American Assets Trust, Inc. (AAT) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Year End 2019 American Assets Trust, Inc. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Adam Wyll, EVP, COO. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to American Assets Trust fourth quarter and year-end 2019 earnings call. Yesterday afternoon, our earnings release and supplemental information were furnished to the Securities and Exchange Commission on Form 8-K. Both are now available on the Investors section of our website, americanassetstrust.com. A telephonic replay and on-demand webcast will also be available for this call over the next week. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results and our 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. You are cautioned 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, our Chairman and CEO, to begin the discussion of our fourth quarter and year end 2019 results. Ernest?

Thanks Adam and good morning everybody and thanks for joining us. As I look back at the past several years and reflect on our financial and operational successes and in particular, our performance has ranked us amongst the best-in-class in REITs, I take comfort knowing that maintaining our disciplined strategy was instrumental in our creating shareholder wealth. And I've asked Adam Wyll, who's been with us 15 years and has done a great job and is our recently appointed and well-qualified Chief Operating Officer, to provide the four primary elements, that have been the drivers to our disciplined strategy. I believe that Adam, together with Bob and our top-notch management team have been crucial to our execution of this strategy. I'll turn the call back over to Adam now, and I'll certainly be available for question-and-answer at the end of our prepared remarks. Adam, please.

Thanks Ernest. As Ernest was mentioning, we believe our results have been driven by four key elements. First, having an irreplaceable portfolio of primarily premier coastal west coast assets and high barrier to entry infill markets with strong demographics, innovation and in the path of growth. Second, having a sensible financial strategy and balance sheet strength with a well-laddered maturity schedule, ample liquidity and a target net debt-to-EBITDA ratio of 5.5 times or less. Third, having a best-in-class operational platform where we are vertically integrated and with expertise in all facets of real estate investment, management and development. And fourth, and perhaps the single most important element of our success is our people. We are fortunate to have a cohesive, seasoned executive team with an average industry tenure of almost 30 years and has been working together on average for almost 15 years. Each executive team member has a significant experience and capabilities across the real estate sector in various asset classes. With that, we are pleased to report for the calendar year ended December 31, 2019, we have earned approximately a 5% growth in FFO per share over the prior year, and we've impressively increased our FFO per share, dividends per share and EBITDA for our eighth consecutive year, each year since we went public in 2011. We believe there is much more success and opportunity to come. On behalf of all of us at American Assets Trust, we thank you for your confidence and allowing us to manage your company and we look forward to your continued support. I'll now turn it over to Bob Barton, our Executive Vice President and CFO, to discuss fourth quarter and year-end results, and then to Steve Center, our VP of Office Properties, to discuss the positive momentum in our office leasing. Bob?

