Nov 1, 2017
Executives
Adam Wyll - SVP, General Counsel & Secretary Ernest Rady - Chairman, President & CEO Bob Barton - EVP & CFO Jim Durfey - VP, Office Properties Chris Sullivan - VP, Retail Properties
Analysts
Todd Thomas - KeyBanc Capital Markets Craig Schmidt - Bank of America Lynch Michael Carroll - RBC Capital Markets Rich Hill - Morgan Stanley Haendel St. Juste - Mizuho Securities
Operator
Good day, ladies and gentlemen, and welcome to American Assets Trust's third-quarter 2017 earnings conference call. [Operator Instructions].
And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Adam Wyll, Senior Vice President and General Counsel.
Adam Wyll
Good morning. I'd like to thank everyone for joining us today for American Assets Trust's 2017 third-quarter earnings conference call.
Joining me on the call are Ernest Rady and Bob Barton. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.
Our 2017 third-quarter supplemental disclosure package provides a significant amount of valuable information with respect to the Company's operating and financial performance. The document is currently available on our website.
Certain matters discussed on this call 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 costs of construction.
The earnings release and supplemental reporting package that we issued yesterday, and our annual report filed on Form 10-K and our other financial disclosure documents, provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations. Additionally, this call will contain non-GAAP financial information, including funds from operations or FFO; earnings before interest, taxes, depreciation and amortization, or EBITDA; and net operating income, or NOI.
American Assets is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data for the third quarter of 2017 furnished to the Securities and Exchange Commission and this information is available on the Company's website at www.AmericanAssetsTrust.com.
I will now turn the call over to our Chairman, President and CEO, Ernest Rady, to begin our discussion of third-quarter results. Ernest?
Ernest Rady
Thanks, Adam, and good morning, everyone, and welcome. Thank you for joining American Assets Trust's third-quarter 2017 earnings call.
Our focus in 2017, as it has been for all these years, continues to be in the growth of net asset value for our shareholders, which we believe will ultimately result in increasing cash flow and dividends paid out to our stockholders. The Company's Board of Directors has declared a dividend on its common stock of $0.27 per share for the quarterly period ending December 31, 2017, which is approximately a 4% increase over the prior quarterly dividend.
The dividend will be paid on December 21, 2017 to stockholders of record December 7, 2017. During 2017 we have continued to reinvest into our portfolio as major head tenants have transitioned out either through lease expiration or other events.
During this process everything has seemed to take longer than we initially expected and pushed out the timing of cash flow in several projects. For example, our Torrey Point development in San Diego, that was initially scheduled for completion by the end of the first quarter of this year, was delayed by unprecedented record rains in San Diego, which pushed the completion of the development out until late August of this year which, by the way, is now 35% leased.
We also saw the tight labor market combined with the slow permitting process in San Diego push back the completion of Torrey Plaza's renovation from May of this year until the end of 2017. We expect to see projects taking longer, especially with an already tight labor market seeing thousands of construction workers and contractors having to Houston and Florida, and of course now in Northern California, for hurricane and fire reconstruction work.
We have seen these cycles before and this too shall pass, but has had an impact on the timing of our cash flow. Bob is going to deduce our 2018 guidance which reflects our ongoing commitment to reinvest and reposition our assets regardless of the market cycle we may be in.
Always with a focus of enhancing our portfolio and creating long-term net asset value and net asset value growth for our shareholders. In July we closed on the approximately 128,000 square foot acquisition of Gateway Marketplace in San Diego for $42 million.
It was a small acquisition but strategically located adjacent to our existing South Bay marketplace that is approximately 133,000 square feet. On August one we took over management of the 533 unit Pacific Ridge apartment in San Diego overlooking Mission Bay and adjacent to the University of San Diego.
We are now in the process of digesting and optimizing the operations. This will be another great addition to our portfolio, we certainly hope.
On September 1 we acquired the former Mervyn building that we didn't already own with our Dell Monte shopping center on the Monterey Peninsula. This building is approximately 80,000 square feet and has Forever 21 and a Golds Gym as tenants.
We believe it is important to control the tenant mix within our centers and we consider this another strategic buy. The purchase price was approximately $5 million.
I will now turn it over to Bob Barton, our Executive Vice President and CFO. Bob, take it from here, please.
Bob Barton
Last night we reported third-quarter 2017 FFO of $0.524 per share. Net income attributable to common stockholders was $0.19 per share for the third quarter.
