American Assets Trust, Inc. (AAT) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Fourth Quarter and Year End 2015 American Assets Trust Incorporated Earnings Conference Call. My name is Wanda [ph], and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Adam Wyll, Senior Vice President and General Counsel. Please proceed; sir.

Good morning. I would like to thank everyone for joining us today for American Assets Trust 2015 fourth quarter earnings conference call. Joining me on the call are Ernest Rady and Bob Barton. These and other members of our Management team are available to take your questions at the conclusion of our prepared remarks. Our 2015 fourth quarter supplemental disclosure package provides a significant amount of valuable information with respect to the Company's operating and financial performance. The document is currently available on our website. Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our future operations and our actual performance may differ materially from the information contained in our forward-looking statements and we can give no assurance that these expectations will be attained. Risks inherent in these assumptions include, but are not limited to future economic conditions, including interest rates, real estate conditions and the risks and cost of construction. The earnings release and supplemental reporting package that we issued yesterday and 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 condition 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 fourth quarter of 2015, furnished to the Securities and Exchange Commission, and this information is available on the Company's website at www.americanassetstrust.com. I will now turn the call over to our Chairman, President and CEO, Ernest Rady to begin our discussion of fourth quarter results. Ernest?

Thanks, Adam. Good morning, everyone. Thank you for joining American Assets Trust fourth quarter 2015 earnings call. American Assets Trust has now completed five years as a public company and we are celebrating our 50th year of being in business. When you look back on our diversified strategy of high quality coastal West Coast properties, combined with our focus of creating net assets value for our shareholders as a first priority, it looks like it has been the right strategy regardless of the current volatility in the capital markets. We have grown the net asset value of your company from approximately $22 a share at the initial public offering to over $45 a share today. I believe, it is an industry-leading performance. Our NAV growth continues today as we [lease] [ph] our cash flow on a multi-family and store front retail development in the Lloyd District of Portland, our Torrey Reserve office and retail expansion in San Diageo, and continue our office development of Torrey Point in San Diego. Our FFO CAGR or compound annual growth rate has been approximately 13% since 2011. As of December 31, 2015, our retail portfolio of properties comprised of approximately 3 million square feet, 98.6% leased. Our office portfolio consisting of approximately 2.7 million square feet was 92.4% leased at year end, of which half of that vacancy relates to Oregon Square, where we are currently evaluating various alternatives to reposition that asset into an accretive development for our stockholders. Our same-store cash NOI growth was 9.9% for the fourth quarter. Even excluding the contributions from the Embassy Suites mixed use portfolio, our same-store cash NOI was a very [indiscernible] 6.6%. Consistent and predictable NAV and FFO growth per share, along with an increasing dividend is our focus on all our behalf. Many of you have heard me say that we hope to deliver a 10% or better shareholder return per annum over the next decade. Not every year, but over the next decade. We looked at real estate over the long-term. Anyone who has been in real estate for a long time knows that there will be cycles both, up and down, which is why we are focused on high quality coastal, West Coast real estate. We have seen that even during the great recession that our cash flows [indiscernible]. I am also pleased and honored to be working with this top-notch management team and our new structure is both efficient and effective. 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 will now turn it over to Bob, our Executive Vice President and CFO. Bob?

