American Assets Trust Inc (AAT) Q4 2020 Earnings Call Transcript

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American Assets Trust Inc (AAT -1.53%)
Q4 2020 Earnings Call
Feb 10, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to the Q4 2020 American Assets Trust, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

It is now my pleasure to turn the call over to your host for today, Mr. Adam Wyll, EVP and Chief Operating Officer. Sir, the floor is yours.

Adam Wyll -- Executive Vice President and Chief Operating Officer

Thank you. Good morning, everyone. Welcome to American Assets Trust Inc.'s fourth quarter and year-end 2020 earnings call. Yesterday afternoon, our earnings release and supplemental information were furnished to the SEC on Form 8-K. Both are now available on the Investors section of our website, americanassetstrust.com. 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 in 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, for a number of reasons, including uncertainty related to the scope, severity and duration of the COVID-19 pandemic on us and on our tenants.

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 2020 results. Ernest?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Thanks, Adam. Great job. First and foremost, I would like to wish all our stakeholders and their loved ones continued health and safety during these truly unprecedented times. Now that people are starting to get vaccinated, we are optimistic and even hopeful eventually this pandemic will no longer be a threat, lives will return to some kind of normalcy and the economy will recover.

However, at the present time, this pandemic continues to create challenges within our portfolio, particularly for our three theaters, gym's and our Waikiki Beach Walk properties.

As most of you know, all of our properties in Hawaii are owned fee simple and are very valuable. We have a strong view that post-pandemic, Waikiki will return to normal, pent up tourism returning and every night being like a Friday night.

While this pandemic still remains a threat that we believe we are well prepared to endure a prolonged pandemic with our irreplaceable portfolio, our best-in-class operating platform, our top-notch management team, our disciplined financial strength and a very strong balance sheet.

In such regard, I am extremely proud to announce that our inaugural public offering, which we closed on January 26, 2021, the offering consists of $500 million of 3.38% senior unsecured notes due 2031. And by the way, it was oversubscribed 4 times.

This spot offering provides substantial liquidity, staying power, and provided for the repayment of $200 million -- $250 million of debt and provides all funds needed for the development of La Jolla Commons III, which we plan to break ground this April.

Success and demand of this bond offering in the midst of a pandemic is truly a testament to our incredible properties, efficient operating portfolio, and our top-notch management team.

Bob will provide more financial details on the bond offering.

Finally, I'd like to mention that the Board of Directors has approved a quarterly dividend of $0.28 for the first quarter, an increase of $0.03 from our previous dividend, which we believe is supported by our collection efforts in the fourth quarter, and is an expression of our Board's confidence in the embedded growth of our portfolio that we believe will recover post-pandemic. And Bob, Adam and Steve will go into more detail on our various asset segments and financial results, and I will be available for any questions you may have at the conclusion of our prepared remarks.

I'm now going to turn the call back to Adam. Adam, please?

Adam Wyll -- Executive Vice President and Chief Operating Officer

Thanks, Ernest. Good job.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

As you can see, we're mutually cooperative.

Adam Wyll -- Executive Vice President and Chief Operating Officer

We remain optimistic with the overall performance of our portfolio, even in light of the pandemic, and we are pleased to report that 100% of our properties are currently open and accessible by our tenants in each of our markets.

Of course, we too have felt the bumps along the road like everyone else in our sectors. Yet, our collections of monthly recurring billings due continued to improve in Q4 over Q3 and Q3 over Q2. The total collections to-date of approximately 92% in Q4 versus 90% in Q3 and 87% in Q2.

January is currently trending consistent with Q4, just over 91% to-date, and likely to increase further, all despite the headwinds of Governor Newsom shutdown restrictions in California that lasted through most of December and January.

Collections for essential tenants in our retail portfolio, which represent approximately one-third of retail build rents were almost 100% in Q3 and Q4. And collections for nonessential tenants continued to improve from 69% in Q3 to over 74% in Q4.

Of note, no tenant in our retail portfolio represents more than 2% of our ABR, and less than 6% of our retail portfolio is due to expire in 2021, assuming no exercise of lease options.

And of the approximately 500 tenants in our retail portfolio, since the beginning of the pandemic, we have had 13 retailers file bankruptcy, covering 18 total tenant lease spaces, of which 13 spaces have been assumed or are in the process of being assumed in bankruptcy, which we believe is a testament to us having superior locations that these restructured tenants want to remain in. Notably, the rejected leases to-date were less than 13,000 square feet in the aggregate.

As you would expect, our primary collection challenges remain in the retail segment with our movie theaters and gym's, as well as many of our retailers at Waikiki Beach Walk, which until mid-October had no incoming tourism to sustain meaningful revenue for our tenants.

