American Assets Trust, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 American Assets Trust, Inc. earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Mr. Adam Weil. Thank you. Please go ahead.

Thank you. Good morning, everyone. Welcome to American Asset Trust's third quarter 2019 earnings call. Yesterday afternoon, our earnings release and supplemental information were filed on a Form 8K with the Securities and Exchange Commission. Both are now available on the Investors section of our website, AmericanAssetsTrust.com. An audio webcast of this call will also be available for replay by phone over the next week, as well as on the Investors section of our website. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results and earnings release and supplemental information. We will also be making forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties discussed in our SEC filings. Your caution not to place undue reliance on these forward-looking statements. Actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update. And with that, I'll turn the call over to Ernest Rady to begin the discussion of our third quarter results. Ernest? Thank you.

Good morning, everyone, and thank you all for joining American Assets Trust's third quarter 2019 earnings call. We are making 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. The company's board of directors has declared a dividend on its common stock of $0.30 per share for the quarterly earnings period ending December 31, 2019, which is a $0.02 per share increase and an approximately 7% increase over the prior quarterly dividend. The dividend will be paid on December 26, 2019 to stockholders of record on December 12, 2019, and we are all delighted to share financially some of the success that we've enjoyed over the last years. I am also pleased to announce that the board is named Adam Weil as our Executive Vice President and Chief Operating Officer. Adam is and has been a valuable member of our management team, and this title better describes the breadth of responsibility he has successfully taken on and will continue to manage since our IPO, as well as the confidence our board has in him. And there is no change in reporting function, and he has been a very important part of our management team. And we appreciate what he's done and look forward to working with him in the future. We are fortunate to have such a great management team and a group of employees at AT, all of whom work together as we continue as a best-in-class real estate investment trust. I'm going to keep my introductory comments short since Bob is going to introduce our 2020 guidance, which will focus on the growth and resilience strength of our high-quality coastal West Coast high barrier to entry portfolio. Again, on behalf of all of us at American Bus, we thank you for your confidence in allowing us to manage your company, and we look forward to your continued support. I will now turn it over to Bob Barton. our Executive Vice President and CF. Okay, Bob, take it from here.

