American Assets Trust, Inc. (AAT) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the American Assets Trust Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today's conference may be recorded. I would now like to introduce your host for today's conference Mr. Adam Wyll, Senior Vice President and General Counsel. Sir, please go ahead.

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2018 fourth quarter and year end 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. For 2018 fourth quarter and year end 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 Web site. 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. We can give no assurance that these expectations will be attained. Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions and the risks and cost of constructions. 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 fourth quarter and year end 2018 furnished to the Securities and Exchange Commission and this information is available on our Web site at www.americanassetstrust.com. I'll now turn the call over to our Chairman, President and CEO, Ernest Rady, to begin our discussion of fourth quarter and year end results. Ernest?

Thanks Adam and that was really eloquent. Good morning everyone. Thank you for joining American Assets Trust fourth quarter and year end 2018 earnings call. We continue to make great progress on all fronts as we continue to focus our efforts on earnings growth combined with growth in net asset value for our shareholders. At American Assets Trust, our strategy is focused on these seven things; One Market, coastal West Coast markets from San Diego to Seattle and Hawaii, which have dynamic high barrier to entry attributes where the demographics tend to demand and local economies are strong and that we believe outperform other markets over time; two, diversification by asset class. We believe that the old system of a combination of office, retail and multi-family properties as opposed to focusing as a single asset class provides for superior positioning opportunities; three, consistent growth both organically and opportunistically. We believe that our enabling annualized growth over the last eight years has been approximately 12%, our annualized total shareholder return over the last years has also been approximately 12% speaking to the quality of our portfolio. Four, we maintain the conservative balance sheet and debt profile; five, environmental sustainability and social responsibility. We use proven conservative methods to reduce carbon emissions, minimize our environmental impact and preserve natural resources for future generations. Additionally, we firmly believe that our success is directly related to the success and health of our communities in which our properties are located. Six, technology. We expect to bring in cutting edge technology into our properties and our business operations attract higher credit tenants and creates material operational cost savings. Seven, dedication to transparency, excellence and success and all that we do. During the fourth quarter, we signed a significant lease with Google and one market in San Francisco which will contribute significantly to our earnings in 2019 and beyond. The office market in both San Francisco and Bellevue, Washington remain quite strong. We continued our renovation of the former Kmart building [indiscernible] Waikele Center in Hawaii and remain optimistic on the leasing front as we have commenced these negotiations and begun negotiating LOIs, letters of intent with various perspective national retailers. The Safeway store at Waikele Center remains on track open in the fourth quarter. Our renovation of one of the existing smaller office buildings at Oregon Square in Portland is almost incomplete and we are optimistic on the leasing front as we have negotiations with LOIs with respective full building users. We continue to reinvest and improve our existing assets and remain optimistic about the future of this portfolio and our ability to improve the price, NAV gap on behalf of all of us in American Trusts, we thank you for your confidence. We work hard to earn it and allow us to manage your company. And we'll look forward to your continued support. I'll now turn it over to Bob Barton, our Executive Vice President and CFO. Bob?

