Good day, ladies and gentlemen, and welcome to American Assets Trust's third-quarter 2017 earnings conference call. [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Adam Wyll, Senior Vice President and General Counsel.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust's 2017 third-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 third-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. 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 third 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 will now turn the call over to our Chairman, President and CEO, Ernest Rady, to begin our discussion of third-quarter results. Ernest?

Thanks, Adam, and good morning, everyone, and welcome. Thank you for joining American Assets Trust's third-quarter 2017 earnings call. Our focus in 2017, as it has been for all these years, 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 paid out to our stockholders. The Company's Board of Directors has declared a dividend on its common stock of $0.27 per share for the quarterly period ending December 31, 2017, which is approximately a 4% increase over the prior quarterly dividend. The dividend will be paid on December 21, 2017 to stockholders of record December 7, 2017. During 2017 we have continued to reinvest into our portfolio as major head tenants have transitioned out either through lease expiration or other events. During this process everything has seemed to take longer than we initially expected and pushed out the timing of cash flow in several projects. For example, our Torrey Point development in San Diego, that was initially scheduled for completion by the end of the first quarter of this year, was delayed by unprecedented record rains in San Diego, which pushed the completion of the development out until late August of this year which, by the way, is now 35% leased. We also saw the tight labor market combined with the slow permitting process in San Diego push back the completion of Torrey Plaza's renovation from May of this year until the end of 2017. We expect to see projects taking longer, especially with an already tight labor market seeing thousands of construction workers and contractors having to Houston and Florida, and of course now in Northern California, for hurricane and fire reconstruction work. We have seen these cycles before and this too shall…

Last night we reported third-quarter 2017 FFO of $0.524 per share. Net income attributable to common stockholders was $0.19 per share for the third quarter. Our retail portfolio ended the quarter at 97% leased combined with the highest annualized base rents amongst our peers. On a year-over-year basis our retail occupancy of 97% was the same as reported in the third quarter of 2016, leaving roughly 99,000 square feet vacant in our approximately 3.3 million square foot retail portfolio. During the trailing four quarters 71 retail leases were signed representing approximately 310,000 square feet or 9% of our total retail portfolio. Of these leases signed, 62 leases consisting of approximately 293,000 square feet were for spaces previously leased. On a comparable basis the annual cash basis rent decreased approximately 7.6% over the prior leases. This roll down relates primarily to the 155,000 square feet Lowe's renewal in the second quarter at Waikele Center. As you may recall, Waikele Center is a 537,000 square foot high quality dominant retail destination located in Waipahu within the fast growing area of West Oahu, Hawaii. It is approximately 10 minutes from the Honolulu airport. It is a strategic location fronting Simon Premium Outlets and enjoying a half a mile of frontage along the north side of the Interstate H1, which provides excellent visibility as well as immediate access to major vehicular arteries. This center was developed in 1993 and we acquired it in 2004 and have experienced very strong same-store growth for the past 12-plus years. As the major leases like Lowe's and others that have or will come up for renewal in the current marketplace, several of such tenants' in place rents have brands such that they are above the current marketplace. Once they are reset to market we expect to see same-store…

[Operator Instructions]. Our first question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.

A couple of questions around the guidance. And Bob, thanks for a lot of the good detail there. First, I think late last year or early this year you talked about 2017 being a year of transition. And you commented that a lot of the completions and activity was pushed back and delayed here. Do you think that the disruption causing some of the cash flow volatility will settle down during 2018? Or do you anticipate that it might continue through 2019 a bit when you factor in some of the other expirations and activity that is ongoing in the portfolio?

Todd, that's a really great question and if we were absolutely confident in the answer we could tell you. All I can tell you is that the portfolio remains of top quality. The people who are managing it are top quality. The markets we are in they are very good and very significant. There is a lot of activity, but I wish I could tell you exactly what would happen. I think and I hope it will settle down. The values have remained as they have in the past and actually probably continue to grow. So, all I can tell you is we are going to do our best to make sure that the volatility declines and the FFO continues to grow.

Yes, I would add to that, Earnest, that I expect the volatility to decline. If you look at the beginning of 2017, there was concern about -- we had 15 floors of vacancy or expirations coming due at City Center Bellevue. All those have been dealt with the exception of the new ones that are coming on from this week -- the five floors I talked about. But as of today we only have 12,000 square feet of vacancy. I think also too by taking Waikele Center out of same-store that will reduce the volatility on a going forward basis.