Good morning and thank you, Ernest. Last night we reported third quarter 2019 FFO of $0.50, $0.57 per share, and net income attributable to common stockholders of $0.22 per share for the third quarter. Third quarter results are primarily comprised of the following. First, actual FFO increased in the third quarter by approximately 27 percent or 11.7 percent on an FFO per share basis to 57 cents per FFO share compared to the second quarter of 2019, primarily from the following five items. First, the acquisition of La Jolla Commons on June 20th added approximately 8.5 cents of FFO per share. Second, the Embassy Suites in Waikiki Beach added approximately 1.4 cents of FFO per share due to the seasonality over the summer months. Third, the Landmark at One Market in San Francisco added approximately 3.7 cents of FFO per share, resulting from the lease commencement on July 1st of the remaining five of the seven floors now occupied by Google under their lease agreement that was entered into in Q4 2018. Fourth, an equal increase in both G&A and interest expense reduced FFO by approximately 1.5 cents per FFO share. And fifth, a decrease of approximately 6 cents of FFO per share as a result of the increase in the weighted average shares resulting from the equity raise in connection with the acquisition of La Jolla Commons in Q2 of this year. Secondly, as Ernest previously mentioned, we've increased the quarterly dividend by two cents per share beginning on December 26 to stockholders of record on December 12, and approximately a 7.1% increase over the prior quarterly dividend. And third, our 2020 guidance range midpoint of 242 is approximately a 9% increase over the revised 2019 guidance midpoint. However, excluding 2019 non-recurring termination fees of approximately 5.2 million recorded year-to-date, the majority of which was non-cash, the 2020 guidance midpoint would be approximately 13 percent increase over 2019, and we believe reflects the true FFO growth in 2020. Let's discuss these highlights in more detail. Our retail portfolio ended the quarter at 98% lease, combined with what we believe are the highest annualized base rents amongst our peers. During the trailing four quarters, 73 retail leases were signed, representing approximately 313,000 square feet, or 10% of our total retail portfolio. Of these leases signed, 61 leases consisting of approximately 181,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 3.7% over the prior leases, and on a straight-line basis increased 10.6% over the prior leases. Our office portfolio ended the quarter at 94.7% leased. Specifically, as it relates to La Jolla Commons, we have made great progress. As of the date we acquired that asset on June 20th, it was 88% leased. Ten days later, on June 30th, it was 95.9% lease. And as of September 30th, it was 96.6% lease. We believe it continues to be in the path of future growth and in a dynamic market where the vacancy is approximately 3%. Steve Center, our Vice President of Office Properties, has done a tremendous job in overseeing this asset's leasing momentum. setting what we believe are new high-water marks for office rent in the UTC sub-market. It's also important to note that we believe our in-place rents for the entire office portfolio are approximately 18% below market. During the trailing four quarters, 71 new office leases were signed, representing approximately 679,000 square feet, or 20% of our total office portfolio. Of these leases signed during the year, 47 leases consisting of approximately 494,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 45% over the prior leases, and on a straight-line basis increased 69% over the prior leases. The increase in the straight-line rent in both retail and office reflects the cash NOI growth that is locked in and we expect to see beginning in 2020. At first glance, overall same-store cash NOI was somewhat confusing to expectations. But with a deeper dive into the numbers, it is simply comprised of same-store retail cash NOI decreasing in the third quarter by 5 percent, or approximately $800,000, resulting from a decrease in retail termination fees received in 2019 over 2018 from two Aaron Brothers stores, one of which has been released in 2019. And we recorded a bad debt expense for one Forever 21 store closing we have at Del Monte Center in Q3 19. That is the only Forever 21 store we have in the portfolio. When we acquired the Forever 21 building in Q3 of 2017 for approximately $5 million, We modeled our acquisition to reflect the natural expiration of the Forever 21 lease as of July 31, 2020. Now we have the opportunity to renovate that building much sooner and make it relevant to the current marketplace. We received their October rent and have reserved their fourth quarter rent for approximately $250,000. It is already factored into our 2020 guidance as well. which we will share with you in just a moment. Same-store cash NOI increased 10.5% in the third quarter, primarily due to additional revenue from new leases signed at City Center Bellevue, and we received a termination fee of approximately $700,000 from a tenant in City Center Bellevue for approximately 37,000 square feet, terminating in the third quarter of 2019. VMware has since entered into a lease that expands into all of this tenant's former space, effective in 2020 at higher rates. Same store multifamily cash NOI for all multifamily properties on a combined basis decreased approximately 4.8%, primarily due to a decrease in cash NOI of approximately 8% in our San Diego multifamily portfolio. primarily due to a reduction in the occupancy percentage, combined with higher repair and maintenance expenses at Loma Palisades. Cash NOI increased 8% at our Haslo and 8th multifamily property in Portland. Although the occupancy percentage for Haslo and 8th remained consistent at approximately 91% compared to the same period in 2018, Rental expenses decreased approximately 6%, providing for the increase in cash NOI. Moving on to our mixed-use property, as previously announced, Waikiki Beachwalk, our mixed-use property consisting of the Embassy Suites Hotel and Waikiki Beachwalk Retail, was moved out of same-store designation beginning in Q1-19 and as the mixed-use property undergoes a significant renovation, which began at the beginning of the year, including spalling work on all outdoor balconies and exterior painting of both towers. As an update to the renovation, work on the first tower is now complete, and we are now working on the second hotel tower. The spalling work and exterior painting is estimated to be completed before the end of Q2 next year. The room refresh project is expected to begin in mid-March and be completed for both towers by the end of May 20. As the renovation work is ongoing for the third quarter of 2019, our mixed-use properties reported a combined increase in cash NOI of approximately 2%. Looking at the results separately, the Embassy Suites cash NOI remained flat despite the ongoing renovation work. 3% in rev par for the quarter, which was offset by an increase in room operating expenses and an increase in sales and marketing expenses. At Waikiki Beachwalk Retail, cash NOI increased 4%, primarily due to increases in base rent and parking income, partially offset by an increase in real estate taxes. Tenant sales remain high at $1,060 per square foot for the rolling 12 months as our tenants continue to benefit from the exit location and a good economy. Now, as we look at our balance sheet and liquidity at the end of the third quarter, we had approximately $466 million in liquidity, comprised of $116 million of cash and cash equivalents, and $350 million of availability in our line of credit. Our leverage, which we measure in terms of net debt to EBITDA, was 5.5 times. And our focus is to maintain