5.5% cap rate. Since we acquired City Center Bellevue, we have grown the unlevered cash flows approximately 23% once VMware moves into the top floors towards the end of Q2. And the in-place rents are still approximately 21% below market. If we were to sell this asset at the end of the second quarter at the same cap rate that we bought it for, factoring in the 3.9% interest-only secured loan that we have against it, we would achieve a levered IRR of approximately 24%. In terms of NAV creation, that is over $1 per share of net asset value that we have created. And thirdly, it allows us to maintain a conservative leverage profile as we continue to align our balance sheet with investment-grade metrics, as we approach the investment grade market in 2015, subject to market conditions at that time. I also want to point out that there are other options that are also available to us other than using cash on the balance sheet or using a line of credit or issuing shares of common stock. We also have the ability to sell other assets that we continue to evaluate on a quarterly basis as to their future internal cash flow growth. Suffice it to say that we have many options, but it's key to maintain financial flexibility and an overall strategy of NAV-accretive transactions. Everything we do is focused on creating net asset value for our shareholders. So we're very thoughtful when it comes to the issuance of additional common shares. The median net asset value of the analysts that cover us is over $35 per share. The majority of our analysts have published an NAV per share in AAT anywhere from $35 to $36 per share. I can also tell you that our own internal net asset value is well over $36 per share on a conservative basis. And we will share the details with you later in the second quarter, as we have done in prior years. So the question that some may ask is why raise equity when you're trading less than what you believe your NAV to be? Good question. The answer to this is that we believe that from time to time, it is prudent to incur short-term earnings dilution that will increase both long-term NAV and earnings growth. Here's how I see our net asset value creation with 2 of our properties that we currently have under development. At our Lloyd development project in Portland, Oregon, we're developing to our midpoint stabilized yield of 6.75% based on our published range of 6.25% to 7.25%. With an average cap rate of 4.5% or less for high-quality multi-family properties in Portland, we are developing to a profit margin of approximately 50%. At $192 million development costs, that equates to over $96 million in value creation or over $1.64 per share. At our Torrey Reserve development in San Diego, we are developing to a stabilized yield of approximately 8.6%. With an average cap rate of 5.5% and generally less for high-quality office/retail properties in the submarket, we are, again, developing to a profit margin over 50%. At a $34 million development cost, that equates to over $19 million of value creation or over $0.33 per share. These 2 projects alone are expected to create nearly $2 per share in net asset value. The proceeds from the ATM of approximately $47 million is dilutive to net asset value by approximately $0.09 per share. As you can see, we are looking to create approximately $1.90 in net asset value net of the dilution from the proceeds that were raised from the ATM during the first quarter. Our focus continues to be on long-term net asset value creation. Now as we look at our balance sheet liquidity at the end of the first quarter, we are well positioned to continue to execute on a strategy of selectively acquiring or developing accretive, irreplaceable assets in our core West Coast coastal markets. At the end of the first quarter, we had approximately $329 million in liquidity, comprised of $79 million of cash and cash equivalents and $250 million of availability on our line of credit. At the end of the first quarter, our total debt to total capitalization was 34%. 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, subject to market conditions at that time. Conservative and disciplined balance sheet management is a guiding principle at American Assets Trust. We're 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. Lastly, we are reaffirming our 2014 full year guidance range of $1.54 to $1.62 as follows. Starting with our midpoint guidance of $1.58, we have approximately $0.03 of dilution to FFO on a full year basis for the equity raised during Q1 through the ATM. We -- secondly, we will receive approximately $1.4 million of termination fees of approximately $0.025 of additional FFO from the early termination of McDermott Will & Emery law firm in our Torrey Reserve Campus under the terms of their kick-out right pursuant to their lease, as we have previously discussed. And third, our initial 2014 forecast included approximately $800,000 of interest expense related to approximately $45 million of forecasted draws on our line of credit during Q1 and Q2. Since we raised these proceeds through the ATM instead, we were able to keep our leverage down, create long-term NAV and reduce our interest expense by approximately $0.014 for the year. These 3 items, combined, allow us to reaffirm our 2014 full year guidance of $1.54 to $1.62. A couple of last points regarding 2014 guidance for those who are updating their models on AAT. Compared with our first quarter's results of $0.39 per FFO share, we expect Q2 to be down approximately $0.025 to approximately $0.365 per FFO share due to the following 3 items. First, the Embassy Suites is expected to be down approximately $0.02 per FFO share due to both the seasonality from the shoulder months of April and May, along with the room refresh that will take approximately 20% of the rooms off-line for approximately 10 weeks during Q2. Approximately half relates to the seasonality and half relates to the room refresh. Secondly, the dilution from the shares issued in Q1 will dilute our earnings by approximately $0.01 per FFO share in Q2. And third, higher than anticipated straight-line rents in Q2 from both Saks Off 5th at Carmel Mountain Plaza and VMware at CCB starting sooner than anticipated, which is expected to add approximately $0.005 of additional FFO per share. 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 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 the line of Jason White.

