As a reminder, this call is being recorded.
It is now my pleasure to introduce Senior Vice President, General Counsel, Adam Wyle.
Good morning. I'd like to thank everyone for joining us today for American Asset Trust 2019 Q2 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 2019 Q2 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 ks 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. Explanation of such non GAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data for the Q2 of 2019 furnished to the Securities and Exchange Commission and this information is available on the company's website at www.americanassetstrust.com. I'll now turn the call over to our Chairman, President
and CEO, Ernest Rady, to begin our discussion of second quarter results. Ernest? Thanks, Adam. That was very eloquent and good morning, everyone. Thank you for joining American Assets Trust's 2nd quarter 2019 earnings call.
We continue to make great progress on all fronts as we continue to focus our efforts on earnings growth combined with growth in asset value for our shareholders. We saw a lot of positive developments during the Q2 of 'nineteen, and we remain very optimistic going forward. First of all, I want to welcome all of our new stockholders, and we sincerely appreciate your confidence and support. The whole transaction turned out well for everyone. Existing stockholders got enhanced marketability and another investment property for growth.
Our new stockholders got immediate appreciation. So far, we've had better than expected leasing success with our recent acquisition of La Jolla Commons as we were very fortunate to be able to source and sign a new 73,000 square foot lease within 2 weeks of closing. Bob will talk more about the details of the acquisition and impact of the recent lease that was signed. Secondly, at Oregon Square, we have completed the modern renovation of and 100% leased to WeWork at current market rates, slightly above our initial estimates. We are now pursuing proceeding to do a similar modern renovation on the adjacent 710 Building at Oregon Square and prospective tenants of ours began indicating interest.
Also, during the Q2, our sustainability achievements included Haslow on 8th in Portman being designated as the 1st in the world to receive Neighborhood LEED Green Certification the Landmark at 1 Market being designated as the 1st BREAM USA Certification in San Francisco. BREAM is BREEAM. We filed our 1st comprehensive sustainability report with GRESB. We posted our net asset value internal estimate of $51.50 a share on our website, and Bob will discuss that in more detail later. In our view, the office markets in San Francisco and Bellevue, Washington remain strong.
The Safeway store at Waikali Center remains on track to open in the Q4 of 'nineteen. We continue to reinvest and improve our existing assets and remain optimistic about the future of this portfolio and our ability to narrow the price to net asset value, GAAP. On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage your company and we look forward to your continued support. I will now turn it over to Bob Barton, our Executive Vice President and
Q2 2019 FFO of $0.51 per share and net income attributable to common stockholders of $0.18 per share for the Q2. 2nd quarter results are primarily comprised of the following four highlights. First, on June 20, we acquired the La Jolla Commons office campus in San Diego comprised of 2 Class A plus office towers in University Town Center, also known as UTC, one of the most desirable submarkets in the City of San Diego, which we believe is on the forefront of significant and prolonged growth. The acquisition also includes a fully entitled development parcel for an approximately 224,000 Square Foot Class A office tower. La Jolla Commons 1 was built in 2,008 and consists of approximately 303,000 square feet that was approximately 72% leased at the time of acquisition to a diversified credit tenant base.
La Jolla Commons 2 was built in 20 14 and is 100% leased to LPL Financial that as of today has a market cap of approximately $7,000,000,000 and a weighted average lease term remaining at La Jolla Commons of 9.9 years. As of the date of the acquisition, the combined project was approximately 88% leased in a submarket with approximately 97% occupancy. Our underwriting assumed a lease up of approximate to approximately 96% leased by the beginning of Q3 of 2020. We saw the scarcity of large contiguous spaces in the UTC submarket and were able to sign a new lease with Illumina less than 2 weeks after our closing at rates that were approximately 10% higher than what we modeled in our underwriting. This also confirms that our in place rents are approximately 10% or more below market.
Note that as of today, Illumina has a market cap of approximately $44,000,000,000 With the signing of this Illumina lease less than 2 weeks after we closed the acquisition, La Jolla Commons combined lease percentage is now 96% leased a year sooner than we expected. The net purchase price of approximately $514,000,000 was paid with approximately $472,000,000 of net proceeds received from the secondary offering with the balance coming from our existing credit facility. The NOI yield that we modeled in our due diligence was approximately 5.4% on in place NOI and 5.6% at year end 2019 and a stabilized yield of 6% in 2020, factoring in a 7% vacancy factor. With the signing of Illumina, our stabilized NOI yield for our stabilized NOI yield for year end 2019 is approximately 6.3% and year end 2020 is also expected to be approximately 6.3%. Due to the mid year start date in 2020 of this new lease.