Good morning, and thank you, Ernest. Overall conditions in our core markets, San Diego, San Francisco, Portland, Seattle, and Hawaii continued to show significant signs of strength in all four of our asset classes. We expect this to continue into the foreseeable future. In San Diego, construction on Torrey Point is well underway as we have completed the excavation of the first building, which will become the basement for the subterranean garage. Our focus now is on putting up the steel and iron in late April, early May. This two-building approximately 90,000 square-foot project, is expected to be completed in the first quarter of 2017. We expect the building to be stabilized in the first quarter of 2018. We expect this to be the crown jewel of office space in San Diego County, with its proximity to Interstate 5 and unobstructed views of Torrey Pines State Beach Park, Torrey Reserve and the Pacific Ocean. We have also gone back with a fine-tooth comb with a hope that we under promise and over deliver on a stabilized yield and therefore have reduced the previous midpoint of our estimated stabilized yield from 8.75% to a revised stabilized yield of 8.05%. Our revised range of our estimated stabilized yield is 7.54% to 8.55%. Some of the adjustments to our construction model included the following. One, with the current volatility in the market price of our stock, we have assumed that the ATM will not be used and instead we will use a line of credit for approximately $30 million, which we estimate to cost less than $300,000. Secondly, we have increased the leasing commissions to reflect all 10-year leases, which have added approximately $750,000 to our construction cost. Realistically, we think it will be a combination of 10-year, 7-year and 5-year leases, which will be less. Thirdly, we have increased our tenant improvement allowances by an additional $1.3 million. Fourth, we have reduced our midpoint rental rate to $4 per square foot, triple net from $4.15 per square foot, triple net. By comparison, at our Torrey Reserve Campus, which is across freeway from Torrey Point, we completed a lease at $4 per square foot, triple net in 2015 at one of our new buildings. Our midpoint for Torrey Point assumes no growth than that rate for what we believe will be the best office space in San Diego. We believe the high-end of our range at $4.25 per square foot, triple net, which would be a 2% compounded annual growth rate is not unrealistic at all, but we want to err on the side of conservatism, and as a result we will use $4 per square foot, triple net at the midpoint. The difference in the cash NOI at the midpoint is less than $170,000 annually. Again, this has no impact on our 2016 guidance. As you know, this development opportunity is subject to market conditions and the results may ultimately vary. In Hawaii, our Waikiki Beach Walk mixed-use project continues to post impressive results. As of December 31st, the retail property was 100% leased with sales per square foot over $1,000 per square foot. In December, the Embassy Suites, Waikiki, once again exceeded its competition in ADR and RevPAR for the month, according to Smith Travel Research report for the month of December. In comparison to the competitive set, the property achieved an occupancy index of 96.4%, ADR index of 132.8% and a RevPAR index of 128%. In actual numbers for the month of December, that index translates into actual occupancy of 89.5%, ADR of $317 and RevPAR of $284. The Embassy Suites, Waikiki, remains the number one performing hotel in 2015 compared with 223 Embassy brand hotels in terms of average daily rate, RevPAR, gross suite revenue and it came in number six in occupancy at 89.8%. Our booking pace at the Embassy Suites for 2016 seems to be running ahead of 2015 so far. We keep a close eye on April and May, which are considered to be our shoulder months at the Embassy. This is also one of the reasons we have historically not adjusted our guidance in our Q4 earnings call, because we need to see how the Embassy is doing during Q1 and into Q2. In Portland, Oregon, our recently completed Hassalo on Eighth project in the Lloyd District is currently in lease up mode. As you may recall, our Hassalo on Eighth project consists of three apartment buildings, the Velomor building which has 177 units, Elwood building, which has 143 units and the Aster Tower, which has 337 units. Velomor was the first building to open in early July 2015 and Aster and Elwood opened in mid-October 2015. Our most recent leasing stats as of the beginning of this week show Velomor being 92% leased. The Astor tower is 46% leased and Elwood is 47% leased. Overall as of the beginning of this week, Hassalo on Eighth project is 59% leased and 50% occupied, with an average rent per square foot of approximately $2.36. Our team in Portland is committed to making this project a success as evidenced by their accomplishments to-date. Hassalo on Eighth leasing results are on track to achieve our estimated stabilized yield in 2017. Each community that we invest in has its own unique attributes, personality, energy environment [ph]. For example, we love Portland, because it is so different from San Diego, San Francisco, Hawaii and other markets that we are in. It is very cool, very hip. Portland loves its food, its wine, its sustainability and its bicycles. We love the way that we build more bicycle racks in our projects than we do parking spaces. In fact, I believe, approximately 50% of the Portland community uses alternative forms of transportation, i.e. bicycles, buses and so on, compared with approximately 8% in San Diego. As this trendsetter-oriented neighborhood is transformed, we expect to see more retail, more restaurants and more nightlife in this neighborhood that is approximately 11,000 people coming to work each day. It is a transformation that is taking place before your eyes and we believe it will only get better over time. Transitioning to acquisitions, the pricing of assets equal to or greater in quality than our existing portfolio generally provide returns of unacceptably low levels. At the present time, while our stock has been trading at a discount NAV, acquisitions have not made a lot of sense in terms of NAV creation. Disciplined investing is a core metric at AAT. Nonetheless, we continue to evaluate growth opportunities and recycling capital where the probability to increase net asset value and internal growth exists. Turning to financial results, last night we reported fourth-quarter 2015 FFO of $0.45 per share. Net income attributable to common stockholders was $0.18 per share for the fourth quarter. For the full-year, FFO was $1.76 per diluted share. Net income attributable to common shareholders was $0.86 per diluted share for the year. The Company's Board of Directors has declared a dividend on its common stock of $0.25 per share