our net debt to EBITDA at 5.5 times or below. On July 30th, we entered into a note purchase agreement for the private placement of 150 million unsecured 3.91% senior guaranteed notes with an 11-year maturity. The effective interest rate net of the settlement of a Treasury rate lock contract is 3.88% for 10 years. As we approach the end of the year, we are updating our 2019 guidance by tightening the FFO per share range to 220 to 224 per FFO share from our prior guidance range of 218 to 226 per FFO share, with the same midpoint of 222 per FFO share. Now, let's talk about 2020 guidance. We are introducing our 2020 FFO per share guidance range of 238 to 246 per FFO share, with a midpoint of 242 per FFO share, which is approximately a 9 percent increase in FFO over the revised 2019 midpoint, or an increase of approximately 13 percent, excluding non-recurring termination fees received year-to-date through September that totaled approximately 5.2 million or 7 cents of FFO per share. Let's walk through what makes up the 2020 guidance. First, same-store retail cash NOI is expected to increase approximately 4% or 3.5 cents per FFO share. This is primarily due to increases in cash NOI at Carmel Mountain Plaza as we receive full year's rent from the at-home lease and rent continues on two new leases recently signed at Solana Beach Town Center. Secondly, same-store office cash NOI is expected to increase approximately 14% or $0.14 per FFO share. The increase in same-store office cash NOI is mostly attributable to the following. First, at Torrey Reserve, we expect to receive a full year's rent from newly signed tenants that is estimated to increase cash NOI approximately four cents per share of FFO. At Torrey Point, we expect to receive a full year's rent from newly signed tenants. The increase in cash NOI is estimated to be two cents per share of FFO. At the Lloyd District, we expect to receive a full year's rent from newly signed tenants including rents to be received from our newly redeveloped Oregon Square building, as well as rent increases from contractual increases specified in existing lease agreements. The increase to cash NOI is estimated to be approximately $0.07 per share of FFO. At City Center Bellevue, we expect to receive a full year's rent from newly signed leases as well as rent increases from contractual increases. The increase to cash NOI is estimated to be approximately three cents per FFO share. At First in Maine, we are currently negotiating lease renewals with the GSA, which we are optimistic that it will occur. A decrease in cash NOI is anticipated. Based on current negotiations, which include renovations and the give-back of one floor, we are estimating a decrease to cash NOI of approximately $0.02 per share. What's interesting is that this growth in the same store office cash NOI is not coming from Landmark at one market. The reason is that Google, which is a tenant at Landmark, has partial renovations of approximately 35% of its base rent through the second quarter of 2020. The same-store office cash NOI growth in 2020 is mostly from positive momentum at City Center Bellevue, Torrey Reserve Campus, and the Lloyd District portfolio. Same-store multifamily cash NOI is expected to increase approximately 3.5% or $0.01 per share of FFO. Number four, our non-same-store guidance includes the following four properties. First, a full year of operations in 2020 at La Jolla Commons is expected to increase our cash NOI approximately 18 cents per share of FFO. Secondly, a major tenant's lease at the One Beach Street property in San Francisco is scheduled to expire at the end of 2019. Beginning in 2020, we will remove One Beach from the same store metric as we anticipate undergoing a significant redevelopment project of the interior of the building and adding a rooftop deck with elevator access and panoramic views of Alcatraz off the north waterfront in San Francisco. The current in-place rents of the expiring tenant are approximately $39 per square foot in a dynamic market that we believe is in excess of $70 per square foot and justifies the reinvestment in the building. The decrease in cash NOI is estimated to be approximately $0.04 per share of FFO in 2020. Third, Waikele Center in Hawaii was removed from same store in 2019 with the demolition of the former Kmart building. We anticipate that Waikele Center will remain as a non-same store property as we continue to work with prospective tenants. We do not anticipate commencing construction on a new building retail building space until we have a signed lease with a lead tenant. Meanwhile, the new Safeway store at Wykelly Center is scheduled to open before the end of 2019 in space formerly occupied by the sports authority. Lease revenue from Safeway is expected to increase cash NOI approximately two cents per share of FFO in 2020. Fourth, our mixed-use property consisting of the Embassy Suites and Waikiki Beachwalk retail properties were also taken out of the same store metrics in 2019 due to previously mentioned paintings falling and room refresh work intended to maintain the high-level customer experience that keeps our embassy suites the number one performing embassy suites in the world. We hope to have everything completed by the end of the second quarter in 2020. We expect the results of our mixed-use property will remain flat in 2020 with no change to cash NOI for 2020. Fifth, G&A is expected to increase to approximately $26.2 million, which will decrease FFO by approximately two cents per share of FFO. Interest expense is expected to decrease by approximately $2 million, primarily due to the capitalization of interest costs related to the anticipated development at the La Jolla Commons property. We currently are actively planning and getting ready for the development of the 224,000 construction gross square feet Class A office tower mentioned above. However, at this time, there is no definitive date with respect to the start of construction, nor is there any assurance that the project will be developed. The reduction of interest expense related to the capitalization of interest costs is expected to increase our FFO per share by approximately two and a half cents. Seven, straight-line revenue combined with above- and below-market revenue adjustments is estimated to remain flat at approximately $20 million in 2020, the majority of which relates to Landmark, La Jolla Commons, and the Lloyd District Office portfolio. Number eight, in connection with the acquisition of La Jolla Commons, we did a follow-on equity offering in June 2019. As a result, we estimate that our outstanding weighted average shares of common stock used in the calculation of FFO per share for 2020 will increase by approximately 5.3 million shares. We have estimated that the increased number of outstanding weighted average shares of common stock will result in a dilutive effect of approximately 15 cents of FFO per share for 2020. These adjustments should approximately reconcile our revised 2019 midpoint revised guidance of $2.22 with our 2020 guidance of $2.42. Retail same-store occupancy is expected to end 2020 at approximately 95.8 percent, and office same-store occupancy is expected to end 2020 at approximately 96 percent. Operational CapEx in 2020 are again expected to be in the 80 to 85 million range, which is consistent with our 2019 estimate. Our estimated operational CapEx in 2019 and 2020 are higher than our historical 30 to 40 million per year due to the increased leasing activity resulting in higher tenant improvement and leasing commission expenditures. 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've 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.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Handel St. Just with Mizuho. Your line is now open.