Good morning and thank you Adam. Last night, we reported fourth quarter 2019 FFO of $0.56 per share and net income attributable to common stockholders of $0.22 per share for the fourth quarter, bringing our year-end 2019 FFO to the low end of our guidance range at $2.20 per FFO share, still a healthy 5% growth in FFO over 2018. Let's jump right into the fourth quarter highlights. We ended up short of our guidance midpoint by approximately $0.02 of FFO, primarily due to two things; first, multifamily was down approximately $0.015 of FFO for the quarter. And secondly, we had a bad debt expense of approximately $0.005 of FFO per share related to a retail tenant in our household multi-family project, which we were required to reserve to new accounting rules. Let me give you a little bit more color on the multifamily. We were on track and on budget through Q3 of 2019. Late in Q4 2019, we saw that both our San Diego and Portland multifamily were not performing up to our internal projections. For San Diego, approximately $0.005 of FFO related to lower than expected revenues, resulting from a lower average occupancy percentage and higher rent and rent incentives and approximately another $0.005 cents related to higher operating expenses. For our Hassalo on Eighth departments in Portland, Oregon, approximately $0.005 related to lower base rents and higher lease incentives to maintain a consistent occupancy. We took a close look at the fourth quarter multifamily results in depth and tightened our corporate operating model even more conservatively for 2020, and we still believe that we are comfortably within our published 2020 guidance range of $2.38 to $2.46 per FFO share, a 10% growth in FFO at the midpoint. Turning to our fourth quarter results, FFO decreased approximately $0.01 to $0.56 per FFO per share compared to the third quarter. The fourth quarter results include the following activity. First, La Jolla Commons rental payments received in the fourth quarter increased FFO per share by approximately $0.01 of FFO. Secondly, San Diego and Portland multifamily properties, combination of a decrease in base rent and increase in operating real estate tax expenses decreased FFO per share by approximately $0.015 of FFO. Thirdly, Hassalo retail tenant write-off, as previously mentioned, decreased FFO per share by approximately $0.005. Fourth, the seasonality of operations at Embassy Suites, coupled with the ongoing renovation work decreased FFO per share by approximately $0.01 in the fourth quarter. And finally, interest income earned on excess cash on hand and a reduction of the income tax expense, increased FFO per share by approximately $0.01 per FFO share. Now, as we look at our balance sheet and liquidity at the end of the fourth quarter, we had approximately $449 million in liquidity, comprised of approximately $99 million of cash and cash equivalents, and $350 million of availability on our line of credit. Our leverage, which we measure in terms of net debt to EBITDA was 5.6 times. Our focus is to maintain our net debt to EBITDA at 5.5 times or below. Lastly, as previously mentioned, we are maintaining our 2020 guidance range of $2.38 to $2.46 per share, with a midpoint of $2.42 per FFO share. We are estimating our Q1 2020 FFO per share to be $0.58 per FFO share. Our estimate appears to be $0.01 lower than the current Bloomberg consensus of $0.59 per FFO share. This is due to a more conservative view in our corporate operating model of the multifamily in Q1 2020, based on Q4 2019 multifamily operating results, but we are still well within our guidance range for 2020. In fact, as Steve will comment on shortly, we have had good leasing successes in our office portfolio in Q4 2019 and into Q1 2020. Including the Lloyd District, New Portland, Oregon and Torrey Reserve Campus and Solana Beach Corporate Center in San Diego, which further strengthens our guidance range. I will now turn the call over to Steve Center, our Vice President of Office Properties. Steve?

Good morning and thank you, Bob. We've experienced strong net absorption and rent growth, coupled with significant stabilizations through key renewals. Our office portfolio ended the quarter at approximately 95% leased, with only 10% of the office portfolio expiring through the end of 2021. On a comparative basis, we increased occupancy by 594 basis points year-over-year. City Center Bellevue is 99% leased, but we continue to expand and extend our existing customers at much higher rates. We have seen rents climb by over 45% in the last two years. Portland has also been very strong for us. Our Lloyd District office buildings are now 100% leased. We've seen rents increase nearly 20% in the last two years. And similar to the 830 building, we are currently redeveloping the 710 building at Oregon Square, a 33,000 square-foot building that will be delivered in early 2021. In addition, due to increased demand from our existing customers and other tenants that are in the market, we are evaluating additional office buildings on the two remaining blocks at Oregon Square. At First & Main, we have succeeded in renewing the IRS lease for 64,000 square feet with a rent increase of approximately 20%. We also expect to renew the Veterans Benefits Administration lease for 68,000 feet, with a rent increase of approximately 19% by the end of this month. In San Francisco, Landmark is 100% leased to Google and Autodesk. Both customers are making significant investments in their spaces. The market remains very strong, especially for larger blocks of space. At One Beach, we have intentionally let lower rent leases expire, and we are in the process of redeveloping the building, which includes the addition of a 4,000 square foot elevator-served rooftop deck with panoramic views of Alcatraz and the Golden Gate Bridge. The fully renovated approximately 102,000 square-foot building will provide an 85,000 square foot contiguous block of space to be delivered in early 2021. We expect net rent increases of approximately 50% once completed. And Bob reminds me that we are still expecting approximately 10% growth in our overall FFO in 2020, despite this building being empty during the renovation period. Finally, we've made great progress in our San Diego portfolio, which now stands at approximately 92% leased and climbing versus the overall Class A market at 89% leased. Our newest acquisition of La Jolla Commons has been a tremendous success. It was 88% leased on acquisition, 95% leased less than two weeks later with an internally sourced tenant. And as of year-end, it was 99% leased at rates over 10% above our initial underwriting. Additionally, we expect to break ground on building street in the third or fourth quarter of this year, if not sooner, as we respond to and are optimistic about large block RFPs currently in the UTC market. Direct vacancy in Class A buildings in UTC is just 2.9%, with significant new demand driven by both life science and technology users. This bodes well not only for our buildings street at La Jolla Commons, but for our Torrey Point Reserve buildings just north in Del Mar Heights. We recently signed a 33,000 square-foot lease with a publicly traded life science company at Torrey Plaza for most of the floor space that AAT occupies. So, we will be relocating the Torrey Point later this year. That move, coupled with pending tenant expansions will take Torrey Point to approximately 94% leased. At Solana Crossing, our spec suit program has been a great success. The property now stands at 95% leased and should approach 98% if two pending leases are signed. Operator, I'll now turn the call over to you for questions.