The average NOI yield of the property over the term of the next 10 years is estimated to be approximately 7%. Our unlevered IRR expectation on this transaction with the signing of the Illumina lease is expected to increase to approximately 8.25%. In structuring this acquisition, our focus was to protect and enhance our existing FFO earnings growth estimates that we have previously shared and continue to reduce our net debt to EBITDA to 5.5x or less while factoring in the short term NAV dilution for consistent long term earnings growth that we believe will produce long term NAV accretion. Secondly, in connection with the acquisition of La Jolla Commons, we did a one day marketed follow on equity offering, the first since our IPO in January 2011. And we issued 10,925,000 shares of common stock at $44.75 per share.
The shares issued were approximately a 17% expansion of our existing common stock shares outstanding. The offering is oversubscribed and we believe the shares were well received and have traded well since the offering. Also, we believe the expansion of shares has significantly increased the average daily flow, which was also one of our objectives, combined with our focus on earnings growth and balance sheet debt metrics. 3rd, yesterday, July 30, we entered into a no purchase agreement for the private placement of $150,000,000 unsecured 3.91 percent senior guaranteed notes with an 11 year maturity. A month earlier, we entered into a treasury rate lock to manage the risk of the interest rate volatility.
Factoring in the treasury rate lock, the effective weighted average interest rate will be approximately 3.88% for the 11 years. Proceeds from the private placement offering will be used to repay the outstanding balance on our existing credit facility and leave approximately $60,000,000 of cash on the balance sheet. After the private placement offering, our pro form a net debt to EBITDA is estimated to be 5.5x@yearend20 19 and 4.8x@yearend20 20 and 4.6x@yearend20 20 based on our current operating model. 4th, we posted our annual net asset value internal estimate on our website based on our forward NOI estimates in the Q1. Our NAV process takes about 8 weeks to complete and we incorporate input from respected brokers in our various markets as well as our own internal knowledge of our markets and recent transactions.
Among other data points, we focus on cap rates, supply demand constraints in particular markets, weighted average cost of capital, dollar per square foot or dollar per unit, unlevered IRRs and certain ceilings that are perceived in each market. We looked at the valuation of each asset based on metrics that we would look at when making an acquisition. Our conclusion was that our 2019 NAV internal estimate is $51.50 per share, which is approximately a 3% increase over our 2018 estimate. The Google lease that was signed at landmark at one market in San Francisco was a big contributor. NAV estimates are just that, an estimate at a point in time.
It is not a perfect science, but we try to be as accurate as possible and if we are going to we try to on the side of being conservative. The average NAV estimate of sell side research analysts is approximately $47.88 per share, ranging from a low of $43.74 to a high of $51.86 The reason that we post our internal NAV is to help both investors and research analysts understand how management views our diversified portfolio of high quality office, multifamily and retail in coastal West Coast markets and to allow investors and research analysts to use the data that we post to perform their own independent NAV analysis on our portfolio. If we were simply one asset class that is easy to understand, we would probably not go through the effort to post our NAV. Let's talk about retail. Our retail portfolio ended the quarter at 97.5 percent leased, combined with the highest annualized base rents amongst our peers.
On a comparative year over year basis, our retail occupancy increased approximately 88 basis points over the Q2 of 2018, leaving approximately 78,000 square feet vacant in our 3,000,000 plus square square 13% of our total retail portfolio. Of these leases signed, 52 leases consisting of approximately 216,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 7% over the prior leases. Our office portfolio ended the quarter at approximately 93.7 percent leased. On a comparative basis, when you exclude La Jolla Commons from 2019 and factor in 2018, the vacancies at Torrey Point in San Diego and Oregon Square in Portland, our office occupancy experienced an increase of approximately 503 basis points on a year over year basis, primarily due to an increase in occupancy at Torrey Point, Oregon Square and City Center Bellevue.
Office vacancy at the end of 2Q 2019 is 6.3% or 2 16 Square Feet, 216,000 Square Feet of our 3,400,000 Square Foot Office Portfolio. It's also important to note that we believe our in place rents for the office portfolio are approximately 19% below market. During the trailing 4 quarters, 63 new office leases were signed representing approximately 695,000 square feet or 20% of our total office portfolio. Of these leases signed during the year, 42 leases consisting of approximately 518,000 square feet were for spaces previously leased. On a comparable basis, the annual cash basis rent increased 45.3% over the prior leases.
