Welcome to the American Assets Trust Second Quarter 2017 Earnings Conference Call. [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. You may begin.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2017 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 2017 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 and costs of construction. Our earnings release and supplemental reporting package that we issued yesterday and our annual report filed on Form 10-K and other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations. Additionally, this call will contain non-GAAP financial information, including funds from 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 2017 furnished to the Securities and Exchange Commission and this information is available on the company's website at www.americanassetstrust.com. I'll now turn the call over to our Chairman, President and CEO, Ernest Rady, to begin discussion of our second quarter results. Ernest?

Thanks, Adam and good morning, everyone. Thank you for joining American Assets Trust Second Quarter 2017 Earnings Conference Call. Our focus in 2017, as it has been for decades now, continues to be on the growth of net asset value for our shareholders which we believe will ultimately result in increasing cash flow and dividends paid out to our shareholders. 2017 continues to be a year of repositioning, investment and growth and we still expect to deliver relatively strong FFO growth for 2016. On top of that, you may have noticed that Bob and his team -- over 2016. On top of that, you may have noticed that Bob and his team published our updated annual estimate of net asset value in early June of $50.75 a share, with no input from me or my dad. This is approximately an 8-week progress that Bob and his team go through working with outside brokers and each market trying to get an accurate valuation in the current marketplace. And this evaluation is based not only on capitalization rates, on annualized in place NOI, but also factors in the net present value of estimated future lease roll downs and the cost of repositioning and the timing of those cash flows. The valuation also takes into consideration valuation feelings in each market based on dollars per square foot or dollars per hotel room key or dollars per apartment unit. Our current net asset value that we recently published also factored in a significant reduction in value related to the valuation of Waikele Center resulting from the renewal, repositioning and re-leasing at several tenants at Waikele. In spite of all the repositioning and investment, our NAV increased again this year to $50.75 per share. Our objective is to be as accurate as possible and if…

Good morning and thank you, Ernest. Last night, we reported second quarter 2017 FFO of $49.5 per share, just a hair shy of Bloomberg's consensus estimate of $49.6 per share. Net income attributable to common stockholders was $0.12 per share for the second quarter. The company's Board of Directors has declared a dividend on its common stock of $0.26 per share for the quarterly period ending September 30, 2017. The dividend will be paid on September 28, 2017, to stockholders of record on September 14, 2017. Our retail portfolio ended the quarter at 96.8% leased. On a year-over-year basis, our retail occupancy was down approximately 140 basis points from the second quarter of 2016, leaving approximately 98,000 square feet vacant in our $3 million plus square foot retail portfolio. The decrease in retail vacancy is primarily attributed to the Sports Authority bankruptcy in 2016 at our Waikele shopping center which consisted of approximately 50,000 square feet. Additionally, during the second quarter, we renewed Lowe's at Waikele Center which was scheduled to expire in June of 2018 and occupies 150,000 square feet for an additional 10 years. The renewal reflects a roll-down in rents and is the primary reason for the negative cash re-leasing spreads in our retail portfolio during the second quarter. During the trailing 4 quarters, 83 retail leases were signed, representing approximately 389,000 square feet or 13% of our total retail portfolio. Of these leases signed, 72 leases consisting of approximately 367,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent decreased 3.7% over the prior leases. Our office portfolio ended the quarter at approximately 88.7% leased, down approximately 170 basis points on a year-over-year basis, primarily due to one tenant's lease expirations on December 31, 2016, at Torrey Plaza in…

[Operator Instructions]. The first question is from Jeff Donnelly of Wells Fargo.

Bob, thanks for walking us through that quarterly ramp. In your 2017 earnings guidance, [indiscernible] was the focus last quarter. I guess, one question is, are there other factors that are still out there that need to fall into place in order for you to achieve the back end of the year performance that you guys are expecting? Or is it largely due to those 2 acquisitions in the capital markets work that gets you there?

It's largely through the two acquisitions. And then in the fourth quarter, we have some straight-line rent. So the question is when that straight-line rent will kick in. But right now, we're still within the range.