Our retail portfolio ended the quarter at 97% leased combined with the highest annualized base rents amongst our peers. On a year-over-year basis our retail occupancy of 97% was the same as reported in the third quarter of 2016, leaving roughly 99,000 square feet vacant in our approximately 3.3 million square foot retail portfolio.
During the trailing four quarters 71 retail leases were signed representing approximately 310,000 square feet or 9% of our total retail portfolio. Of these leases signed, 62 leases consisting of approximately 293,000 square feet were for spaces previously leased.
On a comparable basis the annual cash basis rent decreased approximately 7.6% over the prior leases. This roll down relates primarily to the 155,000 square feet Lowe's renewal in the second quarter at Waikele Center.
As you may recall, Waikele Center is a 537,000 square foot high quality dominant retail destination located in Waipahu within the fast growing area of West Oahu, Hawaii. It is approximately 10 minutes from the Honolulu airport.
It is a strategic location fronting Simon Premium Outlets and enjoying a half a mile of frontage along the north side of the Interstate H1, which provides excellent visibility as well as immediate access to major vehicular arteries. This center was developed in 1993 and we acquired it in 2004 and have experienced very strong same-store growth for the past 12-plus years.
As the major leases like Lowe's and others that have or will come up for renewal in the current marketplace, several of such tenants' in place rents have brands such that they are above the current marketplace. Once they are reset to market we expect to see same-store growth at the center once again.
Our office portfolio ended the quarter at approximately 89.9% leased. On a year-over-year basis our office occupancy of 89.9% was the same as reported in the third quarter of 2016.
Approximately half of that vacancy relates to Oregon Square which is still in operations until we finalize the path forward in the current marketplace. As you may recall, Oregon Square consists of four city blocks adjacent to the State of Oregon building and has the designation of a superblock within the Lloyd District of Portland, Oregon.
And carries with it a minimum of 12:1 FAR with flexibility on the type of product that can be developed. Approximately a year and a half ago, we deliberately began non-renewing the operating leases as they expired so we could be in the position of moving forward quickly if we could match the right product in the current marketplace with the right tenant and economics that are accretive to our shareholders.
We continue to evaluate the possibilities and believe that eventually we will create long-term value that will be accretive to our shareholders. During the trailing four quarters, 67 new leases were signed representing approximately 466,000 square feet or 17% of our office portfolio.
Of these leases signed during the year, 47 leases consisting of approximately 353,000 square feet were for spaces previously leased. On a comparable basis the annual cash basis rent increased 16.4% over the prior leases.
Let's talk about same-store cash NOI for a moment. Same-store retail cash NOI remained relatively flat in the third quarter and consistent with our initial 2017 guidance for our same-store retail, which is primarily due to the vacant Sports Authority space at our Waikele Shopping Center.
Same store office NOI remained relatively flat as well, increasing 1.7% in the third quarter, primarily due to the rent abatement we received in Q3 2016 on our rent expense for the six story building known as The Annex adjacent to The Landmark building in San Francisco that we lease from Paramount pursuant to a long-term master lease. So, in Q3 2017 we paid the lease rent expense for The Annex of approximately $600,000 and in Q3 2016 it was fully abated.
On a comparable basis, if you add back the rent expense for the prior year, you will see that we had strong same-store office cash NOI which would have been approximately 5% for the current quarter. Same-store multi-family NOI consisting of our San Diego multi-family property, except for the newly acquired Pacific Ridge, was up 6.6% on a cash basis for the third quarter.
Higher year-over-year rents is the main driver of the same-store growth for the multi-family portfolio. We continue to be pleased with the execution and direction of our multi-family portfolio.
Waikiki Beach Walk, our mixed-use property consisting of the Embassy Suites Hotel and Waikiki Beach Walk retail, reported a combined decrease in same-store cash NOI of approximately 8.1% for the third quarter, or approximately $617,000. Approximately 70% of that relates to the Embassy Suites Hotel as a result of a lower ADR by approximately $16 and a lower RevPAR by approximately $11, in large part due to the changes in the Japanese wholesale market.
Said another way, we are currently operating at a higher occupancy with a lower ADR. The remaining portion that relates to Waikiki Beach Walk retail relates primarily to one or two lease expirations that occurred in the first quarter of 2017 and we are in the process of re-leasing those spaces.
Tenant sales at WBW retail were at approximately $1,119 per square foot for the rolling 12 months as our tenants continue to benefit from the excellent location and good economy. Turning to our third-quarter results, FFO increased approximately $1.9 million or $0.03 to $0.524 per FFO share compared to the second quarter and primarily relate to the following activity.