Let's talk about same store NOI for a moment. Same store retail cash NOI decreased in the 2nd quarter by 3.3%, which translates into less than $0.01 of FFO. The decrease primarily relates to decreased rents at Carmel Mountain Plaza after we terminated the ground lease with the ground lessee who owned the former Sears building in exchange for a non cash termination fee equal to the net present value of the former Sears building of approximately $4,500,000 Within approximately 2 weeks after closing that transaction in Q1 2019, we signed a new lease with At Home for the entire 108,000 Square Feet, which upon opening earlier this month reactivated the easterly end of the shopping center. We began straight line rent in Q2 2019 and cash rents began in August 2019. Same store office cash NOI decreased 10% in the second quarter, primarily due to the termination fee of approximately $2,400,000 received in 2Q 'eighteen from a tenant at our Lloyd Center building.
The tenant was replaced within approximately 4 weeks with Genetech at higher rents reflecting the current market. Genetec took possession with the straight line earnings beginning in Q2 'nineteen and cash rents beginning at the end of Q4 'nineteen. If we exclude the 2Q 'eighteen termination fee from our calculation, same store cash NOI related to our office segment increased 2.1%, primarily due to the rental abatements burning off on new or renewed tenants at City Center Bellevue. Same store multifamily cash NOI increased 4.4% primarily due to increased cash NOI achieved at our Loma Palisades Apartments in San Diego and Haslow at 8 Apartments in Portland. The increase in Loma Palisades was primarily due to increased base rents of approximately 6%, coupled with a reduction in rental expenses of approximately 3%.
At Hassello at A, total revenues were up slightly, while our rental expenses decreased approximately 18%, primarily due to efficiencies realized with our norm recycled water program, as well as reductions in payroll, facility services and insurance expenses. As previously announced, Waikiki Beach Walk, our mixed use property consisting of Embassy Suites Hotel and Waikiki Beach Walk Retail was moved out of same store designation beginning in Q1 'nineteen as the mixed use property undergoes a significant renovation, which began at the beginning of the year, including spalding work on all outdoor balconies and exterior painting on both towers. As the renovation work is ongoing for the Q2 of 2019, our mixed use properties reported a combined slight decrease in cash NOI of less than 0.5%. And looking at the results separately, the Embassy Suites hotel cash NOI decreased 6% primarily due to a reduction in revenue resulting from a reduction in occupancy percentage and RevPAR and an increase in real estate taxes. At Waikiki Beach Walk Retail, cash NOI increased 6%, primarily due to increases in base rent and parking income, partially offset by an increase in real estate taxes.
Tenant sales remained high at $10.61 per square foot for the rolling 12 months as our tenants continue to benefit from the excellent location and good economy. Turning to our 2nd quarter results, FFO decreased approximately $0.05 to $0.51 per FFO per share compared to the Q1. The 2nd quarter results include the following activity. First, the significant leases commenced at Lloyd Center Tower and City Center Bellevue. Although the leases have commenced, cash rent won't commence until later in Q4.
Accordingly, the net amount of straight line revenues recognized have increased during the Q2, resulting in an increase of $0.026 per FFO share compared to the Q1. 2nd, the increase in NOI related to the acquisition of La Jolla Commons on June 20 resulted in an increase of $0.014 per FFO share compared to the Q1. 3rd, as previously mentioned, we received a onetime non cash termination fee of approximately $4,500,000 in Q1 2019 on account of termination of the Sears ground lease, which provided approximately $0.668 of FFO per share in Q1, but no corresponding amount in Q2. Finally, the equity offering which closed on June 14 increased our outstanding common shares by 10,950,000 shares. The increased weighted average outstanding common shares in 2Q 'nineteen had a dilutive impact of approximately 0.02 dollars per FFO share compared to the Q1.
Now as we look at our balance sheet and liquidity at the end of the second quarter, we had approximately $300,000,000 in liquidity comprised of $45,000,000 of cash and cash equivalents and $255,000,000 of availability on our line of credit. Our leverage, which we measure in terms of net debt to EBITDA, was 6.7x as expected at the end of the second quarter. Although our continued focus is to get our net debt to EBITDA back down to 5.5x or below. As I have previously discussed, based on our current model, our pro form a net debt to EBITDA is estimated to be approximately 5.5x@yearend2019, 4.8x@yearend2020 and 4.6x@yearend2021. Lastly, we are reaffirming our 2019 FFO guidance range of 2.18 dollars to $2.26 per FFO share with a midpoint of $2.22 per FFO share.