And just clarifying, I don't remember off the cuff. Were the acquisitions -- the assumption for acquisitions originally in your guidance when you gave it? I'm just curious on that.

No. In our initial 2017 guidance, we had not included those 2 acquisitions.

Thanks. And then just to switch gears on Torrey Reserve. Are you able to share maybe more detail around the leasing terms, such as whether it's free rent or gross or net rents or TIs associated with the lease?

Jeff, we'd like not to -- this is Ernest. Because it may affect the remaining leasing -- the lease of the remaining space may be impacted by that information if became available. So when we're all leased up, we'll be happy to share it with you. Until then, we really like to keep it to ourselves.

Jeff, Bob here. So when you asked the question, you were referring to Torrey Point, not Torrey Reserve Plaza, correct?

Oh, I'm sorry, correct. Yes, yes.

Yes. And just to clarify, also, too, is that we're pleased with the terms of that lease and we're within -- we're well within our range of stabilized yield that we presented.

Are you able to talk about the particular tenant use? I'm just curious if it's kind of inconsistent with your expectations and anything else that kind of came from that negotiation that might have given you some color on the condition of the office leasing market.

Our tenant is a company that's going to engage in the development of virtual reality. And I think I just grant that Apple now is talking about doing that, too. So it appears to be the tech choice for the future. They've raised substantial amount of money and we think that they'll be successful and will prove to be a worthwhile and perhaps even growing tenant.

And just one last question. You might have mentioned this in your remarks, Bob, but on the retail rents, excluding the Lowe's space, I think your retail cash rent spread was slightly negative in the quarter. Was that somewhat broad? Or was that still concentrated in the hands of a few of the remaining leases? I know it's a relatively small base of leases.

Yes. You're talking about the leasing respread of negative 32% or whatever was negative. But what we did is we renewed the Lowe's lease. And as a result, we had a roll-down in that lease. Lowe's lease does not come up for maturity until June 1 -- June 30 or June 1, 2018. So what we did is we thought it was prudent to reduce the risk of a 155,000 square foot tenant that we value and basically mark it to market or be a little bit more aggressive than that. Chris, do you want to add anything to that?

Yes. It was definitely market rate. It was comped from what we had there. And then remember, it was also a 10-year term, so lock-in and running for a 10-year term was [indiscernible].

The cash impact won't happen until June, but we've had to adjust the straight-line rents.

No, I apologize. I was -- maybe I wasn't clear. I was actually referring to the cash basis rents excluding Lowe's. I was just reading your footnote that said there was a decrease of 2.2% in the quarter. I wasn't sure if those -- the retail leases excluding Lowe's, if there was something that was weighing on it now within those remaining leases?

Yes. No, there's...

Chris's going to answer it. Go ahead, Chris.

It's primary Lowe's that would have dragged that down. Because the other spreads, there was quite a few leases that went through some up, some down, but very few went down by much. And if they were, they had a soft deal. So I would hang my hats in that, that decrease is primarily on Lowe's.

The next question is from Paul Morgan of Cannacord.

Just sticking on kind of toward the point for a minute. As I recall, one building is 3 floors, the other is two. And did I hear you say that you leased 2 floors in the larger building?

In the three-story building.

Yes. We leased the ground floor and the third floor in the larger building, in the 3-story building.

Okay. I recall at one point kind of a strategy than to maybe lease them as full buildings. Was there anything that maybe capped the deal from working out since they took 2 floors of just taking the full other building?

I think the terms that they leased it on was satisfactory to us. And they're hopeful and we're hopeful that they're going to require additional space. And they have a certain right to the second floor under certain circumstances. So -- and it is a growth business in a growth industry. So we're glad to have them. And I think they're happy to be there.

I see, okay. That makes sense. And then on Portland, you mentioned -- I think this is Portland you were referring to when you talked about rent growth and the apartment market slowing. And maybe just give an update on kind of your leasing strategy for Hassalo and couple of the towers. At least, per the South kind of the average rents were up pretty meaningfully at Aster and Elwood. And then -- but the leased rate was down 300, 400 basis points. So I don't know how much of that is maybe just a burnout, concessions or something. But if you could give kind of a little bit of color on how you guys are kind of attacking the market in light of what's going on more broadly there.