for the quarterly period ending March 31, 2016. Our retail portfolio ended the quarter with 98.6% leased combined with the highest annualized base rents amongst our peers. On a year-over-year basis, our retail occupancy remains the same leaving approximately 42,000 square feet vacant in our 3 million square foot retail portfolio. During the year, 84 retail leases were signed, representing approximately 278,000 square feet or 9% of our total retail portfolio. Of the new retail leases signed during the year, 67 leases consisting of approximately 236,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 13.6% over the prior leases. Our office portfolio ended the quarter at approximately 92.4% leased, up 100 basis points on a year-over-year basis. The increase in net absorption for the office portfolio is due to significant leases signed at our Solana Beach Corporate Centre in our San Diego market, One Beach Street in our San Francisco market and First & Main in our Portland market. During the year, 84 new office leases were signed, representing approximately 432,000 square feet or 16% of our total office portfolio. Of the new office leases signed during the year, 58 leases consisting of approximately 327,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 21.3% over the prior leases. Let us talk about same-store NOI for a moment. Same-store retail cash NOI increased in the fourth quarter to 4.8%. The increase for the quarter was mostly attributable to higher annualized base rents and percentage rents at year-end. We are reaffirming our same-store guidance of a positive 2% for 2016. Same-store office NOI was up 8.9% in the fourth quarter, primarily due to higher annualized base rents at First & Main City Center Bellevue, One Beach and Landmark. Our supplemental filing shows a releasing spreads on 15 comparable office leases that were signed during the quarter at a 4.4% cash increase over the prior rents and a 10.6% increase on a straight line base is over the prior rents. On an annual basis, the releasing spreads on 58 comparable office leases are at a 21.3% cash increase over the prior rents and a 29.4% increase on a straight line basis over the prior leases. This combined with the fact that our in-place office portfolio rents are approximately 20% below market on a cash basis, is a picture of forward-looking growth in a high-quality coastal West Coast office portfolio. We have maintained our 2016 same-store growth forecast of positive 7.5% for the office portfolio. Same-store multifamily NOI was up 9.6% on the cash basis for the quarter. Higher year-over-year rents is the main driver of the same-store growth for the multifamily portfolio. We continue to be pleased with the execution and direction of our multifamily portfolio. We have maintained our 2016 same-store growth forecast of positive 3% for the multifamily portfolio. Waikiki Beach Walk, our mixed-use property consisting of the Embassy Suites Hotel and Waikiki Beach Walk Retailm reported combined same-store cash NOI of 30.8% in the fourth quarter. This is actually comprised of a 61% same-store cash NOI increase in the Embassy Suites or approximately 6,500 room nights were offline during the fourth quarter of 2014, and an 11% same-store cash NOI increased in the Waikiki Beach Walk retail resulting from increased annualized base rents and percentage rents. Tenant sales the WBW retail were at approximately $1,072 per square foot as our tenants continue to outperform. We are maintaining our previously issued 2016 same-store guidance of positive 2% for mixed-use asset. Turning to our fourth-quarter results, FFO increased to $0.45 compared to third quarter FFO of $0.44. Despite a relatively flat quarter-over-quarter change, I would like to highlight the following items. Number one, G&A expense decreased significantly in the fourth quarter, due to the severance expenses incurred during the third quarter related to our former CEO's resignation. This added approximately $0.04 to the fourth quarter FFO. Secondly, the retail portfolio added approximately $0.02 of FFO, due primarily to year-end percentage rents from various tenants and a reduction in operating expenses at various properties. Number three, an increase in interest expense resulting from the reduction of capitalized interest cost with respect to construction of Hassalo on Eighth reduced FFO by approximately $0.03. Fourth, the Embassy Suites' operating results reduced FFO in the current quarter by approximately $0.150 of FFO, due to the expected seasonality of the hotel. Fifth, Hassalo on Eighth leasing cost increased due to the Aster Tower and Elwood building, both placed into service in mid-October 2015, resulting in about $0.050 reduction of FFO. Now, as we look at our balance sheet liquidity at the end of fourth quarter, we had approximately $260 million in liquidity comprised of $40 million of cash and cash equivalents and $220 million of availability on our line of credit. Our leverage at the end of Q4 remains low at a 30.5%, total debt to total capitalization, and a net debt to 6.2 times, which we would like to see reduced to a five handle over time. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.4 four times. Our next debt maturity secured by First & Main in Portland, Oregon matures July 1, 2016 at a 3.97% fixed interest rate. We have recently entered into an interest rate swap that we believe will serve to hedge the interest rate risk on prospective unsecured term loan with an all-in rate around the 3.25%. We expect the new term loan to close around rate around March 1, 2016 during the open prepayment window of the First & Main mortgage. However, we can make no assurances that it will close as contemplated or at all. Lastly, we are reaffirming our 2016 guidance range of a $1.82 to $1.88 of FFO per diluted share with a mid-point of $1.85 of FFO per diluted share. This is a 5.1% increase over our 2015 FFO of $1.76 per diluted share. As I look at the current Bloomberg consensus for Q1 2016, I am seeing $0.456 per FFO share on the screen. Our expectation is that Q1 2016 FFO will be approximately $0.43 per FFO share, which is similar to Q1 2015. I believe the difference is in the assumption of our lease up timeline and the expected cash NOI growth at Hassalo combined with the estimated interest expense. Our interest expense is estimated to be approximately $13 million for Q1 2016. Our cash NOI for Hassalo was approximately $480,000-negative for Q4 2015, and is expected to be approximately $200,000 positive for Q1 2016. We expect to see significant growth in cash NOI of Hassalo as we continue to lease up the property in subsequent quarters. I hope this added color helps. 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 will now turn the call over to you for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Todd Thomas with KeyBanc. Please proceed.