Good morning and thank you, Ernest. Last night, we reported fourth quarter 2018 FFO of $0.47 per share and net income attributable to common stockholders of $0.14 per share for the fourth quarter. Fourth quarter results are primarily comprised of four highlights which are as follows: first, FFO missed consensus by approximately $0.01 in Q4 primarily from the onetime expensing of the demolition costs related to the redevelopment of the former Kmart building at Waikele Center. Secondly, as Ernest mentioned at our landmark at One Market Street in San Francisco, we signed a 10-year lease with Google at prevailing market rates in terms were approximately 253,000 square feet replacing Salesforce.com. Google began paying rent on two floors on January 1, 2019, and will begin paying rent on three additional floors on July 1, 2019. And on the remaining two floors for a total of seven floors, on June 1, 2020, with straight line rent beginning in Q3 '19. As noted in our earnings release and supplemental, the cash basis and straight line percentage change in our comparable new and renewal office leases signed in Q4 were approximately 64% and 96% respectively with a large part of that driven by the Google lease. Third, the former Sears Store at Carmel Mountain Plaza shopping center in San Diego closed its stores in late November 2018 after filing for bankruptcy. This reflects the drop at our leased occupancy from 98.8% in Q3 to 77.4% at the end of Q4. As you may recall, we owned the underlying land which we ground-leased to a third party ground lessee. In late December 2018, we reached a lease termination agreement with the ground lessee for it to surrender the former Sears building which is owned in exchange for the release of its remaining obligations under the ground lease. This transaction closed in January 2019 with the recording of the grant deed, which legally transferred title of the building back to American Assets Trust resulting in a $4.5 million termination fee to be recorded in Q1 '19. That termination fee was calculated based on the discounted cash flow analysis of the then remaining ground lease rent schedule. But wait the story doesn't end there. Less than three weeks later we signed the 10-year lease for the entire former Sears building approximately 108,000 square feet with a national retailer in the home decor space, which we understand is making its debut entry into California. This brings our retail leasing occupancy back up approximately 98% in Q1 '19. We anticipate this retailer will be well-received in this high demographic area and will make a significant impact in Carmel Mountain Plaza by activating the eastern end of the shopping center, which has long been in need of a renovation as it was previously under control by a third-party. Rent is expected to begin in Q4 '19 with straight line rent commencing in Q3 '19. We expect this new tenant to increase FFO on an annual basis by approximately $1.03 over what we were receiving from the former ground lessee. Tenant improvements are minimal. Number four, we increased our 2019 FFO guidance by $0.06 at the midpoint primarily as a result of the $4.5 million termination fee previously discussed to $2.22 per FFO share. We also believe now more that anytime in the last three years there is a clear path to organic growth over the next several years with our high-quality coastal West Coast focus. From our vantage point, we expect to see in excess of 6% organic growth in FFO in 2019 and in excess of 8% organic FFO growth in 2020. We expect similar organic growth in our EBITDA as Google comes online for a full year beginning 1-1-20, which we believe will produce well in excess of 12% growth in EBITDA in 2020 compared with the year-end 2018 resulting in a net debt to EBITDA that we expect will be closer to 5.5x strictly through organic growth. And we believe the existing organic growth also allows us to grow further through smart accretive acquisitions and other opportunities that can create long-term shareholder value that we hope will close the price to NAV gap. Let's take a deeper dive into the details behind these highlights. As it relates to retail, during the trailing four quarters 78 retail leases were signed representing approximately 317,000 square feet or 10% of our total retail portfolio. Of these leases signed, 63 leases consisting of approximately 239,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 3.6% over the prior leases. As it relates to office or office portfolio end of the quarter at approximately 90.9% and the increase of approximately 250 basis points on a comparative basis year-over-year primarily due to an increase in occupancy at our City Center Bellevue and Torrey Reserve Campus in San Diego, leaving a vacancy of approximately 9.1% or 242,000 square feet of our 2.7 million square foot office portfolio. It is also important to note that we believe our in-place rents for the office portfolio even after signing the Google lease are still approximately 23% below market. Let's talk about same-store NOI for a moment. Same-store retail cash NOI increased in the fourth quarter to 3.8%. The increase primarily relates to increased rents at our Carmel Mountain Plaza, Loma Santa Fe and Alamo Quarry Market shopping centers combined with a decreased rental expenses at our Gateway marketplace shopping center which was acquired in 2017. Same-store office cash NOI increased 4.9% in the fourth quarter primarily due to rental abatements burning off on new tenants at City Center Bellevue. Same-store multifamily cash NOI increased 9.1% primarily due to improved operating results of the Pacific Ridge Apartments in San Diego. Total revenue of Pacific Ridge Apartments continues to increase again in 4Q 2018 by approximately 8% primarily due to increased base rent. In addition, rental expenses decreased 3% as our restructured multifamily management team continues to focus on operating expenses and efficient operating margins to drive solid results. The remainder of our multi-family portfolio performed well with an increase of cash NOI of approximately 3% primarily attributable to an increase in base rent and other property income at Hassalo on Eighth in Portland combined with the decrease in rental expense. 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 excluding redevelopment of 1.8% for the fourth quarter. Broken down further this represents an increase at the Embassy Suites Hotel of approximately 14% offset by a decrease at Waikiki Beach Walk retail down approximately 8%. The increased cash NOI the Embassy Suites can be attributed to an increase in ADR year-over-year of approximately 5.8%. At our Waikiki Beach Walk retail center, the decrease in same-store cash NOI was primarily due to a reduction in the percentage rent as well as an increase in repair and maintenance expenses. Nevertheless, tenant sales remain high at $1,112 per square foot for the rolling 12 months as our tenants continue to benefit from the excellent location and good economy. Turning to our fourth quarter results, FFO decreased approximately $0.06 to $0.47 per FFO share compared to the third quarter. The fourth quarter results include the following activity: first, with respect to the signing of the Google lease, which resulted in the early termination of the salesforce lease, the useful life of assets related to Salesforce lease were adjusted to reflect the remaining lease term. The acceleration of the write-off of these assets decreased FFO by approximately $0.02 per FFO share. Second, G&A expenses increased by approximately $0.02 per FFO share as a result of our achieving better than expected year end performance objectives based on the positive results achieved in operations and leasing activities for the entirety of 2018. Third, Embassy Suites seasonality and operations decreased fourth quarter FFO by approximately $0.01. And fourth, at our Waikele Center one-time demolition expenses were incurred with respect to the building formerly occupied Kmart resulting in a $0.01 decrease in FFO per share. Now, as we look at our balance sheet liquidity at the end of the fourth quarter, we had approximately $334 million in liquidity comprised of $48 million of cash and cash equivalents and $286 million of availability on our line of credit. Our leverage which we measure in terms of net debt to EBITDA was 7.2x although our continued focus is to get our net debt to EBITDA back down to 5.5x or below. We believe that our existing organic growth in EBITDA will reflect the following approximate net debt to EBITDA ratios quarter-by-quarter in 2019. Q1 '19 it will drop to 6.1x due to the termination fee related to the former Sears ground lease. Q2 '19, we expect it to go back up to approximately 7x. Q3 '19, it will drop again to 6.6x with a straight line revenue being recorded on the Google lease. Q4 '19, we expect it to be 6.0x and 5.7x by Q4 '20. Again, all of this is through existing organic growth. And as always, our guidance in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we have already discussed. We will continue our best to be as transparent as possible and share with you our analysis interpretations of our quarterly numbers. Operator, I'll now turn the call over to you for questions.