So, we believe the pent-up demand for travel to Hawaii is massive. We expect the tourism to rebound to occur at more deliberate pace until a broader vaccine rollout is achieved, hopefully by this upcoming summer. In the meantime, we are working with these challenged retailers who historically have been great operators to bridge them through to the recovery. This is part of our recurring thesis of prioritizing long-term strategic growth over the short term.

Despite the uncertainty, we remain optimistic that we will continue to see sequential improvement spurred by the vaccine's distribution, government stimulus and anticipated pent up travel demand in regions that have yet to fully reopen their economies.

As Ernest mentioned, we believe that we are well positioned to navigate through and manage these challenges. We have been through challenging times before and each time we have emerged stronger, given our long-term focus on high quality, diversified asset base. We expect this time will be no different.

With that, I'll turn the call over to Bob to discuss Q4 and year-end results in more detail.

Robert Barton -- Executive Vice President and Chief Financial Officer

Good morning and thank you, Ernest and Adam. Last night, we reported fourth quarter and year ended 2020 FFO per share of $0.41 and $1.89 respectively, and fourth quarter and year ended 2020 net income attributable to common stockholders per share of $0.05 and $0.46 respectively.

The lower FFO in the fourth quarter, which is approximately $0.05 lower than the Bloomberg consensus is primarily the result of additional reserves for our theaters, gym's and Waikiki Beach Walk retail. Nevertheless, we remain optimistic of this portfolio, even in light of the pandemic.

The highlights of this quarter are, one, we have ample liquidity. As Ernest previously mentioned, we recently completed our inaugural public bond offering. In the midst of this unprecedented pandemic, we closed on $500 million of 3.38% 10-year senior unsecured notes. With the proceeds from the offering, we repaid $150 million Senior Guaranteed Notes Series A and repaid the $100 million outstanding on our revolving line of credit. We expect to use remaining $236 million of proceeds to fund our La Jolla Commons III development in the UTC submarket of San Diego, as well as continue our renovation of One Beach Street in San Francisco, with the remaining amounts for general corporate purposes and potential accretive acquisition opportunities.

At the beginning of this week, we had approximately $380 million of cash on the balance sheet with zero outstanding on our $350 million line of credit. We chose to access the public debt markets now because of the low treasury yield and strength of the credit markets that we've been seeing during this pandemic. We had the ability to access the public debt market several years prior to this, but we weren't ready to commit to being a regular issuer on a frequent basis until now. What's changed is that we have the ability to ladder our existing debt maturities today, so that we have close to, if not more than $400 million in future debt requirements on a recurring basis over an 18 to 24-month period, while at the same time being laser focused on a 5.5 times net debt-to-EBITDA or less. A conservative balance sheet is very important to us.

During this pandemic, our EBITDA has been challenged, like others with exposure to retail and our hotel, resulting in lower EBITDA. We believe that our high-quality portfolio and superior close to West Coast locations will begin to return to normal post-pandemic, and our expectation is that our net debt-to-EBITDA will begin working its way back down to 5.5% or less, based on the corporate model that I'm looking at.

Number two, we have embedded contractual growth and cash flow in our office portfolio, with approximately $24 million of in-place growth in just the office cash NOI in '21 and '22.

Number three, our same store cash -- office cash NOI came in at just 3% due to abatements that were provided to our GSA tenants at our First & Main in Portland, Oregon, as part of their lease renewal package during Q1 2020. These abatements continued through February '21. Absent these short-term abatements, office same store cash NOI growth in Q4 '20 compared to Q4 '19 would have been approximately 7%.

Number four, multifamily properties incurred mixed results based on their geographic locations. For our multifamily properties located in Portland, occupancy was down 17% compared to the same quarter last year, while the weighted average monthly base rent increased approximately 1.4%. For our multifamily properties located in San Diego, occupancy remained stable at approximately the same over the prior year, while the weighted average monthly base rent increased 7.3% over the prior year.

Of note, our occupancy levels in Portland have been trending much higher since the beginning of the year with our recent leasing momentum, bringing optimism that we will return to a more normalized pre-pandemic occupancy level.

Number five, let's talk about guidance. As previously disclosed, we withdrew our guidance in April 2020, due to the uncertainty that the pandemic would have on our existing guidance, particularly in our mixed use and retail sectors. Until we have a clear view of the duration of the economic impact and the economy shows signs of recovery, we will refrain from issuing formal guidance. However, what we can do is provide you a framework on how to think about our portfolio.