Thanks. It is Jordan Sadler here with Todd.

Good morning, Jordan.

Good morning. First question regarding the NAV, Ernest, you led off with the tremendous growth in NAV over last couple of years, which is pretty remarkable. Clearly, given the dislocation year-to-date, you are now trading significantly below those levels and it started to impact some of the assumptions you have made as Bob you referred in some of your text here. What are the plans currently to address that discount versus net asset value today, if any?

Jordan and Todd, we just got to keep doing what we are doing. We are really focused on the quality of the portfolio, maximizing the returns and we hope that at the end and perhaps in midterm, the market recognizes what we have accomplished. If it does not, we are just going to have to continue doing what we have been doing, which is to increase our NAV. In the long run, I believe, the market valuations will reflect the quality of the portfolio and the skill with which we manage it. So I do not have any magic formula other than to say we all work hard, we are all focused, we all work together for the same cause and we hope that we will continue to produce results which will be satisfactory for our investors.

Okay. Thank you. Then on Hassalo, what has changed that you have pushed the stabilization timeframe up to the second half of '16 versus '17. Then, separately with that Phase 1 shaping up a bit better now, how you are thinking about Phase 2?

Well, as far as the delay, one of the reasons for the delay is that we had a leak in one of the buildings and had postponed its opening and that drove the lease up period into a slower leasing period in Portland. We think that given the delays that we have and the accomplishments we have had in leasing we are entirely satisfied and as a matter of fact enthusiastic about the progress we are making and we have made. As far as Phase 2, Oregon Square, we are now examining at least a half a dozen alternatives. It’s four square city blocks, it is an opportunity to really create something significant in terms of enhancing NAV. We do not want to as my late father used to say "act in haste, repent at leisure", so we are looking at every opportunity, including some office, including some apartments, including phasing it and we are now working on examining each of those alternatives. It is a real opportunity and we want to make sure we make the most of it. As the results become evident and our plans become evident, you know, we look forward to sharing it with everybody in the AAT family.

Jordan, I was not clear on your question, but I just want to make sure that we are on the same page is that for guidance purposes, we have like mid-November for stabilization, so what you are go to see is that in Q1, like I mentioned on the call, the NOI will be minimal, we think around 200,000 and then it is going to ramp up and you are going to see it ramp up each subsequent quarter more and more and more. While guidance for guidance purposes, you know, we have tried to be conservative and put it sometime in the mid-fourth quarter, we are hopeful that it will be sooner than that when we are talking our leasing team up there.

Just to give you some additional perspective and color, with 657 apartments to lease, coming into winter months, the rainy months in Portland, we thought that rather than maximize our initial rents that we would try to maximize our initial cash flow, as the property reaches stabilization we will then try and maximize our cash flow. So we think we are doing the best we can for the short run, which is minimize our cash loss or maximize our cash flow. Then over the coming years, we think that property will produce increasing returns as we’re able to realize the true value of the property in terms of rentals.

Thanks. I will hop back in the queue.

Thank you, Jordan.

Your next question comes from the line of Paul Morgan with Canaccord. Please proceed.

Hi. Good morning.

Hi, Paul.

Just in terms of the cadence of the leasing at Hassalo, you mentioned a leak. Do you have any more color there? What building was that? I mean, it looks like from the time that you held the third quarter call through the end of the year that it was pretty flat in most of the buildings, but I am wondering kind of what building was affected and things had seem to have definitely ramped up so far this year.

