American Assets Trust Inc

NYSE:AAT

Good day, and welcome to the American Assets Trust Fourth Quarter and Year-End 2023 Earnings Conference Call. [Operator Instructions] Please note that statements made on this conference call include forward-looking statements based on current expectations, which are subject to risks and uncertainties discussed in the company's filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements as actual events could cause the company's results to differ materially from these forward-looking statements. As a reminder, today's conference call is being recorded.

It is now my pleasure to introduce your host, Mr. Adam Wyll, President and COO for American Assets Trust. Thank you, Mr. Wyll, you may begin.

Thank you, Gary. Good morning, everyone. Welcome to American Assets Trust Year-end and Fourth Quarter 2023 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. With that quick intro, I'll turn the call over to Ernest Rady, our Chairman and CEO, to begin the discussion of our year-end and fourth quarter 2023 results. Ernest?

Thanks, Adam, and good morning, everybody, and thank you all shareholders for your continued support. I wanted to reiterate our continuing focus on making disciplined business decisions that will support the growth of our earnings and shareholder wealth over the long term. We believe that long-term focus guided by high-quality, irreplaceable and diverse portfolio of properties as well as the strength of our balance sheet, our top notch management team, our very nimble and efficient operating platform and our ability to quickly and prudently adapt to meet evolving demands will allow us to remain well positioned to continue growing our earnings on an accretive basis and could contribute to our outperformance over the long term.

Particularly, as we see replacement costs for high-quality property like ours soaring and likely continued decline over the years to come, we think that today's real estate prices for premium property like ours, will be a bargain in the future. In the meantime, we are encouraged by our operating fundamentals as we built upon our solid growth over our record FFO year in 2022. In fact, we have exceeded that in 2023 to achieve our highest FFO per share since our IPO, and that's over 13 years ago, which makes me so proud of our company, the management team and all of our associates. And by the way, that growth has been notwithstanding the difficult and generally unpredictable economic cycles, volatility and world events that we've been focusing and facing and likely will continue to face.

To me, that speaks volumes about the resilience of American Assets Trust, yet we will see opportunity for organic growth over [indiscernible] years, including through the lease-up of our new developments, the eventual rebound of Asian tourism to Oahu, pushing rents and prudently managing expenses that we will do our absolute best to capitalize on. But during these volatile and uncertain times, our #1 priority is maintaining a strong balance sheet with ample liquidity and an increasing dividend.

Adam, Bob and Steve will go into more detail on our various asset segments, financial results and guidance. First, I want to say that the Board of Directors has approved a quarterly dividend of $0.335 per share for the quarter, an increase of 1.5% from our previous dividend, which we believe is supported by our financial results and is an expression of the Board's confidence in our expected performance. The dividend will be paid on March 21 to shareholders of March 7.

On behalf of all of us at American Trust, we thank you for confidence and continued support in allowing us to continue to manage our company. I'm going to turn the call over back to Adam. Thank you.

Thanks, Ernest. In 2023, our operating fundamentals and financial results were quite healthy and among the best in our history, including the following achievements to name a few. As Ernest mentioned, our highest ever FFO per share, a 3% increase from 2022 and an approximately 7% compounded annual growth rate in our FFO per share since our IPO in 2011. Our highest ever total revenue and over 4% increase from 2022, our highest ever net operating income, or NOI, a 3% increase from 2022. Our highest ever average monthly base rent per square foot for both our office portfolio and retail portfolio, highest average monthly rent per unit for our multifamily portfolio and our highest ever ADR and RevPAR for our WBW Embassy Suites and our highest ever total dividends paid of over $101 million.

We believe these achievements reflect in part the meaningful capital improvements that we've made to continue to enhance, improve and amenitize our properties to remain best-in-class. We certainly know how well received those have been by our tenants, and it makes a significant difference in our ability to retain existing tenants, attract new tenants and push rents. Particularly with the high barrier to entry, modern and amenitized properties like ours that are in the path of growth, education and innovation with convenient transportation access and therefore, are more resilient to challenging market forces in inevitable cycles of the real estate industry.