Hey, good morning, gentlemen.

Good morning.

So I was wondering if you could talk a bit more about the 2020 guidance. I appreciate the color here, but maybe a bit on some of the factors that you contemplate at the upper end and then the lower end of the guidance range.

Well, in terms of the range of the guidance, Handel, I think it's not likely we're going to hit the lower end of the range, first of all, but we generally put a range out. Keep in mind, we're 15 months out by the end of 2020. We're making our best guesstimate at this point in time, but from our vantage point today, at least from my perspective, is that I don't think it's likely we're going to hit the lower end of the range. I think We're seeing positive momentum, positive leasing momentum that will give us the opportunity to accomplish the upper end of the range. But, you know, who knows what the future sees in the next 15 months. But we're very positive on the markets that we're in.

Got it. Got it. Thanks. Maybe a bit more clarity on that. the Why Key Keeps Falling project. I recall at the start of the year you anticipated five cents of drag, so maybe you could parse out a little bit about what is, I guess, the current expectation for the dragon this year and then what's embedded in the guide for next year. And by the way, was that contemplated previously to be completed this year and is now, I guess, spilling over into next year, or was it always the case that you expected a mid-20 completion?

It's really spilling over until next year. In Hawaii, things take longer because you have to ship everything to the island. I would say our goal initially was to have that finished by the end of Q3. The furniture is coming from Vietnam for the room refresh. There's just a whole lot of logistics and timing trying to get that done. So we're hopeful that by the end of Q2 that we'll have this finished. So to answer your question, yeah, it's spilling over into 2020.

But if you compare this to comparable jobs, we think we're making very good progress in very good time.

Okay. And then back to, I guess, the first part of my question. The full-year estimated impact of that project this year, I guess, better than that is? how did the hotel perform during the year versus your expectations when you set that five-step drag outlook at the start of this year, and then maybe quantifying a bit the drag that's embedded within the guidance on an FFO basis for that project next year.

Yeah, you know, we put a reserve at the beginning of the year, and part of that may roll over. But, you know, what's happened is that The Embassy Suites Hotel, the suite spot is to run that at about 88%, 87% occupancy with a rev par north of 300, significantly north of 300. And what we've experienced is we've had to increase the occupancy on that and try to make up for that because the ADR has been reduced somewhat because of the spalling. Keep in mind, when we say spalling, you have scaffolding on the exterior of that building. And when you go to Hawaii, you know, you're on vacation and you don't anticipate opening the curtains and seeing scaffolding out there. You expect to see palm trees and water. So we've had to adjust the rate. It hasn't been, the impact to the NOI hasn't been as significant as we thought it was, but there was some adjustment to that.

Okay, fair enough. And then maybe some color on Loma Palisades, the weakness there. Curious if it's an asset-specific, sub-market-specific issue in what seems to be an otherwise strong multifamily market in Southern California, and then expectations for that asset into next year.

Thank you. Lomas Palisades is in need of a facelift, and we're in the process of providing that. In the meantime, the market has been a bit softer than we would have liked for apartments in San Diego. And we still think it's a great piece of property, right, overlooking SeaWorld, Mission Bay. But it was tired, and it needs some improvement, and we're providing that improvement. Abigail, do you want to add something to that? Abigail just put her thumb up. She didn't put her center finger up. But it's a great piece of property, Andell, extremely valuable. And just in order to maximize the returns from it, we've got to give it a facelift. And we've done the roofs. We're starting to work on the landscaping. We've done the plumbing, the sewers, and we're doing it one at a time. And it'll happen, and it'll be a beautiful property when it's finished. It just needs a facelift.