Well, first of all, when we opened the project, as you know, we were very aggressive in trying to fill the space which was a very good strategy. In the meantime, some other projects have opened up and the competition's gotten a little more competitive. We're now looking at the project not as 3 buildings, but as one project as a whole. And we've now enlisted a computer aid to price the projects. So we find that some types of -- as I've said frequently, that you really have to learn the project and the marketplace. And we've done that over the last year and we think that now we will, going forward, will have a better fix on we can maximize our rent and minimize our vacancy. But it's been a little tougher market than we had hoped for.

Paul, to your question in the supplemental, you noticed that Elwood has -- Elwood's increased into Q2, Aster's increased in Q2, Velomor just slightly down. But the increase in the average monthly base rent on each of the units is really attributable to the LRO system, the lease rent optimization system, that we put in place at the beginning of this year. The first year when we opened up, we didn't use that because we were the market. We were pushing new boundaries of that marketplace in a new development and we were creating a new city, if you will. So we -- what we've seen is that in the last quarter, we've really been able to push those rents based on the predictive analytics of lease rent optimization.

Actually, I think that the LRO has just started to be used now and we're just starting to get the benefits on it.

Okay. And then, I mean, do you have any feel -- I think you said it was going to enter the same-store pool in the fourth quarter. I mean, how kind of the year-over-year number is likely to kind of shape up as kind of we reach that threshold?

I don't have that answer right now. We're hopeful that it will be positive. In our Q3 earnings call, we'll issue our 2018 guidance and we'll have a better view on it.

Portland is an interesting market. In the wintertime, they had snow that was significant and now it's over 105 temperature. So we've kind of got to learn when to rent and how to rent to maximize our returns. And it's a market for us and it's a new market for Portland, too, for this size of project. So we're in the learning process and we're getting much better at it.

Okay, great. And just last real quick on Pacific Ridge. You talked about maybe trying to optimize the student-professional mix. And I just wanted to see how -- whether that had any impact on kind of those fall student leasing now that we're kind of about to enter the school year.

No, Paul. We just took over the management. It was run professionally up until just the first of this month. And so we did not want to interfere with their normal operations during the student-leasing season. And so we're now in the process of devising our strategy going forward. Do you want to add anything, Russell? We've done a great job in integrating that. And it's been a big job, frankly, to take over that project and eliminate the former manager who -- we think we can do a better job. Russell?

Okay. Any changes in the mix or likely to be kind of for the next school year?

Paul, this is Russell. I just wanted to reiterate what Ernest said. Our third-party manager was in place. We took over as of yesterday. And in the interest of the performance of the community, we want to go in there and see everything that is in place and then optimize it. And hopefully, increase the performance by looking at everything from students to market ratios to marketing in different directions. That's what we're going to do, Paul, to optimize this. And we think we can do a pretty good job. We're very hopeful. But thanks for the question.

The next question is from Craig Schmidt of Bank of America.

I was wondering if you can describe the transaction market for the West Coast right now. I mean, you, obviously, were able to shift this to multifamily and now a shopping center deal? But how would you characterize it? And what does that mean for maybe future acquisitions?

I think the transaction market is still very strong. There's lots of money out there and lots of buyers. In our world which is limited, because it's coastal West Coast and it's got to be infill and of the highest quality, there is not unlimited opportunity. We were able to find these 2 acquisitions because in one case, it had joined a shopping center that we already owned and were able to consolidate the competition. And in the other, it was our view of that property which was perhaps somewhat different than the seller's view. So it's still a strong acquisition market from the point of view. It's tough to steal anything, frankly, tough to make a great fight. We look and we look and we look. And frankly, the more I look, the more I like what we have.

And I don't know if you gave this, but did you give a cap rate on Gateway Marketplace?