We believe that Q4 '20 was close to, if not the bottom of the economic impact for us. We have taken approximately $18 million in combined bad debt expense reserves in 2020, including turning up most of the straight line rent for which reserves have been taking. Included in this number is approximately $7.6 million or $0.10 of bad debt expense reserves that were included in our FFO number of $0.41 for Q4 '20.

From my perspective, I believe $0.41 of FFO for Q4 '20 is the bottom. I would suggest that you conservatively use that as a starting base. Assume that continues for the first two quarters. Beginning in Q3 '21, assuming most everyone in America has been vaccinated, I would expect theaters restaurants and especially Waikiki Beach Walk retail and the Embassy Suites Waikiki to begin their recovery. I would apply some percentage growth to the $0.41 of the Q4 2020 FFO beginning in Q3 '21 and continuing into Q4 '21.

Adjustments that also would need to be made include, in Q1 '21, approximately $0.05 related to the yield maintenance make whole payment on the Series A note prepayment will be a non-recurring expense in Q1 '21. Also in Q1 '21 through Q4 '21, the additional proceeds from the public bond offering are expected to increase our interest expense by approximately $0.03 per quarter.

As we look beyond '21, we expect to see the following. First, we expect to see the Embassy Suites Waikiki coming back in full strength in '22, adding approximately another $0.13 of FFO. Secondly, the Waikiki Beach Walk retail coming back in partial strength in '22, adding approximately another $0.08 of FFO. Also, in our supplemental this quarter, we have included our estimated development yield for La Jolla Commons III, which is expected to take between 24 and 30 months to develop. The estimated yield for this development is approximately between 6.5% and 7.5% based on the market conditions today. We expect this project to be completed by the end of 2023.

A 6.5% yield on $175 million is approximately another $11 million of NOI or $0.14 of FFO. In the meantime, the cash on the balance sheet earmarked for this development will be a short-term drag on earnings. And lastly, we expect our One Beach property on the North Waterfront of San Francisco to complete its renovation by the end of 2022, and we expect this property to produce approximately $0.05 plus of FFO upon stabilization in 2023.

For now, this is our informal big picture framework of what we conservatively expect in '21. But it is not considered or it is not to be considered as formal guidance. As we have more clarity and conviction on the back half of '21, we will share it with you. We will continue our best to be as transparent as possible.

I'll now turn the call over to Steve Center, our Vice President of Office Properties, for a brief update on our office segment. Steve?

Steve Center -- Vice President of Office Properties

Thanks, Bob. At the end of the fourth quarter, net of One Beach, which is under redevelopment, our office portfolio stood at approximately 95% leased, with just under 5% expiring at the end of 2021.

Our top-10 office tenants represents 51.5% of our total office based rent. Given the quality of our assets and the strength of the markets in which they are located, the technology and life science is the key market drivers and we continue to execute leases at favorable rental rates, delivering continued NOI growth in our office segment even in this challenging environment.

The weighted average base rent increase for the seven renewals completed during the fourth quarter was 5%. With leases already signed, we have locked in approximately $24 million of NOI growth in our office segment, comprised of approximately $14 million in 2021 and $10 million in 2022. We anticipate additional NOI growth in 2022 and 2023 through the redevelopments and leasing of 102,000 rentable square feet at One Beach Street in San Francisco and 33,000 rentable square feet at 710 Oregon Square in the Lloyd submarket of Portland.

With the recent entitlements for two blocks at Oregon Square in Portland, we can add up to an additional 555,000 rentable square feet to the portfolio. However, we continue evaluating market conditions and prospective tenant interest before commencing development of that project.

In the next few months, we will commence construction of Tower 3 at La Jolla Commons, a 213,000 rentable square foot, 11 storey Class A plus office tower in the UTC submarket of San Diego. With expected completion in Q2 or Q3 of 2023, La Jolla Commons Tower 3 will grow our office portfolio by 6.1%.

We're moving forward because we believe in the long-term fundamentals of the market, especially in UTC. Direct vacancy remains low at 6.5% and the inventory is aging with just 26% or three out of 22 Class A office buildings being built since 2008, two of which are our own towers at La Jolla Commons. These 3three newer towers are 97% leased.

The existing office inventory is actually shrinking due to conversion to life science and lab usage in and around UTC. And record-breaking venture capital is flowing into the region.

San Diego companies raised a record-breaking $2.6 billion of venture capital funding in Q4 of 2020. The 2020 total reached $5.2 billion. Life science companies brought in a record $1.8 billion. The 2020 volume from life science investment reached a record shattering $3.8 billion, and tech investment hit a record high of $762.1 million for the quarter and $1.3 billion for the year.