Number one, the Embassy suites at Waikiki Beach walk in Hawaii increased approximately $0.016 of FFO due to the seasonality over the summer months. Number two, interest expense increased as a result of the new unsecured debt in Q3 and Q2 resulting in a reduction of FFO per share of approximately $0.019.
Number three, straight-line rent increased approximately $0.015 of FFO per share as a result of new leases signed at City Center Bellevue, Waikiki Beach walk retail and lease renewals at The Landmark in San Francisco. And number four, acquisition of Gateway Marketplace contributed approximately $0.01 of FFO per share.
Now as we look at our balance sheet and liquidity at the end of the third quarter we had approximately $344 million in liquidity comprised of $94 million of cash and cash equivalents and $250 million of availability on our line of credit. Our leverage at the end of the third quarter remains low at 34.2% on a total debt to total capitalization basis and a net debt to EBITDA of 6.4 times; although our focus is to get our net debt to EBITDA back down to 5.5 times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at 3.6 times. We have tightened our 2017 guidance range and are introducing our initial 2018 guidance.
Let's talk about 2017 guidance first. We are tightening our 2017 guidance and lowering the bottom end of the range by $0.01 for our full-year 2017 FFO per share to a range of $1.99 to $2.01 with a revised midpoint of $2 per FFO share, which was at the low end of our previous guidance.
We are lowering the bottom end of our range due to a more conservative outlook on the Pacific Ridge acquisition as we incurred higher-than-expected transition costs during Q3 to bring it up to AAT standards. Long-term this will be a great asset for purposes of providing guidance -- long-term this will be a great asset, but for purposes of providing guidance we thought it would be best to adjust the range accordingly.
We are reducing the upper end of the 2017 guidance range primarily because of straight-line rents on lease renewals at City Center Bellevue, Torrey Plaza and Torrey Point did not materialize as we had anticipated at the beginning of 2017. For example, at Torrey Plaza where we are located, we had hoped that the renovation that is currently undergoing would have been completed by the end of August, which is now estimated to be closer to the end of 2017 -- which has been primarily due to the extended time required to get permits processed on this project in San Diego.
At Torrey Point we had initially thought that we would have completed construction by the end of the first quarter in 2017 and it got pushed out due to the unprecedented rains and additional time required for the city of San Diego to sign off on final construction. Construction is not a perfect science, yet the long-term value that is being created will be accretive to our shareholders.
This is more about the timing of the cash flows than anything else. Based on the projected FFO per share midpoint of $2, we will have grown the FFO by approximately 8.1% over the 2016 FFO per share of $1.85.
Now let's talk about the 2018 guidance. We are introducing our 2018 FFO guidance range of $2.01 to $2.09 per FFO share with a midpoint of $2.05 per share, which is approximately a 2.5% to 3% increase in FFO over the 2017 midpoint.
While our 2018 guidance produces less than a stellar growth in our FFO as compared with prior years, it does reflect our commitment to reinvest in our high-quality portfolio no matter what cycle we may be in. Our focus continues to be in NAV creation for our shareholders and the production of consistent predictable cash flow with increasing dividends.
Let me walk you through what makes up our 2018 guidance. Number one, same-store retail cash NOI is expected to increase 3.15% and add $0.028 of FFO.
We expect the same-store retail portfolio to end the 2018 year at 97% occupancy. Waikele Shopping Center is being taken out of the same-store retail portfolio effective January 1, 2018 due to the significant redevelopment that will be taking place.
Number two, same store office cash NOI is expected to be relatively flat for guidance purposes and reflects five floors at City Center Bellevue, two of which have expired October 31 this week, and three remaining floors that are expiring on December 31, 2017. For guidance purposes we have left all five of these floors vacant for 2018 assuming it takes a minimum of four months to find a tenant and get a lease signed and six months to build it out.
Hopefully we are able to lease these floors out sooner versus later as we are in active discussions with several prospective tenants. The loss of revenue from these five floors for all of 2018 is approximately $4.6 million.
We believe the in-place rents are approximately 10% or more below market. The rest of the office portfolio is performing strong.
Absent these five floors at City Center Bellevue that we are leaving vacant in our guidance until leased, our same-store office cash NOI would've been 8% for 2018. We expect the same-store office portfolio to end the 2018 year and 94.7% occupancy.