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

Thank you. Good morning,

Good morning Craig.

Yes, I wanted to see the -- hear a little more about Torrey Point. By year end 2020, what do you think the lease rate is? And what do you think the occupancy is?

We'll be at 94%, as I just said in our comments. And the deals we're doing right now are north of $5 a foot. So, we're hitting our targets.

Okay. But I mean, will they be occupying the space?

Yes.

Or has that just been leased? They will be occupying? Okay, great.

They'll be occupying, yes.

Okay. Thank you very much. And then secondly, do you have a rough estimate or indication on the development, redevelopment yields for the retail pipeline?

Craig, we've done some preliminary back-of-the-napkin numbers. But we don't -- we're not ready to publish those. I can tell you that the -- they exceed our weighted average cost of capital. And we're pleasantly -- we're -- the numbers that we've seen thus far we're impressed with. We're just waiting for Jerry Gammieri, who heads our construction and he's going throughout the buyout now. So we want to get some hard numbers before we publish any firm numbers.

Okay. Thank you.

Thanks Craig.

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

Hey good morning out there.

Good morning Haendel.

Good morning.

So. Ernest, maybe for you. I'm curious on your thoughts for the portfolio here near term. You previously mentioned growth getting larger as a key initiative. And early last year, you seem to be inclined to add more multifamily. More recently, it's been a lot more enthusiasm in office. So, I guess, I'm curious today, given the opportunities in front of you, what you're seeing, what you're most excited about? What's perhaps more likely in terms of expanding the portfolio? And then how would you fund and then -- sorry for the multipart question, but would you be inclined to acquire assets at lower yields, even incur some upfront dilution if there was a strong growth story of potentially a strong IRR?

Are you sure you've got the whole question out there, Haendel? Okay, that's a great question. Also, you should have been an attorney. First of all, as far as retail goes, retail doesn't have the same glow that it's had in prior years. We're doing extremely well in retail, and we're very happy with the retail we have, but the prices of the retail that are of the quality that we would like have not come to a range that entices us. As far as office goes -- and also as far as residential goes, residential is priced for perfection, and we have some issues, as recounted earlier by Bob, in our own portfolio. Number one, Portland is not as strong as we'd like. And we've got some repositioning to do in our San Diego portfolio, which we are working on and which is affecting our results, but we think these results will eventually be satisfactory, if not more than satisfactory. We've had very good fortune, thanks to Steve and his team in acquiring office that has been either undermanaged and/or is in the position in the path of growth. And so we continue to look at those opportunities, and we've made several bids in that regard, and we've been outbid. And then how we would finance it, I'll tell you when we get there, but I'll tell you one thing and that it will not be in the backs of our existing stockholders. It will be accretive, or we won't consider it. We love our existing stockholders, some of whom are family. And we wouldn't want to hurt their wellbeing. So, that's a great question. And thank God, I could remember all the questions. It was really comprehensive. Thank you, Haendel, for your interest.

Thanks Ernest. And one more, if I could, maybe on Portland, specifically. Obviously, the multifamily portfolio there has been a bit challenged. I think supply continues to be part of the challenge. I'm curious if you're more inclined to maybe lighten up there. And then maybe on the office development that you're considering starting the two that you mentioned, what type of pre-leasing levels would you require before you start? And what type of yields should we be thinking about? Thank you.

As far as the Portland, Hassalo, we would not consider selling it. First of all, the replacement cost is probably 25% to 35% more than our cost. Second of all, that -- those apartments have created a presence for us in that community that has resulted in our office being very successful. As our office continue to be successful, it's likely that the apartments will become more successful. So, to get off the train now would be a major mistake. As far as pre-leasing goes, on the two projects you've asked about, San Diego is not a pre-leasing market. If I was going to be a tenant in, say, La Jolla Commons, and we hadn't broken ground, and I had a lease with another building, and I signed the lease with us, and for some reason or other we didn't start construction, that would be something that would be difficult to explain. So, we've got to break ground, and then we'll hope to be pre-leasing. San Diego is not a pre-leasing market. It's common knowledge, how tight the San Francisco market is for blocks of space. We are not in a position yet to even offer adequate rendering of what we have or have coming up. What we think we have coming up is going to be elegant. And we'll work on pre-leasing, but we won't pre-lease at the expense of rental rate.