On the office front, a 2023 report from the U.S. Bureau of Labor Statistics showed that worker productivity [indiscernible] to its lowest level in 75 years, most of which decline was attributed to employees working from home and the corresponding lack of development and engagement. In fact, another industry report showed that companies that have gone fully remote have almost 2x the annual turnover that companies with full-time office and hybrid work policies. What that keeps proving to us is that employers will eventually need to pivot away from remote policies, and our job is to create impactful experiences at our office projects to help our tenants attract employees to the office by enhancing amenities, technology, well-being and the like to support our tenants operational, financial and cultural objectives at the workplace.

We've seen in the past week that UPS, Boeing and others are now insisting on 5 days in the office by their employees as they understandably lose patience with remote work. Meanwhile, from the data we received based on [indiscernible] access control records and property manager estimates, we have seen a further uptick in office utilization at our properties since the end of Q3 with Bellevue and Portland increasing another 5 to 10 percentage points. And San Diego and our Landmark at One Market in San Francisco maintain their strong utilization. And as hybrid work evolves, we note that more than 3/4 of our office tenants have employees in the office at least 3 days a week, progress to be sure.

On the retail front, which comprises 27% of our portfolio NOI, we are about 95% leased with just 6% of our retail GLA expiring this year. We continue to see an improved leasing environment post-COVID as retail fundamentals and U.S. consumer spending have remained relatively strong for the most part, assisted by steady labor markets, excess savings and wealth creation from equity markets and home prices.

In Q4, we had significant retail renewal activity. Our comparable retail leasing spreads have maintained their favorable trajectory over the past year plus with a 7% increase on a cash basis and 13% increase on a straight-line basis for Q4 deals and a 6.5% increase on a cash basis and 15% increase on a straight-line basis for all of 2023. No doubt, this is a testament to our best-in-class and well-managed retail properties that are absolutely dominant in the trade areas which reside in supply-constrained and densely populated markets with favorable demographics.

With respect to our San Diego multifamily communities, we continue to see slightly positive, albeit decelerating blended rent growth in Q4. Specifically in San Diego, we saw leases on vacant units rent at an average rate of approximately 7% reduction from prior rents. This largely due to our pushing lease percentage from 93.5% in Q3 to 95% in Q4 in what is otherwise a seasonally slow leasing period, while rates on renewed units increased an average of 8% over prior rents for a blended average of an approximately 1% increase.

Additionally, in San Diego, net effective rents for our multifamily leases are now over 5% higher year-over-year compared to the fourth quarter of 2022. In Q4 in Portland at our [indiscernible], we saw a blended decrease of approximately 4% between new move-ins and renewals with concessions being offered on longer-term leases as we worked to push our lease percentage from 92% in Q3 to just under 96% at the end of Q4. Net effective rents for our multifamily leases at Hassalo are flat to slightly down year-over-year compared to the fourth quarter of 2022 as the multifamily market in the Pacific Northwest has remained sluggish with softening rents.

As you know, our multifamily communities reside among favorable demographics with fairly low unemployment rates, strong income growth and high ownership costs, so we remain bullish long term on our multifamily fundamentals and wanted to note that notwithstanding some softening in the market, we realized same-store cash NOI growth of 5.5% in 2023 as compared to 2022.

Touching briefly on a few tenants that filed bankruptcy towards the end of 2023, we have come to terms with WeWork at our Oregon Square and [indiscernible] at our Del Monte Center, both of which have remained current on rents to remain at those properties with extended terms subject to bankruptcy court approvals, which are anticipated in the coming quarters. In fact, WeWork has closed all competing locations in Portland, redirecting all business to our location at Oregon Square.

And finally, we're pleased to announce that in January, we entered into a settlement agreement regarding building specifications for one of the existing buildings at our office project in UTC in San Diego, in which we received a net settlement payment of $10 million. With that, I'll turn the call over to Bob to discuss financial results and updated guidance in more detail. Bob?

