American Assets Trust, Inc. (AAT) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the American Assets Trust Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Adam Wyll, Senior Vice President and General Counsel. Sir, you may begin.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2016 second 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 2016 second 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 in 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 conditions and results of operations. Additionally, this call will contain non-GAAP financial information, including funds from operations or FFO, earnings before interest, taxes, depreciation and amortization or EBITDA, and net operating income or NOI. American Assets is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental, operating and financial data for the second quarter of 2016, 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 second quarter results. Ernest?

Thanks Adam, and good morning, everyone. Thank you for joining American Assets Trust second quarter 2016 earnings call. Our focus in 2016 continues to be in the growth of net asset value for our shareholders, which we believe will ultimately result in increasing cash flow and dividends to our stockholders. At Hassalo on Eighth in the Lloyd District of Portland, Oregon where we recently developed 657 multifamily units and approximately 40,000 square feet of store front retail, we have seen very favorable progress in the lease up of this project. At the beginning of the week, our apartments are approximately 93% leased and 89% occupied. Our leasing velocity increased significantly during the second quarter due to 47 units being leased on sagged basis to a corporate housing tenant at the end of Q2 each for three month period. Our leasing team is already working on replacing each of those units as they roll in three, we expect the Hassalo apartments to be at least 94% lease by the beginning of the fourth quarter of this year. In addition, we are now beginning to focus on getting apartment rents up to market Hassalo. The store front retail at Hassalo on Eighth is approximately 70% leased with 7 recent store front retail tenants joining the specialty grocer Green Zebra which opened successfully this past April. The Lloyd District Portfolio we required in 2011, consist of approximately 600,000 net rentable square feet and more than 16 acres located in the Lloyd District of Portland, Oregon. A portion of this property has been designated for additional development to enclose a high density transitory mixed use urban village. We continued to be focused on the development design of Phase 2 which will be built on Oregon Square in the Lloyd District Portfolio. The four city blocks that make Oregon Square, provide us with the opportunity for substantial and significant apartment development and/or repositioning of additional office and/or development of new high rise office tower in conjunction with an anchor tenant. Developments yields continue to present returns that we believe are more attractive than acquisitions and we have opportunity for additional development phases following Oregon Square. We believe there is much future development opportunity in the Lloyd District that we will prudently harvest as we continue to evaluate performance of Hassalo on Eighth and finalize design developments for Oregon Square that have risk adjusted returns that will be accretive to our stockholders across all of which is subject to economic environment conditions. We also minimized development risk by limiting overall development any one point in time to not exceed 15% of our total assets, locking in cost through the use of guaranteed maximum price contracts early or when possible and prefunding a significant portion if not all of the development capital requirements prior to getting started. Our Torrey point development in San Diego overlooking to Pacific Ocean is on track and on budget for completion by the end of the first quarter of 2017. Our San Diego multifamily continues to outperform as you can see from the same store cash NOI growth in San Diego multifamily 15.6% this quarter. And the average same store cash NOI growth of the last nine quarter Q1 ‘14 through Q1 ‘16 has been approximately 6.8%. Additionally, we continue look to enhance our internal growth at our San Diego multifamily assets by selectively deploying capital to improve our units in common areas, which we believe will drive our rents and allow us remain more than competitive and if not superior to nearby apartment communities. Our Hawaii properties continue to be our jewel in the Pacific. Lastly, we continue to look at all opportunities but pricing continues to be an obstacle. In the meantime, we focus on creating net asset value for all of our stockholders as we have done for the last five years since we became public. On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage our company and we look forward to your continued support. I’ll now turn it over to Bob Barton, our Executive Vice President and CFO.