Can you give us an update on the Foodland and the Ross boxes on any kind of leasing interest there?

Yes. Sully, do you want to cover that?

Jason, this is Chris Sullivan. The Ross box, we've concluded our difficulties. As we said, we had a neighboring tenant there that was causing us some difficulties. We've concluded that. And now we're on the process of finishing up with our prospective tenant on that lease. We're probably on the 5-yard line to get that wrapped up and have potential to actually have them occupied by the end of the year, but it could be more likely it'll fall into early next year. But that is resolved. And then on the Foodland, we're still working with potential prospects on that space. But also keep in mind that box is still occupied by the Inspire Church out there that is paying rent on it. So we're not counting that as a vacancy.

Okay. And then on the Ross box, where were rents shaking out versus what Ross was paying?

They're down from where the Ross was paying. I'd have to go actually check my books. I think we're in the low 20s from where Ross was paying in the high 20s on that box. But also the issue on there, Ross was not paying at full triple net. They had quite a discount on the triple net. So when you add back in the full triple net on the new tenant, it brings it up to relatively close. So on an overall dollar amount, they're not off by that much.

Then what about the retail space at Hassalo? It's -- are you getting further along down the line where those conversations can start taking place for the anchor tenant and other retail?

Yes. We're still working with quite a few potential anchor tenants on that. A lot of it's just been they've got to see some more action to be able to see and feel the space. Now we're right up about the street level with a garage, and now it is starting to pick up.

Jason, Bob here. Just a reminder that for guidance purposes, we've included all 3 of those tenants that we've just talked about, Foodland and Ross -- the 2 of them, Foodland and Ross. We've left those vacant for the entire fiscal year of 2014.

Okay. And then one last question. On the equity issuance, when you think about that in terms of netting NAV dilution with development gains, that obviously works when developments are penciling -- or turning out the way they penciled. But it obviously doesn't work when the world turns upside down. Your developments kind of take a hit and don't end up the way you anticipated. Is that kind of a long-term way of how you guys view issuing shares via the ATM, or is this more of a one-off? Or how do you think about that value destruction versus hopeful value creation with developments?

Jason, this is Ernest. From an emotional point of view, it breaks my heart to issue stock at less than NAV. But I have to look at not only what we -- our minimum dilution, but our gain from what we can invest that money for. So it's not only what we get, but what we pay. And net-net, if you look at the numbers that Bob gave you, that of the accretion from what we gain on our balance sheet in terms of ability to develop is very, very significant. So our issuance under the ATM is minimal, but our gains in terms of development and NAV addition are substantial. So we would like never to issue stock at the small discount we do. But if we see an opportunity which adds to NAV, we're going to take advantage of it. And as Bob pointed out, the integrity of our balance sheet is very, very important to us. Things are not going to remain as they are today, where cap rates are unbelievably low and money is so plentiful. So keeping our powder dry, to use an acronym, is really important to us. So integrity of the balance sheet, opportunity to invest with substantial accretion to NAV is paramount on our mind. Before we issue stock, we say what are we getting for what we're giving up. And again, I just want to repeat that what we give up breaks my heart, but what we gain brings tears of joy to my eyes.