Thanks, Adam, and good morning, everyone. Last night, we reported fourth quarter and year-ended 2023 FFO per share of $0.57 and $2.40, respectively. Fourth quarter and year-ended 2023 net income attributable to common stockholders per share was $0.17 and $0.84, respectively. Fourth quarter FFO decreased by approximately $0.02 to $0.57 per FFO share compared to the third quarter of 2023 primarily due to lower revenue at the Embassy Suites Waikiki Hotel, as expected due to the normal seasonality between the high season of Q3 and Q4.

Same-store cash NOI for all sectors combined was 2.6% growth year-over-year for the fourth quarter and 4.5% growth for the full year ended 2023 as compared to the full year ended 2022. Meanwhile, all sectors have positive same-store cash NOI in the fourth quarter, except for the retail sector, which was negative 1.2%, primarily due to a onetime write-off of certain development expenses in Q4 2023 and a large real estate tax refund received in Q4 '22 at [indiscernible].

As to our liquidity, at the end of fourth quarter, we had liquidity of approximately $483 million comprised of approximately $83 million in cash and cash equivalents and $400 million of availability on our revolving line of credit. Additionally, as of the end of the fourth quarter, our leverage, which we measure in terms of net debt to EBITDA, was 6.5x on a trailing 12-month basis. Our objective is to achieve and maintain net debt to EBITDA of 5.5x or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.6x on a trailing 12-month basis.

Let's talk about 2024 guidance. We are introducing our 2024 FFO per share guidance range of $2.19 to $2.33 per FFO share with a midpoint of $2.26 per FFO share, which is approximately a 5.8% decrease over 2023 actual of $2.40 per FFO share. Starting with 2023 ending FFO of $2.40 per share, there are 7 things combined that make up the decrease. They are, number one, same-store cash NOI for all sectors combined, excluding reserves, which I will discuss in more detail in a few minutes, is expected to decrease less than 1% or approximately $0.01 of FFO per share in '24. Broken out by each sector and excluding reserves in each case, same-store office cash NOI is expected to decrease approximately 2.3% or $0.04 per FFO share. This is the first time that we have had negative same-store office cash NOI guidance and in our view, it is due to this unique point in time in which existing and prospective office tenants are taking a longer period of time to make decisions on leasing office space.

Excluded from our same-store cash NOI, guidance is approximately 317,000 square feet or $0.05 per FFO share of speculative office leasing that we decided to push out to 2025, which is more of a timing issue from our perspective. Our decision was based on: if it is not likely to be leased in the first quarter or early second quarter of 2024, it will not likely create revenue in 2024 due to the timing of permitting and construction in our markets. So we took a somewhat conservative approach, and we will continue to update our numbers each quarter as we prefer to under-promise based on the uncertainty and longer decision-making we see and hopefully over-deliver on results as we have done in the past.

Same-store retail cash NOI is expected to increase approximately 2.3% or $0.02 per FFO share in 2024. Same-store multifamily cash NOI is expected to increase approximately 1% or $0.005 per FFO share in 2024. We are anticipating decelerating rent growth in both San Diego and Portland markets, as Adam mentioned earlier, along with the increased operating expenses, particularly insurance, security and repairs and maintenance that we expect to incur in '24.

We expect our multifamily revenue in 2024 to increase 2.6% over 2023 while we expect our multifamily expenses in 2024 to increase 4.4% over 2023. Same-store mixed-use cash NOI is expected to increase approximately 1% or $0.005 per FFO share in 2024. Our 2024 Embassy guidance is prepared by our partners at Outrigger in Waikiki that have boots on the ground and have an awareness in Waikiki from other hotels and retail properties that they own and/or manage. Our 2024 guidance for the Embassy Suites Hotel and Waikiki is based on the following: revenue is expected to increase approximately 4.5% in '24; operating expenses are expected to increase 6.4% in '24 due to the inflationary impact on operating expenses in Hawaii, such as food cost, labor and overhead; occupancy is expected to increase by approximately 2.3% in '24; ADR or average daily rate is expected to increase approximately 2% to $381 in 2024; and RevPAR is expected to increase approximately 5% to $334 in 2024.

Of note, our 2023 NOI for the Embassy Suites Hotel increased by 12.5% compared to 2022 year-to-date and by approximately 8% compared to 2019 even without our guests from Japan. Unfortunately, Japan tourism in Oahu has been much slower than expected due primarily to weakness in the Japanese currency. It is a matter of when, not if, the Japanese return in a more meaningful way to Oahu.