Good morning and thank you Ernest. Last night we reported second quarter 2016 FFO of $0.45 per share. Net income attributable to common stockholders was $0.17 per share for the second quarter. The Company’s Board of Directors has declared a dividend on its common stock of $0.25 per share for the quarterly period ending September 30, 2016. The dividend will be paid on September 29, 2016 to stockholders of record on September 15, 2016. Our retail portfolio ended the quarter at 98.2% leased combined with the highest annualized base rents amongst our peers. On a year-over-year basis, our retail occupancy was down 30 basis points from the second quarter of 2015, leaving approximately 55,000 square feet vacant in our 3 million plus square foot retail portfolio. During the trailing four quarters, 79 retail leases were signed, representing approximately 315,000 square feet or 10% of our total retail portfolio. Of these leases signed, 62 leases consisting of approximately 268,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 6.9% over the prior lease. Our office portfolio for the quarter recently ended - it ended at approximately 90.4% leased down approximately 250 basis points on a year-over-year basis, primarily due to the following two factors. First, the completion of our development project at Torrey Reserve resulting in the addition of approximately 38,000 square feet to our Torrey Reserve property. And secondly, the planned winding down of leases that Oregon Square located in Phase 2 of our Lloyd District Portfolio to accommodate our ongoing design review efforts resulting in approximately 108.000 square of vacancy at Oregon Square. During the trailing four quarters 79 new office leases were signed, representing approximately 296,000 square feet or 11% of our total office portfolio. Of these leases signed during the year, 57 leases consisting of approximately 222,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 6.7% over the prior lease. Let’s talk about same store NOI for a moment. Same store retail cash NOI increased in the second quarter to 2.3%, the relative flat same store retail cash NOI for the quarter was primarily attributable to a bad debt reserve we recorded for Sports Authority at both our Carmel Mountain Plaza, and Waikele regional retail centers. Chris Sullivan, who heads up our retail leasing is in discussions with possible replacement tenants for both retail centers but nothing has been signed at the moment. Expect that big sporting goods acquired designation rights for our Carmel Mountain locations. We view hiccups as opportunities to improve the overall centers especially when you have great real estate in A-plus locations. Same store office NOI was up 11.6% in the second quarter, primarily due to increases in rent at our Landmark building in San Francisco. In addition to TI reimbursements received at First & Main in Portland, Oregon. Same-store multifamily NOI was up 15.6% on the cash basis for the second 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. Waikiki Beach Walk, our mixed-use property consisting of the Embassy Suites Hotel and Waikiki Beach Walk Retail reported a combined increase in same-store cash NOI of 4% for the second quarter. Tenant sales at Waikiki Beach Walk retail were at approximately 160 per square foot for the rolling 12 months as our tenants continue to outperform. Turning to our second quarter results, FFO remained unchanged at $0.45 per FFO share compared to the first quarter. Despite a relatively flat quarter-over-quarter change, I would like to highlight the following items. First, Hassalo on Eighth leased occupancy increased 55% during the second quarter, resulting in an increase to NOI of approximately $627,000. This added approximately $0.01 to the second quarter FFO. And secondly, Sports Authorities failure to immerge form bankruptcy resulted in an approximate charge of about $550,000 during the second quarter for bad debt expenses. This reduced our FFO per share by approximately a $0.01 for the second quarter. Now, as you look at our balance sheet and liquidity at the end of the second quarter, we had approximately 294 million in liquidity comprised of 44 million of cash and cash equivalents and 250 million of availability on our line of credit. Our leverage at the end of the first quarter remains low at 28.5%, total debt to total capitalization and a net debt to EBITDA of 6.2 times, which we would like to see reduce to a five handle overtime. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.4 four times. Let’s talk about guidance. We are reaffirming our 2016 guidance range of a $1.82 to $1.88 FFO per diluted with a mid-point of $1.85 FFO per diluted share. As you recall, we have historically issued our annual guidance range during our Q3 earnings call which is approximately 15 months of forecasting into the future. We usually begin adjusting the guidance range in Q2 of the following year based on new information in results that support those adjustments. Some of the cash flow can be determined based on in place contractual rent. Some of the leases roll each year and we factor in our best guess as to the tenant retention. Some of the tenants will vacate and we estimate our best guess as to the lease up of those basis better not that are will be vacant. Lease up on completed developments also presents the complexity that we again use again use of best estimate as to the new developments overall lease up has to rate and timing based on our knowledge in the markets. Sometimes we get it right and sometimes the unexpected happens which we try to factor in. Our overall direction is to be as realistic as possible but if we are going to air, air on the side being conservative. As a result of this process and our overall diversified strategy of high quality West Coast properties, we are pleased to report that even though the Sports Authority liquidation will have approximately a negative $1.5 million or approximately $2.04 FFO impact to our retail guidance. Our overall combined portfolio guidance midpoint of $1.85 is not expected to change. Let me update the 2016 guidance, so you see how that works out. We anticipate the following changes in our annual 2016 guidance. First, same store retail cash NOI will decrease from our initial 2% positive guidance to 2.5% as a result of Sports Authority and our assumption that we will not receive any further rent for the remainder of the year. Secondly, same store office cash NOI will increase from our initial 7.5% positive guidance to 10% as a result of continued strong leasing results at Landmark and City Center Bellevue. Third, same store multifamily cash NOI will increase from our initial 3% positive guidance to 12% as a result of a very strong year-over-year leasing results that have been beyond our initial expectations. Fourth, same store mixed used cash NOI will increase from our initial 2% positive combined guidance which is attributable to 4% from embassy and flat for the retail to 5% combined mixed used guidance which is attributable to approximately 8% from embassy and 2% from retail. Waikiki Beach Walk retail sales were approximately 1,060 per square foot for the rolling 12 months. Number five, Hassalo on Eighth multifamily is expected to contribute approximately $0.08 of FFO from the year, down about a $0.01 from our initial guidance, primarily due to an allocation of parking income to the L700 building in Portland, Oregon and higher than anticipated operating expenses during the first year of lease up. Number six, non-same store cash NOI from Torrey Reserve and Lloyd District office buildings is expected to contribute approximately half a penny, down about half a penny from our initial guidance, primarily due to pushing out the lease up of Torrey Reserve buildings 5, 13 and 14 in San Diego into 2017. Our initial guidance factored in then active lease negotiations with a perspective tenant that did not materialize. And lastly number seven, 2016 GAAP income adjustments that we expected to be approximately 5.7 million for 2016 are expected to decrease by approximately 3 million to approximately 2.6 million which is expected to reduce FFO by approximately $0.05. This is related in large part to our initial expectation that we would have Torrey Reserve buildings, 5, 13 and 14 in San Diego leased up in the second half of 2016, which we are now pushing those assumptions into 2017. So when you add up these changes, is still comes out to our midpoint of $1.85 of FFO per diluted share. This of course includes any impact of additional acquisitions, dispositions, equity issuances or repurchases. We are well prepared with the strong balance sheet to capitalize and execute an opportunity 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 is from Todd Thomas with KeyBanc Capital Markets. You may begin.