And just to be clear, is that within your same store multifamily projections for next year, or that's excluded?

I think Bob's was. Yeah, we've not taken that out of the same store. That's still in the same store.

Got it. Okay. Thank you.

Thank you. And our next question comes from Richard Hill with Morgan Stanley. Your line is now open.

Hey, you've got Ron on for Richard. The first question, just looking at the – Good morning. Good morning. Just looking at the investor presentation you guys had out with the potential FFO, it looked like it was 245 for 2020. So I guess I'm just wondering, thinking about, you know, the guidance for next year and appreciate a lot of the color that you provided. But it feels like it's a little bit conservative if, you know, Loyola – coming in better than expected, and you're going to have sort of a benefit from interest expense as well. Maybe you just talk about, maybe ask that another way. Is it possible that that high end of the range may even be too low?

First of all, good morning, Ron. There's always that possibility, but keep in mind, so we had that question from several investors along the way. So during... 2019, we've been on the road meeting with investors. And in our presentations through August, we had the bridge which reflected a midpoint or what we thought was realistic at that time that we were comfortable with of 242. So, through eight months of the year, we showed 242. In September, in our September presentation, we increased that midpoint to 245. And through our guidance and our budgeting process, we rolled it up. And when we take a look at the ranges and the possibilities, we always like to put a range around it. That's just prudent to do when you're 15 months out from the end of the next year. So, while we're not saying that you can't achieve 245, what was more important to have a midpoint that reflected the midway between the, you know, rock bottom and the potential way up above. And I think the 245, we put the upper range at 246. I think there is, we're very positive on the potential in this portfolio. And so it's not to say that we can't achieve the 245, but we think the right thing to do was to put the midpoint at 242, which is what we had shown throughout most of the year.

If we had our choice of a strategy, it would be under-promise and over-delivered. In this case, it's our best guess, and we certainly hope to over-deliver, but we don't want to make promises and disappoint. We'd sooner make promises and at least meet them and perhaps exceed the results of that promise.

Great. That's helpful. Maybe can you give an update on what the acquisition environment is like, maybe cap rate assets that you're looking at, what property types? you know, looks most interesting to you right now?

Thanks. Ron, there is so much money around that the value of properties that we look to acquire has been high. And we had a run at several, mostly office properties. We have come to realize that if you own good office in the path of growth, it can be very significantly profitable. but the competition for quality properties such as ours is intense. That would lead to the conclusion that what is the value of what we have if what we acquire is so expensive? So we're very pleased with what we have, and we continue to beat the bushes to try and find more of the same quality with upside as well.

Great. That's all from my end. Thanks, guys. Thanks.

Thank you, Ron.

Say hello to Richard.

Yep. Thanks, Ron.

Thank you. And our next question comes from Michael Carroll with RBC Capital Markets. Your line is now open.

Hey, guys. Jason on for Mike. Who's on? Jason on for Mike. Okay, Jason. Say hello to Michael.

Will do. So just wondering, given all the noise around WeWork, how are you guys feeling about that lease? Are they also continuing to build out the space at 830? Yes.

Yeah, we're watching it. I'm not concerned about it. WeWork seems to have a path for at least a midpoint recovery. We do have security for the lease we have. They continue to work on upgrading the building that we provide them. And so we also believe that if, God forbid, something happens to WeWork, that we have an excellent and improved property in a market that has interest in this product And, frankly, I'm not losing any sleep over it.

Steve, are you losing any sleep? No, I can add to that that it's a 55,000-foot building, and they're now marketing 14,000 feet for leaps. So they've accounted for all but that 14,000 feet in six small spaces. So it appears that they're doing very well, even prior to completing TIs.

And you asked about the other building, that we're also in the process of beginning to upgrade it. And should WeWork not be present for some reason or other, we'll manage that ourselves.

Is that the 7 ton?

Yeah. It's money well spent in a market where the demand seems to be there for the product we are producing.

Got it. And then I was also wondering if you guys could just provide now an update on the ToryPoint asset and what kind of leasing activity you're seeing there.

Steve, I'm going to leave that to you. We're making some progress, but certainly it's been slower than we wished for.

We recently signed a 15,000-foot lease with Norelis, which is a life science company. They were an existing customer in 3,900 feet, and they grew up to 15,000 feet. And we've got proposals out for another 12,000 feet. So we're chipping away at it. The market's coming in our direction. UTC and Torrey Pines are virtually full. UTC's Class A vacancy direct is 2.3% at the end of Q3. So we're seeing a lot of life science prospects, not only at Torrey Point, but also at Torrey Reserve as well. So the market's improving, and we feel good about the future.

It seems to be in the path of the growth, and we're hopeful, if not optimistic.