Non-same-store guidance, which is number two, includes One Beach, Oregon Square Building 710 and La Jolla Commons Tower III. Combined, they are expected to decrease FFO by approximately $0.02 per FFO share in '24. Steve will fill you in regarding leasing of these properties.

Number three, now let's talk about reserves. Estimated bad debt expense reserves are expected to decrease FFO by approximately $5.3 million or $0.07 per FFO share in '24. These reserves are based on our internal probability of risk assessment where we believe that it is more likely than not that these reserves will be needed during 2024. Of the $0.07 of credit reserves, approximately $0.03 of the reserves are allocated to the office sector and $0.04 of the reserves are allocated to the retail sector. These reserves constitute just over 1% of our total expected revenue in 2024, which we believe is a reasonable percentage.

Similar to last year, we are taking a conservative view of the potential risk with certain tenants, particularly in the somewhat unpredictable economic environment and hope to reduce these amounts each quarter as rents are paid.

Number four, G&A is expected to be flat for 2024. Number five, interest expense is expected to increase approximately $3 million and therefore, decreased FFO by $0.04 per FFO share in 2024. This increase relates to $100 million of the Series F notes, which are maturing in July 2024. Once again, we are likely being conservative as we are modeling the interest rate on the refinance to increase from 3.78% to 7.5% due to the volatility of the markets. Hopefully, the rates will be much less than that in July.

Number six, GAAP adjustments primarily related to straight-line rents will decrease FFO by approximately $3.9 million or $0.05 per FFO share in 2024. Number seven, litigation settlements will increase FFO approximately $3.5 million on a net basis over 2023 or $0.05 per FFO share in 2024. This net increase in FFO reflects the settlement mentioned by Adam, regarding building specifications for one of our existing buildings in UTC in which we received $10 million this January 2024, offset by the settlement regarding Building Systems at Hassalo on Eighth in January 2023, which we received a net payment of $6.3 million. The net difference reflects the increase in FFO for 2024.

These adjustments when added together will be approximately $0.14 per FFO share, represents a net decrease in 2024 midpoint over the 2023 FFO per share. While we believe the 2024 guidance is our best estimate as of the date of this earnings call, we do believe that it is possible that we could perform towards the upper end of this guidance range.

In order to do that, first, we need to outperform our multifamily guidance by continuing to see increasing rents and occupancy and/or less expenses than budgeted. Secondly, the office and retail tenants that we reserve for continue to pay rents through the year. Third, additional speculative office leasing needs to occur in Q1 and Q2 of this year. Fourth, interest expense on the refinance of our Series F notes needs to be less than 7.5%. And fifth, tourism and travel to Waikiki needs to see a meaningful return from our Japanese guests, which we are cautiously optimistic about.

Lastly, we have modeled our same-store office occupancy at 12/31/24 to be 86.5% and our total portfolio office occupancy to be 84.3%. We have also modeled our same-store retail occupancy to be 93.9% at year-end '24. Our operating capital expenditures is estimated to be approximately $59 million for the year-ended '24.

As always, our guidance, our NOI bridge and these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we've already discussed. We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers. I also want to briefly note that any non-GAAP financial measures that we've discussed like NOI are reconciled to our GAAP financial results in our earnings release and supplemental information.

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

Thanks, Bob. At the end of the fourth quarter, our office portfolio was 86% leased, dropping 80 basis points, primarily due to 2 known move-outs in Portland. On the first move out, we already have leases out for signature on over 10,000 rentable square feet to backfill the 25,000 rentable square feet move out of Lloyd Center Tower with increases of 9.9% on a cash basis and 13.5% on a straight-line basis for the new deal.

On the second move out, the tenant actually downsized from a 16,000-foot full floor at Lloyd 700 into approximately 12,000 rentable square feet rather than live through an occupied remodel and corridor construction. And we already have an interest in that vacated full floor from a potential replacement tenant.