Okay and then with regards to the Pacific Ridge acquisition, you mentioned that there were some higher transition costs there to bring that asset up to AAT standards. Can you elaborate on that little bit? And then when do you think the transition there will be complete and when do you expect to stabilize occupancy?

The project was managed by professional managers who were not active in the market in San Diego. We couldn't take over as soon as we wanted to because there was a turnover of students and we were reluctant to take over and deal with that. So we allowed them to do it. Then when we took over those prior managers exited. So, we had to replace the management which we've done. And we think that over the next year we'll be able to enhance the returns from that project. But it's been a busy few months and it was more turbulent than I would've expected.

So, in terms of occupancy is that sort of set at this point for the balance of the school year here? Will it take another leasing cycle to get occupancy up?

Well, we have some vacancy that's in the nonstudent units and those are leasing up well. We won't know about the occupancy for the students until the school year is over. We're starting to plan for that as of -- in the next 30 to 45 days. So, it's a great project. We've got to get our hands around it and we are doing that and we are as optimistic as ever. And also frankly there was some deferred maintenance in that project because the people who owned it before were not as diligent in maintaining the facilities as well as they should have. So, we are playing catch-up with that. But the project is as good as we ever thought it was. The location is good if not better than we thought it was. The opportunity to work with students is as good as we ever thought it was and the rentals to non-students are as -- we are as hopeful as ever.

Yes, Todd, we ended Q3 at 90.4% leased and we should be around 93%-94%. If you look at Q2 we were at 94.2% leased. So, part of that was on -- had to do with the transition. So our hope is that we're back to 93%-94%.

I think we are, Bob. I think we leased a bunch of units in the last couple weeks.

Okay. And just on the balance sheet, Bob, you talked about reducing leverage back to about 5.5 times on a debt to EBITDA basis. Can you just talk about the timing there and the path to reduce leverage?

Yes, a low leverage is important to us and the path to get there is two ways. One is by the growth in the EBITDA; and secondly, it is the payoff of the outstanding debt. So for instance, we have a mortgage coming due at the end of the first quarter, beginning of the second quarter. Our expectation is to pay that down with cash. And as the legacy CMBS matures we'd like to pay back down. So, we think if you look at our corporate operating model, within eight quarters or less we should be at a 5.5 or less on a net debt to EBITDA basis.

Okay, thank you.

Our next question comes from Craig Schmidt with Bank of America. Your line is open.

Portraying 2018 as a transition year, as you look out into 2018 is there any risk to continue drag in terms of taking a little bit longer to lease up some projects and getting approvals and the kinds of things that are bringing the 2018 number down?

I think the approvals are in place. It's now a question of leasing that space that we created. And as I said earlier in an answer to another question, that there's a lot of activity, but we can't predict exactly when it's going to lease up. But we are hopeful if not optimistic that the lease up occurs quickly. The transition just took us longer than we thought because of mostly external factors if you want to know the truth. I can go into those in detail if you're interested.

Well, I guess one of the external -- I'm wondering are retailers reacting more slowly? We are hearing from some of your peers, at least in the retail space, that while deals may get done, it's taking a lot longer for them to get done.

I think that is absolutely accurate. We can give you some color if you want to hear about that from Chris. It's taking longer. It's a little more difficult to negotiate with them. Many of them are not expanding as rapidly as they have been in the past and it just takes longer and more handholding.

And is Chris' expectation this drag will continue for the next 12 months or will they be a little bit more reactive?

Craig, if I had to anticipate what will happen is the active retailers are just a lot more site visits, a lot more checking of boxes to make sure that they will go forward on a site. So, it won't get any easier but, as I always said before, even before this it wasn't easy with the big boxes. So that world isn't really going to change.

On the other hand, I think that the quality of our portfolio will lead us through this turmoil in better shape than many of our peers. I think the quality of the portfolio will speak for itself as the cycle plays out.

Great, thank you.

Our next question comes from Michael Carroll with RBC Capital Markets. Your line is open.

Bob, I'm sorry if I missed this, but did you provide the details on the plans for Waikele Center? How extensive will that redevelopment be and do you have an estimated budget for that?

We've run some preliminary numbers, but we really don't because it depends on who steps into Kmart. We are looking at various scenarios on what to do. And until the lease is signed I really don't want to put any estimates out there because it could change.

Michael, as Chris said earlier, all these retail tenants take longer to make up their mind and to make a commitment than they have in the past. On the other hand, it's a half a mile of frontage on the H1 with 43 acres of fee simple in the middle of an established community. So will it happen? I'm absolutely confident. The timing I'm not as certain and the outcome I'm not as certain. But it will be good, I just don't know how good.