Good morning, Todd.

Hi, thanks. Good morning. Just first on Hassalo, in terms of the lease up there, can you just talk about how your tracking relative to the 6% stabilize yield forecast and when you think you might be able to achieve that yield?

You know Todd, we’re at a point in the lease up where we’ve been successful with our leasing to date. Now we have to explore what the true market is for the rentals in that project. And I don’t know what it is and we won’t know what it is until we test the limits. And we’re now on a position having the cash flow that has been developed or revolved from our successful leasing to date to test those limits. And so we’ll have a better idea next year. Our objective now is first of all to get the rents closer to market because we think we are below market. And second of all to make sure that the occupancy of the project doesn’t not decline over the Christmas season because December, January, February is the rainy season in Portland and it’s a slow rental season everywhere, so we want to get through that session with as much occupancy as we can. So we’re in the process of exploring our occupancies, trying to minimize our downside and see what upside we can achieve. And I don’t know exactly what it is yet but I think it’s going to be certainly an excess of where we are today.

Todd, Bob here. Let me just add to that. If you look in the supplemental on Page 23, it shows the percentage leased in the AVR for Hassalo on Eighth each of the apartments and it shows the percentage lease that the various percentages that were in place at the end of June 30th, if you annualize those that AVR to 94%, you come out to in place of about 5.35% yield. So if we get to 94% based on rents that are below market today and excluding parking income which we do have that as well, you add a minimum of 535. So we are hopeful as we continue to lease that up and we continue to push rents, we will get to that 6% yield in the coming year.

And the 6% yield in may thought process is the opening salvo from this project which has turned out to be very desirable and very successful. Jerry Gammieri, who is in charge of construction has informed that since the time we bought this project construction-wise out, costs have gone up at least 6.5%. So you are looking to the increasing cost of if we were to replace this project today of 20% to 30%, well that’s $50 million give or take. So we got a winner, we just don’t know how successful it’s going to be in the short run. We’re going to test those limits, but in a long run, we have a very successful project.

That’s helpful. And then as you lease up these remaining units and I guess you look to release the 47 corporate housing units that you talked about and all that, are you burning off concession and trending rents higher for these final batch of unit here?

Certainly, that’s where we are now, that’s with the 94% gives us the comfort of being to say where can we go, up from now we wanted to maximize our cash flow in the short run, now we want to maximize our cash flow in the medium and long term and we’re just going to have to explore those limits.

Okay, got it. And moving over to the office and Torrey Reserve, the ICW move out your end, I was just wondering if you could provide an update there on progress to backs all that space and you know maybe give us a little bit of an update of sense where rents will be you know versus $34 that ICW is paying today? And then also can you remind us how much leasing capital you expect to spend there?

Well, we have a lot of balls in the air. There is a lot of activity. We have not been successful in landing our replacement tenant for ICW. So Jim you want to add some color to that.

Sure. There is still good - Hi Todd. There is still good activity in the Del Monte office market and as you know we’ve got a pretty good blockage space coming on January 1 with ICW. We have couple of proposals out, one on rental large. I give it 50-50 chance. We’ll see where that goes. In terms of your questions regarding rents, rents are clearly going to be in excess of where ICW was when their lease expires on 12.31. In terms of your question on concessions relative to tenant improvements, yeah we think we are going to have to spend a few bucks to improve the premises because they’ve been where they are for 20 odd years. So - but we see it as a great opportunity to increase our rents and we’re working very hard to fill that space.

