Good day, ladies and gentlemen and welcome to the American Assets Trust, Inc. First Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Adam Wyll, Senior Vice President and General Counsel. You may begin.

Good morning. I would like to thank everyone for joining us today for American Assets Trust 2017 first 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 first 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 maybe 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 cost of construction. The earnings release and supplemental reporting package that we issued yesterday and our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations. Additionally, this call will contain non-GAAP financial information, including funds from operations, or FFO; earnings before interest, taxes, depreciation and amortization or EBITDA; and net operating income or NOI. American Assets is providing this information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the company’s supplemental operating and financial data for the first quarter of 2017 furnished to the Securities and Exchange Commission and this information is available on our 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 first quarter results. Ernest?

Thanks, Adam and good morning, everyone and thank you for joining American Assets Trust first quarter 2017 earnings call. Since we went public, our focus has been to be – to grow the net asset value of our stockholders, which we believe will result in increasing cash flow and dividends to our shareholders. We continue to believe that 2017 will be a year of repositioning, investment and growth. In light of all this, we still expect to deliver in excess of 9% growth in our FFO over 2016, which Bob will continue to outline in more detail in his comments. Our repositioning includes the Torrey Reserve building in San Diego that we have now started construction with the goal and vision to make it more relevant to the current leasing marketplace by opening it up and making it more light, bright and energetic and more spaces for tenants to collaborating amongst their employees. We expect this to take approximately 5 months and finish in the fourth quarter. At the Waikele Regional Shopping Center on the island of Oahu in Hawaii, we are still working on various scenarios that will create the best long-term sustainable outcome from the Kmart space. We are being purposely deliberative in our process as location is irreplaceable and we locked the right long-term tenants for this property, which we believe will ultimately result in an outcome that we all will be proud of and create long-term value for our shareholders. The acquisition of Pacific Ridge Apartments was just completed on April 28. Pacific Ridge is a 533-unit luxury apartment community located in San Diego, California that was completed in 2013 and currently is approximately 96% leased. The property is perched up a bluff offering unobstructed panoramic views of the Pacific Ocean with an unparalleled amenity package and designed with a large focus on environmental sustainability. The property’s central location in San Diego provides residents with convenient access to the light rail systems, extending residents’ reach to downtown, to San Diego Airport, to San Diego Zoo, sporting venues, numerous malls, retail centers, universities, culinary destinations and the freeway and public transportation. You can learn more about this asset at our new property website, www.livepacificridge.com. We believe the overall quality of this portfolio, our portfolio – your portfolio will continue to outperform regardless of where we are in the real estate cycle. With interest rates expected to increase, we are hopeful to find some dislocation in the marketplace and capitalize on those opportunities that present themselves. Again, on behalf of all of us at American Assets Trust, we thank you for your confidence and allow us to manage your property and we look forward to your continued support. I will now turn it over to Bob Barton, our Executive Vice President and CFO. Bob, please?

Good morning and thank you, Ernest. Last night, we reported first quarter 2017 FFO of $0.44 per share. Net income attributable to common stockholders was $0.16 per share for the first quarter. The company’s Board of Directors has declared a dividend on its common stock of $0.26 per share for the quarterly period ending June 30, 2017. The dividend will be paid on June 29, 2017 to stockholders of record on June 15, 2017. Our retail portfolio ended the quarter at 96.9% leased. On a year-over-year basis, our retail occupancy was down approximately 170 basis points from the first quarter of 2016, leaving approximately 95,000 square feet vacant in our 3 million plus square feet retail portfolio. The decrease in retail vacancy is primarily attributed to The Sports Authority bankruptcy in 2016 at our Waikele property, which consisted of approximately 50,000 square feet. During the trailing four quarters, 72 retail leases were signed representing approximately 230,000 square feet or 8% of our total retail portfolio. Of these lease assigned, 62 leases consisting of approximately 211,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis ramp increased 7.3% over the prior leases. In our supplemental document on Page 30, we list the total lease expirations by sector and by year. On average, we have approximately 250,000 square feet of space expiring each year in our retail portfolio and approximately 250,000 square feet of space expiring each year in our office portfolio. The top of that page assumes no options or exercise and the bottom of that page assumes all lease options are exercised. If you look at the top of that page, assuming no options or exercise, you will see that we have approximately 1.2 million square feet expiring in 2018. The majority of that…

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

Thank you.

Good morning Craig.

Good morning. I was wondering if you could explain a little more about the bad debt charge due to the Tell Me Club, which I understand is a – well as a travel agency, I mean I can understand why you could lose revenue, I am just not sure to how it became bad debt?