I guess trying to answer your question from a different perspective is that back in June we published our updated NAV at that point in time and we factored in the costs that we thought it that point time and ran a discounted cash flow. And assuming that the cash flows wouldn't materialize until 2020 and then discounted those cash flows back on the Kmart center. We factored in the Sports Authority, bought vacant box and the Kmart vacant box and discounted it all the way back till June of 2017. And even then we still came in at $50.75 on an NAV basis, net asset value per share basis, which factored in all those discounts. So, while I don't want to go through what the actual cost was at that point in time, we are still fortunate to have a very high quality portfolio.

Okay, and then are you renovating just the Kmart box or are you renovating the entire center?

No, we are renovating the Kmart box and then we are repositioning or bringing in a new tenant for the Sports Authority.

And then the renovation of the center will just be an enhancement of the center. So don't look at it as if the entire center is being taken out. This is just the re-leasing of the Kmart box and then I put -- re-skinning of the property to bring it up to standard. You've got to remember it's in the middle of the Ion terrific space, but it's also been sitting there for 15, 20 years. It just needs a refresh, but by no stretch is this a completely redo the center.

Okay and then why is it taking so long to execute a lease with that national grocer? Are you still confident that that will occur?

I'm going to ask Chris to handle that.

I feel very confident that that will occur. The industry shakeup with many of the major tenets puts everything quite a bit slower. There's an awful lot more on their plate. The grocery business comes down to how perfect those aisles are positioned, where everything goes so that when you go down that racecourse with your basket all the most optimal profitable pulls off those shelves and SKUs, that's where the rubber meets the road there in the grocery business. So, it takes them a long time, but the end result is not just do you get a grocery store, not just do you get the rent, you're probably going to get another 30,000 people coming into your center every week. And that's what makes the difference. Tenant mix is everything in this business.

Okay great and then last question, with the Bellevue expirations in the office portfolio, how much downtime do you currently assume in your guidance?

We have left them completely vacant for 2018 on the five floors in City Center Bellevue. And what we did in our earnings script, I mentioned that we assume it's going to take at least four months to find and locate a tenant, because you can't show that space until those tenants which expire on 12/31 open up the doors so you can tour through their former space. So, we put four months to find, locate, sign a lease and then six months to build it out. That takes me 10 months and then I have another two months for whatever you want to call it, additional time. So I just left it out. As soon as the leases are signed and they will come in -- and hopefully our office guys will outperform. Jim?

This is Jim. I feel confident I will beat Bob's estimates, but I'll just leave it at that at this point time.

It's a good question though, Michael, thank you.

Our next question comes from Rich Hill with Morgan Stanley. Your line is open.

Good morning. Thanks for taking the call. Why don't you just chat maybe a little bit more about the Lowe's lease renewal? And I apologize if I missed it earlier. But is that a trend that you think you're going to see going forward? And is it right to characterize that the lease rolled down? How should we think about that?

Do you want to take that, Chris, or should I take it?

No, I'll take it. Rich, so, on the Lowe's lease, so they were well over market. I don't want to go into too many details; there's a lot of strategy on how many stores they're going to put on the island, where they're going to get positioned. And so, we took a bit of a roll down on that. I recognize that was painful for us to take it. But after copying the market carefully, what's out there, where they can go -- this is a 10-year term. We don't want to lose Lowe's at that site. That Lowe's produces quite a bit of traffic to the center. It's good traffic. But to answer your question, that large box of 155,000 square feet, that comes down to more in what's the market range for them and more into their occupancy. So, I hope that answers your question.

Their store, Rich, was not up to their standard. It was a store that they bought from someone else and it was substandard. So, they had to look at this as an investment going forward. And so, it was important for us to keep them and thankfully they decided to stay with us rather than to go to an alternate site.

Got it. And then one more question if I may. I think I heard you say correctly the same store NOI for multi-family baked into the guide was around 3.45%. Please correct me if I'm wrong. That seems like a fairly material slowdown I think from what you're putting up this year. Is it just because the properties that you have, which are great, have sort of matured, you've leased them up and this is what we can expect going forward? Or was there something else driving that, maybe supplier something else?

I guess the first answer is yes, the 3.45% is what we are projecting for same-store cash NOI growth. I think what you've seen -- the rent growth in the prior several years, we've been using lease rent optimization tied in with our accounting system/property management system, which tells you what the market is locally and it encourages you to get all you can get from a rent standpoint. And we've had tremendous growth for the last probably three, four years. So, what we are doing is we're putting in what we think, based on our data information, where we think it's going. Now hopefully I'm wrong, but I think that is a good estimate for 2018. Ernest?