20 years ago, this building was built as an - and this is an overstatement. There is an insurance factors that it’s not structured or positioned as a multitenant building, we now have the opportunity to upgrade this because it’s a great location and a great structure and that’s what we’re in the process of doing, looking into an executing on.

Okay, but it sounds like it would be fair to expect some downtime as we head into 2017 for that space, is that right?

Well, you count on it, but we’re not counting on it, you know we want to be conservative, we hope there won’t be downtime, there is certainly the possibility there could be downtime. We just don’t know.

Okay.

And then no effort has been spared to succeed with the releasing of the space.

Alright, great, thank you.

Thank you, Todd.

Thank you. Our next question is from Jason White with Green Street Advisors. You may begin.

Hey guys, just stay on toward a second and maybe Todd point as well. If you kind of step back just sort of a big picture for a second at the kind of underwriting you did in the demand you saw on the market when you undertook the expansion towards our even - toward point of that - for that matter. What is changed or what do you think now on the ground that maybe you didn’t see the time you made the investment decision because it seems like has been you know it’s great space, but it seems like it’s been very difficult to lease up. Has the market change or is there just not that much demand in the submarket or can you just walk to the big picture and help us understand what may have changed from your expectations versus what we’re seeing on the group?

I think there is a little more space available than we contemplated at the time and we embarked on this. We think we still have the best location and are very, very high quality project. Jim can comment on the amount of activity in the submarket and it’s pretty significant. We just have to - you know we just have to - if the bid as they say and be successfully in signing lease. Jim, you want to add something on that?

Sure. Good morning, Jason. Relative to new buildings building 13 and 14, we actually signed our first lease last week for about 5,400 square feet, so we broke the ice over there. As you know those are two story buildings with about 9,000 foot floor place and there is only way to subdivide it and you can’t split him half when you lease the whole floor. So that limits are build and used 2,000 or 3,000 foot leases. Point number two on the subject is worked as to the top of the market completing with the best buildings in the Del Monte submarket. So you eliminate part of your potential constituency based on rents. We’ve got some good activity on those buildings right now. We as I mentioned I broke the ice with the first lease and expect to have into next quarter, something else coming out which I can’t comment at this point in time but we’re still seeing good activity.

And as Jim points out the project was build the number of portion of the project, build a number of years ago. In addition of these leasing efforts, we are spending money to make sure that amenities that we offer are state-of-the-art, start of the market.

Yeah.

Sorry, Torrey Point - you asked question about Torrey Point. Obviously we are getting close to the point where you’ve got anything closed building up there. This is never been a preleased market from an office perspective, you’ve got to have something where they can kick the tires and we’re not getting some activity you know it’s been up and down five and see the giant leasing sign, we’re getting number of calls on it as a result of that to the building is way out of the ground and expect to be done by the end of the year. So we’re still very optimistic that that’s going to be home run up on the top of the yield.

I think the broker said, he’s never had more calls on any project than that one. That call do not make a signed lease or cash income, from that we have to make sure that we can comfort that interest into recent dollars.

Okay, great. And maybe also if could walk through the recent property trade down the road Carmel Mountain Plaza, it think it traded in the high 3% cap rate range, if you can maybe contrast that with Carmel Mountain and what you saw there because I believe you bid on the project but just curious if you kind of contrast the two properties?

The properties are traded in my mind, I categorize as A-minus because it’s in a very busy submarket with lots of competition. Carmel Mountain has very little competition because it is the major shopping area for in that community. We have anchor tenants, we have some big box the tenant - the project that closed that we bid on was largely big box. So in my mind if that traded for a sub-4 cap rate, I don’t know what Carmel Mountain Plaza would trade for, but I would pay more for Carmel Mountain Plaza on a capitalized income basis then I would pay for what we bid on. So we are very happy we own Carmel Mountain Plaza and have we bought this other project, it would have been fine but it will take a while to reposition it to where we can produce returns that will be eye catching.

Chris, do you have any addition comments.

No. I think Ernest did it.

Thank you.

Thank you. Our next question is from Craig Schimdt with Bank of America. You may begin.

Good morning, Craig.

Hey, good morning. Do you guys know what the same store NOI for retail would be without Sports Authority?

Without Sports Authority, it - with Sports Authority, it is what it is right today. We’re at 0.3% same store cash NOI for the second quarter because of Sports Authority. We took a $0.01 charge in the second quarter and then we’ve - for the year, we’ve gone flat because we’ve taken it out for the rest of the year. So we’re still at the midpoint but the information I gave in the guidance update reflects that.

As we pointed out, we have two Sports Authorities in our portfolio, one has been - has attracted a bid from Del Monte and Carmel Mountain Plaza and the other did not attract a bid and for why for that property. But we believe that opportunity is our - now ours to upgrade the use of that property. So we’re somewhat disappointed but we are optimistic that we are going to be able to upgrade that portfolio by better using there. Chris agrees with me so much.