Meanwhile, in the fourth quarter, we executed 11 leases totaling approximately 35,000 rentable square feet, which included a new restaurant lease at La Jolla Commons III and a Starbucks renewal at First & Main. Netting out those retail leases, we executed 9 office leases totaling approximately 27,000 rentable square feet as follows: we executed 6 comparable new and renewal leases for approximately 21,000 rental square feet with rent increases of 23.4% on a cash basis and 31.2% on a straight-line basis and we executed 3 noncomparable leases totaling approximately 6,000 rentable square feet.

While Q4 was relatively quiet as expected, 2024 is already off to a strong start. We've executed 6 leases to date totaling approximately 50,000 rentable square feet, of which approximately 15,000 rentable square feet is net absorption. Approximately 46,000 rentable square feet were comparable leases with increases of 10.7% on a cash basis and 26.6% on a straight-line basis. And we have additional 10 deals in lease documentation totaling approximately 93,000 rental square feet, of which approximately 41,000 rentable square feet is net absorption. Approximately 34,000 rentable square feet are new deals with no prior tenant. The remaining 59,000 rentable square feet are leases with increases over prior rents at 18.3% on a cash basis and 27.9% on a straight-line basis. And we have additional proposals in play and tour activity is increasing.

Let's talk about La Jolla Commons III for a moment. As mentioned earlier, we signed a restaurant lease with [indiscernible], one of the country's most acclaimed chefs to open a French concept in the new tower's restaurant wing. Travis and partner [indiscernible], one of 2023's top 5 restaurants in San Diego Magazine.

Our fitness center designed by Gensler and to be operated by Health Fitness is into the city of San Diego for permit. Layouts are underway with construction commencing next month for this premier fitness amenity. Our first office leases out for signature in the new tower for approximately 8,200 square feet, and we have several proposals in various stages of negotiation and tour activity is increasing, albeit decision-making is taking a bit more time these days.

Nevertheless, the UTC submarket remains very healthy, and there is a scarcity of top-tier spaces in the market as evidenced by our rates recently achieved and new proposals made for Tower 1, which are approaching pro forma rates for Tower 3. While we are not immune to continued additional attrition due to current conditions, the attrition is waning and being offset by the new leasing activity just discussed. We're down to approximately 6.8% rolling in 2024, given deals signed year-to-date with the average deal size of the remainder of approximately 5,600 square feet. And we have approximately 8% of the portfolio rolling in 2025, with the average deal size of approximately 7,200 rentable per square feet.

As Ernest said, we continue to focus on making disciplined business decisions with a long-term focus. Our strategic investments in exceptional new amenities and spec suites, both initiatives launched in early 2018 continued despite the negative press because we are achieving premium rents despite stubborn market headwinds. We believe that the flight to quality, experience and stability of our office portfolio for new tenants and the stickiness created by those attributes for our existing customers with leases expiring will drive solid performance through these turbulent times and drive NOI and occupancy growth long term.

I think it's also important to note that though the office market is likely to remain challenged primarily because of the secular change to hybrid work and work from home, silver linings can be observed at a granular level with [indiscernible] and premier markets continuing to perform, and that's exactly what we own. I'll now turn the call back over to the operator for Q&A.

[Operator Instructions] Our first question is from Todd Thomas with KeyBanc Capital Markets.

First question, can you talk a little bit about the office leasing in a little bit more detail, Steve? You mentioned, and I appreciate the detail, I guess, around what's been signed year-to-date and the net absorption there. Can you address the 310,000 square feet of expirations and what assumptions you're making around retention and just talk a little bit more about the new lease pipeline?

Sure. Good questions. First of all, it was a light quarter. With regard to the new leasing, you're seeing longer-term commitments. So of the 50,000 feet done year-to-date, the weighted average lease term is 96 months. And for the pending 93,000 feet, the weighted average lease term is 99 months. So we're seeing tenants step up for longer terms and making those commitments. So that's exciting for us.

