American Assets Trust (AAT) Q4 2018 Earnings Conference Call Transcript

American Assets Trust (AAT 2.12%)
Q4 2018 Earnings Conference Call
Feb. 13, 2019 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the American Assets Trust fourth-quarter and full-year 2018 earnings call. At this time, [Operator instructions] As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Mr. Adam Wyll, senior vice president and general counsel.

Sir, please go ahead.

Adam Wyll -- Senior Vice President and General Counsel

Good morning. I'd like to thank everyone for joining us today for American Assets Trust 2018 fourth-quarter and year-end earnings conference call. Joining me on the call are Ernest Rady and Bob Barton. [Inaudible] and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

Our 2018 fourth-quarter and year-end supplemental disclosure package provides a significant amount of valuable information with respect to the company's operating and financial performance. The document is currently available on our website. Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results.

Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, our future operations and our actual performance may differ materially from the information contained in our forward-looking statements, and we can give no assurance that these expectations will be attained. Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions, and the risks and 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 condition and results of operations. Additionally, this call will contain non-GAAP financial information, including funds from operations or FFO; earnings before interest, taxes, depreciation, and amortization or EBITDA; and net operating income or NOI.

American Assets is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data for the fourth-quarter and year-end 2018 furnished to the Securities and Exchange Commission, and this information is available on our website at www.americanassetstrust.com. I'll now turn the call over to our Chairman, President, and CEO Ernest Rady to begin our discussion of fourth-quarter and year-end results. Ernest?

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Thanks, Adam, and that was really eloquent. Good morning, everyone. Thank you for joining American Assets Trust fourth-quarter and year-end 2018 earnings call. We continue to make great progress on all fronts as we continue to focus our efforts on earnings growth combined with growth in net asset value for our shareholders.

At American Assets Trust, our strategy is focused on these seven things: one, coastal West Coast markets from San Diego to Seattle and Hawaii, which have dynamic high-barrier-to-entry attributes, where the demographics [Inaudible] demand and local economies are strong and that, we believe, outperform other markets over time; two, diversification by asset class, we believe that the old system of a combination of office, retail, and multi-family properties as opposed to focusing as a single-asset class provides for superior positioning opportunities; three, consistent growth both organically and opportunistically, we believe that our NAV annualized growth over the last eight years has been approximately 12%, our annualized total shareholder return over the last years has also been approximately 12%, speaking to the quality of our portfolio; we -- four, we maintain a conservative balance sheet and debt profile; five, environmental sustainability and social responsibility, we use proven conservative methods to reduce carbon emissions, minimize our environmental impact, and preserve natural resources for future generations. Additionally, we firmly believe that our success is directly related to the success and health of our communities in which our properties are located; six, technology, we expect to bring in cutting-edge technology into our properties and our business operations attack -- attract higher credit tenants and creates material operational cost savings; seven, dedication to transparency, excellence, and success and all that we do. During the fourth quarter, we signed a significant lease with Google at our one market in San Francisco, which will contribute significantly to our earnings in 2019 and beyond. The office market in both San Francisco and Bellevue, Washington remain quite strong, and we continued our renovation of the former Kmart building at our Waikele Center in Hawaii and remain optimistic on the leasing front as we have commenced lease negotiations and begun negotiating LOIs, letters of intent, with various perspective national retailers.

The Safeway store at Waikele Center remains on track to open in the fourth-quarter '19. Our renovation of one of the existing smaller office buildings at Oregon Square in Portland is almost incomplete and we are optimistic on the leasing front as we have negotiations with LOIs with respective full-bid building users. We continue to reinvest and improve our existing assets and remain optimistic about the future of this portfolio and our ability to improve the price, NAV, GAAP. On behalf of all of us in American Trust, we thank you for your confidence.

We work hard to earn it and allow us to manage your company, and we'll look forward to your continued support. I'll now turn it over to Bob Barton, our executive vice president and CFO. Thanks. Bob, you go ahead.

Bob Barton -- Executive Vice President and Chief Financial Officer

Good morning and thank you, Ernest. Last night, we reported fourth-quarter 2018 FFO of $0.47 per share and net income attributable to common stockholders of $0.14 per share for the fourth quarter. Fourth-quarter results are primarily comprised of four highlights, which are as follows: first, FFO missed consensus by approximately $0.01 in Q4, primarily from the one-time expensing of the demolition costs related to the redevelopment of the former Kmart building at our Waikele Center. Secondly, as Ernest mentioned, at our landmark at One Market Street in San Francisco, we signed a 10-year lease with Google at prevailing market rates and terms were approximately 253,000 square feet, replacing Salesforce.com.