And our next question comes from the line of Blaine Heck from Wells Fargo Securities.

Bob, you mentioned accretive acquisitions as the second possible reason for the ATM issuance. And maybe John can chime in as well, but are you guys seeing or pursuing any opportunities like these, the City Center Bellevue opportunity you referenced out there at this point, or is pricing still too high for pretty much everything?

Well, we continue to look at everything that comes to market. We are taking a very close look at a couple of retail properties, one in California and another in Hawaii. We're looking at additional multi-family opportunities. Whether or not those are going to come to fruition is yet to be seen. But the effort to underwrite and keep ourselves informed as to what opportunities are out there has not slowed down at all.

We love the #1 position we have in terms of shareholder return that we've been able to achieve for the last 3 years. And believe me, we're going to fight to maintain that #1 position. And we can't do it unless we're -- have the good fortune of finding excellent properties, and that's what we continue to work at.

Sure, that's helpful. And then can you give us a sense of how leasing is going for the backfill at Tax and Treasury at First & Main and maybe some color on the profile of the prospective tenants that are looking at the vacant space?

Okay. Jim Durfey is going to handle that one, and thank you for the question.

Blaine, we've had a significant ramp-up in activity in the last quarter at First & Main. The majority of the prospects are in the FIRE category. They are not tech tenants that we're seeing come through the door. So -- and I think that's a very, very positive thing. With Park Avenue West coming out of the ground with rents comparable to what we're asking, we found that's also been a positive, because those people who can't get into Park Avenue West now look at us as an alternative. But we're -- we have some very promising activity going on. I can't elaborate on the who's or where's or what's. But hopefully, in the next quarter, we'll be able to give you some better information.

Sure, great. And then last one for me. Your 2% office same-store NOI target I guess implies roughly 3%, on average, for the rest of the year. Can you just kind of fill in the blanks of what's going to be driving that increase?

Yes. On the overall, I mean, it's really the Saks Off 5th at Carmel Mountain Plaza, VMware that's coming in. Those are the primary ones built into our numbers.

So for office, it's primarily the VMware?

For office, it's primarily the VMware that -- where we leased up the top 2 floors of City Center Bellevue.

And our next question comes from the line of Vance Edelson from Morgan Stanley.

I hopped on the call late so apologies if I missed any of this. Just starting with sort of a general question on market color. You mentioned the cap rates being unbelievably low, I think, is the term that Ernest used. Have you seen any further cap rate compression up and down the coast across the various asset classes? Maybe if you could just provide an update on any movement over the past several months.

First of all, chiming in -- coming in late for our performance is -- you really lost something significant. So I hope you listen to a replay because what we said was terrific. But given that, we're glad you're here, even if you're late, and we hope to see you at NAREIT. John, why don't you answer that, please?

Yes. I think it's safe to say that the compression that we continued to see toward the end of last year I would describe as having bottomed out. For high-quality institutional, multi-family properties, everything is starting with a 4. There is the odd asset that actually starts with a 3. But for the most part, I think it's safe to say that cap rates have bottomed out at this point. We'd like to see them begin to rise, but that hasn't happened yet.

Okay, got it. That's very helpful. And then on the room refresh in Waikiki, any reason to take such a large portion, the 20%, offline at a time? I thought maybe you'd prefer to just do a floor or 2 to minimize the impact. Do you get more operational efficiencies by doing such a large chunk, or is this just a good time of year to do that because occupancy is naturally lower?

Well, we're doing one of the towers now, which is a good time of year to do it, and the other tower will come later in -- again in a quiet season. The reason you have to take as much offline at a time is you take 2 floors out of the equation. You're doing the work on the floor -- on the top floor, you're keeping the floor below it vacant to mitigate noise. Then you shut down the floor below that one, do the refresh on the floor that was sitting there vacant for noise purposes. And then you keep going down the building. So you can't just take -- you can't just do one floor at a time. You've got to take 2 floors offline to complete the construction.