[Operator Instructions] Our first question comes from the line of Craig Schmidt with Bank of America. Your line is now open.

Good morning Craig.

Thank you. Good morning. I thought that recognizing the $4.5 million in lease term fees and then looking at your corporate guidance page in the supplemental, net income essentially stayed the same, but you picked up around $4 million in depreciation and amortization. Could you walk me how the $4.5 million raised your guidance?

Craig, it's a very good question. I've had several questions on that and the optics don't look good, when you're looking at that. Let me walk you through it. So the difference between our two mid points in FFO is [$3.671 million] [ph] and the termination fees that we recorded or will record are $4.5 million. What we've done is we've taken the $4.5 million and reduced that by approximately 800,000 and change to reflect pushing out some of the speculative leasing that we had in our original guidance to later quarters in 2019. So that net -- the $4.5 million less pushing out some of that speculative leasing gets you down to [$3.671 million] [ph]. The other question is that on the depreciation, what we know is that the depreciation is accurate. The FFO is accurate on both the original or the prior Q3 guidance and the current -- the revised guidance. What we're looking into is that we think that the original Q3 guidance should be increased to what we see today [88,191] [ph] which would reduce your -- which would increase your depreciation and decrease your net income. Again, this is all just for guidance on the guidance sheet of the supplemental Page 9 and we'll run that to ground.

That was a great question especially when you consider the complexity again. So good for you. Thank you, Craig.

Thanks for the explanation.

Our pleasure.

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is now open.

Good morning, Todd.

Hi. Good morning. First question, Bob, you mentioned, so $1.03 pick up from Carmel Mountain Plaza, is that the annualized impact or is that the impact in the second half once straight line rent commences? And then, I was curious if you can talk a little bit about how the rent stacks up versus the $30 square foot average for the center. I realize it's a big box there, but can you just describe the rent a little bit and the economics in general?

Yes. Your first question the 1.03 increase over the -- what we receiving from the ground lessee that's on an annualized basis. So you're not going to get that full impact in '19. In terms of where the rents are, I believe it's similar to what we received on some of the other big boxes. But Chris, why don't you talk to that?

So keep in mind that Sears box is 107,000 square feet. So it's an enormous box. The other boxes in the center are in the 25,000, 30,000, I think the other large box we have out there is 40,000. I don't have my sheets in front of me, but I believe the rent was in the $15 to $16 rent plus triple net, which is absolutely market for a box of that size. So that's why on a per square foot basis, it may look a little less compared to other boxes and that $30 square foot number you have there also probably includes some of the shops to bring that number up.

That's helpful.

I also think that with the TIs being minimal on this, so you could take that box and carve it up into 3 or 4 different boxes. But the landlord cost to demise that and create those new boxes plus higher TIs would probably get you a higher rate, but on a net present value basis you're probably better off with what we got. And I think that the type of tenant coming in there is really going to activate that center and well received in the marketplace.