UTC is adjacent to UCSD, which pulled in $1.35 billion in research contracts and grants during the fiscal year that ended June 30, once again shattering our funding record and maintaining the University standing as one of the 10 largest research school in the U.S.

La Jolla Commons is just a few blocks away from the UTC Mall, which has undergone a $1.2 billion redevelopment, including 90 new tenants and is Westfield's top performing Center. In the San Diego trolley operations serving UCSD and UTC are expected to begin operations in 2022.

And as for the impact of work-from-home on our portfolio, based upon discussions with many of our tenants, not to mention significant expenditures, our larger tenants are currently investing in their existing spaces. We expect the impact to be relatively short term in nature.

Beyond our portfolio, even though the tech giants had established long-term work-from-home protocols, they are massively increasing their office footprint by expanding, acquiring buildings and land and leasing significant space across the country, all during COVID.

Facebook has expanded by 2.2 million square feet, Microsoft by 1 million square feet, Amazon by 1.5 million square feet; and Google now plans 3 mixed-use projects on Google owned land, 40 acres in 1.3 million square feet in Mountain View, San Jose and Sunnyvale. Further, in November, Google bought a 10-acre plot close to its existing campus in Kirkland, Washington, and plans to use it to expand in the area. Also, Apple just acquired a large land site in Culver City, which is Los Angeles. for a large office development for at least 1,000 people, at least an additional 336,000 feet in New York City.

In summary, we have a stable office portfolio with a strong tenant roster, no or little near term rollover, significant built in NOI growth and additional upside through repositioning and redevelopment within our existing portfolio, plus substantial new development on sites we already own.

Operator, I'll turn the call over to you for questions. Good job.

Questions and Answers:

Operator

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

Craig Schmidt -- Bank of America -- Analyst

Hello. I guess, good morning.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Good morning, Craig.

Craig Schmidt -- Bank of America -- Analyst

Good morning. I'm wondering what does the retail leasing pipeline look like heading into 2021, and what do you think you'll do relative to the 303,000 you leased in 2020?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Chris, can you answer that? Yes.

Chris Sullivan -- Vice President of Retail Properties

Yes.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

I know it's not the -- the pipeline is not as barren as the press says, but it's -- certainly, it's not as brilliant as we'd like.

Chris Sullivan -- Vice President of Retail Properties

Yes, Craig, can you repeat the second half of your question? You had a number there. You said 300,000?

Craig Schmidt -- Bank of America -- Analyst

Yes, I have 303,000 total retail square foot leased in 2020.

Chris Sullivan -- Vice President of Retail Properties

I was thinking you're referring to the roll that's going to -- that comes up through 2021. From a pipeline standpoint, you're starting to see retailers pop their head back out. So, given -- activity started picking up a little bit in Q4, and it's continuing to roll some momentum coming into first quarter of 2021. I can't give you an exact number, but I am way more bullish that they're starting to look around and starting to do tours again, the phones are ringing with more activity. And then of course as for the roll of our renewals coming up, and I think the majority of those will probably get renewed. As Bob said earlier, I think we really hit the trough in Q4. There is still some turbulence ahead, but springs coming and you're starting to see talk of going back to school, vaccines are common and retailers getting more optimistic.

Craig Schmidt -- Bank of America -- Analyst

Great. And then the trend of leasing spreads turned negative in the fourth quarter, but it sounds like you'll see a more positive result on leasing spreads in '21?

Adam Wyll -- Executive Vice President and Chief Operating Officer

Craig. I hope so. It's combat leasing from what I can tell you. The retailers, I don't know the last time you bought a new suit was or any of us, but the retailers are still -- we're still having their troubles in quite a few categories. So, I don't want to lean to tell you that I'm going to be seeing rates come up. Some situations, it's a balancing act between occupancy and rate, and I'm always a fan, let's be there to fight another battle.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

It's hand to hand combat, Craig, and the retailers at the moment have the upper hand. I think that the biggest cost in real estate is vacancy, and we're going to focus on keeping our properties well occupied as possible, particularly as we come out of this difficult pandemic.

Craig Schmidt -- Bank of America -- Analyst

Thank you. That's helpful.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Thank you, sir.

Operator

Your next question comes from the line of Haendel St. Juste from Mizuho.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Haendel, good morning.

Haendel St. Juste -- Mizuho -- Analyst

Hey. Good morning. Good job, everyone.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Thank you. Thank you.

Adam Wyll -- Executive Vice President and Chief Operating Officer

That's the one thing we all are doing.