It was the high-rise, and I think that delayed the opening by what, six weeks, and that was sad, but still with all fixed we are going forward with great enthusiasm.

Even talking to that point is that, even with the six weeks delay, we still opened in mid-October. By the earnings call on November 3rd, we were 27% leased and today we are now 46% to 47% leased, and that is during the slow months. It has been well received, you know, we are on track and we are very encouraged by what we have seen so far.

Is there any mid-November stabilization? Obviously, you can go through the strong months over the summer. Is there anything that is keeping you from thinking it could happen kind of closer to the September timeframe? Then in terms of the Street retail and what is the timing of the openings there? You know, when will that be substantially stabilized?

Paul, I will take the apartment. This is Ernest. This is the first apartment project we have ever opened in Portland, so we have given you our best guess. We hope that we will do better and we are going to try and do better but we have a great team up there and they are doing a great job and we will keep you posted as to the project we made. As to Street retail, sorry. Jerry wants to Jerry is in charge of construction.

Right, so the first Green Zebra store, our first retail tenant will open in April of this year, so a lot of the leasing effort that we have had so far, we have done it without the benefit of retail there. Now with the grocery store opening in April, I think it will only enhance the leasing effort.

Chris, do you want to add?

Yes, so we have the grocery store open mid-April, Paul, and then our food tenants that are around that. I think we have three or four food tenants that should be opening roughly about that same period of time and that will bring it up - the Street front opened at about 40% and then in the burner we have a couple of other larger leases in the burner, when I say that are out for execution, so we are making a pretty good progress. Those are the two leases should those close will be approximately 75% of the Street shops will then be leased.

Okay. Great. Then has there been any change in - going back to the multifamily part of it, any change in the concessions that you are offering?

Modest and not worth commenting, sometimes in slow period that will give us more in a busy period, it will give a little less, but the concessions are not significant. The concessions is in the overall rental rate, which may be as much as 15% to 20% below we can achieve when we reach stabilization and that is the plum or the apples that we are reaching for, but it is going to take time to get there. Sometimes you try to climb [ph] up a ladder too fast, you fall off. Our strategy is to fill it up, give the project the quality of reputation it deserves and then start to get a return, which we think the quality of the project deserves.

Great. Then just last for me on the change in yield guidance for the Torrey project. I mean, you have kind of talked about the great location. Your own data points in terms of leasing across the freeway there seem to have suggest that the rent expectation that you had before were achievable, so I am kind of wondering is it discussions with brokers or is there any specific reason what is going on in the tech market or anything that has caused you to be more conservative in terms of pro forma rents?

Paul, it is Bob. I think it is sticking to our model of under promise and over deliver. You know, we got a lot of volatility going on in the market at this point time, but I would think tell you, once you stand on top of that knoll, and you look at the Pacific Ocean, it is amazing property and the fact that this new building right next to us that we have leased in '15 at $4 triple net, I mean, it leads me to believe Jim Durfey, heads up our office, he is very bullish on the 4.25%. I think it is really just - let us just tone down the guidance, let us be a little bit more conservative, under promise and over deliver. If you consider maximizing cash flow, if you rent it for a little bit less at the outset and you are occupied six months earlier, that is a lot more cash in the bank than waiting for the last dollars and collecting it over the next decade, so we just do not want to fool ourselves. We do not really know and we are very enthusiastic and we will keep you in the loop and we are hopeful it is going to be, but this is just our best guess.

There is nothing specific that has dictated that reduction other than just an era of conservatism.

Okay. Thanks…

Thanks for the question, Paul. If you come out here, we would love to take you up there and show you.

Yes. Great. I look forward to that.

Okay. Thank you.

Your next question comes from the line of Jason White with Green Street Advisors. Please proceed.

Hey, good morning. Just a quick question on your 18 lease expirations, I was just hoping for some more color in terms of are you working on some of those leases yet or are there embedded options that you plan to have taken, just kind of how are you thinking about that given it is a sizable slug of your retail portfolio?

Chris, do you want to cover that?

Hey, Jason. This is Chris Sullivan. No. I am always working well out in advance, so is there any one specific?

It was 35% of your rent, so I was looking at Kmart, Lowe's, The Sports Authority; you know it is a whole laundry list, so I did not know if there are ones that you felt like were kind of options or let me take in so you do not have to worry about them or the other ones that you may be more concerned about. Even the Sports Authority that might come back sooner.

I can assure you that we are working on it now.

Jason, you see my shaded grey hair. It has all gone grey to white, so we are working on all those now and I can't provide a whole lot of color on sports authority, but the two stores that we do have with them are the rental rate is right and the stores performance are very strong and we will just have to see where that sorts out.