Yes. Craig. It’s a good question. It’s that the way the Japanese wholesaler works, when we have – and it’s very typical with the Japanese wholesalers, is that they will package tours or rooms together for their constituency in Japan. And they are – and those people that buy those packages will then come to our facility as a guest and we get paid generally 15 days to 20 days after they depart. And so we have never ever experienced a loss from these Japanese wholesalers. It’s just unheard of. So we were all caught off guard. And again, we have never had a bad debt expense on that Embassy Suites Hotel since we opened in December – since December 1, 2006.

And apparently, our folks there are confident that they can make that for them. But that was an unpleasant surprise, Craig.

Okay, great. Thanks a lot.

Thank you.

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

Good morning Todd.

Hi guys, good morning. It’s Drew Smith on for Todd today. Just wanted to get a little more clarity on guidance and the Pacific Ridge acquisition, could you just run through the accretion from the acquisition one more time and how that affected guidance?

Yes. On the Pacific Ridge, we think that it will be – for the remaining eight months of 2017, we believe that will be accretive by $0.04. And so yes – and that’s net of the interest costs. So we think that for the next eight months, it will be accretive $0.04, but then we are reducing that $0.01 for that bankruptcy charge with the Tell Me Club. And that gets us to $0.03 increase in our midpoint.

Drew, when we take over an apartment project like this, we have really to see what the opportunities are. And as I think Bob said in his presentation, we just took over within the last week. So we are hopeful that we will be able to do better than we expected. But we won’t know until we managed it for at least 1 year. But I don’t think it will be bad. I really just don’t how good.

Understood. Thank you. One last one, any thoughts on dispositions, the acquisition was structured to accommodate 10.31, is there anything on your mind there and any further acquisition thoughts as well on that front, so acquisitions or dispositions? Thanks guys.

Well, we have gone over our portfolio thoroughly. And frankly, we love everything we have. So we are thinking about it, but we can’t find anything that jumps out and say we ought to trade this for that. As far as acquisition goes, we have placed somebody on the management team to be aware – to make us aware of acquisition opportunities. So there are other things on our radar. We do have our eyes open to keep a close eye on the marketplace.

Okay. Thanks guys. I appreciate it.

Thank you, Drew.

Thank you. Our next question comes from Paul Morgan with Canaccord. Your line is now open.

Hi Paul.

Hi, good morning. Just in terms of the guidance, as you think about the ramp over the year I mean if you see $0.44 and you are 2 or 3 at the midpoint for the full year, that’s basically an average of like $0.53 for the rest of the year, it was a pretty big kind of sequential increase, is there – I mean I know there is a lot of moving pieces and you have kind of this charge in the quarter, but I mean is there any – how do you expect kind of the ramp in FFO to look over the course of the year or I mean, are we going to see a big step up in the second quarter or kind of really accelerating into the back end of the year?

We are going to see – I mean in the second quarter, you are going to see some ramp because you are going to have the accretion for a partial quarter on Pacific Ridge. So we acquired that on April 28, so you will see May and June in terms of those results. Secondly, you won’t have that $0.01 charge on the Tell Me Club bankruptcy at the hotel. Third, you won’t have that $0.015 non-cash charge that we took when we paid off the CMBS early in the first quarter. So, I mean, those right there are going to step it up and then we will take a look at the operations.

Okay. So I will follow-up offline kind of maybe a little bit more on the quarterly ramp. In terms of the Pacific Ridge, I mean, I know it’s kind of early obviously to disclose. But I mean, have you given – have you had any time to kind of think more about sort of the mix of kind of students and professionals there? And whether there is kind of any optimization that could be done and kind of what you think kind of growth might look like from the asset in the first couple of years?

We are thinking about it, Paul and it’s really an interesting intellectual exercise. But I would – we have not reached any conclusion. It’s too early to reach a conclusion. We are going to have to adjust at a field more closely than we are able to view from the distance. We have looked at it in the past as a potential buyer. So, it’s too early to say, but it’s a very nice piece of property in a good location.

Okay. And then just last, any update on kind of what traffic has been like at the San Diego project and whether you are kind of seeing any momentum as San Diego gets close to completion there?

It’s a San Diego project, Torrey Point? Yes, lots of traffic, no leases signed. But it’s becoming a focal point in San Diego. People are asking me, what about that building just off the freeway with those fantastic views. So Jim, do you want to talk about any activities that you’ve experienced?

Sure.

Jim Durfey handles the office leasing.