Got it. Got it. And can I clarify one thing. The comments earlier on Torrey Point, I appreciated that. Are those embedded in the current guide for 2020? Or should we be thinking of that as a potential upside to 2020 and maybe even 2021? Thank you.

No, the results that Steve was talking about and where he sees it going is better than our guidance for Torrey Point.

Just as a matter of curiosity, we're moving here to Torrey Point because our space got leased here and we're occupying less space over there. So, it's an economic move for us and an economic move for the company. It will be more efficient at net lower cost in less space. So, it's a win-win.

Okay. Thank you. I'll yield.

Thank you, Haendel. Very good questions. And if you need a reference to become an attorney, I'm willing to be your reference.

Thank you.

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

Hi Mike.

Hello Mike.

Hey. And Bob, can you talk a little bit about your -- the multifamily portfolio? I guess, what specifically drove the weakness versus your expectations in Portland and San Diego? Was it supply or was it something else?

Maybe I'll take that.

You want to take that?

This is for San Diego. In San Diego, the fourth quarter is usually a weak leasing market. And in 1 project, in particular, we are in the process of repositioning. And it's a major repositioning. It's a great location, but the building is old, and we've got to update it. Second of all, my mistake in that management was overloaded with all the maintenance required. So, we've now separated those two. And I think that going forward, at least a year from now, you'll be very pleased with the results. In the meantime, we are focused on doing the best we can and I think you'll be pleased.

Mike, let me add to that from two perspectives. One, on a same-store basis, we were down 6% quarter -- year-over-year in the fourth quarter. And that was primarily due to increase in rental expenses and increase in real estate taxes. So, the question that comes up is, well, what about Prop 13, doesn't that limit that. Well, there is a bond measure that was passed earlier this year that we got to [build] [ph] with late in the fourth quarter. And so that's why we had like a 10% increase in real estate taxes this year versus the cap under Prop 13, which is generally 2%. And then when you look at the budget versus actual, where we fell short was of approximately $0.015 in the multifamily was in San Diego, again, the operating expenses, but we also had a softening of the rent compared to our expectation in the fourth quarter. And then in Portland, we had more lease incentives, which reduced the revenue coming in and those less -- we had more lease incentives trying to maintain a consistent occupancy in Portland. So that's really the answer to your question.

These are great properties. And they can and will do better and we are focused on it and you'll be pleased, I sincerely hope.

Okay. And then the bonds that's increased taxes, is that a reoccurring thing? Should we expect that to occur in 2022?

Yes. Yes, that's -- yes, that was passed in -- I think, late in 2019 -- mid to late 2019, and we're expecting that going forward. But we -- our guidance that we issued allows for any differences like that. There is a leeway in there within that range. So, we're very comfortable with the current guidance.

Is it safe to say Bob that there's no way we're going to overestimate the results, and if anything, we're going to try and under-promise and over-deliver as we have in the last eight years, which have resulted in consistent growth? Is that a fair statement?

You must be an attorney.

Haendel and I.

Yes. No, that's true. The last thing we want to do -- our credibility is so important. And so the last thing we want to do is overpromise. And so when we miss something like that, that really bothers us. And we want to understand why and what the impact is going forward. So, we're very comfortable with the 2020 guidance where it is.

Okay. And is there a need to make changes to the same-store guide that was provided last quarter. I know the multifamily guide right now is 3.5% growth. I mean, should we expect it to be lower than that?

No, I think we're okay for now on that. I mean, our -- internally, the multifamily expectation was even higher than that. And in our guidance, we brought it down to 3.5%. So, I think we're fine where it is right now. We'll see a little bit of drop in Q1, and then we expect to see that pick up. And for the year, we should end up at 3.5% from where I'm sitting today.

We're going to work hard to over deliver. And on the other hand, in one major project in San Diego, there's a major repositioning going on, which will improve the value of the property, and it started with the sewer and the roofs and the painting and the landscaping. And that's something that we ought to do. In the short run, that may not -- the outcome may not be as pleasant, but in the long run, it's a giant winner.

Okay. And then last one for me. Can you talk at about, maybe Steve, about the One Beach renovation? I guess, what's the expected budget of that project? And is there another tenant in that building? And can you commence the construction of that until that tenant moves out?