Number three, same-store multi-family cash NOI is expected to increase 3.45% and add $0.01 to FFO. We expect the same-store multi-family portfolio to end the 2018 year at 95.8% occupancy.
Number four, same-store mixed-use cash NOI is expected to increase 2.8% and add $0.01 to FFO. We expect the same-store mixed-use portfolio to end the 2018 year at 93.4% occupancy.
Number five, let's talk about non-same-store guidance, which includes, A, Waikele shopping center, which is expected to reduce FFO by approximately $3.4 million or $0.053 with the expiration of Kmart on June 30, 2018, reflecting six months of no rent for the remainder of 2018; B, Gateway Marketplace that was acquired early in the third quarter is expected to increase FFO by approximately $1.2 million or $0.019; C, Pacific Ridge apartment community that was acquired in the second quarter is expected to increase FFO by approximately $3 million or $0.047; D, Torrey Point development in San Diego which is now 35% leased with rent commencing March 1, 2018 is expected to increase FFO by approximately $1 million or $0.016. For Torrey Point we assumed that we would be 93% leased and stabilized by October of 2018.
Hopefully it is much sooner than that as we continue to actively tour prospective tenants through the new development. Number six, G&A is expected to increase approximately $900,000 to $21 million and reduce FFO by approximately $0.015 per FFO share.
Number seven, interest expense is expected to increase approximately $340,000 and reduce FFO by approximately $0.005 per FFO share. Lots of moving parts and interest expense, but from a high-level perspective it reflects a reduction of $6.2 million in interest expense relating to the secured CMBS notes that were repaid in 2017 combined with the reduction in debt amortization of the fair value market adjustments on secured debt that was repaid in 2017.
This is offset with an increase of $6.8 million in interest expense relating to the new unsecured private placement debt that was issued during 2017 combined with the increase in interest expense related to the reduction in capitalized interest in 2018. Number eight, net effect of straight-line rents is expected to increase FFO by approximately $400,000 or approximately $0.005 per FFO share.
This could increase if office leasing exceeds our guidance expectations at City Center Bellevue and Torrey Point. Number 9, amortization of net above and below market rents is expected to reduce FFO by approximately $400,000 or approximately $0.005 of FFO per share.
These adjustments would approximately reconcile our 2017 midpoint guidance with our 2018 midpoint guidance. When I compare our 2018 midpoint guidance to the 2018 full-year consensus that I see in my Bloomberg screen of approximately $2.21 per FFO share, we are different by approximately $0.16 or approximately $10.3 million of FFO at the midpoint.
Below is a summary of the items that I believe are the timing differences in the cash flows between the two estimates due to delays in development, redevelopment projects and lease ups that may help to reconcile the difference. Number one, Torrey Point San Diego.
The remaining 51,700 square feet of office space available per lease, which brings us to a 93% occupancy, is expected to produce an additional $0.036 of FFO based on the current market dynamics. Our guidance factors this remaining lease up by October 2018 and at full year in 2019.
I believe Bloomberg's consensus reflects this as being leased up as of the end of 2017. Number two, Torrey Plaza San Diego where we are currently located.
The remaining 70,000 square feet will be available once the redevelopment is completed in December of 2017. Assuming the space is leased at 375 per square foot on a modified gross net of utilities basis, the remaining lease up is expected to produce an additional $0.036 of FFO per share.
Our guidance factors this remaining lease up by October 2018 and a full year in 2019. I believe Bloomberg's consensus reflects this as being leased up as of the end of 2017.
Number three, City Center Bellevue Washington. As previously mentioned, there will be five floors of approximately 91,000 square feet of office space that will be vacated between now and year end.
Assuming a market rate of $42 per square foot full-service gross, the re-leasing of these five floors is expected to produce an additional $0.042 of FFO per share. None of the space is forecasted to be occupied in our 2018 model.
I believe Bloomberg's consensus is not factored in the vacancy of these floors. Number four, Waikele Shopping Center, the former Sports Authority space.
As we mentioned in the past, we have entered into a letter of intent with a national grocer to lease the space. The delays have been tied to the time required for the national grocer to determine the most optimal configuration for their proposed space.
We are hopeful that a lease will be executed in the coming months. Once this lease is executed it will take approximately 12 months between working drawings, permits and construction to complete.
This is also dependent upon the final configuration of the space. Best case we could have it delivered in the first quarter of 2019 and worst-case would be several quarters beyond that.
We believe ultimately it will add approximately $0.017 of FFO. The Waikele Shopping Center, the former Kmart space, our redevelopment plans are ongoing and we continue to evaluate the best ideas that will revitalize the shopping center with the right tenant mix.