Okay. Also given the so much stronger yen, are you seeing that impact your Hawaii assets?

I think Bob covered that in the guidance, do you want to go over that again.

Yeah, I mean we didn’t know what to expect Craig. That’s a good question. And we have inside through the star reports from our hotel in Waikele and we’ve seen some softening on beach front hotels, but we have not missed a B on the Embassy suites and we continue to outperform .So we have not seen the impact on that - on the strength of dollar or vice versa the yen.

Embassy suites has a diversified client tail and it’s not only the Japanese but it’s Philippines, it’s Canada, even as far away as New York not the same from California. So with that diversified market - it seems when there is a reduction in interest from one segment of our market, another segment of that market pops up and picks it up. But there is no question, it’s a cyclical asset and at some point, we are going to have returns that are not up but in the meantime in the short run that may happen in the long run.

You know Craig, to add to Ernest comment, the composition of our customers are the Embassy suite through the end of June made up 63% from the United States , 11% was from Japan, 9% was from Australia, 4% was from Canada and then 12% from Oceania and you know Korea and New Zealand, Philippines and other countries. So kind of gives you an inside into who are customer base is.

Our rent expectation there have been more than that over the time when we go and my hope is that over the next decade that the AVR will double again. We are really fortunate on it.

Okay. And I guess a last question is, was there any time did you learned about downtown Portland given that you are bringing your Hassalo on Eighth projects up to stabilization that you can apply towards the next phase of work there?

Absolutely, we are taking every bit of information that’s produced from our existing project and incorporate it in our plan for the next portion. And as I said we have alternatives, we have the repositioning of one of the office buildings there. We have a major tenant in Portland has put out a request for proposal and we’ve responded. The apartments where few design review that we went through design review ones and that project was so ambitious that it would not have been economic first to build something of that size, so we are now asking design review to approve this in phase. And we’re taking all of the information that we got like to the tenants like what do the square footage is the most effective, what amenities are required. And we also have to deal with the fact that cost have escalated. As I said earlier, Jerry Gammieri has - I sat in with a contractor, cost go up 6.5% a year, so we’re going to have to have rents adjust or the product we provide adjust to take into account and absorb those high costs and produce a revenue that makes sense for us to go ahead. So it’s a jigsaw type puzzle and we’re working to get the pieces in place. And now we have the information and we’re certainly working on developing that additional project which we look upon as a significant short term and long range opportunity for this company.

Okay, thank you.

Thank you, sir.

Thanks, Craig.

And welcome back Craig.

Thank you. Our next question is from Paul Morgan with Canaccord. You may begin.

Hi Paul.

Hi. Good morning. A quick clarification, you mentioned corporate units at Hassalo, did I hear as 43 and kind of when did they roll in and when will they roll out?

I think it’s about a 90 day deal.

Yeah and that’s their plan and you know it gives us the opportunity to have more time to cover those units when you roll out and give in the short run and the whole things is very positive.

So Paul, the units that we brought on, it’s 47 units from a corporate housing and we saw that as an opportunity even though as a short term lease, but in the meantime our leasing team is getting is prepared and they are getting ready as those roll to bring on other tenants. Interesting is that our weighted average rent per square foot on our existing units is around 240 now. And the weighted average rent per square foot on this corporate housing because of the short term lease, we were able to get more and it’s closer to 270. So in the short turn that helps us and we’re going to push rents as these roll.

And obviously the units that are rented in this corporate arrangement were not rented, so it gives us the information that those rents are going to have to be adjusted to make sure that we can have higher occupancy with those rents than we have. On the other hand the rents that we’re rented, we know that we can increase those rents because there was a lower vacancy rate. So that’s all what we’re going to now to examine where we are now, what our opportunities are now to get rents closer to market value and get pick that information and apply it to the next phase.

So, yeah. and when do they start coming in, I mean I am just trying to see when you are going to releasing that space given us as kind of the peak season right now?

I think now, and it’s think it’s 90 days.

Yeah, so they - we signed the contract around June 15 and so 90 days, so sometime September 15th, towards the end of September those will start rolling out.

And that gives - were slow to fill him up again.

So I mean I don’t know the I guess the Portland seasonality that well normally I would think that this would be you know stronger leasing season or did you do that because you expect that the September, October period will be better than if you would have taken those kind of two or longer term lease market over the summer?

I think this was an - we still have - at 94%, we still have apartments to rent, so this just took a portion of the apartments for rent and rented him. And now we have this rental season over December and coming into before the Christmas season to adjust the rents on the existing apartments as to become available. And as important to make sure that the lease terms on those apartments cover as much as possible the Christmas holidays. And we’re just leaning this frankly I mean this is a whole new residential area that’s turned out to be a very well accepted by the big community. And we now have to see how we’re going to off breaking this long run to maximize our revenue over the 12 months period.