Google began paying rent on two floors on January 1, 2019 and will begin paying rent on three additional floors on July 1, 2019 and on the remaining two floors for a total of seven floors, on June 1, 2020 with straightline rent beginning in Q3 '19. As noted in our earnings release and supplemental, the cash basis and straightline percentage change in our comparable new and renewal office leases signed in Q4 were approximately 64% and 96%, respectively, with a large part of that driven by the Google lease. Third, the former Sears Store at Carmel Mountain Plaza shopping center in San Diego closed its stores in late November 2018 after filing for bankruptcy. This reflects the drop at our leased occupancy from 98.8% in Q3 to 77.4% at the end of Q4.

As you may recall, we owned the underlying land, which we ground-leased to a third-party ground lessee. In late December 2018, we reached a lease termination agreement with the ground lessee for it to surrender the former Sears building, which it owned in exchange for the release of its remaining obligations under the ground lease. This transaction closed in January 2019 with the recording of the grant deed, which legally transferred title of the building back to American Assets Trust resulting in a $4.5 million termination fee to be recorded in Q1 '19. That termination fee was calculated based on the discounted cash flow analysis of the then remaining ground lease rent schedule.

But wait the story doesn't end there. Less than three weeks later, we signed a 10-year lease for the entire former Sears building approximately 108,000 square feet with a national retailer in the home decor space, which we understand is making its debut entry into California. This brings our retail leasing occupancy back up approximately 98% in Q1 '19. We anticipate this retailer will be well-received in this high demographic area and will make a significant impact in Carmel Mountain Plaza by activating the eastern end of the shopping center, which has long been in need of a renovation as it was previously under control by a third-party.

Rent is expected to begin in Q4 '19 with straightline rent commencing in Q3 '19. We expect this new tenant to increase FFO on an annual basis by approximately $1.03 over what we were receiving from the former ground lessee. Tenant improvements are minimal. Number four, we increased our 2019 FFO guidance by $0.06 at the midpoint primarily as a result of the $4.5 million termination fee previously discussed to $2.22 per FFO share.

We also believe now more that anytime in the last three years, there is a clear path to organic growth over the next several years with our high-quality coastal West Coast focus. From our vantage point, we expect to see in excess of 6% organic growth in FFO in 2019 and in excess of 8% organic growth -- organic FFO growth in 2020. We expect similar organic growth in our EBITDA as Google comes online for a full year, beginning 1/1/20, which we believe will produce well in excess of 12% growth in EBITDA in 2020 compared with the year-end 2018, resulting in a net debt to EBITDA that we expect will be closer to 5.5 times strictly through organic growth. And we believe existing organic growth also allows us to grow further through smart accretive acquisitions and other opportunities that create -- that can create long-term shareholder value that we hope will close the price to NAV GAAP.

Let's take a deeper dive into the details behind these highlights. As it relates to retail, during the trailing four quarters, 78 retail leases were signed representing approximately 317,000 square feet or 10% of our total retail portfolio. Of these leases signed, 63 leases consisting of approximately 239,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 3.6% over the prior leases.

As it relates to office or office portfolio, ended the quarter at approximately 90.9%, an increase of approximately 250 basis points on a comparative basis year over year, primarily due to an increase in occupancy at our City Center Bellevue and Torrey Reserve Campus in San Diego, leaving a vacancy of approximately 9.1% or 242,000 square feet of our 2.7 million square foot office portfolio. It is also important to note that we believe our in-place rents for the office portfolio, even after signing the Google lease, are still approximately 23% below market. Let's talk about same-store NOI for a moment. Same-store retail cash NOI increased in the fourth quarter to 3.8%.

The increase primarily relates to increased rents at our Carmel Mountain Plaza, Loma Santa Fe, and Alamo Quarry Market shopping centers combined with a decreased rental expenses at our Gateway marketplace shopping center, which was acquired in 2017. Same-store office cash NOI increased 4.9% in the fourth quarter, primarily due to rental abatements burning off on new tenants at City Center Bellevue. Same-store multifamily cash NOI increased 9.1%, primarily due to improved operating results at -- of the Pacific Ridge Apartments in San Diego. Total revenue of Pacific Ridge Apartments continues to increase again in 4Q 2018 by approximately 8%, primarily due to increased base rent.