That of course is no downtime.

Exactly.

Sure. And when did the ground lease expire and do you previously have ground lease income factored into the 2019 guidance?

Yes, we did. It expired in January -- end of the year January. And we did have that in guidance but that was like slightly less than a $0.01.

Okay. So the ground lease expired in January. How do you arrive -- how did you arrive at the $4.5 million terminal value, it sounded like it was sort of a discounted or a net present value of the remaining lease term.

Yes. There's specific guidance on how you determine what that termination fee is and really what we look at is to the discounted value of what we gave up. And what we gave up was the remaining obligation under that ground lease which their lease ended in I believe 2023. And what we got in exchange was 108,000 square foot building. And the best way to value that was looking at what we gave up.

I believe you had extensive discussions with our outside auditors to make sure that we were doing the accurate presentation.

Oh, yes.

Got it. So, the Sears lease expired at the end of '18, the ground lease went through 2023.

That is correct.

Okay. And then just sort of a bigger picture question for you, maybe Ernest can chime in. The Google lease dramatically increases your office NOI and you've talked previously about keeping office below certain threshold. I think 40% as a percent of the company's portfolio. It seems like it'll be above that 40% threshold once the Google lease kicks in. How are you thinking about rebalancing the portfolio from here? What are your current thoughts there?

Our first focus is on increasing that asset value and cash flow for the stockholders. It's not as important to us that we maintain the absolute proportions that have existed in the past. So we'll be looking at this from an entrepreneurial point of view to see how we continue to increase our net asset. We're not going to focus on a split that we had before for years. So, unfortunately the diversification has allowed us to have a significant upswing from office. And it's nothing that I say gosh, I wish we didn't have all that office.

I wish we had more.

Okay, got it. Thank you.

Thanks Todd.

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

Good morning, Rich.

Hey good morning guys. Good morning. Thanks for that clarification on the ground lease. I think it makes it pretty clear to me what you own at this point. Want to maybe -- be a little bit more high level at this point and talk about San Diego. Obviously, there's two big catalysts there. Ernest, in the past you've said you're very confident in that lease or getting those leases done, but maybe could you give us an update on what the San Diego office market looks like and are you more optimistic, less optimistic than you used to be on the timing of those lease executions.

Well, I'm optimistic on the timing of the lease executions in San Diego. But, certainly any comparison between San Francisco even Portland and Seattle and San Diego was purely coincidental. San Diego is much more competitive. But Steve Center, who heads up our office leasing in San Diego is doing an excellent job. So I continue to be optimistic, but it's not like rolling off a log. There's a lot of competition. You want to add something too Steve?

Sure. Just to get a little more specific [indiscernible] the two needle movers in San Diego, Torrey Plaza and Torrey Point. And Torrey plaza the building that we renovated, we need to lease. And I'm looking at getting to stabilization of 92%. We need to do about 38,000 feet of net absorption in this building to hit 92%. And we're in active proposals on 26,000 feet to that. So the activity is good, the reception or the renovations is very, very good. We've been proactively building spec suites and they're bearing fruit as well. So we've got good momentum and we expect that positive things to report in future and future quarters. At Torrey point, we just signed a new lease with the company called eMolecules for 73,100 feet, so that basically fill the second floor of the three story. And we've got a couple of larger deals that we're in discussions with for other components of that project. So good momentum, we think once we get the TIs built with RASM which is a recent deal for 13,500 feet and eMolecules coupled with the other 10, the other building get that activity there and an activity begets activity and we think we're going to finish strong there.

You can see why I'm optimistic on San Diego. That was a good report, Steve. Thank you.

No. It was very helpful, Steve and Ernest that's maybe a lot more concrete detail than we've received in the past, Is that fair?

Yes. I think that's fair. Don't forget. And we've been involved in a lot of renovation and so it's taken a little longer because I think the product we had -- was not consistent with what the market demanded. We have now remodeled and we have one more remodel going on and we're now providing the product that the market wants. And I think we could compete more than effectively.

Great. Thank you. That's all I have guys.

Thank you.

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

Haendel, good morning.

Good morning, sir. How are you?

Good. Good.

So, I got a couple of questions. I guess how long the lease you are signing with the new home furnishing store and does it contain rent bumps. And did I hear correctly by saying, when you said that the tenant takes occupancy in the third quarter and that the actual cash flow starts in the fourth quarter.