Haendel St. Juste -- Mizuho -- Analyst

Just a question for you, I guess on the dividend. I guess we're all -- some of us are scratching our head here on why you're raising the dividend now versus maybe saving the cash and de-levering a bit more, your leverage is above 7 times. I understand the higher collections and confidence. But there's still a lot of uncertainty, spreads are under a bit of pressure it sounds. Hawaii seems like it's going to be soft, the near term. So, I guess why not hold off a bit and de-lever a bit?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Haendel, that's a very good question. I suggested to the Board that to increase a $0.01 or $0.02, to indicate that we have confidence in the quality of our portfolio, our financial position and our management, they felt that I was underestimating all those three and they added another $0.01. So, the Board made that decision independently, and I think they were fine. I mean, we have a difference by a $0.01, but not much more. I think that this is going to be a significant recovery once we get the vaccine.

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes, Haendel, let me just add to that. It's -- the methodology is also consistent with our collections, and we try to stay consistent on that, or the board tried to stay consistent on that. And from -- the other thing is, as we mentioned, is that we believe that Q4 is the bottom or if not close to the bottom. And what's changed is also too that people are starting to get vaccines. So, there is a lot more data points out there, and we think the Board thought that this is the right thing to do.

Haendel St. Juste -- Mizuho -- Analyst

Thanks a lot, Bot. Maybe as an add-on for you, you mentioned the mid-5 times debt-EBITDA is a long-term target. Curious on when do you think we'll get there, and do we start to see some inflection here in the next quarter or two? The last couple of quarters you've been trending up. So, just curious on some perspective on reaching that long term mid 5 target?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

He wants to know when you're going to hit 5.5 times, you say you'd like to get there, and he wants a timeframe.

Robert Barton -- Executive Vice President and Chief Financial Officer

Okay. Well, thanks for that question, Haendel. I get paid extra for being amateur for the roll. Well, Haendel, that's why we also set a framework on how to think about the portfolio. I can't tell you what that percentage is for the second half of this year, but our view or my particular view would be is that, once everybody in America is vaccinated or once we've vaccinated and we get that herd immunity, give us approximately 12 months from that period of time and I think we will trend back down to that 5.5 times, based on the growth, based on -- I mean, think about how much we've lost out of Embassy and Waikiki Beach Walk retail. I mean, both of those, each of those, the retail, the Waikiki Beach Walk retail and the Embassy are anywhere from $12 million to $14 million each of cash NOI. So, that's probably about $0.14 each of them for additional FFO.

So, let us rebound. I mean, let us get to the vaccine. Get me to that point, give us 12 months.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

You have no idea how focused is on 5.5. I say, good morning, Bob. He replies, 5.5.

Haendel St. Juste -- Mizuho -- Analyst

I love it. I love it. And then on Hawaii, I guess what are you hearing for tourism expectations for this year? Obviously, there's lots of uncertainty, but I guess what's the latest, any -- any stats on the tourism board or anything that you could put some numbers around to help us understand perhaps what the expectation is?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

I don't think we could tell you anything which you could take to the bank. It's just so uncertain. On the other hand, the direction seems to be right with vaccines become available. I feel strongly that there is a pent-up demand for Americans to travel and many of us have the resources to travel. We've been pent up and for this last 9 months, and once we get out of out-of-home, we're going to travel. So, I think -- I don't know how, and I don't know when, but I expect it's coming.

Haendel St. Juste -- Mizuho -- Analyst

Fair enough. Thank you, guys. Good luck.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Thank you, Haendel.

Operator

Your next question comes from Rich Hill from Morgan Stanley.

Rich Hill -- Morgan Stanley -- Analyst

Hey, good morning guys.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Good morning, Rich.

Rich Hill -- Morgan Stanley -- Analyst

Ernest, I'm really curious about where you're going to go first when the world does reopen. But we can have that conversation offline. Bob, I do have some questions for you. I appreciate the guidance or the non-guidance guidance, is that what we're supposed to call it Bob?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes.

Rich Hill -- Morgan Stanley -- Analyst

As you think about 2021, it occurs to us that there is a lot of noise on straight-line rents and abatements. 4Q, the miss versus our numbers was almost all straight-line rents. So, as you think about the leasing environment in 2021, and I appreciate the guidance about how we should think about the velocity in 1Q, 2Q, 3Q and 4Q. But can you maybe talk about what -- are all the abatements supposed to go away or all the deferrals supposed to go away? How are you thinking about that as you negotiate with retailers or retailers and office tenants for that matter?