I made discussions with a couple of large tenants to occupy space up there. And I am not at liberty going to it, but we are very optimistic that we would start filling that space up here very shortly.

It’s a great site and it’s a well-designed building and we are more than hopeful.

Okay, great. Thanks.

Thank you, Paul.

Thank you. Our next line comes from the line of Rich Hill of Morgan Stanley. Your line is now open.

Hey, good morning guys. As always, thanks for the transparency. Just I had a couple of clarifications. So you obviously increased your FFO guide at the low-end of the range by around $0.04. I think I heard – or excuse me, you increased it slightly. I think I heard from you that the new apartment project in San Diego was worth around $0.04 and then you have the negative one-off. So, does that mean sort of on a same prop portfolio basis, your guide maybe would have been down a little bit without that acquisition or how should we think about that?

In terms of the multifamily, because we got...

Yes, I am talking about sort of portfolio overall. Because if I am thinking about the $0.04 benefit that you got from the multifamily property and then the $0.01 hit you got from the bad debt that feels like a $0.03 increase and you didn’t increase guidance by that much. So I am just wondering how to think about that?

Yes. I am not sure how to answer your question on that. I don’t think we would have been down. I know that – I mean, big picture, Rich, is that this is a transition year. And this is the first quarter that we have been down sequentially quarter-over-quarter in revenue, but without Pacific Ridge – because Pacific Ridge didn’t have any impact at all in Q1. And the ramp up for the rest of the year, we expect it to be $0.04 there and $0.01 reduction from that for the bankruptcy charge at the hotel, so you got a net $0.03 accretive. We – and without that acquisition, we still would have been within our range.

Got it, okay.

It’s we are doing a lot to improve the portfolio this year. The results will not be available this year. But in subsequent years, we will have an improved portfolio based on the improvements that we are installing this year. So as Bob phrases it, it’s a transitional year.

And Rich, following up on Ernest’s comments is that this transition year is – we are building for the future. And if you just take a look at our portfolio, you look at the Pacific Ridge cash flow that will be added, you look at ICW Plaza down here or Torrey Plaza down here in San Diego, when we repositioned this building, you are going to add on 70,000 square feet at we believe a higher rental rate. You add in Torrey Point that’s not online. And then to that, we have the repositioning of Kmart in Waikele that will come online we hope in 2018. And so you look throughout our portfolio...

And Bob, the 21 units at Loma Palisades and then we are now starting to examine the opportunity for more – some more of the older units at Loma Palisades and be positioned. So, it just all speaks to repositioning this year and an improvement for the long run.

Got it. That’s helpful. And Ernest, I have asked you this question before and I know you love all your children. But between office, multifamily and retail, what do you love more right now? And if you had to put a dollar to work, are we supposed to assume it’s going to go more into apartments like Pacific Ridge or do you think retail is starting to become more interesting?

You know Rich, you are a young man. I can tell you that we love all our children. But we love our grandchildren more. Actually, in terms of opportunity in the marketplace today, I like the opportunity for apartments as well as anything. We would buy more retail if we could find it, but it have to be of the quality that we have now. Office is a more commanding or difficult type of product, because there is – it’s lumpy. So, the Board has restricted us in terms of office to approximately what we have today. So, our focus is mostly on apartments.

Got it. And just one more follow-up question if I may on apartments. The same-store revenue in Portland look to be pretty impressive compared to maybe what some of your apartment peers have been reporting where they have been showing some deceleration in Portland. Anything specific about that property that you are seeing different, that maybe is out – that is maybe setting it apart from the rest of the Portland market?

Well, first of all, it’s located on the transportation that goes all over Portland. So, it’s also becoming a community. Now, some of the retail is leasing up and is becoming more of a community. Third of all, it’s the best product we think that we could have provided. We studied very closely what we could do with that site and I think we did the right thing and it’s now proving out to be that we didn’t do everything perfectly, but we did a lot of things very well. So, we are optimistic on that project in the long run and it’s gaining its own reputation as being a well-run place for folks to live in Portland. So, it will – I think it will get better and I just don’t know how fast or how long it will take, but certainly, we are gaining a position of strength in the marketplace.

Great. Thanks, guys. Look forward to future updates.

Thank you.

Thank you.

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

Good morning, Jeff.

Good morning, guys. It sounded like office might – you might love all your children, but I might be your stepchild. Just a few questions, you touched on some of these, but just on Pacific Ridge...

If we have stepchildren, we are going to put them up for adoption. We love our office too, because it’s the best of the best, but it’s certainly a more difficult approximation to guess long-term and steady increase in earnings from. It’s lumpy.