In addition, rental expenses decreased 3% as our restructured multifamily management team continues to focus on operating expenses and efficient operating margins to drive solid results. The remainder of our multi-family portfolio performed well with an increase of cash NOI of approximately 3%, primarily attributable to an increase in base rent and other property income at [Inaudible] on Eighth in Portland combined with the decrease in rental expense. Waikiki Beach Walk, our mixed-use property consisting of the Embassy suites hotel and Waikiki Beach Walk retail reported a combined increase in same-store cash NOI excluding redevelopment of 1.8% for the fourth quarter. Broken down further, this represents an increase at the Embassy suites hotel of approximately 14%, offset by a decrease at Waikiki Beach Walk retail down approximately 8%.

The increased cash NOI at Embassy suites can be attributed to an increase in ADR year over year of approximately 5.8%. At our Waikiki Beach Walk retail center, the decrease in same-store cash NOI was primarily due to a reduction in the percentage rent as well as an increase in repair and maintenance expenses. Nevertheless, tenant sales remain high at $1,112 per square foot for the rolling 12 months as our tenants continue to benefit from the excellent location and good economy. Turning to our fourth quarter results, FFO decreased approximately $0.06 to $0.47 per FFO share compared to the third quarter.

The fourth-quarter results include the following activity: first, with respect to the signing of the Google lease, which resulted in the early termination of the salesforce lease, the useful life of assets related to salesforce lease were adjusted to reflect the remaining lease term. The acceleration of the write-off of these assets decreased FFO by approximately $0.02 per FFO share. Second, G&A expenses increased by approximately $0.02 per FFO share as a result of our achieving better-than-expected year-end performance objectives based on the positive results achieved in operations and leasing activities for the entirety of 2018. Third, Embassy suites seasonality and operations decreased fourth-quarter FFO by approximately $0.01.

And fourth, at our Waikele Center, one-time demolition expenses were incurred with respect to the building formerly occupied Kmart resulting in a $0.01 decrease in FFO per share. Now, as we look at our balance sheet liquidity at the end of the fourth quarter, we had approximately $334 million in liquidity comprised of $48 million of cash and cash equivalents and $286 million of availability on our line of credit. Our leverage, which we measure in terms of net debt to EBITDA was 7.2 times, although our continued focus is to get our net debt to EBITDA back down to 5.5 times or below. We believe that our existing organic growth in EBITDA will reflect the following approximate net debt to EBITDA ratios quarter by quarter in 2019: Q1 '19, it will drop to 6.1 times due to the termination fee related to the former Sears ground lease; Q2 '19, we expect it to go back up to approximately 7 times; Q3 '19, it will drop again to 6.6 times with a straightline revenue being recorded on the Google lease; Q4 '19, we expect it to be 6.0 times and 5.7 times by Q4 '20.

Again, all of this is through existing organic growth. And as always, our guidance in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we have already discussed. We will continue our best to be as transparent as possible and share with you our analysis interpretations of our quarterly numbers. Operator, I'll now turn the call over to you for questions.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Good job, Bob.

Questions and Answers:

Operator

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Morning, Craig.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Good morning.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

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

Bob Barton -- Executive Vice President and Chief Financial Officer

Craig, that's a very good question. I've had several questions on that, and the optics don't look good when you're looking at that. Let me walk you through it. So the difference between our two midpoints in FFO is $3,671,000 and the termination fees that we recorded or will record in Q1 are $4.5 million.

What we've done is we've taken the $4.5 million and reduced that by approximately $800,000 and change to reflect pushing out some of the speculative leasing that we had in our original guidance to later quarters in 2019. So that net, the $4.5 million less pushing out some of that speculative leasing gets you down to $3,671,000. The other question is that on the depreciation, the -- what we know is that the depreciation is accurate. The FFO is accurate on both the original or the prior Q3 guidance and the current -- the revised guidance.

What we -- what we're looking into is that we think that the original Q3 guidance should be increased to what we see today, $88,191, which would reduce your -- which would increase your depreciation and decrease your net income. Again, this is all just for guidance on the guidance sheet of the supplemental Page 9, and we'll run that to ground.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Craig, that was a great question, especially when you consider the complexity of the answer. So good for you. Thank you, Craig.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

No, thanks. Thanks for the explanation.