The timing of this work is scheduled to minimize the downtime. And it was a beautiful property before, and when it's finished, I can hardly wait to see it. It's going to be gorgeous.

Okay, that all make sense. And then lastly for me, anything you can share on the prospective competitive supply in the Lloyd District? Are there any other projects moving along that you're keeping an eye on, or would that be considerably down the road?

There is nothing of the size and scope coming online in Lloyd that we're particularly concerned about. There are several small complexes. And by small, I'm talking 30 to 50 units. But none of the competitive properties will have the amenity package that we will be offering. And frankly, we believe we'll be able to beat most of those projects on rent as well.

And our next question comes from the line of Rich Moore from RBC Capital Markets.

On the ATM, guys, are you doing anything now? Are you active? Or was the -- what you did in the first quarter sort of the extent of what you were looking to do?

No. We're not active right now, no.

But we do have some dry powder left. And again, each and every day we consider all our options. Our options are to acquire, to maintain -- a prerequisite is to maintain balance sheet integrity. And so we're looking at how the heck do we increase NAV and keep that superstar rating that we got the first 3 years.

Okay. So you have capacity to do more ATM, you're just not doing it at the moment.

We will not do a huge amount. Anything we do is going to be of the same size that we've already done that -- because you can't go out and acquire something that huge. So we're looking at what our opportunities are.

Rich, Bob here. I've stated before that our balance sheet is such that we have the capacity to handle all of our development projects for the next several years. And so we're -- our balance sheet is sufficient and strong. When the opportunities present themselves, if it makes sense, as we're approaching the investment grade rating, if we want to shore up the balance sheet at all, we may tap into it. But there's no -- as I sit here now, there's no intention at this point in time, and we're not in it right now.

Okay, yes. I like your leverage level, Bob. So I can certainly see why you want to issue equity to keep it there. The second thing is on the multi-family stuff that you guys have in California, is that -- is the strength of what you're seeing there, is that going to continue I guess? Is that sort of peaking in any way, or do you think that there's more to run there? And then given the strength of what you guys have seen, can you push rents, I guess, further even from where you've already done?

Russell, do you want to take that?

This is Russell Rodriguez, Director of Multi-Family. In answering that, I have to tell you that our metrics of projected occupancies show that we'll continue to lift our average rental rates through our optimization at every turn and at every lease renewal. We're focused and disciplined on that. So we're going to continue with this. And to answer your question, I see that -- the fundamentals there positively for us.

Okay. So you don't see a slowdown in demand for space?

I don't see that currently. I can't speak to the years to come. But currently, we're enjoying this current supply and demand fundamental.

Okay. And then staying in multi-family for a second. You guys seem kind of satisfied with where you are on the office front. And whenever you're talking about acquisitions, you tend to talk about retail. And, John, you mentioned the little bit of multi-family that you're taking a look at and, of course, it's expensive. I'm curious is there more to do, you think, on the multi-family front, maybe even additional development, or is retail really the -- obviously, besides Hassalo, you -- clearly, you're doing that. But I mean, is there more to do on the multi-family side, I guess?

Rich, this is Ernest. You've known me for several years now. We try not to leave money on the table. And we're going to try and take advantage of every opportunity that is available to us, including maximizing our rents and also providing our tenants the highest quality of service. And if you look at multi-family development, you have to look at the Lloyd District, where we're spending almost $200 million. And we have additional opportunities there. So we love multi-family, and we love retail. And it's difficult to acquire in both those categories. But I think our development proves we can create value through development much better than we can by buying things at a 4-cap rate or a 5-cap rate.

Do you think -- Ernest, do you think you'll do more multi-family developments?

If we get a chance, we will. If we see the numbers -- I mean, Bob reviewed some of the numbers that we see at Lloyd. And if we can produce those kinds of returns, we're sure going to try and figure out a way to do it. But we're also really focused on risk, what's the downside in these things. And we did that. In the Lloyd District, we have minimum downside because the market is so strong at the location of the property. So we consider all those things, what the cost of capital is, what the returns are, what the risks are. And if we see something that is accretive to NAV and enhances the long-term value for our stockholders, very likely we will do our best to take advantage of it.