Well, I might have misunderstood your response earlier. But I thought you guys have said that Pacific Ridge was acquired with the 10/31 proceeds. Is that in a reverse 10/31 meaning that there is a pending sale or is – am I just – did I mishear that?

Bob would like to handle that, please.

Yes. Hey, Jeff. It’s standard for us that whenever we do an acquisition, we always tee up a reverse deferred tax exchange, because what it does is it forces us to go and take a look at each of our assets within our portfolio. I mean, we are not – we don’t have to hold on to all our assets. When we look at each asset from the standpoint of future earnings, same-store growth and whether it continues to be accretive. And when we – after we do that evaluation, if there is any low hanging fruit that doesn’t make sense, we will then exchange that from that perspective. But after our analysis, all the assets that we have are performing well and the future growth looks very strong.

It gives us the opportunity Jeff, if there are somebody who walked in here with an offer that exceeded the economic value we attribute to that property, we can take advantage of that offer without having to incur taxes on the sale. So we have always done that. Just position it and look around and if there is an opportunity, we take advantage and if not, it’s just a couple of senses in the…

Understood. And then just actually on the Pacific Ridge, I am just curious what slides you from the low to the high end of that un-levered IRR target you have mentioned, I think it’s like 6.5 to a high-7, is that implementation of your plan, is that more macro factors like – what’s going on in the San Diego market, I am just curious what moves you around?

When we take a look at this, we got a base case and we got a moderate case. And so we – our base case we think is some as realistic as possible, possibly slightly conservative. But we also have a moderate case that we think that will present opportunities if it plays out according to those assumptions. And I – it just depends on the various assumptions that we are using, so that’s what’s the difference. And it’s NOI. It’s not the terminal cap rate that’s making the difference, it’s the NOI, which is differential.

Okay, that’s helpful. And actually a question on the – I guess related to the hotel bad debt. Thanks for the color on that line item. I think you said the same-store NOI for the hotel was down about 18% and the entire project was down 13%, but can you tell us what the – just do the math for us and tell us what the same-store NOI was for the remainder of the project, the non-hotel component…?

What the same-store was or what?

Yes. What the same-store NOI was, I don’t know the contribution of the – off the top of my head, I wasn’t sure if you might have that handy...?

I don’t have that in front of me, but I believe in my comments, I gave you what the same-store was – on a percentage basis was separately.

Okay, I didn’t catch that. I can follow-up with you on that and afterwards. And then just one last question, actually I know this isn’t in your ownership and you might have touched on this in the last question, but the Lloyd Center, the big mall redevelopment, it’s going next to Hassalo, that’s largely through its renovation, I think just some minor works remains, I was just curious have you guys have seen increased foot traffic in the area, any signs of that redevelopment has kind of re-energized that area or any kind of view that you have had just having such a big project right next door?

It certainly has been a negative. I couldn’t quantify how positive it’s been. Jim, do you have any feel for that?

Well, I think maybe so I can address that on a retail side better than I mean it doesn’t impact the office component. Our office component is 97.5% leased and it hasn’t done anything.

It certainly adds to the ambience of the area that makes it a community. They have all of those amenities available to the retails that we have in our portfolio, the retail that’s involved in the joining portfolio, a park, the public transportation. It just – if you check the boxes for what makes for a good project, you would check all the boxes for that project.

Okay, great. Thank you, guys.

Thank you. Thanks for your interest.

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

Good morning.

Good morning.

So I had a question on retail, can you talk a bit more about the demand for space, your pricing power in current environment with – I guess some specific color on demand for higher end retail space in Hawaii, given the decline in new leased rents there?

Haendel, this is Chris. I will take that one. So your question was how does the demand feel right now for space in Hawaii?

Yes. You have pricing power, right, we have seen a decline in the new lease rates there, so just curious if the demand, pricing power and particularly at the higher end at some of your assets there?

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In the short run, absorption is taking place. But in the long run, it really cements the destiny of – cements Honolulu and our properties as a destination for tourists. So short run, probably as it says, Chris has explained, long run, it really cements the projects as a great destination for tourists.

Okay. Can you add any color as to what drove the decline then in the year-over-year lease rates there?

Haendel, are you talking about the lease rates on a couple of small shop spaces in Beach Walk, which ones….?

Yes. He is referring to the roll-down on the Waikiki Beach Walk retail. There were shops on that.

So there is…

We had two – on the new leases, we had two leases that went up significantly and one that went down.