Adam Wyll -- Senior Vice President and General Counsel

Our pleasure.

Operator

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Morning, Todd.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Good morning. First question, Bob, you mentioned -- so $1.03 pickup from -- at Carmel Mountain Plaza. Is that the annualized impact or is that the impact in the second half once straightline rent commences? And then I was curious if you can talk a little bit about how the rent stacks up versus the $30 square foot average for the center.

I realize it's a big box there, but can you just describe the rent a little bit and the economics in general?

Bob Barton -- Executive Vice President and Chief Financial Officer

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

But Chris, why don't you talk to that?

Chris Sullivan -- Vice President of Retail Properties

Yes. So keep in mind that Sears box is 107,000 square feet, so it's an enormous box. The other boxes in the center are in the 25,000, 30,000. I think the other large box we have out there is 40.

I don't have my sheets in front of me but I believe the rent was in the $15, $16 rent plus triple net, which is absolutely market for a box of that size. So that's why on a per square foot basis, it may look a little less compared to other boxes. And that $30 square foot number you have there also probably includes some of the shops to bring that number up.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Yes, sure. That's helpful.

Bob Barton -- Executive Vice President and Chief Financial Officer

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Plus, of course, there's no downtime.

Bob Barton -- Executive Vice President and Chief Financial Officer

Exactly.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

Bob Barton -- Executive Vice President and Chief Financial Officer

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. So the ground lease expired in January. Well, how do you arrive. How -- well, how did how did you arrive at the $4.5 million terminal value.

It sounded like it was sort of a discounted or a net present value of the remaining lease term.

Bob Barton -- Executive Vice President and Chief Financial Officer

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Bob Barton -- Executive Vice President and Chief Financial Officer

Oh, yes.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

Bob Barton -- Executive Vice President and Chief Financial Officer

That is correct.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. And then just sort of a bigger picture question for you, maybe maybe Ernest can chime in. Ehe Google lease dramatically increases your office NOI and you've talked previously about keeping office below certain thresholds. I think 40% as a percent of the company's portfolio and it seems like it will be above that 40% threshold once the Google lease kicks in.

How are you thinking about rebalancing the portfolio from here? What are your current thoughts there?

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Our first focus is on increasing that asset value with cash flow for the stockholders. It's not as important to us that we maintain the absolute proportions that we've existed -- that have existed in the past. So we'll be looking at this from an entrepreneurial point of view to say how can we continue to increase our net asset value. We're not going to focus on a split that we had before for years.

But fortunately, the diversification has allowed us to have a significant upswing from office. And it's nothing that I say, "Gosh, I wish we didn't have all that office. I wish we had more."

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. Got it. Thank you.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Thanks.

Bob Barton -- Executive Vice President and Chief Financial Officer

Thanks Doug.

Operator

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

Rich Hill -- Morgan Stanley -- Analyst

Hey, good morning, guys. Good morning. Thanks for that clarification on the ground lease. I think it makes it pretty clear to me what you own at this point.

Wanted to maybe be a little bit more high level at this point talk about San Diego. Obviously, there's two big catalysts there. Earnest, in the past you've said you're very confident in that lease, of getting those leases done but maybe could you give us an update on what the San Diego office market looks like. And are you more optimistic, less optimistic than you used to be on the timing of those lease executions?

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

There's a lot of competition. You want to add some to that, Steve?

Steve Center -- Vice President of Office Properties

Sure. Just to get a little more specific, Torrey Plaza -- the two needle-movers in San Diego are Torrey Plaza and Torrey Point. And Torrey Plaza, the building that we're that we renovated, we need to lease -- I'm looking at getting to stabilization of 92%. We need to do about 30,000 feet of net absorption in this building to hit 92%, and we're in active proposals of 26,000 feet of that.

So the activity is good. The reception of the renovations is very, very good. We've been proactively building spec suites and they're bearing fruit as well. So we've got good momentum and we expect to have positive things to report in future quarters.

Torrey Point, we just signed a new lease with a company called eMolecules for 73,000 feet, so that basically filled the second floor of the three-storey and we've got a couple of larger deals that we're in discussions with for other components of that project, so good momentum. We think once we get the TIs built with RSM, which is a recent deal for 13,500 feet and eMolecules, coupled with the other 10, the other building, get that activity there. And an activity begets activity and we think we're going to finish strong there.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Rich Hill -- Morgan Stanley -- Analyst

Yes. No, no. It was very helpful. Steve and Earnest, that's maybe a lot more concrete detail than we've received in the past.