It's a macro estimate too because incomes in San Diego have not kept -- income growth in San Diego has not kept up with the cost of housing. Housing prices have risen, rents have risen dramatically and there may be a ceiling on this marketplace and there may not. So I think what Bob said is just the best guess we could make. But one thing I can assure you is we'll do the best we can for our stockholders and at the same time provide the best housing we can for our tenants.

Got it. Thank you, Bob. Bob, just to reiterate, I wasn't suggesting that it wasn't a good number. I was just trying to understand the deceleration. So thanks for your transparency as always, guys.

Our next question comes from Haendel St. Juste with Mizuho. Your line is open.

Curious, Ernest, if you are a buyer of assets today. And if so, is it fair to assume that apartments are still your preference? And how would you be thinking about funding and are you seeing any change in seller psychology?

Of the three asset categories we are in, apartments probably provide the best opportunities. You heard our discussion about retail and the wins that are interfacing from Amazon, etc. Office, we've always said we have great office. We have enough office right now. As far as funding apartments, that would be a problem because we have cash on hand and we could acquire some apartments. Bob is and the Board is devoted to keeping the leverage low. So what we do is we enhance our existing apartments. We also have plans -- we have plans -- not also, but we have plans to enhance the existing apartments and that's our strategy, that's where most of our capital is going to be going. On the other hand, we also see construction costs going up dramatically. So, we have a great opportunity, for example, in Hassalo where even though the rent have not met our expectations, Bob's estimate from the marketplace has been that the value of that project has increased by $30 million to $50 million even though the rents are not what we hoped they would be. So, it's a real problem today to how do you make a tight construction market, increasing construction costs, rents that are flattening out work. So, we think that -- we know that we're grateful for what we have and we need to maximize it and acquisitions are probably not going to drive the Company in the future in any significant -- in the short-term future in any significant way.

Got you, got you. Thanks for that. So, it sounds like as you think about capital allocation, debt reduction, funding your readouts, certainly a bit higher priority today than acquisitions.

I would say so, yes. Bob is shaking his head -- and when Bob shakes his head it's tough to change his mind.

So thinking long-term, and we've talked about this before, about where you'd like the portfolio to be. You have great assets on the West Coast, assets that I am sure a lot of people want. But just thinking about the balance of the portfolio over the next call it five years. Is it fair to assume that retail probably plays a lesser role? I mean, it sounds like you like what you have, but incrementally, given the situation or the retail backdrop, you'd probably like to have a little less. And it sounds like apartment exposure probably is what makes up any reduction in retail.

I don't know that we are thinking about reduction in retail, because anything we would consider selling would be impossible to replace. But we have, and we've said it many times, that we have irreplaceable assets. So, I don't think we're thinking so much about reduction, but -- and we think that over the next five years this portfolio has the possibility of reducing the results that it's produced over the last five or six years. If you'll recall, Haendel, when we went public we estimated we had a 21 or 22 NAV and five or six years later we've distributed large amounts of cash and dividends and we have a net asset value of approximately $51 a share. We are going to try not to settle for less and we're going to do the best we can. But we still think that the portfolio is a way of producing consistent and growing cash flow and enhancing net asset value.

Okay. And one more if I may. Joint venture partners, in the past, it seems as though you've been a bit more hesitant towards bringing in JV capital into some of your larger projects. I'm wondering if that has changed in light of some of the challenges in San Diego and Portland. Curious on what role joint ventures could play as you perhaps think about derisking some of your larger projects.

Well, the opportunity of course that people are looking for is for us to put some of our assets in the joint venture. That's absolutely off the table. But if we found a joint venture partner who would put up a significant amount of cash and we would put up some as well. And we would get management fees and we would get some leverage or some carried interest, that would be something we consider. So far nobody has stepped up with those terms and we are not prepared to do anything on terms that are not really beneficial for our existing stockholders.

Thank you for the thoughts.

Thank you. I show no further questions in queue, so I'd like to turn the call back over to Mr. Ernest Rady for closing remarks.

I want to thank you all. This is not the report that we've made over the last six years. And we know that it's not up to the standards that we have set, it's not up to our historical performance. And I can tell you that myself and management is dedicated to returning to those metrics and making our stockholders proud and happy. And so, thank you for your interest and we hope we have better news going forward. Thank you all for joining us.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may all disconnect and have a wonderful day.