Jason, let me just add a little bit other input. In 2018, that includes Macy's, which is 212,000 square feet, which their rent is very low and we are not concerned about that at all.

…that land lease?

Yes. I mean, it is minimal rent. Then you have the Sears out a Carmel Mountain Plaza in San Diego, we would love to get that back. That would be an answer to our most since players.

That is a 107,000 square feet. The sports authority in Carmel Mountain Plaza, the occupancy percentage is very healthy. We do not believe it has going anywhere. If you look historically at our retail portfolio approximately 92% of our retail leases have renewed. Whereas on the office, you know, probably around 82%, 84% so we are always looking know a year or two in advance we try to renew them when we can and we are not really concerned at this point in time.

If we do start to be worried, we are going to let you know.

All right, then just a question on the Old Navy. I see they have had some tough comps recently, and you have two expirations coming up this year and one next year. Is there anything going on with those or are they just kind of keep their space and keep rolling?

We have worked out terms with Belvieu, so those are in the projects are being [ph]

Okay. Then last question for me. The Seattle office market, I think you gave some highlights last call, Bob, but any developments there in terms of the supply coming online and what your tenant footprint looks like and maybe potential risk up there?

Yes. Jason, Jim Durfey, who you know and who heads up our office can speak to that.

Good morning, Jason. The office market up in Bellevue is very similar to where we talked about the last quarter. The big news that we got in last six months was Expedia planning on moving out of a bunch of space in 2018. They have now comeback to the market and said do not think they can move quite that early, so they are in a process of trying to renew some of their existing leases through 2020, which is good news for all of us obviously. Three new buildings that are coming online, the 99 building, which is the first one coming out of ground from Trammell Crow has had some lease up success. They are still got some space this to go the other two are still it out in a very early prerelease mode. Much like the San Diego market, the Bellevue market appears that you need to see your finished product preleasing is not premier in the office market up there either. You need to kick a tire, so we have seen and we do not have a lot of space in our building as you know. We got some ruling. We have already started talking to some of those tenants who could potentially roll and we are very hopeful that we can retain a portion of them and some of them had sub-tenants in their spaces, who if the tenant moves out, we hope to retain the subtenant, so we are still very bullish on Bellevue although we do not see rental rates increasing as rapidly going forward - much flat and we have spent a substantial amount of money to bring that building into tiptop condition to compete with any new product that comes in the market, which I will prove to be very wise, upgrading elevators, upgrading lobbies. It is now as nice as anything that can [ph] and our offerings can be at a more competitive cost than new construction.

Great. Thanks for the update.

Thank you, Jason. Thanks for your interest.

Your next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Good morning, Ernest and Bob. Question for you guys, Northern California office, speaking with some investment sales brokers it sounds like there is more product that is likely to come out to market; maybe the number of bidders is down a little bit, so it seems like there is potential that prices could soften a little bit. If that were to happen, does that become a market that is somewhere where you would like to gain increased scale, office in San Francisco or do you feel like the two buildings that you have now is probably about as much exposure as you'd like to get to that market?

We will have to have more exposure in San Francisco, but not at the heavy prices that exists in the marketplace today. You might look at the rental rates we are getting in the office that we have and they are substantially below the market prices for rent that exist today. Even if they soften somewhat, they won't get anywhere near the rates that we have in place in our buildings. Look, we always run for the opportunity. Right now, the best opportunity we have is to run what we have and we are doing it and doing it [ph]. That is a good question. Thank you.

Maybe for Jim, I mean, is there any sign of softness in rents in San Francisco office that's showing up or is it just maybe fear of what could happen if financing for some of the private tech companies slows down and they are less aggressive?

I think it is more fear Brendan than anything, so at this point in time the market is still very strong. As you know, we do not have a single square foot of vacant space, so to that end and were looking at nothing rolling until we got one more floor of sales for Autodesk rolling in 2017, so we are stable. We are in good shape. I do not think the market is going to take a turn south here in the next 6 to 12 months that I could forecast my crystal ball, but at anytime you got so much rapid growth. I mean, you are always concerned going forward…

…strategies that has proved worthwhile for American Assets over the last decades is the worst of times are the best times. Bring it on and we will start looking for opportunities and I think we will be able to increase NAV.

Yes. It sounds great. For Bob, so Oregon Square on the office side or just overall Lloyd District portfolio on the office side, given that you guys are contemplating a couple of different options there, how should we think about just existing NOI that is being generated today? How is that likely to trend over the next year or two, is that likely to be pretty steady until you make a decision in terms of what you are likely to do for new development or redevelopment?