You noted, I think, in your remarks from your report that this past quarter was the shorter-term leases. We do have some legacy smaller tenants that are reaching retirement age in places like salon and crossing where they don't want to go long term. So we're doing 2- and 3- and 4-year deals with some of those customers. And so just quarter-by-quarter, it just depends on what we're facing. In terms of rollover in 2024, let's see, we're already in play on about -- let's see, about 1/3 of the space rolling with either renewing existing tenants or we have backfilling tenants for spaces that we know are going vacant. So we're already well engaged on that. Beyond that, it's just -- we keep -- we're able to push rents and we continue to achieve rent premiums because we've got really good properties with great amenities. So we feel good.

It's not easy, Todd, but we have 3 things going for us. The first is Steve does an excellent job. The second thing is the properties are well located and well amenitized. And the third thing is we have the financial stability to do what we promise and we have an excellent reputation in the marketplace as well. And I think that's what's allowing us this performance that we're enjoying.

Are the lease expirations in '24 in the office portfolio, are they sort of concentrated in certain assets or certain submarkets? And then, Bob, I think you may have mentioned this, sorry if I missed it, but can you talk about the office occupancy expectation at year-end? What's embedded in guidance?

Yes, in the guidance, Todd. So what we mentioned in the call here is that we've modeled in for our same-store office occupancy to be 86.5% and our total portfolio office occupancy to be 84.3%. And the decrease between the 2 is that it relates to One Beach not leased up in our model in '24. And that, combined with pushing out that 317,000 square feet of office in 2025 from -- just if -- we're worried about -- not worried, but we've seen that it takes longer to do permits, and it takes longer for people to make decisions at this coming across. So we took a conservative approach. What we don't want to do is over promise. And we thought that was the right approach to do by pushing that out for the '24 guidance on that.

Todd, to answer your question in terms of where the rollover is occurring, I've got [indiscernible] for both '24 and '25 rather than just by one year. 37% of the rollovers in San Diego, 34% is in Portland and 24% in Bellevue. So it's kind of evenly split. San Francisco is just one lease rolling. So -- and San Diego is really strong. Portland has been surprising, Todd. We've had a lot of activity recently, and we've got [indiscernible] May of 2025 with clear result rolling out of 5 floors and we're in leases with a tenant to backfill one of those floors already. And we've had really good tour activity. And then we just -- last Friday, got 2 deals, one the letter of intent from one of our spec suites and the other spec suite, we got the proposal and we've already responded to it. So -- and we've got another full floor tenant that may backfill the full floor that I mentioned at Lloyds 700. So Portland has really been surprisingly strong. And these are -- we're not diving on the [indiscernible] for rents, we're getting premium rents.

I think some of the other buildings important are even questionable as far as their ability to perform for tenant improvements and lease commissions that gives us a [indiscernible].

Okay. That's helpful. And then just with regard to guidance, Bob, you said the non-same-store is expected to decrease FFO by $0.02. That's, I guess, largely related to cost capitalization burning off. Can you just talk about the schedule for cost capitalization and sort of expenses increasing as it pertains to, I guess, primarily One Beach and La Jolla where I know you pushed the completion date back a little bit further to March. What's the schedule like for those 2 assets in terms of cost capitalization and the impact?

Yes. Good question, Todd. Yes, for One Beach, so we got the certificate of completion back in beginning of August. So we have the -- so what we'll do is we'll continue to capitalize the interest in the real estate taxes until the end of July in '24.

For La Jolla Commons, we basically are starting from January -- from the 1st of January '24 until the end of '24. So we have all of '24 to continue the capitalization of the interest and the real estate taxes. But that's also what's causing is that -- is causing the $0.02 is because La Jolla Commons now we have to expand during this next year in '24, just the operating cost to keep the building the way it should be in terms of air conditioners, handlers, the security and that's what's creating the $0.02.

Okay. Okay. Got it. And just lastly then, just to be clear, so the litigation payment that you received in January, that was about $10 million. Bob, you said -- so the impact year-over-year -- but you received $10 million in January. So that's $0.13 that you'll recognize in guidance or in 1Q '24 results, is that right?

Correct. Correct. So yes, so -- but on reconciling '24 to '23, so you're taking the $10 million that's coming in '24, we just received and reducing what we received last year of $6.3 million, $6.5 million. So the net increase is $3.5 million. We will recognize that $10 million in January of this year or the first quarter.