Rich, this is Bob. If I look into the future, my instinct would be is that, that pie that we show -- the pie that allocates our NOI in the supplemental, I would expect that to grow over time on an accretive basis but probably in similar percentages in terms of NOI. And sometimes maybe the multi-family may step up a little bit after Lloyd, but we're still looking to keep that pie and grow the retail and grow everything proportionately somewhat.

Okay, all right. Fair enough, Bob. And then last thing, guys. The outlook for San Francisco, I'm always trying to get a feel for when or if it just gets to be too much in -- of a good thing, I guess. And so you -- how do you view that market and your assets in particular?

Well, we're very pleased with what we own there. We would certainly like to own more. We don't see it slowing down much. You're obviously aware of the big leases that have been announced recently. We're pleased to report that, that appears to have no bearing on the tenant -- tenancy situation at Landmark. And it's a very, very buoyant market. I expect to see a lot of construction. That will probably give rent growth a bit of a pause. But the fundamentals of the San Francisco market are very unique, much different than any other West Coast city.

But we took advantage of the turbulence in the marketplace by selling one property that we thought was a very good price and bought our property in Seattle, in Bellevue and increased the performance. So how do we -- our challenge is always how do we increase the performance for our capital base.

Our next question comes from the line of Craig Schmidt from Bank of America.

I know you've said in the past that dispositions are motivated by acquisitions. I'm wondering if you did do an accretive acquisition, would you support it with a possible disposition?

Possible. We just have to look at it again. John, you want to -- since that's -- since that was your quote.

No. I mean, we -- we're constantly looking at what's the best opportunity to recycle capital and increase internal growth. And I think we've also said in the past that there really aren't any sacred cows. But we look at what is the most strategic trade we can do and then we execute. Of all the properties in our portfolio, we're quite confident that we could sell any one of them at any given point in time. And so again, that motivation is created by us finding something to acquire. Now, we're looking at a few things right now. And I would say that if we were successful in acquiring any one of the current opportunities that it would result in something being sold. I can't tell you which because, frankly, we haven't really focused on that part of the transaction. But I wouldn't see or expect anything to be any different going forward than how we've operated in the past.

Okay. And then just quickly back to Foodland. Is -- as you work through the process, are you favoring breaking up the space or would you like to keep it to one tenant?

Craig, this is Chris Sullivan. If it came down to that, we would break up the space. As you know, it's a 50,000-foot box. At this point, we're kind of working with some of the larger discount users that could potentially take it. But we haven't had to cross that bridge quite yet, but it would be a possibility.

And our next question comes from the line of Todd Thomas from KeyBanc Capital Markets.

Bob, first question, the 57,000 square feet of retail expirations that you mentioned, is that what's remaining in 2014? Or was your point that the activity that we've seen in terms of leasing spreads over the last couple of quarters is sort of indicative of what we'll see flow through from those expirations over the coming quarters?

Yes. That's basically -- no, 57,000, assuming that they don't exercise their option. Now, keep in mind that we have like somewhere -- a low 90% tenant retention. But if they were not to assume their -- exercise their options, we'd be re-leasing that space in below market -- the in-place is below current market, so that would be a growth potential.

Okay. So those negotiations are -- you haven't received exercise notices from those tenants at this point. And then I guess in terms of those leases, generally, do your leases have extension option periods with stated rent, or would they be negotiated at fair market value?

They generally have options, and they vary. The majority of them, I think, are at fair market value.

That's typically the case. Go ahead.

Yes. Typically, if it's a large anchor tenant, you may have a fixed rent. But typically, if it's a shop tenant or even what I would refer to as a mini anchor, it's going to be at fair market.

We prefer fair market, obviously.

Right, okay. And then last quarter, you made comments, it sounded like both Lloyd and Torrey Reserve, the developments were coming along a little better than expected and maybe those yields would be revisited, potentially revised higher. I was just wondering if you had any updates on those projects at this point.