Got it. Okay, thank you, guys.

Thank you, Jason.

Thank you. And our next question comes from Mitch Germain with JMP Securities. Your line is now open. Hi, Mitch.

Hey, good morning. How are you? Good, good. So the UTC development, I'm curious where that stands from a planning slash entitlement perspective, number one. And then number two, what does it take for you guys to commence it? And then I guess number three, how are you planning to fund it?

Okay, I'm going to ask Jerry Gamieri, who's in charge of that entitlement, and he knows the answer because I ask him that question almost daily.

Good morning, Mitch. We are in the process right now with the city of San Diego to protect our entitlements and submit under the code. There's a code change coming in 2020. We expect to be into the city this year to basically protect ourselves for the next four years. So we have some runway in front of us allowing us an opportunity to pre-lease the building before we go to construction. But our hope is to be permit ready by the first quarter of 2020.

Let me just be clear to those people listening is that the entitlement to build is protected. It's vested. But what Jerry's talking about is that if he can get into the city of San Diego and get the permit number, then we don't have to do the upgrade from the 2016 code to the 2020.

Is it an upgrade or just a change, Jerry? It's a change in code. It's a change. It's not just an upgrade. The change in code leaves more time delays. But the entitlement is vested. And then whether we're going to build it, it is much more likely than not we would build into a market with 3% vacancy. And as the financing goes, as Bob pointed out in his presentation, we have $110 million cash on the balance sheet. And as the time approaches, we'll consider other methods of financing.

Yeah, Mitch, you know, the cost of that building, I mean, we haven't bid it out yet. But, you know, just back of the napkin, it's probably one-sixth. It's under $200 million. from my back of the napkin mouth, probably 160 to 180, somewhere in that range. But it's less than a 4% expansion of our balance sheet. So it's the right thing in the right market in a very low vacancy market in UTC, and that's on the forefront of growth. We'd like to buy another one just like it.

Yeah, that sounds wonderful. So, Bob, while I have you, talk to me about from 3Q to 4Q. So it looks like you have a term fee this quarter that comes out of the numbers, obviously. Forever 21 comes out. How do I get from 3Q to 4Q in terms of the bridge to hit your guidance range?

Bridge to hit my guidance range. So you're looking for the bridge going forward to 22?

No, I'm talking about from 3Q to 4Q. I guess there's a couple negatives in the number, right? How much was the charge that you took for Forever 21?

We took approximately $250,000. Actually, we got paid for November. I just heard about that this morning. So that may be a little bit stiff. I think it's likely.

And then you had a term fee that you received in the office sector, right?

Term fee we received about $700,000 in the office sector in Q3.

So netting those two, it's about $500,000 positive, right? That comes off?

Approximately, yeah.

Yeah. And then is there anything, you know, that kind of that we should be cognizant of in the 4Q that Was it in 3Q?

No, nothing really sticks out on that. You know, we're on track to hit our midpoint.

Great. Thank you. Thank you, Mitch. Thank you. And our next question comes from Craig Schmidt with Bank of America. Your line is now open. Morning, Craig.

Hey, guys. This is Elvis for Craig. How are you guys doing?

Okay, good. Thanks. Say hi to Craig for us.

We will. And congratulations to Adam.

Yeah, he does it. He deserves it.

Just a quick question, because there's a lot of moving pieces in and out of the same store pool. How should we think about that cash same store NOI as you report it or as you think you will report it, call it in the end of 2020 for the entire portfolio?

Well, in the remarks, Elvis, I think we said it was 4% growth in retail and What was it, 14% growth in office? And, frankly, you know, when I look at the office into the next couple of years, we're expecting, you know, an excess of 10% in the office sector on the same store. I mean, that is a strong sector for us. And then multifamily should be about 3.5%.

So, Bob, the 9% includes redevelopment or excludes redevelopment?

It excludes redevelopment.

Okay. So, including redevelopment, where would that be trending, you think, call it, through 2020?

It's not going to be – I mean, multifamily isn't impacted. Retail would be impacted slightly. You know, if you look at it, what it is today on the supplemental – excluding redevelopment and including it, it's not that big of – and we break it out in there. So I'll be glad to, you know, give you more color on that after the call, but I don't think there's that big of an impact.

All right, that would be helpful. And just another question. So as you commence or potentially commence the La Jolla project, you're going to probably trend to be more than 50% office, How do you think about your diversified portfolio going forward, and will you rebalance in the future with more multifamily or retail, or is office sort of the stock that you think you'll have longer term?