Is that fair?

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Rich Hill -- Morgan Stanley -- Analyst

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Thank you.

Adam Wyll -- Senior Vice President and General Counsel

Thank you.

Operator

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Haendel , good morning.

Haendel St. Juste -- Mizuho Americas -- Analyst

Hey. Hey, man. Good morning, sir. How are you?

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Good. Good.

Haendel St. Juste -- Mizuho Americas -- Analyst

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Chris Sullivan -- Vice President of Retail Properties

Yes. Morning, Haendel.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

This is Chris Sullivan.

Chris Sullivan -- Vice President of Retail Properties

So I believe it's a 10-year term and you get a bump every five years [Inaudible] with big box anchors. I believe our tenants is starting to TIs --

Jerry Gammieri -- Vice President of Construction and Development

This Friday.

Chris Sullivan -- Vice President of Retail Properties

There we go. Haendel, you know Jerry. He said it's this Friday they're pulliing permits. So they'll start -- there you go.

This Friday. So a figure of about four- or five-months TI picture and then now they'll open and away they go.

Bob Barton -- Executive Vice President and Chief Financial Officer

Yes. Haendel, we're factoring in straightline rent coming in in Q3, beginning Q3 and then cash coming in in Q4.

Haendel St. Juste -- Mizuho Americas -- Analyst

Got it. OK. Thanks. Bob, I guess, and, Ernest, maybe you, as a follow-up on the decision to retenant the former Sears box with another large-box tenant.

I guess, I understand the dollars and sense of getting someone in there today at a similar rent but wouldn't the better long-term decision from an NAV perspective had been to redevelop the box into smaller spaces at higher rents, which would not only get cash flow benefits but also cap rate benefits?

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Chris Sullivan -- Vice President of Retail Properties

Well, Haendel, in theory, that sounds good but remember it's all market by market. So when you look who's in the Carmel Mountain market, you look at up across the freeway at Forest Ranch and you go up to the next intersection at 78 and down to Miramar. A lot of your boxes are already in place. So when you look at who your available prospects are and what's going to make a bang to the buck for the center, that bench started getting pretty thin.

So when you factor in leasing risk, you factor in the amount of time it takes, the costs to [Inaudible] the building and everything involved and you bring it up on a net present value, this deal made a lot of sense to take -- to do this one.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Did that answer your question?

Haendel St. Juste -- Mizuho Americas -- Analyst

OK. [Inaudible]

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

A redevelopment would've involved capital costs, it would regard -- taken up time, it would -- we'd have uncertainty. This way, we have no vacancy, we have no capital -- we have minimum capital costs and we have certainty, all of which adds up to, in my view, if I may describe it as a home run.

Haendel St. Juste -- Mizuho Americas -- Analyst

OK. OK. And I guess, one more for me. Curious on the current outlook for incremental lease terms.

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Bob Barton -- Executive Vice President and Chief Financial Officer

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

It's really case by case.

Haendel St. Juste -- Mizuho Americas -- Analyst

Got it. Got it. OK. Thank you, guys.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Good questions. Thank you, Haendel.

Operator

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

Michael Carroll -- RBC Capital Markets -- Analyst

Yes. Thanks. I wanted to dive into the Torrey Point and Torrey Reserve projects again real quick. I know that you were just talking about there are several large deals looking at the rest of Torrey Point.

I mean, how -- what's the size of those tenants and how many -- I guess, how many more leases do you need to sign to fill up that project? Are you holding it back for one larger user?

Steve Sullivan -- Vice President of Retail Properties

I would say it's going to be three to four. We've got 23,000 feet on the third floor of the three-storey. For the right credit, you had divided it in half, which we did on the second floor. So the RSM led the way with 13,500 feet.

We divide it down for them and then eMolecules came in for most of the remainder. So for the right credit, we break it up but I see that going full floor. Then you have a 10,000 foot increment on the graph for the three-storey and 12,000 in the two-storey plus another 4,800. So it could be three to four leases maybe five tops.

Michael Carroll -- RBC Capital Markets -- Analyst

OK. Great. And then do you think that there's enough activity to get that project stabilized by the end of the year?

Steve Center -- Vice President of Office Properties

Yes.