No. We continue to monitor that. But we are on budget, on track, and it's probably safe to just keep the yields where they are. We still -- we're, what -- from a development standpoint, we've completed probably 27% of the $192 million development thus far, from a capital outlay standpoint. So we still have some wood to chop. And it doesn't make sense to change that published yield at this point in time.

Although I think from a contract point of view, we've committed and have contractually committed to spend, I think, what, 75% or 80% of that money within budget. So we're well on budget. Only 27%, as Bob has pointed out, has been paid out.

It's looking good.

Okay, good. And then with regard to the Lloyd District, with that development project, so $192 million is the expected cost. I know you're funding that development with cash today and your line. I just want to make sure I'm thinking about this right. Are there plans to source any construction financing at all, or is the plan just to continue using free cash flow equity and the line?

Currently, there's no intention on using construction financing. What we're trying to do is keep the leverage down as we approach the investment-grade market in 2015. So what we would do is then use cash on the balance sheet and cash from operations.

I think you pointed out in your presentation that we had cash on the balance sheet of almost $80 million.

Yes.

Okay, understood. And just last question, just on the investment front, things are -- things that you are looking at, some retail in California and Hawaii, you mentioned also some of the multi-family. Just in terms of balancing that out with your comments about how low cap rates are, if we see acquisitions, should we expect them to be value-add or have some component -- some value-add component or would they be largely stabilized core, core plus deals?

We're always looking to value-add. Just to trade for the sake of trading, it wouldn't make much sense. John, do you want to add to that?

Yes. I think you can anticipate both. If it's a stabilized asset, where we can effect an exchange and take an existing property that perhaps has less internal growth than what we're acquiring, we look at that as an accretive transaction or accretive acquisition. So it could be stabilized. It could be value-add. Our preference would always to -- do value-added deals. They're just few and far between.

And our last question comes from the line of Paul Morgan from MLB.

So between the 2 quarters, Safeway -- the Safeway deal was announced. And obviously, they have a bunch of shopping centers that they've developed that they're divesting and-- as well as potential movement within store closings. But specifically, on their developed portfolio, I mean, is that something where those are scattered among most of your core markets. You think you'd be interested? They'd probably go at pretty low cap rates. Is that something where, if you were interested, it would entail a swap? Have you thought about the Safeway asset sales?

We've looked at a lot of them. One that was recently announced in Hawaii, the going-in cap rate was about a 5. And after 10 years, your return was about 5.8. So you're talking about anemic internal growth, and that's because of the way that Safeway structured their lease and some of the other anchor leases. It's just -- there's no growth in them. So we've looked at probably a dozen Safeway centers, and they just don't make any sense.

Yes, okay. And I know you get this question every few quarters. But since you mentioned maybe swapping assets, how are you thinking about Alamo Quarry these days? Obviously, it's one of your bigger assets. It's a high-quality center, but -- clearly, from a geographic perspective. Is there any kind of new thoughts on -- as you think about what might not be a core center, where San Antonio falls there?

One of the best performing assets in our entire portfolio. So for us to sell it, we'd have to find something of equal or greater quality. That will be difficult. So until then, we're quite content continuing to own and operate that center.

Okay, great. And then just lastly, anything incremental in terms -- obviously, you've got Torrey and Lloyd. But any other opportunities within the portfolio for future redevelopments that we could see in the pipeline over the next year or 2?

Well, we have Sorrento Pointe. That is scheduled to commence grading in August. We have our project in Solana Beach, Solana 101. That is about halfway through the entitlement process. We do have some other smaller additions on some of our shopping centers. By way of example, the 2 pads that we added at Carmel Mountain Plaza. So we're constantly looking both internally and moving our development pipeline along.

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

Gentlemen, thank you again for spending your time with us. We're delighted to have been able to tell you that our performance was top tier. We are dedicated to maintaining that top tier performance and continuing to earn your confidence. So thank you all for allowing us to manage your portfolio. Good morning.

Thank you, ladies and gentlemen. That concludes your conference call for today. Thank you for joining us, and you may now disconnect.