Yes. Oregon Square, we are evaluating the various options on redevelopment repositioning that asset whether we do it all at once, whether we keep two existing buildings and then build the other half of it. What is driving us is to create a development that is accretive for the shareholders. Once we can figure that puzzle out, which we are working on right now, then we will move forward. Until we know what we are developing, then Oregon Square remains in operations and is sort of a drag on earnings. We have, what, 94,000 square feet that are vacant, so half of our office vacancy is at Oregon Square and that is a planned strategy by the way. We are letting the leases expire, so that then we have the freedom to go forward as we seems that we are not bound by having to owner or existing leases.

So even if you let the rest leases go, I mean that is probably 300,000, 400,000 at the most as it burns off year-over-year, but overall I think it is going to be pretty steady.

Is there a much role there in like '16 at the most 300,000 square feet to 400,000 square feet of remaining occupancy?

Let us clarify that, Jim. Would you clarify that?

Yes. Brendan, on Oregon Square, I think, four things to point out here is just four buildings totaling about 120,000 feet. As Bob mentioned, 94,000 is already vacant in a planned, vacancy strategy. Those leases expiring are somewhere between $19 and $24 gross, so as you can tell with $10 operating expenses. Those are not a very large contributor to the net operating income of the company or the Oregon portfolio for that matter. There is some potential to maybe backfill one of those four buildings. On a short-term basis the rents disclosure to $25 with minimal TIs, we are looking it as a possibility, but I mean Oregon Square long-term is not a four building office portfolio and we are kind of geared up for that plan.

How would you describe Jim the leasing in the rest of our office portfolio in Portland?

Well, the office portfolio in Portland. We do not have a lot of space left but it has been very robust. As you know, Brendan, Lloyd like 700 buildings had a large lease with the California Department or Oregon Department of Environmental Quality. We are continuing to shift the square footage around not to total but which floors they get and significantly we had an existing tenant agree to renew a full floor lease on about the last day of the year, so that took 16,288 feet off the potential leasing market in Lloyd 700, which is a great news for us. We are still seeing activity and we are still seeing rents being pushed up. I mean, Portland is a very strong office market as we speak with very low vacancies, so….

…describe our existing portfolio was robust and the vacancy we have is planned vacancy in order to reposition to create net asset value

...in the Oregon Square building.

...in the Oregon Square absolutely.

Okay. Great. Just last one I had, a quick one for Bob, so you mentioned the term loan in March you might have mentioned it. I apologize if I missed it, but it is the amount of the term loan. Is that about $80 million to replace the First & Main mortgage or would you think of doing more?

We are thinking of doing more about $100 million.

Okay. Great. Thank you.

Sure. Thank you.

Thanks for your interest, Brendan.

Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Hi. Good morning, guys.

Hi, Rich.

Hi, Rich.

When you guys say stabilized at Hassalo, I assume you mean stabilized the occupancy. Is that right? If so, what are you thinking of in terms of occupancy when it is stabilized?

We just do not know. Like I said earlier, Rich, we have never opened an office department project in Portland. We think that generally speaking about 95% is stabilized. Then the question is going to be is, how much we can increase the rental rates and will have to measure that in terms of occupancy. When we get there, we have a history of being able to maximize our returns and that will continue to be our strategy and we have a great team up there. They understand where we are going we have got the right product in the market. We have got a great location. We will just see how much a rent that our project can commends.

Right, so you are thinking, Ernest, 95% by mid-November for occupancy?

As soon as possible, going forward we check in every week. How many leave us. How many turnover, believe me, we are watching…

For guidance purposes that is correct, Rich.

Okay. All right, thanks, Bob. Then if you guys think about Oregon Square, I mean what would probably be the timeframe for starting something that I cannot quite figure out exactly where you guys are with. It sounds like you are still studying options, but the most reasonable timeframe for something going on there, what you think that is?

A couple of years fourth quarter - we have not approved project for Oregon Square, and it is not as economically a compelling as it should be so we are now looking at alternatives, which could prove to be more economically compelling. We do not know the exact outcome of those studies. We are working on it as quickly as possible. We want to make sure we do the right thing that maximizes our returns so we have our analytics department working on it. The architects have come up with various iterations, leasing people up there, putting numbers to it, we are in the process of studying that, so if I led you to a conclusion, that would be something that we do not have ourselves. Jerry, do you want to add anything to that?

No. I think that is well put. That is really where we are at. We are shooting different options to make sure that is the product that we can put out and it is the interest of all the shareholders.