There is a tenant on the third floor, and we're going to do the construction around them. So, we're set up to do that. In terms of the scope, I think the budget is around--

I think probably we'll not--

Yes. Okay. Fair enough.

--until we know.

About I don't -- we haven't got--

Fully bought out, yes.

It isn't bought out and we don't even have a building permit.

Yes, we do not have a building permit yet at this point. We're in the city for permitting. And we're not even out on the street yet fully tendering costs. We've got some preliminary costs, but we're not.

That was Jerry Gammieri, who is responsible for the construction. And as you know, San Francisco may take its time delivering just a building permit. But in the end, it will all be worthwhile. And fortunately, the market is strong enough to absorb all the difficulties that municipality puts in our way.

Well, we actually have numbers included in our operating CapEx of 2020. So I mean, we factored in approximately $22 million for operating CapEx for the building. And on top of that, you have some TI's leasing commissions. But that's all in the guidance that we provided in Q3 2019.

So, that is not bought out yet, so--

No, that's not.

Those are your best estimate or hopefully conservative.

That's right. That's right.

Okay, great. Thank you.

Thanks Mike.

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

Hey, good morning guys. Just want to make sure I understand your expectations for same-store NOI in 2020. I believe on the call last quarter, you did provide some guidance. Are you maintaining your multifamily views or should we think about that coming down a little bit?

No, we are currently maintaining our multifamily views as well, along with all the other sectors that we provided in our Q3 guidance. If that changes, we will let you know.

And I'd like to add too that the advantage of being diversified is there some upside in the multifamily and there's some downside. There's also upside in retail and downside and upside and office is downside. The portfolio as a whole, I believe, will perform, as Bob has projected, and we hope that to over-deliver rather than under-promise or whatever.

Got it. So, on the bad debt on the retail space, could you give us any ideas if that rent is above or below market?

Chris, if you want to--

All right. It's Chris Sullivan. That's our grocer there. So, their rent is about market. They're just going through some struggles. I think they'll get through it. It kind of comes down to an issue of body counts in the Lloyd Center, weather patterns. I mean, it's the grocery business, so it's a bit of a struggle there. I think they'll get through it. But to answer that question, their rent is at about market.

It's an important amenity for that project. And so we're, you would have to say, nursing them along. And as that area -- as that Lloyd District becomes more mature, they will have a business. They have a business, we'll have rent. In the meantime, it's important that we keep them there as an amenity for the people and for the folks in the area.

Got it. And Ernest, you've alluded to this a few different times. But look, you have a high-quality portfolio, but it's small, and there is volatility from quarter-to-quarter. But as you think about speaking to investors and the sell-side analyst community. Is it right just to sort of think about your company, particularly with the leasing velocity that you have going on, about where this is going, not quarter-to-quarter, but maybe over the next 12 to 24 months?

What was the question, again? Over the next 24 months, if we're fortunate, we'll have another La Jolla Commons in our portfolio, and we will not be small as we are today, that, hopefully, we'll be able to grow and have a more diversified and growing portfolio. And that's the strategy that we're pursuing, and we hope we're successful at it. If not, the existing portfolio will continue to produce results that have built wealth for the stockholders over the last eight years since we went public.

Got it. Thank you guys. That's it for me.

Thank you.

Thank you, Rich.

Thank you. Our next question comes from the line of Daniel Ismail with Green Street Advisors. Your line is now open.

Good morning Danny.

Hi everyone. Good morning. Across your office portfolio, can you maybe discuss the trends in concessions across your markets and expectations for leasing economics in 2020?

The economics continue to improve. San Francisco is very strong. We're bullish there. Bellevue is right behind it in terms of the rent growth. And even though we're 99% leased, we continue to find opportunities to expand and raise rents -- expand our existing customers and raise rents. Portland has been a pleasant surprise. It's performing really well, and we're out of space, and we have growing customers. So, we're bullish there. And then San Diego has really turned the quarter as well. Vacancy is coming in and we're seeing life science and tech users being forced out of Torrey Pines and UTC to the benefit of Del Mar Heights. And so our Torrey Reserve and Solana Beach properties are doing really, really well. So it's just getting better.

And then, I guess, just two big picture questions. Ernest, you mentioned not wanting to do any financing on the backs of shareholders and not to be too lawyery, if that's a word. But I was just hoping if you can clarify whether or not you meant accretive via FFO or NAV or just maybe a bit of point of clarification there?