What we tell investors is you guys don't pay me to come to work to build an office REIT, a shopping center REIT, or a residential REIT. You pay me to build wealth. And if the opportunity to build wealth is in office, we're going to emphasize that. At the same time, we're going to try and build wealth in the other categories too. So we don't think of ourselves as one character only. We think of ourselves as wealth builders. Right now, the opportunity that is in office, and we're fortunate to have been in that, to be able to take advantage of that opportunity.

Yeah, Elvis, just to add to that, I think that's a great way that Ernest stated about creating wealth. Where we are right now, we're not looking to add retail. We're looking to add office and multifamily to a lesser extent.

And if you look at this strategy, since we went public over the last eight years, we've increased our dividend every year, and our compound return has been what, 13% or 14% a year. I used to apologize for being a multi-strategy REIT. I stopped apologizing because the statistics are we're as good as anybody in the industry and better than the vast majority. And we hope to be able to continue that track record.

Great. Thanks, guys.

Thank you, sir.

Thank you. And our next question comes from Todd Thomas with KeyBank Capital Markets. Your line is now open.

Morning, Todd. Hi. Hi, good morning. So I just wanted to circle back to acquisitions. You had talked previously about doubling the size of the portfolio over what's now, I guess, a four-year time frame. And you commented that it's a competitive environment, but your cost of capital has also improved. So I'm just curious if your appetite's changed. And Bob, I'm curious if there's anything in the 2020 guidance for investments or capital raising.

Our appetite hasn't changed. It's a question of the number of calories in the meal we'd have to consume. So we're going to continue to try and achieve those objectives, but we don't have to achieve them to produce superior results. And, Bob, you want to take it from there?

Yeah. Hey, Todd, in the 2020 guidance, we've not factored in any acquisitions at all. We're actively looking. You know, our job is to create value for our shareholders, and that's why we're out looking. We're not looking to get big for the sake of getting big. We're looking to do it accretively, and if we find something and bring it to your attention, it's going to be accretive. It's going to be good for every shareholder. That's well put.

Okay. When you had discussed that plan a couple quarters ago, what's changed since then? Is it just that there's been some cap rate compression and more capital coming into the markets that you're targeting? What's changed over the last couple of quarters specifically?

Well, nothing's changed except that we continue to look and we make acquisitions that are significant. To make acquisitions significant is not like going to the grocery store and filling your basket up with groceries. You've got to find something that makes sense.

Bob? Yeah, I think, you know, regardless of where we are in the economy, we still underwrite. We're very consistent on our underwriting. We look for unlevered IRRs greater than six. We focus on NAV, and we focus on earnings growth. Earnings growth is really important, and we want to make sure it's accretive. I mean, you could make an acquisition and get big, and through financial engineering, you could destroy shareholder value or destroy earnings. That's not what we do. And if you look at our history, we've been pretty good at it. The other thing, too, is that our – Our cost of capital, which I think you mentioned, we continue to enhance our cost of capital, and not everybody is at that vantage point. So I think it's our job to look for those opportunities, and we are actively looking.

Okay, and then going back to the multifamily portfolio, we saw occupancy decrease a little bit more meaningfully in the quarter across the portfolio, in Portland as well, not just in San Diego. But you are projecting, you know, pretty solid recovery in 2020. And I'm just wondering if you could, you know, shed some light on what happened in the quarter, you know, more broadly, and what gives you confidence that you'll see the same store growth materialize that you're forecasting?

Well, Portland has become more competitive than those are circumstances. We have a pain control. We have excellent product. In San Diego, we have excellent product as well. Loma Palisades needs a facelift, as I said earlier. And we're working on that. Pacific Ridge is doing well and has opportunity for upside. It's a changing situation. Do you want to add anything, Abigail?

Yeah, just to add a little bit to that. I think, you know, we've seen a softening in the county in terms of vacancy rates. And while we think about San Diego being a nice, healthy state, place to live and with healthy occupancy across the board in San Diego between three- and five-star communities, the average vacancy rate is about 5% to 6%, and that's pretty comparative to what we're seeing in the portfolio here in San Diego. So like Ernest said, we're trying to continue building value. We're investing capital in the communities in hopes that it will continue to target greater populations greater leasing and more occupancy in these communities.

Okay. Are you increasing your use of concessions? Should we expect to see, you know, rents start to come down? So far, they've, you know, held up, you know, pretty well across the multifamily portfolio. But, you know, should we expect to see you begin to build a little bit more occupancy in 2020?

We'll do what we can to maximize that.