Rich, while we do not have a absolute date. I mean, I think collectively it is our hope that we would like to start in September. It could be six months out, but we do not have a date certain.

…start construction in September?

No. Just start the process. We are already in design, development. We are trying to figure out what model is the right model that is accretive for our shareholders. We have the entitlements, so the entitlement is not a certain obstacle, but you have to go through design review and design review can be time consuming and expensive. We have the design view for a project, which we do not believe maximizes the economies that can be obtained from that site, so we will see. Maybe it is not, maybe it is, but it is just too early to say.

Okay. All right. Yes, good.

We are working on everybody's behalf.

Good. Thank you, guys. Then what I am curious about I guess is, while you are doing that, while all that activity going on, is there anything else you are working on in terms of development, because obviously the acquisition market is pretty tough, so I am assuming would you think you are not spending a great deal of time trying to figure out another acquisition, but is there anything else on the development front that you are contemplating?

Nothing that would hit the radar screen with the bank, but Jerry how many projects do you have going within our existing portfolio now, for TIs, improvements et cetera?

Sure. Active right now across the portfolio it is probably about 110 to 115 different types of projects for capital improvements to tenant improvements and we are doing some planning, some potential repositioning things for different sites that we have across the portfolio on looking it every option and see if we have another.

From a macro point of view, our strategy is to improve what we have and wait for the opportunity to make a giant step forward. Right now, the giant step forward is difficult, because of the pricing in the marketplace, but we are not resting on our laurels. We are looking to improve what we have. If you look at some of the properties we have, over the years they have increases as many and valued by as much as 10 times just by constant the sourcing [ph] and improving and repositioning, so we continue to do and that is why we are able to produce industry-leading increase in NAV.

Okay. Would you guys include some of those in supplement? I mean, are they that size or not?

Bob is shaking his head no.

Bob, shaking his head, because he is old.

Yes. All right, good. I appreciate it, guys. Thank you.

Thanks, Rich.

Thank you.

Your next question comes from the line of Mitch Germain with JMP. Please proceed.

Good morning, everyone.

Good morning, Mitch.

Hi, Mitch.

Thanks for joining us.

No problem. Just a quick one for me, Bob, Just reconcile for me the change in your FFO guide from taking out some of the fourth quarter to the first quarter, what that $0.02 of decline is related to?

In part it is due to the Embassy and I mean it is consistent with Q1 2015.

It is just going to be a $0.02 decline in the hotel…

Correct.

…is that the way to think about it?

Well, it is that, plus and I think that the big difference really is between what we are seeing on Bloomberg and what we are projection a $0.43 it is really the differences at the Hassalo lease up between what the market is expecting and what we internally believe.

Got you. Then, Ernest, maybe big picture for you, asset pricing changes a bit more favorably for you guys to maybe begin to consider acquiring and putting some real capital to the work. Anything specific from a sector standpoint or market standpoint or you want to be - Hassalo?

We would love own more apartments, and the likelihood is, we will have to develop them if we are going to acquire them and we keep looking at that possibility. We would love to own more shopping centers, but nothing comes for up for sale. That is just compelling for us, because with the price of our stock as it is, we will have to trade something that we have for something would be better. What we have is so elegant we cannot find anything that would be better. Office, we have always said that our office should remain in the 35% of our cash flow and that is where we are actually with 37%, so without availabilities through the ATM of additional capital, we have to look at maximizing, but we have and that is what we are doing, but we are doing on a piece-by-piece basis rather than doing something dramatic. Give us the opportunity, we will do something dramatic, but we do not see any opportunity out there.

Yes. Mitch, in the last two months we did look at a big retail acquisition, but as Ernest says, what happen is when you are trading at a discount to NAV that added on $15 million of cost to the acquisition. It was not accretive to anybody, so we passed on that. We maintain that discipline that we continue to talk about.

I think you have to look at the quality of the portfolio and how we continue to massage it. Even without acquisition, it produces industry-leading metrics and that is our strategy.

That is true. When you look at our corporate operating model going out into '17, '18, I mean, you still see the growth coming.

Great. Great five-year run. Thanks, guys.

Thanks, Mitch.

Thanks, Mitch.

With no further questions, I would now like to turn the conference over to Ernest Rady, Chairman and CEO for closing remark.

Thank you all for joining us today. We are so proud and pleased to have been able to produce results that are acceptable if not admirable for our stockholders. We are going to continue to work on those strategies and continue to offer the results that we hope will be pleasing to everybody, so thanks for your interest. We look forward to seeing you all soon.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect. Have a great day.