Robert Barton -- Executive Vice President and Chief Financial Officer

Well, I think that -- yes, I'll try to answer that. I mean, I think, what is out there in terms of straight line, in terms of deferred rents, we expect to collect those. To the extent that we don't collect them, where we don't think that we're 75% or more confident that we're going to collect them, we'll put a reserve up. But right now, I mean we're still confident on what remains on the books in terms of collecting those in 2021, we're hopeful. And I think everybody in the real estate industry is hopeful that once this vaccine comes together, you will start seeing the retail to start opening and you'll start seeing the companies and the tenants that we do have straight-line rent across pursuing their growth in their companies that we've tried to nurse through this ugly pandemic. So, we're still confident on what we got.

Rich Hill -- Morgan Stanley -- Analyst

Got it. So, it sounds like 1Q and 2Q are going to be still a little bit messy hand-to-hand combat. But then the world would just get back to normal from an abatement and deferral standpoint and rent growth standpoint thereafter, is that a right characterization?

Robert Barton -- Executive Vice President and Chief Financial Officer

That would be my perspective, where I stand today. That's our best estimate and we think with the amount of vaccines that are being disseminated across at this point in time, I think Ernest had his second shot this last weekend.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

I've been hugging everybody since.

Robert Barton -- Executive Vice President and Chief Financial Officer

This world, this pandemic will ultimately come to an end, and things will get better.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

From both your lips to God's ears, let's make it happen.

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes.

Rich Hill -- Morgan Stanley -- Analyst

So, Steve, one quick question for you. I'm nitpicking here. But it looks like occupancy maybe declined slightly for La Jolla and One Beach, if I was looking at it correctly. Again, very, very slightly. Could you just maybe go into a little bit more detail on any quarter-over-quarter change in demand that you're seeing on those two properties?

Steve Center -- Vice President of Office Properties

It wasn't One Beach. So, you might to think about, One Beach is kind of offline right now as we redevelop it. But in UTC, we had TriNet, who had sublease their space, move out of a 6,000 foot space. That was a blip there, if you will. But we successfully renewed other tenants -- smaller tenants now, that building. So, we've been really successful holding rates. There's no COVID discount. We've been more flexible on lease term with smaller tenants who are uncertain about the future. I mean, I've got an engineering firm that's got three people over 65, and so they're kind of -- I don't know that I can commit long term right now.

Fortunately, as we pointed out on the call, we've got about 51.5% of our tenants are top-10 and very stable. Furthermore, they continue to grow. I mean, VMware, they're coming up one -- they've got 35,000 feet rolling next year and we're already in discussions about trying to find another floor form them in the building, as well as talking renewal.

So, we're fortunate in that regard. I don't know about the other property. And then here in Del Mar Heights, we strategically let a couple of smaller tenants roll to aggregate figure blocks of space. So, that's being smart about commodity space versus big blocks, which are scarce, we're going to get premium rents for. So, the blip that you saw, I mean there is some softness due to COVID, clearly. I mentioned the engineering firm.

Our teams are doing a great job of taking care of our tenants. They want to stay with us. Some just say I don't need 5,000 feet, I need 3,000. And if we're able to accommodate them and keep our existing customers, we're doing it. But we'll get -- '21 is a year for bunch of small tenants, we still have 41 tenants rolling at an average of 3,700 feet in 2021. '22 is a much better story and that about two-thirds of the tenants rolling are big. They're the VMware's, they're other bigger customers.

And then in terms of pricing power, this quarter the ending versus new rate is a bit muted, but it just depends on where. So, going through the portfolio of Bellevue, we're 97% leased, but we've got 23.5% rolling through 2022, but those are going to be outsized increases in rent. We've been very successful with rent increases there and that should continue. Portland, same story. We're 97% leased there. We've got 8.4% rolling. And again, the rates are holding up there. So, we are doing well.

San Francisco, we're out of business there until we have to renew Autodesk in 2022; and then San Diego, down here the rent increases are 2% to 6% versus 20% Portland or 30% and 35% in Bellevue.

So, it's kind of lumpy. It just depends on when you're going to make these renewals and reset rents, and what level. So, this was -- this last quarter was just a bit quiet and mainly focused on markets that aren't as hyperinflationary as Bellevue and Portland.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

One piece to make it clear, we emptied it so that we could reposition it.

Rich Hill -- Morgan Stanley -- Analyst

Okay, that's -- I'll go back and look at the disclosure. Hey Bob, just one more question for me. Given that you're guiding without guiding, can you talk about 2022 to a little bit? Is it just going to be back to -- I actually don't -- I'm not sure the market even cares about 2021 at this point. Is 2022, business as usual and all the plans that we were previously discussing this time last year fully intact?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes, nothing has changed on that. I mean, we still expect our cash NOI to increase in the office sector by, I think, $12 million in '21, $13 million in 2022. We're just -- as we begin our development on La Jolla Commons III, which should conclude -- should be completed by the end of '23, I see a big pick up after that. And One Beach, One Beach should be finished by the end of 2022. So, what we're doing is we're taking advantage of the opportunities that currently exist within our own portfolio. We don't need any acquisitions to create value at this point in time. We're always looking, but we have plenty just within our own portfolio to create significant value.