Our focus is always on building wealth. So, what we would like to do, if possible, is acquire something that would be accretive. And that's what I mean by not on the backs of the shareholders. In other words, we're not going to get big by taking the value that our existing stockholders have and diluting it to make an acquisition just for the sake of being larger. We would like to be larger. We'd also like to be accretive. And that's what we're shooting for over the next period. Bob is chomping at the bit.

No. hey Danny, from a financial perspective, both earnings growth and NAV growth is important to us and to the shareholders. So when we -- from an acquisition standpoint, we'll look at it from an earnings growth perspective, from debt metrics, make sure we maintain a low balance sheet leverage. And then also from an NAV perspective, we look at the average of our research analyst NAV. We look at -- we also have a higher bar internally that we publish each year that we measure against. And so from an earnings perspective, we want to make sure that FFO is delivering in excess of 6% on a cap rate basis and growing. From an unlevered IRR basis, we want to make sure we're over 6% for the Class A plus properties that we're looking at. And when we look at development, from a financial perspective, the rule of thumb has historically been, obviously, get as much as you can, but you take a look at your weighted average cost of capital, which ours has been, let's say, in 2019 and now, it's somewhere between 4.8% and 5%. And you want to add at least 200 basis points to that. So, you're over about 7%. We would be hopeful to get somewhere between a range of 6.5% to 8% return on cost on that development. So, we want to -- we -- the earnings growth and the wealth creation, which is represented by the NAV growth. To the extent that, we dip in the NAV growth on the short term, we want to make sure that we recoup that NAV dilution short-term within the three-year period and then start growing and creating wealth for our shareholders.

I'm sure that convinced you, that with all the metrics we have to overcome that Bob places in our path, that whatever we acquire will be valuable to the stockholders going forward.

That's helpful. Thanks. And just one last one. I know we chatted about this before, but can you give any updated thoughts on the split roll Proposition 13 ballot initiative and any potential impacts to your California office portfolio?

Well, the answer we always say is that, I think, to a certain extent and maybe to a great extent, the leases protect us from the short-term aberration of Proposition 13. And if Proposition 13 were to pass, it may decrease values, and that would give us an opportunity to make some additional acquisitions. So, the way I put it is if chips go in the air, our job is to catch a few and store on the way down.

Danny, we've actually gone through our portfolio and looked at the increase in our retail and in our office. And again, in the first year, we don't think there's an impact because the majority, if not all, of our leases pass that on to the tenant. I think the real issue is, is long-term in terms of what your NAV. And for that reason, what we're doing is that when we look at an acquisition, because it's a 50/50 chance over the next seven years, whether or not something like that passes, we're adding on our terminal or reversionary cap rate when we underwrite, we're adding another 20 basis points to that to address that NAV or valuation issue on the front end.

And of course, what we see in the marketplace is the properties are trading very well. The prices are, frankly, somewhat astonishing. So, that leads me to wonder what our properties would be worth if they were on the market. And it's certainly, in my opinion, not reflected in the price of the stock at current levels.

Great, that's helpful. Thanks everyone.

Thank you, Danny.

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

Hi Todd.

Hi. Thanks. Good morning. First question, in terms of the guidance, it sounds like the office leasing is driving incremental growth beyond what you previously anticipated. And the office leasing in the quarter was strong. It was almost $0.02 a share of FFO. Can you help us understand where that leasing slots into the 2020 bridge that you previously had provided? And Bob, you talked a little bit about the move and the lease at Torrey Point. Can you quantify that upside in 2020 and 2021?

Yes, I can't quantify that right now. I don't have the numbers in front of me. But Steve, do you want to talk any more about that?

In terms of the performance of Torrey Point, I'd focus on the two expanding tenants and the leases that we've got aside from ours. We're doing a market deal. The leases that we're expanding are actually higher than the rent that we've got projected for ourselves. So, it's a good outcome at Tory point. We've got great customers there, growing customers, obviously, and it's a really good outcome.

It took us a while to get there. But once we got there, the waiting was worthwhile, and the construction was worthwhile, and we're glad to have what we have. And we're going to be living there as a matter of fact. So, we're looking forward to living with it.

Yes, Todd, in terms of our guidance that we issued for same-store office in Q3. I think we had 14% increase in same-store office cash NOI. So I mean, we're comfortable -- I don't have all the recent leasing successes factored into that. But we're confident of the range that we have out there.