No leases have been signed, but our best information at this time is that we expect this redevelopment would add approximately $0.037 of FFO when completed. As leases get signed we will update you on our expectations.
As to the timing, without any leases currently signed our best guestimate is that we could lease or redevelop the space for delivery by the beginning of Q3 2020. Number 6, Hassalo on Eighth, Portland, Oregon.
We completed the 657 unit award-winning multi-family development late in 2016 as rent growth was slowing and new supply was coming on. We believe we are still approximately at least $0.015 per FFO below what our expectation was going into the development.
The strategy was right; however, after eight years of positive rent growth from 6% to 10% annually, it came to a stop late in 2016 and into 2017. Long-term the project will do well and create value for our shareholders.
Our occupancy is keeping steady around 93%. We see it as a timing issue until current supply is absorbed and the Lloyd District continues to evolve into a thriving community.
We believe these reconciling items explain the differences in expectations between our 2018 guidance and consensus on Bloomberg. Lastly our operational capital expenditures are budgeted to be approximately $31 million to $35 million in 2018.
We will continue to do our best to be as transparent as possible and share with you our analysis interpretations on our quarterly numbers. We are well prepared with an even stronger balance sheet than in prior years to capitalize and execute on the opportunities that we believe will present themselves over the coming quarters.
Operator, I will now turn the call over to you for questions.
Operator
[Operator Instructions]. Our first question comes from Todd Thomas with KeyBanc Capital Markets.
Your line is open.
Todd Thomas
A couple of questions around the guidance. And Bob, thanks for a lot of the good detail there.
First, I think late last year or early this year you talked about 2017 being a year of transition. And you commented that a lot of the completions and activity was pushed back and delayed here.
Do you think that the disruption causing some of the cash flow volatility will settle down during 2018? Or do you anticipate that it might continue through 2019 a bit when you factor in some of the other expirations and activity that is ongoing in the portfolio?
Ernest Rady
Todd, that's a really great question and if we were absolutely confident in the answer we could tell you. All I can tell you is that the portfolio remains of top quality.
The people who are managing it are top quality. The markets we are in they are very good and very significant.
There is a lot of activity, but I wish I could tell you exactly what would happen. I think and I hope it will settle down.
The values have remained as they have in the past and actually probably continue to grow. So, all I can tell you is we are going to do our best to make sure that the volatility declines and the FFO continues to grow.
Bob Barton
Yes, I would add to that, Earnest, that I expect the volatility to decline. If you look at the beginning of 2017, there was concern about -- we had 15 floors of vacancy or expirations coming due at City Center Bellevue.
All those have been dealt with the exception of the new ones that are coming on from this week -- the five floors I talked about. But as of today we only have 12,000 square feet of vacancy.
I think also too by taking Waikele Center out of same-store that will reduce the volatility on a going forward basis.
Todd Thomas
Okay and then with regards to the Pacific Ridge acquisition, you mentioned that there were some higher transition costs there to bring that asset up to AAT standards. Can you elaborate on that little bit?
And then when do you think the transition there will be complete and when do you expect to stabilize occupancy?
Ernest Rady
The project was managed by professional managers who were not active in the market in San Diego. We couldn't take over as soon as we wanted to because there was a turnover of students and we were reluctant to take over and deal with that.
So we allowed them to do it. Then when we took over those prior managers exited.
So, we had to replace the management which we've done. And we think that over the next year we'll be able to enhance the returns from that project.
But it's been a busy few months and it was more turbulent than I would've expected.
Todd Thomas
So, in terms of occupancy is that sort of set at this point for the balance of the school year here? Will it take another leasing cycle to get occupancy up?
Ernest Rady
Well, we have some vacancy that's in the nonstudent units and those are leasing up well. We won't know about the occupancy for the students until the school year is over.
We're starting to plan for that as of -- in the next 30 to 45 days. So, it's a great project.
We've got to get our hands around it and we are doing that and we are as optimistic as ever. And also frankly there was some deferred maintenance in that project because the people who owned it before were not as diligent in maintaining the facilities as well as they should have.
So, we are playing catch-up with that. But the project is as good as we ever thought it was.
The location is good if not better than we thought it was. The opportunity to work with students is as good as we ever thought it was and the rentals to non-students are as -- we are as hopeful as ever.
Bob Barton
Yes, Todd, we ended Q3 at 90.4% leased and we should be around 93%-94%. If you look at Q2 we were at 94.2% leased.