I don't think we disclosed that. The cap rate on Gateway Marketplace was a little higher than the average because it was -- it's a special property in a special location. And we were able to -- it was a discount store that was taken over and repositioned by another developer and it probably meant a little more to us than to anybody else. On the other hand, we've got a better or slightly better return than we would've thought if we bought something else.

Craig, we went in at slightly less than 6%.

The next question is from Brian Hawthorne of RBC Capital Markets.

Thanks for the description on the acquisition market. I was just wondering if you've seen any change in it versus between now versus 12 months ago?

Not much in the quality of assets that we would pursue. I think we see a lot of office offerings for sale and we don't really look at them, because as we've said before, the board and management has agreed that we ought to retain the portion of the asset in office that we presently have. So lots of office for sale, very little retail for sale of the quality that we want and the same for apartments. And of course, apartment market San Diego was a very special market. We're really glad that we have what we have here. And as I said earlier, we're studying now Loma Palisades to see if there's another opportunity. But instead of buying, we reposition and we get a better return than if we went to the marketplace and paid market rates.

Brian, for high-quality retail assets or high-quality any of these sectors that we're in on the coastal West Coast, anytime we're looking at something, we come up across quite often with life insurance companies. Their cost to capital is much lower than the REIT world. And so they're aggressive out there.

You know the market we're in is very innovative. And so there's job creation. On top of that, people want to live here because of the climate. So we think that we're in the right place for now and for the future. Thanks for asking, Brian.

The next question is from Richard Hill of Morgan Stanley.

I want to maybe drill down a little bit more on your acquisition of this retail property. I'm curious just from a demographic standpoint maybe if you're looking at competition, household density or household income. Ernest, what made this project particularly interesting to you? You made some comments that maybe not every retail property is up to par for what you're looking for to add to your portfolio. So what made this property particularly stand out? What are the determinants that passes your sniff test, if you will?

We got a little better rate of return than if we bought something else. It is in Chula Vista which is North of La Jolla of San Diego. We owned and have owned the adjoining center for, I guess, decades now. It's a special market probably not as much as impacted by the Internet as others. It's a shopping center for the entire South Bay market. It just made a lot of sense for us to own it as opposed to somebody else owning it. And then we had to deal with that other owner should that take place on lease renewals. So all in all, it just made sense for us to own it as opposed to having somebody else own it, plus we got a good rate of return, plus we're very familiar with the marketplace.

Got it. So maybe more one-off adding retail. This was, obviously, strategic. I know on the last earnings call, you had talked about multifamily and really liking multifamily. But if I'm reading between the lines in your comment, your comments today, it sounds like maybe what the options that you're seeing are not quite what you'd like to add to your portfolio and you increasingly like what you own. Does that mean acquisition activity might be slowing a little bit? And you're just into preserving value, maintaining value, increasing value? How are you thinking about that?

Really, we always look to increase value. What do we own that we can enhance? And we've given you some examples of that this morning on Loma Palisades. Plus we have a number of construction projects going on, on the projects that we own, such as Torrey Reserve, to increase them. But you're quite right, frankly, Bob is a very staunch defender of our balance sheet. And he went over the metrics that we have in terms of debt relative to the income, et cetera. So the chances of us going on a wild canter of acquisitions is not great with the capital available to us. So we have to make the most of what we have for the stockholders we have and that's our focus.

And Richard, to that end, we're still always looking at acquisitions. I wouldn't model in any additional acquisitions for the rest of this year, but we're always looking and you just never know.

But when we look, we've looked -- we're now looking because of Bob's ferocious defense of the balance sheet of what can we trade, what can we sell and be better off owning that what we acquire than what we dispose of. So we do not have unlimited resources now for acquisitions. It would have to be owning something that's better than we own now and having to free up the cash and keep the efficacy of the balance sheet in mind.

I'm not showing any further questions at this time. I'd like to turn the call back over to Ernest Rady for closing remarks.

Thanks, all you guys, for sticking with us all these years. You've heard our comments over the last six years and you've been more than gentlemen and you've been more than polite. And I just want you know we appreciate your interest and your consideration. And we hope to see you soon. Thanks, again.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.