Next question is from Adam Kramer with Morgan Stanley.

I hope everyone is doing well. I just wanted to ask about the guidance and maybe try to kind of suss out kind of what could cause kind of the high end to come true versus the low end, some of the assumptions embedded into kind of both the high and low end? And if there's any kind of conservatism embedded in there as well?

Yes. I mean, thanks, Adam. We mentioned it in the script a little bit, but pretty much, I mean, if we're more successful on leasing that 317,000 that we pushed out that, if that comes to fruition, that will be additive, obviously. Interest expense is lower on the refinancing, which we're hopeful of. But we're just being conservative from that standpoint and multifamily being -- multifamily having a higher growth rate year-over-year. So those are just 3, but we have a shot at getting to the high end of the range of $233.

Also if we collect on all those reserves, you were mentioning the big upside, of course, is La Jolla Commons III and it is I believe the best building in San Diego in the best location. It's just the market is a challenge. But I think if anybody is successful in leasing that building will be successful.

Yes. And for guidance purposes, we've left that out.

Got it. No, that makes total sense. Just maybe on kind of the balance sheet. I know you mentioned kind of the bond offering potentially this year. Maybe just walk us through if you were to do an offering today and what rate do you think you would get? And then maybe just remind us on timing for when to kind of think about modeling in the bond offering. And then just on kind of net debt to EBITDA, remind us where you are today and kind of given spend left for redevelopment and given potential future acquisitions, development spend, how should we think about kind of where net debt-to-EBITDA will trend?

We have a picture of what it would cost us to date. And the Board is -- in terms of a bond issuance, the Board has decided that the odds are more in favor of getting a successful and lower rate if we wait until the rest of the -- until some of the time this year expires. Bob, do you have anything to add to that?

Yes. Let me start answering your questions from the beginning. I think the net debt to EBITDA were about 6.5 and change on a trailing 12 month will vary throughout the year. The key to getting it down to 5.5 is really leasing up La Jolla Commons III. That's going to make a big difference. We know it's just a matter of time and you've heard Steve's comments in terms of what he's seeing in the marketplace.

In terms of pricing, we've -- there's a lot of discussion. We have a lot of optionality. One option that we are considering is on the $100 million that comes due in July '24, just use our line of credit for about 8 months. And that would be probably in the 6% range. But we'll see. We've modeled in 7.5% in our guidance because the volatility, things change so quickly. And then the possibility exists that we could go back to the public debt market in the first quarter of '25. At that point in time, I mean, we're hopeful that the rate would be favorable at that time. But if it was priced today, you'll probably be somewhere in the mid-6s.

Got it. That's really helpful, guys. And just the last one, maybe just on Hawaii and tourism. What's kind of the view on when you could see kind of a full recovery there? Or is that something that maybe is only kind of [indiscernible] and shouldn't really think about the timing and kind of base case?

Well, the best answer is we really don't know because we don't have any control over it. But as Bob pointed out, eventually, Hawaii will recover, Embassy Suites is a fantastic property. We keep it in the first-class shape, has an excellent reputation. Do you want to add something, Bob?

Yes. Adam, really, it's coming down to the Japanese yen. It's been sticky at about 148. It's gone as high as 152. It's down to 148. In pre-COVID it used to be 105 to 108. So there -- our Japanese guests are factoring that, that's an additional cost to that. So when we were last time in Hawaii seeing our team at the end of December, and we saw a Japanese guests over there, but it's a much smaller percentage. So we think -- it's not that we think, we know that it's just a matter of time when that occurs, but we don't know, as Ernest mentioned, we just don't know that timing at this point.

In the meantime, the domestic market has filled the void to some extent, but not with the same revenue that would come if it were the Japanese.

Adam, this is Adam. I saw a report yesterday that said the Asian tourists to Oahu were at about 20% of the pre-COVID levels last year. So plenty of room to grow. Just timing is uncertain.

We got 2 Adams on the phone, things must be going -- it's a great day.

[Operator Instructions] The next question is from Haendel St. Juste with Mizuho.