So, part of that was on -- had to do with the transition. So our hope is that we're back to 93%-94%.
Ernest Rady
I think we are, Bob. I think we leased a bunch of units in the last couple weeks.
Todd Thomas
Okay. And just on the balance sheet, Bob, you talked about reducing leverage back to about 5.5 times on a debt to EBITDA basis.
Can you just talk about the timing there and the path to reduce leverage?
Bob Barton
Yes, a low leverage is important to us and the path to get there is two ways. One is by the growth in the EBITDA; and secondly, it is the payoff of the outstanding debt.
So for instance, we have a mortgage coming due at the end of the first quarter, beginning of the second quarter. Our expectation is to pay that down with cash.
And as the legacy CMBS matures we'd like to pay back down. So, we think if you look at our corporate operating model, within eight quarters or less we should be at a 5.5 or less on a net debt to EBITDA basis.
Todd Thomas
Okay, thank you.
Operator
Our next question comes from Craig Schmidt with Bank of America. Your line is open.
Craig Schmidt
Portraying 2018 as a transition year, as you look out into 2018 is there any risk to continue drag in terms of taking a little bit longer to lease up some projects and getting approvals and the kinds of things that are bringing the 2018 number down?
Ernest Rady
I think the approvals are in place. It's now a question of leasing that space that we created.
And as I said earlier in an answer to another question, that there's a lot of activity, but we can't predict exactly when it's going to lease up. But we are hopeful if not optimistic that the lease up occurs quickly.
The transition just took us longer than we thought because of mostly external factors if you want to know the truth. I can go into those in detail if you're interested.
Craig Schmidt
Well, I guess one of the external -- I'm wondering are retailers reacting more slowly? We are hearing from some of your peers, at least in the retail space, that while deals may get done, it's taking a lot longer for them to get done.
Ernest Rady
I think that is absolutely accurate. We can give you some color if you want to hear about that from Chris.
It's taking longer. It's a little more difficult to negotiate with them.
Many of them are not expanding as rapidly as they have been in the past and it just takes longer and more handholding.
Craig Schmidt
And is Chris' expectation this drag will continue for the next 12 months or will they be a little bit more reactive?
Chris Sullivan
Craig, if I had to anticipate what will happen is the active retailers are just a lot more site visits, a lot more checking of boxes to make sure that they will go forward on a site. So, it won't get any easier but, as I always said before, even before this it wasn't easy with the big boxes.
So that world isn't really going to change.
Ernest Rady
On the other hand, I think that the quality of our portfolio will lead us through this turmoil in better shape than many of our peers. I think the quality of the portfolio will speak for itself as the cycle plays out.
Craig Schmidt
Great, thank you.
Operator
Our next question comes from Michael Carroll with RBC Capital Markets. Your line is open.
Michael Carroll
Bob, I'm sorry if I missed this, but did you provide the details on the plans for Waikele Center? How extensive will that redevelopment be and do you have an estimated budget for that?
Bob Barton
We've run some preliminary numbers, but we really don't because it depends on who steps into Kmart. We are looking at various scenarios on what to do.
And until the lease is signed I really don't want to put any estimates out there because it could change.
Ernest Rady
Michael, as Chris said earlier, all these retail tenants take longer to make up their mind and to make a commitment than they have in the past. On the other hand, it's a half a mile of frontage on the H1 with 43 acres of fee simple in the middle of an established community.
So will it happen? I'm absolutely confident.
The timing I'm not as certain and the outcome I'm not as certain. But it will be good, I just don't know how good.
Chris Sullivan
I guess trying to answer your question from a different perspective is that back in June we published our updated NAV at that point in time and we factored in the costs that we thought it that point time and ran a discounted cash flow. And assuming that the cash flows wouldn't materialize until 2020 and then discounted those cash flows back on the Kmart center.
We factored in the Sports Authority, bought vacant box and the Kmart vacant box and discounted it all the way back till June of 2017. And even then we still came in at $50.75 on an NAV basis, net asset value per share basis, which factored in all those discounts.
So, while I don't want to go through what the actual cost was at that point in time, we are still fortunate to have a very high quality portfolio.
Michael Carroll
Okay, and then are you renovating just the Kmart box or are you renovating the entire center?
Bob Barton
No, we are renovating the Kmart box and then we are repositioning or bringing in a new tenant for the Sports Authority.