Okay, thanks. And then you know just going back to the Sports Authorities, you’d mentioned last quarter that I think if I get this right you were saying, you thought Carmel Mountain was a below market rent, Waikele was sort of closer to market. Is that still the view there? And then just on your comment, Dick’s has acquired the designation rights at Carmel Mountain, I mean how meaningful is that, there is only couple of years left on the lease, I would assume anybody who would kind of want to move in, would need to negotiate with you as well?

Okay, Chris is going to cover that one.

Hey, Paul, it’s Chris Sullivan. So Carmel Mountain that box is approximately 40,000 square feet. There is five year options on it, they were - current rent is bit low. So with Dick’s, we are still negotiating this, it’s not wrapped up. So they are taking terrible sites, they propose to take several sites in San Diego and I believe they - maybe was 30 sites of Sports Authority throughout the country, don’t call me on that, but they are working their way through that. I think we’ll probably get some wrapped up but they said we still got work to do. So that rents probably got some lift there. Waikele is a 50,000 foot box unit, you’ve seen box before, it’s right on H1 there. So we’ve got some decent prospects on that that we’re working to get those settled, but I think that rent had 30 boxes probably going to be pretty close to market.

Okay. And then your guidance assumes that nothing moves in before year end, I guess that’s for you real estate but -

That’s you know with these big boxes, they have got awful lot of work to do, they have got their TIs, so we were hopeful you know in one other cases that we might see - we might see some boxes on the shelf by the time Jan close shows up, but that’s just not realistic.

Okay, right, great, thanks.

Thank you.

Thank you. Our next question comes from Haendel St. Juste with Mizuho. You may begin.

Good morning, Haendel.

Hey, good morning. Good morning. Any update to provide on Bellevue office, there is some pretty big lease expiration, as you talked about previously coming up over the next couple of years, anything new there?

That’s a really good question. And Jim is really working hard to tie-up much of those renewals as possible. And Jim, you want to cover anything on that?

Yes, surely. Good morning, Haendel. The Bellevue market all of - I think the picture is intangible, lot of excess space because of three new builders come out of the market, Expedia rolling out which is now being pushed out to 2020 which is good news for everybody. But the news that I think a lot of people aren’t aware is there is over million square feet of active new prospects in that market as we speak. So there is still good activity in Bellevue, that’s clearly not going to cover the entire million that’s new buildings. But always we received information with couple of new buildings have just signed have pretty good size leases as well. So Bellevue although it still have to take a little time to fill that space. Bellevue is still on a long term basis is as a great opportunity in the office market. Now specifically with American Assets portfolio, we have now at the end of the 2018, 13 that are expiring and I am currently in discussions to either review or backfill 11 of those 13 floor. So the activity is very good. And I most cases, those rents perhaps are going to be an increase over what the old tenant was paying. So still very optimistic about Bellevue, it has work to do but we see light at the end of the tunnel.

And we’ve seen this light coming in the tunnel and we’ve used these last couple of years to upgrade the amenities for the tenants that are there. So we can compete with whatever gets through, upgraded elevators, upgraded hallways, upgrades bathroom. So we have a first class building and a first class market competing with some first class competition but we have the benefit of cost in place. You know we’ve looked at what a cost to replace our building right this that we own now at a lower cost and substantially in excess of cost. So we’re ready to compete.

Got it. So if I hear you, you’re seeing some pretty good demand. You are conversation what you said 11 of the 13 floors expect to get better rent in many cases. Which certainly good, certainly given the market dynamics of that higher supply and what people expect to be slower job growth, but how committed are you to Bellevue long term, is that an asset that you are thinking of or maybe should be thinking of monetizing here?

No, you know it’s a location and a building and if anything in the long term vision of the company, as you know we have a market place in San Diego, one in Portland, one in Honolulu, one in the Bay Area, I’d like to add Seattle. And so our objective is to make Seattle a center of opportunity for us not an area that we would want to retreat from.

Got it, okay. Anymore color if you could give around Phase 2 that’s under review in Portland, you talked about maybe some office, some apartment, but any round numbers on potential investment dollars or yields, you give us a sense of and maybe timing?

I wouldn’t want to do that. The timing is I think that the design review is going to take place sometime December. We’re not sure if they are going to have a core for that. In the meantime, costs are increasing at a 6.5% anchor rate that we said earlier. In the meantime rents are going up. So it’s such a moving target but in the long run that’s - I don’t know how long and it’s certainly and it’s from two to ten years. It’s going to be a giant asset for this company to own forever and ever. We’re taking an area that was a work area only and turn it into a work and live area and it’s getting an ambiance that it didn’t have before. So we’re kind of excited about what the future holds for us in Portland and in the Lloyd District.