This is Ravi Vaidya on the line for Haendel. I hope you guys are all doing well here. Just a question about the office same-store portfolio. How long do you think this will remain negative? And do you expect an inflection in the back half of the year into 2025? Or like what's kind of driving the negative same-store office projection? Is it the timing of the speculative leasing?

That's a really good question to ask, and I've really got Steve to answer the question because I don't really know. Steve, do you have that feel?

Well, you hit on -- and Bob remarked on it in our comments, it's really -- if a lease isn't signed by Q1, we just pushed it out to '25 because permit is taking up to 6 months depending on the municipality and the construction can take 4 to 6 months as well depending on the [indiscernible]. So we're just being conservative in that regard. That being said, we've got smaller leases and smaller -- I should say, smaller suites that are ready to go, and those could happen much more quickly. But we just erred on the side of caution to be honest with you, given the timing that I mentioned.

And I think it's safe to say the markets we're in, we're doing as well as anybody. Is that a fair statement?

I would say we're doing better.

So if it can happen, Steve is going to make it happen.

Got it. Just about your multifamily portfolio, the occupancy increased pretty dramatically sequentially, but the average rent per unit decreased a bit. We're hearing broader conversations and broader discussions of incremental supply and how it's weighing on landlord pricing power. Is that kind of what's happening here within your multi portfolio?

Well, one of the things that's happening is our expenses are going up, and then I'll let Abigail answer the revenue side.

In San Diego, there were approximately 3,000 units that came online to the rental market. So rents have been decreasing a little bit because renters are competing as our property managers for new renters are offering concessions trying to fill their lease-ups. So we are competing with that, although our multifamily here, the rental rates, we're trying to push them. The team mentioned that we're continuing to reposition properties, and we're offering great experiences for the residents, and they have great big floor fleets. So we're going to continue pushing as best as possible given the market.

And Ravi, Q4 is traditionally a slower leasing period for our multifamily. And so as Abigail has mentioned, occupancy rates soften a little bit.

What's happening is there's more competition as Abigail pointed out, and we see insurance costs going up and labor costs going up. So it's a bit of a squeeze, but they're great properties. And if you look at the last 10 years, they've been very profitable and likely the next 10 years will produce comparable results, but there will be hiccups.

Got it. That's helpful. Just one more here. Within your retail portfolio, can you talk about retailer demand for more space. How you -- how is pricing power [indiscernible] and maybe your tenant credit risks and many -- what are some of your watchlist tenants at the moment?

I think as you heard in the script, Ravi, our retail properties are performing well. They're in dominant locations right now. So there's quite a bit of interest. Of course, we don't have as many properties as some of our retail peers. So we don't have a whole lot expiring this year. In fact, I think we only have one tenant left on the roster this year that's over 10,000 square feet, which is one of our Old Navy's at Alamo Quarry, which is performing incredibly well.

So we're feeling really good about the retail portfolio right now. We know nothing is perfect, but everything is trending well. You may have heard Bob mention that we have some reserves around retail. And like last year, we're just trying to be a little more conservative, not knowing how things shake out, say, for example, with -- we mentioned we have a deal with [indiscernible] but we still put a little reserve around those guys not knowing if they successfully emerge or not, [indiscernible] has been having some challenges.

We have 3 of those locations. We put a little reserve around those guys. We may be wrong on those, and we hope we are but they're current on rents currently.

And then we have one small format [indiscernible] Carmel Mountain Plaza that we're just keeping an eye on. We renewed them. But these are -- when we go through them, we try to figure out what are the probabilities and so we put a little reserve on them and just hope they keep paying rent and they figure out their finances. So it's a way for investors or analysts can run their own numbers on whether we're being overly conservative or not. But like Bob said, we'd rather under promise and over deliver. But otherwise, we feel really good about our retail properties.

This concludes our question-and-answer session. I would like to turn the conference back over to Ernest Rady for any closing remarks.

Again, thank you all for your attention and your interest. My late father who was a gynecologist used to tell me "When times get tough, the toughs get going." Things are not as perfect as they have been in the past but we have a very competent management team, great properties, liquidity, and we'll get through this as well as anybody and hopefully better than anybody else. So again, thank you for your interest and your confidence.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.