Got it. There was $0.14 of FFO growth, though, attributable to 4 specific office assets. Again, it sounds like some of the leasing or some of the leasing that you're expecting to materialize here could push that a little bit higher. Is that fair?

That's fair. I'm hopeful.

Okay.

But please don't count on it. We've had the experience of not delivering $0.02, and we don't want to make that mistake again. So, please don't put that in your numbers. Let's have a pleasant surprise.

Yes. Don't push up the Bloomberg number.

Yes.

Got it. And then back to investments, Ernest, you're talking about trying to find another La Jolla Commons, but you had previously talked about doubling the size of the portfolio over a number of years. I'm just curious if you could step back maybe and talk about some of the acquisition opportunities that you're seeing more broadly out there?

Sure. We've looked at, at least two significant investment opportunities and the metrics that Bob laid out, we couldn't meet them. So, we got outbid. And so we have to find something that we have the good fortune to acquire that meets the metrics Bob has outlined. And there are opportunities out there, and there's lots of money out there. So, we'll just have to keep looking. Eventually, we'll find some, if not; the portfolio will continue to produce returns, which I think will be more than adequate. What we'd like to be quite a bit more than adequate.

And then in terms of some of the markets that you're in today. When you look at the geographic opportunity sets that you're sort of focused on, where do you think you're likely to see the most attractive opportunities potentially surface?

Well, we've looked at all the markets that we're in. And we've made a couple of bids in two of the markets. And so I can't tell you what's going to happen in the future other than we do see the opportunities that come up, because we are a factor in each of those marketplaces. And we'll continue to look at the opportunities, and hopefully, we're fortunate to get one that makes sense for our existing stockholders.

Okay. And just last question for me. I was just curious if you could comment on bookings at the Embassy Suites Hotel. Have you seen any impact at all from travel bans or reduced tourism and travel? Is there anything changing there at all at Waikiki Beach Walk or anything along those lines?

As it relates to any impact from China or the coronavirus, we haven't heard of that or seen that. We just talked with Simeon, who's our General Manager, and does an outstanding job at the Embassy Suites for us. So, we have 40% of our customers come from Asia. And the majority of that's really Japan. And I would say that less than 1% comes from China, and that's really like the one-off, it's not wholesale. But there has not been -- we've not had any visitors or customers from China recently. And it's interesting to note, Simeon was sharing with me earlier this week that they're only 10 airports that have -- in the U.S. that have this infrared or scanning device that can see your temperature, and one of them is in Honolulu Airport. And so what they'll do is they'll stop you and quarantine, if you go through that. But we haven't seen any impact from that. We are -- and the impact last year wasn't as severe as we thought on the Embassy Suite from the spalling and painting. We do have the refresh going on in April and May, I believe. And we hope to be all wrapped up with this spalling, painting and refresh project at the Embassy Suites by the end of June. That's our goal. So, we've -- of the two towers that are there, the front one called the Hula Tower, which is closest to the ocean, is completely done on the spalling and painting. The back tower closest to the mountains is about three-fourths of the way completed. And so I think we're on our way and close to that. We won't see what the impact is until we get to April and May, but we're very hopeful on that.

Is it safe to say, Bob, in your opinion, the worst is over? And that we're approaching the finish line and the furniture is either shipped or being shipped, and that when this is all completed, and the refurbishing is done, and the painting and the spalling is done, we're going to have the number one performing Embassy Suites in the world on a continuing basis.

I love these lawyers. Yes, that's true. I mean, it is such -- you may think about that. There's only two hotels in Waikiki that are on fee, and this is one of them. And it is in such a sweet spot. Anybody that's at the Hilton Hawaiian Village walks through Waikiki Beach Walk, which is where our retail is and the podium for the hotel, you got the Trump Tower right next door, people walk, come through that. This is main and main. A very -- it's an asset that will continue to grow and continue to enhance wealth.

Thanks Todd.

Okay, great. Thank you.

Thank you. This concludes today's question-and-answer session. I would now like to turn the call over to Ernest Rady for closing remarks.

Again, we apologize for the $0.02 differential, but it doesn't affect the overall value of our multibillion-dollar property. And I hope investors look at this not in the short run and what happened over this last quarter, but the performance that we've had over the last eight years, where we've earned our stockholders a return of 12% to 13%, and we hope to continue that trend and we hope to continue to earn the confidence of all our stockholders. And again, thank you for your interest and we look forward to chatting with you next quarter.

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