Okay. And then one last one if I may and Bob maybe this one is for you. Didn’t you really mentioned of ATM issuance and you sort of the composition of guidance as you laid out, is that something that your stocks had pretty nice recovery in the past few months that you are thinking of and maybe are there, would it typically be the send up and redo of funding that you’ve done in the past tapping ATM for. And maybe additionally, are there any other investments opportunity that perhaps didn’t quite pencil maybe three months ago that may make more sense in your terms as you consider your better cost of capital?

Thanks a good question Haendel. You know we’re always looking at acquisitions. And we - you know our focus is to create net asset value first. And if it’s accretive to NAV then we’ll look at it. And we don’t mind getting aggressive on it but it still has to be accretive over the long period, short period and long period. Relative to your question on the ATM, you know we evaluate that this quarter. I think year-to-date, we have not tapped the ATM. We have sufficient capacity through a line of credit and cash on the balance sheet to handle what we need. So we’re on track with CapEx. We are on track with our capital spent including Torrey Point. So you know we’re not desperate for cash at all by any means. You know evaluate it quarter-to-quarter, if it make sense, we may take a little. But right now my attention is not to tap into the ATM but we evaluate that quarter-to-quarter.

One might note that our NAV we believe is still in excess of our market price, so if we’re tap into the ATM, we would have to find something that produces return that add to the NAV more than the dilution we would be subject to by some staff into the ATM. It’s a very tough objective to achieve and it’s frustrating if you want to know the truth.

Actually you know why you mentioned NAV, can you give us a few of the building blocks for NAV, maybe some of the cap rates that in your NAV, you assume for some of your key markets and asset types?

I think Bob publishes that once a year and then we’re asked by the SEC to remove it. So Bob you want to cover on that?

Yeah, we you know - once a year, we do update our NAV and we published it mid-June. What we do is, is we issue an 8-K that references to our website, and we put the detail on an asset by asset basis, show you what our NOI is, showing what are - what we believe to be the cap rate is and we approach it on a conservative basis. We think that when we publish at least our goal is that when we publish what we believe our NAV based on our knowledge in the market place that when we publish we could generally sell those buildings for more than that. So we did publish mid-June a net asset value that we believe of $50 per share. And if anybody is interested, yeah, they can contact us. I am not sure if it’s still in the website. It’s still in the website. Adam tell us, it’s still in the website, so if you go to the website and look under the Presentations, you’ll be able to see the detail asset by asset and how we think about the value of our assets.

Wonderful. Okay, thank you, guys.

Thank you, Haendel.

Thank you, Haendel.

Thank you. Our next question is from Jeff Donnelly with Wells Fargo Securities. You may begin.

Good morning. Ernest, you know thanks for your commentary on that power center transaction [indiscernible]. I was curious, are you seeing any opportunities to obtain, the acquire assets I should say more reasonable prices by using your OP units currency or is that just not

You know when our OP, when our stock price is less than our NAV and you go to a buyer and say you get a $100 per share in cash, we could give you a price in our units but we have to adjust the number of units to take in the comp effect that we are selling discount. It’s tough to have currency to mix a compelling transaction for a possible seller. So we’ve explored over the year a number of those opportunities but we have not been successful.

And I am curious, let me ask I guess Craig’s earlier question differently. If it were not for the Sports Authority vacating their spaces, would you guys have felt compelled to revise your same store retail NOI growth guidance?

Yes. We try to be as realistic as possible. And if we take a look at where our initial guidance is, we generally will update or comment on it in Q2 of each year. And just kind of true it up what we think is realistic within the certain range. If we don’t think the upward is increasing, but we think we feel more confident about a certain range, we’ll tighten up the bottom end. But we probably would have tightened up that range.

I think Bob does a great job in being highly accurate and if - as he pointed out, if we hear we want hear on conservative side, that’s always been our strength.

That’s helpful. And just switching out to Hassalo, I am just curious, if you guys have a sense how your price point competition over in the Pearl District has been varying in the recent quarters, have there been any signs of you know either increase confectioning, I mean we slowdown in early phase because there is sort of the price leader in the market, now I am just curious if you add any color on that?

You know I am not intimately acquainted with what’s going on in the Pearl District, but there is no question, they have a rental price than do and that’s something that perhaps we can involve to over the next number of years. I think that the market as a whole is pretty strong. We came up with a new product in new area and we are the new boy in the block and I think now we can say that you know we bust into the market place, we’ve established a fact that it’s a good place to life. We feel very sensitive our tenant’s requirements and we think that the opportunity going forward is even more significant than it was when we first start.