Michael Carroll -- RBC Capital Markets -- Analyst

OK. And then on the Torrey Reserve projects, can you remind us how much space you actually renovated there?

Steve Center -- Vice President of Office Properties

Gosh. I'd say 40,000 feet of spec or white boxing and we're still doing some more.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

And it's not only the renovation in the tenant space. It's the renovation in the public space, and that's what's added to the appeal. We --

Michael Carroll -- RBC Capital Markets -- Analyst

OK.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Go ahead.

Michael Carroll -- RBC Capital Markets -- Analyst

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

Steve Center -- Vice President of Office Properties

Oh, yes. Yes. We're -- we haven't gone backwards yet, so we continue to judiciously push while making deals. We're winning more than our fair share of deals versus our competition right now.

And so we want to keep that momentum going. And one way we're doing that, again, we've mentioned spec suites earlier. Having the suites built and ready to go versus someone having to contemplate a six-month process to design a permit and build a space, it makes a huge difference, especially for tenants [Inaudible] feet. Furthermore, they typically don't give themselves enough time to get all that done with their lease expiring.

So we've taken opportunities where timing is an issue and rather than treating it as a typical landlord-tenant relationship, we partnered with them, so to speak, and we figure out how to get them in on time. We just signed a lease with a group called Mariner Wealth Management that just signed last week. And part of the reason we got that done is we were able to meet their ambitious schedule because they had taken longer to get this done. So part of the success is the execution and the vertically integrated team with leasing with legal with construction in-house as well as our operations folks.

So long-winded answer there, but --

Michael Carroll -- RBC Capital Markets -- Analyst

No, it's perfect.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

And the renovation to the common area, people walk in and say, "Wow."

Michael Carroll -- RBC Capital Markets -- Analyst

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Jerry Gammieri -- Vice President of Construction and Development

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Michael Carroll -- RBC Capital Markets -- Analyst

OK. Great. Thank you.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Thank you.

Operator

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

Jeff Donnelly -- Wedbush Securities -- Analyst

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

San Antonio is a top-notch property that compares favorably with anything that we've looked at that's available on the coastal West Coast. We've been looking for a decade to try and find a [Inaudible] that would bring the whole portfolio to the coastal West Coast and we've not found anything in coastal West Coast that is as good or as promising as what we have in San Antonio. As far as repurchasing shares, maybe we have a small guy a problem but we're kind of a mid-sized REIT on the smaller side. We'd like to be more institutional.

We'd like to get in the game that would not be involved with purchasing our shares and getting smaller. If anything, we'd like to get larger and be more a factor in the marketplace than we presently are. So repurchasing our shares is not on the agenda but that's a good suggestion and thank you.

Jeff Donnelly -- Wedbush Securities -- Analyst

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

I can -- you want the honest truth? I don't know. What the legislature will do, I don't know. What the reaction of the marketplace will be, I don't know. But the factors that are really important is there is innovation in the coastal West Coast.

There's job creation, there is climate, and people want to live here. So this marketplace that we're in will overcome, I believe, in the midterm anything that government inflicts on us. And they will probably do their best to inflict what they can on us but good is good and we don't have [Inaudible] and that's the secret to our success.

Jeff Donnelly -- Wedbush Securities -- Analyst

I like the word inflict. And just --

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

[Inaudible]

Jeff Donnelly -- Wedbush Securities -- Analyst

Especially out there. And just one last question that, I guess, what's the status of your plans with the board? I just think -- I believe California kind of passed some rules about competition -- composition of the board, excuse me. And just wondering what changes you anticipate making in 2019 or '20 to the board?

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Jeff Donnelly -- Wedbush Securities -- Analyst

Great. Thanks guys.

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Thank you.

Operator

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

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 44 minutes

Call Participants:

Adam Wyll -- Senior Vice President and General Counsel

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Bob Barton -- Executive Vice President and Chief Financial Officer

Ernest Rady -- Chairman of the Board of Directors, President, and Chief Executive Officer

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Chris Sullivan -- Vice President of Retail Properties

Rich Hill -- Morgan Stanley -- Analyst

Steve Center -- Vice President of Office Properties

Haendel St. Juste -- Mizuho Americas -- Analyst

Jerry Gammieri -- Vice President of Construction and Development

Michael Carroll -- RBC Capital Markets -- Analyst

Steve Sullivan -- Vice President of Retail Properties

Jeff Donnelly -- Wedbush Securities -- Analyst

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