I have to actually pull the particulars. I mean some of those rates on Beach Walk are quite high on a per square to foot basis. I have been running it for 10 years and new tenants starting up, that’s got a ramp into it, wherever that used to be. I would have to go look specifically that one to answer.

Yes.

Okay. And we can follow-up on that? Can we shift to office for a second, it looks like TIs in the quarter were up quite a little bit to over 36,000 square foot, it looks like tighter renewal activity I suspect in Bellevue and so can you comment there what’s going on there about the dramatic increase in the TIs and then also in Bellevue, how are you feeling about that market overall. And Ernest for you, perhaps is that an asset that you might be changing your mind on given the ramping supply and slowing growth in that Bellevue office market?

Well, Jim is going to – has a better picture of Bellevue than I. But frankly, I love that property. I mean it is a wonderful piece of property in a great location that’s going, at the moment through some re-absorption and I wouldn’t want to trade that Seattle was hot. We are in the best location in Seattle with a great property that we have spent a lot of money, repositioning to compete with new product coming on. And with that, I will hand it over to Jim to tell you what’s happening in marketplace.

Good morning Haendel, this is Jim. When we started speaking last summer about going forward at the City Center Bellevue product…

Can you hear Jim, because he is standing, can you hear him, Haendel?

Loud and clear.

Okay, good.

When we started looking at just last summer, we had 15 full floor equivalents rolling from then until the end of 2018. Well, we have now knocked 7.5 of those 15 floors off the market. There is another half floor out for sale there as we speak and the expectation of another floor and a half is going to get done before the smoke clears. So long-term picture of the 15 floors, we think 5.5 floors are going to come back. Now that being said, the other thing you remember is three new buildings came out of grab and Bellevue totaling 1.5 million square feet. And Expedia now, as they were going to move out 300,000 square feet, Microsoft threatening to move out a bunch of space, so when we looked at the same, 2 years ago in particular, I think that the common thought was that Bellevue might have some problems long-term. That has all turned around 180 degrees. Those three new buildings totaling 100 and – or 1.5 million square feet only have five full floors of vacancy left. So you are looking at probably 100,000 feet out of the 1.5 million. That’s how well they have done. Expedia extended out to 2020, so that went off the market, so as we look at that market and we started to see rents start to increase again. Back in the peak of the market, I was getting $46, $47 and that dropped all the way down to close to $40 at the point, 2 years ago when things were starting to look bad. And then we are back to $42, $43 and we are very optimistic that we are going to back to those 5.5 floors. And your question as to why we spent $36 in TIs, some of that 7.5 floors was renewals, some of it was new leases to the existing subtenants. But I can tell you that any of that space that would have vacated completely, our TIs would have been closer to $60 a foot and we had those people leave and backfill with new talents. So I am quite happy with the fact that the TIs were what they were to retain good tenants and to bring in subtenants in the direct leases that we think are long-term very accretive to us. And by the way, all those rents on those new deals, I mean, we have talked about TI has been $36, but the rents all went up somewhere between $5 and $8 a foot on those new deals.

So, the floors that you are getting back, Jim, but if I may ask a question on behalf of Haendel and you have talked about the rents that will be available in the marketplace on those as we re-lease them, what are the existing rents on those floors?

It’s 36 to 38 range and we expect to get in the 42 range.

Yes, so there is upside.

Got it. Appreciate that. And then one more if I may. Just want to clarify and go back to the Tell Me Club. Is there any concern that there is other – risk from other wholesalers, travel agencies? And could this be any indicator of weakening tourism, demand or trends from Japan? Anything more read into that?

Yes, Haendel, and that’s a good question. No, it’s – the bankruptcy does not reflect a reduced demand for the Embassy product and especially our product on Waikiki. So, the demand has not gone away. It’s – and we are also taking a look at our other Japanese wholesalers and revisiting our structure with them. We know other hotels felt the pain too out there, not just the Embassy, but other large hotels. So anyway, just to answer your question. The demand has not changed for the Embassy and we are just looking at how we can restructure our agreements with the Japanese wholesalers or other wholesalers as well.

As you know, Outrigger runs that property on Waikiki for us and they own or manage thousands of hotel rooms. And I can assure you that they are being very, very cautious of going forward. And I know they will do that on our behalf as well as their own behalf.

Thank you, gentlemen. Appreciate it.

Thank you, sir. Thank you, Haendel.

Thank you. And I am showing no further questions at this time. I would like to hand the call back over to Ernest Rady for any closing remarks.

Okay. Gentlemen, I want to assure you that you have the best property on the Coastal West Coast and you have the most dedicated and capable management team and we are proud to serve you. So, thank you for your interest.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a great day.