Chris Sullivan
And then the renovation of the center will just be an enhancement of the center. So don't look at it as if the entire center is being taken out.
This is just the re-leasing of the Kmart box and then I put -- re-skinning of the property to bring it up to standard. You've got to remember it's in the middle of the Ion terrific space, but it's also been sitting there for 15, 20 years.
It just needs a refresh, but by no stretch is this a completely redo the center.
Michael Carroll
Okay and then why is it taking so long to execute a lease with that national grocer? Are you still confident that that will occur?
Ernest Rady
I'm going to ask Chris to handle that.
Chris Sullivan
I feel very confident that that will occur. The industry shakeup with many of the major tenets puts everything quite a bit slower.
There's an awful lot more on their plate. The grocery business comes down to how perfect those aisles are positioned, where everything goes so that when you go down that racecourse with your basket all the most optimal profitable pulls off those shelves and SKUs, that's where the rubber meets the road there in the grocery business.
So, it takes them a long time, but the end result is not just do you get a grocery store, not just do you get the rent, you're probably going to get another 30,000 people coming into your center every week. And that's what makes the difference.
Tenant mix is everything in this business.
Michael Carroll
Okay great and then last question, with the Bellevue expirations in the office portfolio, how much downtime do you currently assume in your guidance?
Bob Barton
We have left them completely vacant for 2018 on the five floors in City Center Bellevue. And what we did in our earnings script, I mentioned that we assume it's going to take at least four months to find and locate a tenant, because you can't show that space until those tenants which expire on 12/31 open up the doors so you can tour through their former space.
So, we put four months to find, locate, sign a lease and then six months to build it out. That takes me 10 months and then I have another two months for whatever you want to call it, additional time.
So I just left it out. As soon as the leases are signed and they will come in -- and hopefully our office guys will outperform.
Jim?
Jim Durfey
This is Jim. I feel confident I will beat Bob's estimates, but I'll just leave it at that at this point time.
Ernest Rady
It's a good question though, Michael, thank you.
Operator
Our next question comes from Rich Hill with Morgan Stanley. Your line is open.
Rich Hill
Good morning. Thanks for taking the call.
Why don't you just chat maybe a little bit more about the Lowe's lease renewal? And I apologize if I missed it earlier.
But is that a trend that you think you're going to see going forward? And is it right to characterize that the lease rolled down?
How should we think about that?
Bob Barton
Do you want to take that, Chris, or should I take it?
Chris Sullivan
No, I'll take it. Rich, so, on the Lowe's lease, so they were well over market.
I don't want to go into too many details; there's a lot of strategy on how many stores they're going to put on the island, where they're going to get positioned. And so, we took a bit of a roll down on that.
I recognize that was painful for us to take it. But after copying the market carefully, what's out there, where they can go -- this is a 10-year term.
We don't want to lose Lowe's at that site. That Lowe's produces quite a bit of traffic to the center.
It's good traffic. But to answer your question, that large box of 155,000 square feet, that comes down to more in what's the market range for them and more into their occupancy.
So, I hope that answers your question.
Ernest Rady
Their store, Rich, was not up to their standard. It was a store that they bought from someone else and it was substandard.
So, they had to look at this as an investment going forward. And so, it was important for us to keep them and thankfully they decided to stay with us rather than to go to an alternate site.
Rich Hill
Got it. And then one more question if I may.
I think I heard you say correctly the same store NOI for multi-family baked into the guide was around 3.45%. Please correct me if I'm wrong.
That seems like a fairly material slowdown I think from what you're putting up this year. Is it just because the properties that you have, which are great, have sort of matured, you've leased them up and this is what we can expect going forward?
Or was there something else driving that, maybe supplier something else?
Bob Barton
I guess the first answer is yes, the 3.45% is what we are projecting for same-store cash NOI growth. I think what you've seen -- the rent growth in the prior several years, we've been using lease rent optimization tied in with our accounting system/property management system, which tells you what the market is locally and it encourages you to get all you can get from a rent standpoint.
And we've had tremendous growth for the last probably three, four years. So, what we are doing is we're putting in what we think, based on our data information, where we think it's going.
Now hopefully I'm wrong, but I think that is a good estimate for 2018. Ernest?
Ernest Rady
It's a macro estimate too because incomes in San Diego have not kept -- income growth in San Diego has not kept up with the cost of housing. Housing prices have risen, rents have risen dramatically and there may be a ceiling on this marketplace and there may not.
So I think what Bob said is just the best guess we could make. But one thing I can assure you is we'll do the best we can for our stockholders and at the same time provide the best housing we can for our tenants.