You know, Todd, too, when I think about that, is that you think about the new product that comes online, and for a studio, what I've seen, I think in the recent paper, a studio is going for like $2,700, which is very expensive. And I think that the pricing of our product and the quality of our product is in a sweet spot. You know, people, if you want a three-bedroom studio, let's say it's $4,000 to $4,500, it's $1,500 a person, which is achievable. But when you start mixing that up, it becomes more expensive. It's tough for a sustainable rent to continue at that higher rates. So I think that our product is priced right, and I think that that growth, we will see it, continue to see it. I feel a positive about our multifamily portfolio here in San Diego. In terms of Portland, you know, we've mentioned on other calls that there is an oversupply of product in multifamily product in the Lloyd, not the Lloyd district, but in Portland. And that is slowly being absorbed. And I can't tell you when that's going away. And hopefully within the next two years that goes away. But in the meantime, we're staying steady at about 91%.

Okay, and then just last question. I was just wondering if, Ernest, I missed your prepared remarks at the very beginning of the call. And, you know, I came on right as you were finishing, though, and I heard you commenting about the appointment of Adam to COO. You know, Ernest, you've been in the chairman, CEO, and president seat for several years, and the executive management team has been, you know, comprised entirely of you and Bob for quite some time now. So I find this announcement interesting, and I'm just curious if you could talk about, you know, what this means for AAT, what Adam will focus on with his new responsibilities here, read into that announcement.

No, other than it's a recognition by the board that Adam has made a significant contribution and that his role has been more than just Chief Legal Counsel. He has really handled a lot of the operations very well and the board wanted to acknowledge that with the title. This has never been just Bob and I. It's been Bob and I and all the team in this room including Adam, who has made a great contribution, is extremely capable, and he has the good fortune of being younger than me. On the other hand, I love what I do, and I'm having fun, and if the board fired me, I don't know what I'd do to have so much fun. So we're going to continue to work together. It's a great team. We're dedicated to build the wealth for all our stockholders. Stick with us, Todd.

All right, great. Thank you.

Thank you. Thanks, Todd. Thank you.

And I'm currently seeing no further questions in the queue. I'd like to turn the call back to correction. I do see one further question in the queue. Would you like to take it?

Sure.

All right. Our next question comes from Tammy Feek with Wells Fargo Securities. Your line is now open. Hi.

Hi. I'm just wondering, the CapEx that you laid out for 2020, does that include the redevelopment spending that you're planning to do?

The redevelopment at which property? That does not include La Jolla Commons at all.

Okay, so like the Kmart space at Waikili? I guess I'm just curious to know what – I'm really just looking for a summary of the capital spending that you expect to do in total for development and redevelopment projects in 2020.

Yes. We have, I think, about $30 million in there for Kmart redevelopment. We're hopeful that Chris gets a lease signed, and we expect to put probably about $30 million towards that, and then a lot of TIs and leasing commissions on some of the new leases.

Okay, so I guess just in total, what are you expecting to spend for the developments and redevelopments in 2020?

You know, Tammy, I don't have that broken out in front of me, but I'll be glad to answer that offline.

Okay, great. And then I'm just wondering if you could talk a little bit more about the opportunity in the Forever 21 space. You mentioned renovating that space. I'm wondering if you will replace that tenant with another apparel tenant, or is there a better use? Is there expansion potential? Just wondering if you could elaborate there a little bit.

Sully, who handles that, is stirring, which means that he wants to answer the question. Chris, am I correct that you would like to answer that question?

Hi, Tammy. So you know that Forever 21 is on 20,000 feet of the ground floor and 40,000 feet of the second former Mervyn's building, Del Monte Center. So as we look to break up that box in space, it will be probably a combination of what I would say your more typical mall tenants and also a combination of some entertainment uses there. and you're in the process of exploring. Oh, yeah, we've been working on this for about a year probably now.

Okay, got it. And then do you think that the rents there will go up relative to what Forever 21 was spending? Yeah, I'm sorry, the Forever 21 rent there.

Yeah, I'm going to say I certainly hope so. Forever 21 is on a gross lease. So I've got to compute it back to get my triple nets and the rest of it, but I hope to do better.

Okay. And then just a last question. It looks like in the most recent investor presentation, the FFO estimates for 2021 and 2022 were eliminated, and I'm just curious why you decided to take that out.

What we are doing is just getting ready for our – you know, guidance report on this earnings call. So what we're doing is just focusing in on 19 and 20. And as we get into 2020, what we'll do is, you know, we hope to, you know, give you more information on that. The information that we put was not fully baked because, you know, we only put out what we knew at that point in time. What we do know is that there's growth. And so as we get a clearer picture, we will share it with you as we have consistently in the past.

Okay, great. Thank you.

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

Thanks, all of our stockholders and the representatives for allowing us to have so much fun. It's really fun for us to create the wealth we've been able to create for our stockholders over the last eight years, and we hope the next years are as fruitful. Thank you for your confidence.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.