Rich Hill -- Morgan Stanley -- Analyst

Perfect. Thanks, Bob. Thanks, everyone. I appreciate the additional color.

Robert Barton -- Executive Vice President and Chief Financial Officer

Thank you, Rich.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Thanks, Rich.

Operator

Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Hi, Todd.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, thanks. Hi, good morning. The first question just around the color in detail for '21 and '22. Bob, appreciate those comments, and you mentioned the 4Q would likely be the bottom or close to the bottom. Is that inclusive of the $0.05 make whole that will be recognized in the first quarter, meaning that excluding that make whole, you would expect to be at around $0.46 as sort of a baseline, is that the right way to think about it?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes, that is. I mean, so $0.41 does not include the make whole. So, that's -- so if you continue that, based on my comments, you would say start with $0.41 in Q1. From that, you would deduct $0.05 for that make whole and add -- and deduct another $0.03 for incremental interest expense in Q1. So, on the script that we just shared with you, it will give you a road map on how we -- a roadmap for a framework on how I think or we think that you can view '21.

And then in the second half of that, you make your own assessment or determine what you think the percentage should be on the pickup in that. But keep in mind, of that $0.41 for Q4 that I am suggesting we start with in Q1, that includes $0.10 of reserves, $7.6 million of reserves in the fourth quarter. So, as you start the second half, is that really going to happen? I don't think so.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay, got it. So, $0.41 goes to $0.36 with the make whole in the first quarter, less some incremental interest expense, and then you'd expect to build back throughout the year, obviously adjusting for the $0.05 make whole?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes. Yes.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

That's helpful.

Robert Barton -- Executive Vice President and Chief Financial Officer

And then if you have any questions, please feel free to reach out.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Sure. I appreciate that. And then Steve or Bob, maybe regarding the $24 million of office cash NOI that's locked in, that's expected to commence during ' 21 and '22, how much of that is being straight line today versus what has yet to commence for FFO purposes on a GAAP basis?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes, I don't have that in front of me, but really that's been included in our presentation in terms of that cash NOI growth. And really what we're showing is the growth in that fad. And that obviously will drop on down, obviously has to be adjusted for anything related to the straight line on that. But I don't have the exact number on that.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Good question. Thank you.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And in terms of the 14 million in '21, what's kind of the cadence sort of quarterly, how should we think about the timing of the cash commencements throughout the year?

Robert Barton -- Executive Vice President and Chief Financial Officer

Well, in Q1 and Q2, we have big TIs going out. We have probably $25 million of TIs related to a large tenants up in Landmark. So, it will probably be more in the second half of the year.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And then at the multifamily assets, so it sounds like you saw a bounce in occupancy in January at Hassalo. Can you just talk a little bit about the pricing strategy there and use of concessions and maybe provide some color on leasing activity in general? It sounds like you're -- it seems like you're holding rates in anticipation of a further return in demand. Just curious if you could sort of talk about Hassalo a little bit and the Portland Assets?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

As Steve pointed out, our office portfolio in Portland is excellent. Our portfolio of residential is we had a management issue, which we've now taken care of. So, it's too early to say how much of a recovery we're going to make. But the early indications, as Bob pointed out in his report, is that we are leasing up.

We are -- the biggest cost in real estate is vacancy. So, we may do some things in the short run to increase our occupancy, and can eliminate some of the vacancy. So, I don't know how to answer that question properly. It's too early to say. But we'll make it work, I'll tell you that.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Can you share what the occupancy build look like in January?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Do we have that?

Robert Barton -- Executive Vice President and Chief Financial Officer

I don't.

Steve Center -- Vice President of Office Properties

I think we went from 75% or 85% or 87% occupancy, not that much.

Robert Barton -- Executive Vice President and Chief Financial Officer

No 80s.

Steve Center -- Vice President of Office Properties

No 80s?

Robert Barton -- Executive Vice President and Chief Financial Officer

I mean, yes, we don't have that right in front of us.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Let me turn the corner.

Robert Barton -- Executive Vice President and Chief Financial Officer

We're in an upward trajectory.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay, got it. And just one last one if I could on the master lease at Loma Palisades and Pacific Ridge. Can you just remind us when that expires and do you expect the school to reup and renew that master lease or what do you expect to happen there?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

I don't know that we have an expectation. We're certainly working on it. And Abigail, do you want to say something when it expires?