Chris, why don't you handle that since you…

Good morning, Haendel. This is Chris Sullivan. So I believe it's a 10-year term and you get a bump every five years, people with big box anchors. I believe our tenants must be starting the TIs this Friday. There we go. And do you know Jerry, he said it's this Friday they are pulling permits. So they'll start. There you go. This Friday. So figure about 4 and 5 month TI pitcher and then they'll open in a way they go.

Haendel, we are factoring in straight line rent coming in Q3 -- beginning Q3, and then, cash coming in Q4.

Got it. Okay. Thanks. And Bob, I guess -- maybe you the follow-up on the decision to REIT tenant, the former CEO of Sears box with another large box tenant. I guess, I understand the dollars and sense of getting someone in there today at a similar event, but wouldn't the better long-term decision from an NAV perspective had been to redevelop the box into smaller spaces at higher rents, which would not only add cash flow benefits but also cap rate benefit?

Chris Sullivan is chomping at the table; he wants to answer that question. I can't deny him the opportunity. Chris?

Well, Haendel, in theory that sounds good. But, remember it's all market-by-market. So, when you look whose in the Carmel Mountain market, you look east up across the freeway at Forest Ranch and you go up to the next intersection at 78 and down to Miramar. A lot of your boxes are already in place. So when you look at, who is your available prospects are and what's going to make a bang to the buck for the center? That bench start getting pretty thin. So when you factor in leasing risk, you factor in the amount of time it takes, the costs to [redesign] [ph] the building and everything involved and then you bring it up on a net present value. This deal made a lot of sense to take -- to do this one.

That answers your questions? Redeployment would involve capital costs, it would involve -- take enough time, it would -- we had uncertainty. This way, we have no vacancy. We have no capital coupled -- with minimum capital costs and we have certainty all of which adds up to my view, if I may describe it as a home run.

Okay. Then, I guess one more for me. Curious on the -- your current outlook for incremental lease term fees, I know they're hard to predict and that there isn't anything incremental embedded in your current FFO guide here. But curious how you feeling about engaging tenants today regarding -- early lease terminations, are you still open for business for those who are willing to pay you to get out of lease, or are you more inclined to enforce the leases. I know these aren't case-by-case, but just maybe you could walk us through some of your thinking on potential lease termination discussions.

Case-by-case, Haendel, I'd like to tell you that logic is the most important factor in our consideration, but greed also plays a role. So if we have an opportunity, we'll do our best to take advantage, consistent with playing fair with all of our base of tenants.

One other point regarding that Haendel is that, if you look at the termination fees, we had in '18 and the termination fees we have in '19, they're about equal. So the growth, I think it's like 6% and FFO growth are 6%, 7%; FFO growth in '19 is going to be the same with or without the termination fees. So it's not like a onetime here.

It's really case-by-case.

Got it. Okay. Thank you, guys.

Good questions. Thank you, Haendel.

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

Yes. Thanks. I wanted to dive into the Torrey Point and Torrey Reserve projects, again, real quick. I know that you were just talking about there were several large deals looking at the rest of Torrey point. What's the size of those tenants and it's how many more leases do you need to sign to fill up that project, are you holding it back for one larger user?

I would say it's going to be three to four. We've got 23,000 feet on the third floor of the three story. For the right credit, you would divide it in half, which we did on the second floor. RSM led the way with 13,500 feet. We divide it down for them and then eMolecules came in for most of the remainder. So for the right credit, we break it up. I see that going full floor. Then you have a 10,000 foot increment on the graph for the three story and 12,000 in the two story plus another 4800. So it could be three to four leases maybe five tops.

Okay, great. And do you think that there's enough activity to get that project stabilized by the end of the year?

Yes.

And then on the Torrey Reserve project, can you remind us how much space you actually modified there?

Well, gosh, I'd say 40,000 feet of spec or white boxing and we're still doing some work. It's not only the renovation in the tenant space. It's the renovation in the public space. And that's what's added to the appeal.

Okay. And then, what type of upward have you been seeing in those rents given those renovations? Is it fairly meaningful?