Rich Hill
Got it. Thank you, Bob.
Bob, just to reiterate, I wasn't suggesting that it wasn't a good number. I was just trying to understand the deceleration.
So thanks for your transparency as always, guys.
Operator
Our next question comes from Haendel St. Juste with Mizuho.
Your line is open.
Haendel St. Juste
Curious, Ernest, if you are a buyer of assets today. And if so, is it fair to assume that apartments are still your preference?
And how would you be thinking about funding and are you seeing any change in seller psychology?
Ernest Rady
Of the three asset categories we are in, apartments probably provide the best opportunities. You heard our discussion about retail and the wins that are interfacing from Amazon, etc.
Office, we've always said we have great office. We have enough office right now.
As far as funding apartments, that would be a problem because we have cash on hand and we could acquire some apartments. Bob is and the Board is devoted to keeping the leverage low.
So what we do is we enhance our existing apartments. We also have plans -- we have plans -- not also, but we have plans to enhance the existing apartments and that's our strategy, that's where most of our capital is going to be going.
On the other hand, we also see construction costs going up dramatically. So, we have a great opportunity, for example, in Hassalo where even though the rent have not met our expectations, Bob's estimate from the marketplace has been that the value of that project has increased by $30 million to $50 million even though the rents are not what we hoped they would be.
So, it's a real problem today to how do you make a tight construction market, increasing construction costs, rents that are flattening out work. So, we think that -- we know that we're grateful for what we have and we need to maximize it and acquisitions are probably not going to drive the Company in the future in any significant -- in the short-term future in any significant way.
Haendel St. Juste
Got you, got you. Thanks for that.
So, it sounds like as you think about capital allocation, debt reduction, funding your readouts, certainly a bit higher priority today than acquisitions.
Ernest Rady
I would say so, yes. Bob is shaking his head -- and when Bob shakes his head it's tough to change his mind.
Haendel St. Juste
So thinking long-term, and we've talked about this before, about where you'd like the portfolio to be. You have great assets on the West Coast, assets that I am sure a lot of people want.
But just thinking about the balance of the portfolio over the next call it five years. Is it fair to assume that retail probably plays a lesser role?
I mean, it sounds like you like what you have, but incrementally, given the situation or the retail backdrop, you'd probably like to have a little less. And it sounds like apartment exposure probably is what makes up any reduction in retail.
Ernest Rady
I don't know that we are thinking about reduction in retail, because anything we would consider selling would be impossible to replace. But we have, and we've said it many times, that we have irreplaceable assets.
So, I don't think we're thinking so much about reduction, but -- and we think that over the next five years this portfolio has the possibility of reducing the results that it's produced over the last five or six years. If you'll recall, Haendel, when we went public we estimated we had a 21 or 22 NAV and five or six years later we've distributed large amounts of cash and dividends and we have a net asset value of approximately $51 a share.
We are going to try not to settle for less and we're going to do the best we can. But we still think that the portfolio is a way of producing consistent and growing cash flow and enhancing net asset value.
Haendel St. Juste
Okay. And one more if I may.
Joint venture partners, in the past, it seems as though you've been a bit more hesitant towards bringing in JV capital into some of your larger projects. I'm wondering if that has changed in light of some of the challenges in San Diego and Portland.
Curious on what role joint ventures could play as you perhaps think about derisking some of your larger projects.
Ernest Rady
Well, the opportunity of course that people are looking for is for us to put some of our assets in the joint venture. That's absolutely off the table.
But if we found a joint venture partner who would put up a significant amount of cash and we would put up some as well. And we would get management fees and we would get some leverage or some carried interest, that would be something we consider.
So far nobody has stepped up with those terms and we are not prepared to do anything on terms that are not really beneficial for our existing stockholders.
Haendel St. Juste
Thank you for the thoughts.
Operator
Thank you. I show no further questions in queue, so I'd like to turn the call back over to Mr.
Ernest Rady for closing remarks.
Ernest Rady
I want to thank you all. This is not the report that we've made over the last six years.
And we know that it's not up to the standards that we have set, it's not up to our historical performance. And I can tell you that myself and management is dedicated to returning to those metrics and making our stockholders proud and happy.
And so, thank you for your interest and we hope we have better news going forward. Thank you all for joining us.
Operator
Thank you. Ladies and gentlemen, that concludes today's conference.
Thank you for your participation. You may all disconnect and have a wonderful day.