Abigail Rex -- Director, Multifamily, San Diego

Hi, good morning. So that master lease for both Pacific Ridge and Loma expires on May 31 of this year.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

And have you had any discussions about renewing it or is that still off the table?

Abigail Rex -- Director, Multifamily, San Diego

So, off the table, we all hope that with the vaccine, students will be able to return to school in the fall, and that is the hope I think of every university. We'll just have to play it by year and hope that there is a renewal or that there's further partnership. But I don't have any further information at this current moment.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay, all right. Thank you.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Thank you.

Adam Wyll -- Executive Vice President and Chief Operating Officer

Thanks, Todd.

Operator

Your next question comes from the line of Daniel Ismail from Green Street.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Good morning, Daniel.

Dylan -- Green Street -- Analyst

Hey, guys. This is Dylan [Phonetic] on for Danny. But hey, how are you guys doing this morning?

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Nobody here has COVID. Tested everybody.

Dylan -- Green Street -- Analyst

Just a few questions on the development of One Landmark [Phonetic]. You guys mentioned I think it's starting sometime in the next few months. You guys -- is that subject to a pre-lease, are you guys going to start that on-stack?

Steve Center -- Vice President of Office Properties

Which one?

Adam Wyll -- Executive Vice President and Chief Operating Officer

You're talking One Beach La Jolla Commons down in UTC?

Dylan -- Green Street -- Analyst

Sorry, La Jolla Commons.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

There is no pre-leasing. I had lunch yesterday with one of the senior partners in the law firm. And he said, they were considering that site and they weren't sure if we'd started. There's never been pre-leasing in San Diego. So, we have a couple of years to build it. During that time, we hope the market recovers. It's a very strong market. And that's kind of the story.

Adam Wyll -- Executive Vice President and Chief Operating Officer

Yes, hey, Dan, I think Steve's comments that he shared our very strong reasons why we should pursue that without any pre-lease. For instance like, two remaining lots in Oregon Square, that's not a -- that is something that you would want to pre-lease.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

You would want to rebuild.

Adam Wyll -- Executive Vice President and Chief Operating Officer

[Speech Overlap] Correct, yes, thank you. You'd want to get a tenant before you build that. Now, like Ernest said, in UTC, and for what Steve's comments were, those are all the comments why you would want to go forward without a tenant at this point in time. Obviously, you would love to have a tenant. But by the time you finish, that's going to be an even stronger market than it is today.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

And we've used this time to buy the project out and I think we've had some savings that we would not have had if we were trying to build a year from now.

Steve Center -- Vice President of Office Properties

So, we are going.

Dylan -- Green Street -- Analyst

Perfect. That makes sense. And then just kind of as a follow-up to that, I think our math implies $80 rent per square foot at that property. Is that -- I guess, A, is that accurate? And B, how does that compare to where you guys signed the alumina lease back in, I think, late '19 when you guys initially acquired this property over there?

Steve Center -- Vice President of Office Properties

Rents for new product are much higher. We're in the high fours strip on that, with $1.70 in expenses. I'm talking on a monthly basis. I haven't converted into a gross for annual. But the Alumina lease started 4.90 full service, and has 3% annual bond. So, and that -- the rents I just mentioned, the triple net rents I just mentioned are affirmed by two recent deals, one in June, one in December for deals new products. So, that's today's rents and that's what we put in the pro forma and we'll how the market goes, but we're bullish.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Bullish, AND we're also a printing that the economy recovers. And -- but in the short run, the leasing is less certain than we'd like. In the long run, it's a giant win. It's a great location, great property.

Dylan -- Green Street -- Analyst

Perfect. That was very helpful. Thanks, guys.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Thank you.

Operator

And I show no further questions at this time. I will now turn the call to Mr. Ernest Rady, for any closing remarks.

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Guys, thanks for all those great, great questions. I hope you're all able to get a vaccine as quickly as possible, so that we can all end this distance of interacting and we can all get together. I miss you all. I hope to work with you again as quickly as possible, and thank you for your interest in our great company.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Adam Wyll -- Executive Vice President and Chief Operating Officer

Ernest S. Rady -- Chairman, President and Chief Executive Officer

Robert Barton -- Executive Vice President and Chief Financial Officer

Steve Center -- Vice President of Office Properties

Chris Sullivan -- Vice President of Retail Properties

Abigail Rex -- Director, Multifamily, San Diego

Craig Schmidt -- Bank of America -- Analyst

Haendel St. Juste -- Mizuho -- Analyst

Rich Hill -- Morgan Stanley -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Dylan -- Green Street -- Analyst

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