Oh, yes. We have gone backwards. Yes. So, we continue to judiciously push while making deals. We're winning more than our fair share of deals versus our competition right now. And so, we want to keep that momentum going and when we were doing like and we've mentioned spec suites earlier, having the suites built and ready to go versus someone having to contemplate a six month process to design and permit, build a space, it makes a huge difference especially for tenants call it under 7000 feet. Furthermore, they typically don't give themselves enough time to get all that done with their lease expiring. So we've taken opportunities where timing is an issue and rather than treating as a typical landlord tenant relationship, we've partnered with them so to speak and we figure out how to get them in on time. We just signed a lease with a group called Mariner Wealth Management, they just signed last week. And part of the reason we got that done is, we were able to meet their ambitious schedule because they had taken longer to get this done. So part of the success is the execution and the vertically integrated team with leasing with legal with construction in-house as well as our operations. So long winded answer there, but…

No. It's perfect.

And the renovation to the common area, people walk in and say wow!

Okay. And then my last question real quick is on the Embassy Suites refresh. When do you plan on breaking ground on that project? Is that still going to go on as those you previously described last quarter?

That's a complicated answer. And Jerry who's been responsible for it will cover it but we have three parts to it. First of all, we have to -- go ahead Jerry, you're going to share.

Sure. We have the painting and spalding project that has already commenced on the Hula Tower. We expect that project to be ongoing throughout '19. And then, we'll carry over to the Aloha Tower as well. We anticipate having both projects done in 2019 from a painting and spalding aspect. And we are also working on refreshing the hard goods within the rooms and that project should start in Q3 of 2019 and that'll take us through 2020.

It's a sequence we don't want to do it all at once because I have nothing but confusion. So first off -- the first couple of phases that Jerry outlined and then we refresh.

Great. Thank you.

Thank you.

Our next question comes from line of Jeff Donnelly with Wells Fargo. Your line is now open.

Good morning guys. It might be a two-parter here, but I guess what's your reaction to the selling assets in San Antonio and redeploying that into share repurchases because it would seem that that would sort of intensify that coastal West Coast focus that you mentioned Ernest and the company would be taking advantage of repurchasing its shares at a nice discount to your own opinion of any and taking advantage of it, what tends to be a very strong 2020 FFO growth. I'm just curious how you guys think about the outlook for San Antonio and maybe why that matches your outlook for the West Coast? And then, maybe Bob, I know there's a desire to deliver but at the same time repurchases could make sense to.

San Antonio is a top-notch property that compares favorably with anything that we've looked at that's available on the coastal West Coast. We've been looking for a decade to try and find a 1031 that would bring the whole portfolio to the coastal West Coast and we've not found anything in coastal West Coast that is as good or as promising as what we have in San Antonio. As far as repurchasing shares maybe we have a small problem, but we're kind of a mid-sized REIT on the smaller side. We'd like to be more institutional. We'd like to get in the game that would not be involved with purchasing -- our REIT purchased, our shares are getting smaller. If anything we'd like to get larger and be more of a factor in the marketplace than we presently are. So repurchasing our shares is not on the agenda, but that's a good suggestion and thank you.

We can debate that. But I guess to switch gears, how do you guys think about the potential impact of a change to Prop 13. Obviously, that's kind of getting more press out there and what's your thoughts on that? I know it's still early.

You want the honest truth, I don't know. What the legislature will do, I don't know what the reaction with the marketplace will be. I don't know. But the factors that are really important is, there is innovation in the coastal West Coast. There's job creation. There is climate and people want to live here. So this marketplace that we're in will overcome, I believe in the mid-term anything that government inflicts on us. And they will probably do their best to inflict what they can on us but good is good. And we don't have. But we are great and that's the secret to our success.

I like the word inflict. And it is just one -- especially out there. Just one last question as it gets, what's the status of your plans with the board. I just think I believe California kind of passing rules about composition of the board. And just wondering what changes you anticipate making in 2019 or '20 to the board?

We are nominating a woman to the Board who I have a long-term experience with. She was the COO of a bank that I was involved with. She's been in private equity and where she's certainly welcome and she's met everybody in the company and she's very interested in the company. Larry Finger who's been on our board for many years has agreed graciously to become a consultant instead of a Board Member. So we will be complying with all the laws that California, can I use the word inflicts on us again and continue to have the benefit of all the advice we've had from the board in the past plus this young lady [indiscernible].

Great. Thanks guys.

Thank you. I'm showing no further questions in queue at this time. I'd like to turn the call back to Ernest Rady for closing remarks.

Well, again, thank you all for your interest in the company. I think this -- our results continue to reflect the strategies that we have which I believe are the best strategies for real estate in our marketplace and we hope to continue to perform on all of our shareholders behalf. Thank you for your interest. Thank you for your time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.