Jeff, let me add to this comment is that we have that competitive set that we look at three apartments in the Pearl District area and five on the NAV side where we are. And that range goes all the way up to a high of I think 3.20 per square foot, down till like 2.20. And the weighted average is 2.79. So the strategy that we took was not to be at the market, it is to fill it up quickly. And it’s amazing with such a - with terrific product that was build. And you look at those three buildings. The first one opened up at the first week of July in 2015 and it was - it reached 93% by the end of September that year. Then we opened up the other two apartment buildings, the Elwood as the Aster building - apartment building. And late October you know beginning in November and they are close to stabilization today. So the response has been terrific and now the focus is getting it back up to market.

Understood. And I know there aren’t many data points, but you know what comparisons have been for units that have flow that have rolled over or renewed in the short time at that building has been operating?

I don’t have that metrics. I can get that for you if you want but I know that it’s only recently we’ve asked the person in charge of that project to now have objectives at two points. First of all, get the rents closer to market. And second of all, make sure that during the slow rental season, we have as much leasing that covers that season, so that we don’t take a giant step back.

Jeff, I am also looking at a few data points. You know we started, we did - our focus was at 2.36 square foot on a weighted average basis. As in the end of June that’s starting to inch up, we’re now at $2.40 a square foot. And when you add in the corporate housing units that weighted average is 2.73. So we are on the way. We know that a 2.50, you get a 6% unlevered cash on cash return on investment. So we are tracking and we think we are on track.

And if you take the 6% targeted return and compared with to the market value which are cap rate on a project like that would be around 4 and the project cost $200 million you know the math comes out has been very beneficial towards the stockholders.

And just one last question, I guess you know Ernest, you’re saying earlier is kind of exciting for you to watch this sort of predominately work area transformed for the live work area and I was just curious what’s your apatite is for expanding your ownership in that area to provide either to provide more control of the existing inventory that’s in that market whether it’s retailer apartments or field for future developments whether it multifamily or street retail, just maybe as more street retail is need to sort of feel those changes. When I was visiting your property in the second quarter, I’d heard you guys once looked at one of the parking decks that ties around right at your front door and just got me wondering if you guys actively look at expanding your presence there or you just kind of happy with what you have.

We actively look at the presence we have there, but any expansion would be significant beyond that we have, because we have four square city blocks that we are working on now which could result in an investment of $800 million to $1 billion. I would say we got enough on our plate and we are willing to fine tune that but certainly any additional significant financial commitment of that area what have to be put in the base and to we finish what’s on our plate. Even with the shopping center in the next door, the company that’s repositioning is spending I think about $50 million in repositioning that, the parks has been upgraded, other developers have bought land in the area. So plenty in our plate, you know there is old expression bulls make money, bears make money and you know what happens to pigs. So we just going to - we are going to digest what we have, maximize the return, we’re grateful what we have and we are excited about our future in that area.

Okay, great, thank you.

Thank you, sir.

Thank you. Our next question is from Richard Hill with Morgan Stanley. You may begin.

Hey, this is Ronald on Richard Hill’s line. Just a really quick one for me, going back to the office portfolio specifically San Francisco, just common update, what you guys hearing on the ground maybe that from three to six months ago in terms of jobs and hiring and what the demand for office looks like, just curious to see what you guys are hearing?

You know Ron, there is lots of return on San Francisco with seems go off this market and we’ve been told there is some sublet space available. It’s not a recession like took place some years ago. I think the market is probably leveled up somewhere in my view. But I think a decline would not be an accurate description. Jim, do you have a viewpoint on that?

I would agree. I see this flattening a little bit but I don’t see imminent danger or massive drops like we had back in 2007 and 2008. So obviously the portfolio we have there is fully leased and 100% leased, no significant rolls coming up, retiring as 12 months. So I think we’re in a good position at that market and sitting tight.

And also our impression that our rents in place are significantly lower than the current market, so even if there was a decline in the current market rents, it’s doubtful to be what come back to the level of our rents in place. You need to touch up.

I would agree.

Yeah, Ron. Our in place rents are approximately 35% below market in San Francisco.

Okay, great. That’s all I got from my hand. Thank you.

Thank you, Ron. Thanks for your interest.

Thank you. Our next question is from Rich Moore with RBC Capital Markets. You may begin.

Good morning, Rich.

Good morning, Rich.

Rich, your line is open. Please check your mute button.

Rich, we’re waiting for you. He might have to go somewhere else. Maybe we should more on and come back to him. Last question.

I am showing no further questions. At this time, I’d like to turn the call back to Mr. Rady for closing remarks.

Okay, once again all of you thank you for your interest. We’re excited about what we’ve achieved over the last five years in more than doubling our NAV. We’re going to work as contentiously as possible to produce results that are envies or enviable and we have a great portfolio and we are truly blessed to have great stockholders. So thank you for your interest.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.