When I compare our 3Q 'nineteen consensus of 0.569 FFO per share in my Bloomberg screen to our internal model, we are lower by approximately $0.01 of FFO share. We believe this difference is primarily related to the recently completed follow on equity transaction and the dilution based on the weighted average shares outstanding that were issued. As always, our guidance in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we have already discussed. We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers. Operator, I'll now turn the call back over to you for questions.
Thank And our first question comes from the line of Rich Hill with Morgan Stanley. Your line is now open.
Hey, good morning, guys. Bob, as always, thank you for the color and a lot of detail. I want to come back to La Jolla comments. Obviously, you're ramping it up. It's going to be stabilized faster than anticipated.
Don't think that lease starts until 20 20. But I'm thinking about sort of the ramp that you provided earlier this year to 2021. And given that it's going to be stabilized maybe year before you anticipate it, could you maybe help us quantify or maybe help us think about how incremental that a year additional stabilization will be to the bridge you previously provided?
Well, Rich, thanks for the question. We'll be issuing guidance on our Q3 'nineteen call. But from where we sit today and looking at our corporate operating model, the numbers that were in our bridge seem to be conservative.
Okay, helpful. And just to reiterate or to clarify, did I hear you correctly that in 2020 you expect around 7% NOI from La Jolla Commons?
That was on average. The NOI yield over the average term over the next decade will be 7%. So it's going to ramp up from 6.3%, increasing approximately 25 to 50 basis points a year till it exceeds 8%. And if you look at the average of that NOI yield over that term, it will be approximately 7%.
Okay. Thank you. That's it for me.
Thank you, Rich. Thanks, Rich. Thank you.
Our next question comes from the line of Craig Schmidt with Bank of America. Your line is now open.
Yes, thank you. Good morning. I was wondering, the mix is starting to favor office. As you look forward to 2020 beyond, what do you think the balance and the mix of your different components of the different mixed uses and office multifamily retail could be going forward?
This is Ernest, Craig. As I've said on the on our investor presentations, our job is not to be a retail or office or an apartment REIT. Our job is to create wealth for stockholders. And as we go forward, we think we have significant opportunities within our portfolio and we continue to look at opportunities outside of our portfolio, but in the same three asset classes and Coastal West Coast focus. So I'd like to tell you exactly what it's going to be, but we're going to be hopefully where the
shareholder value. Craig, this is Bob. Let me just add to Ernest's comment on that is that I love the way he describes that we are we're really a wealth builder. But having said that, we understand that there is a cloud over retail. And so there's no current intention on acquiring more retail.
And we think the growth in our NOI will really come from office and multifamily going forward.
Thank you. And our next question comes from the line of Mitch Germain with JMP Securities. Your line is now
open. Thanks for taking my question. To that point, would you consider maybe selling one of your retail assets, maybe throwing a cap rate out there and using some of that as a means to deliver?
Sure. If we saw a better opportunity to enhance shareholder wealth, that's what we get up every morning for and look forward to those opportunities. If we had an opportunity to sell a retail asset that made sense and acquire either another retail asset or another asset in the 2 types of properties we own, We'd look at it. Over the years, this portfolio got built by doing $2,000,000,000 worth of trades, and we're not out of the trade business yet.
Great. And just on the acquisition that you guys completed this quarter, maybe just talk about the process. Was it a fully marketed transaction? What sort of capital could you possibly have been bidding against? Maybe just maybe describe how the process played out?
I don't know that I can really do that because we weren't involved in it until we had the opportunity. It was presented to us on an effective take it or leave basis. We acted very quickly. And I think that you'd have to talk to the brokers and find out exactly what their process was. I hate to comment on it because I wasn't involved.
All we were involved is when it was presented to us, we said we love it, we'd like to do it. We moved on it and we closed it.
And Mitch, let me just add to that, that when we heard about it, it was not on the market and it was off market and we moved quickly once we had a handshake.
Got you. And
Off market sort of a euphemism. I don't know what the Exactly.
Agreed. And then last question on the deleveraging. Obviously, a portion of that is the equity raise, though a portion of that obviously is some of the income coming online from the leasing, right? Is that the way that we should think about how the deleveraging plays out over the course of the next 18 months?
Yes. That deleveraging, nothing additional is needed. That's all organically going forward.
Thank you.
Thank you, Mitch.
Thank you. And I'm showing no further questions at this time. So with that, I'll turn the call back over to Chairman and CEO, Ernst Grady, for closing remarks.
Thanks again for all our new shareholders joining us. We're extremely delighted about our position now. We think that our future over the next number of years is going to be a pleasant surprise for all of us, and we look forward to sharing that with you as it evolves. Thank you again for joining us.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a wonderful day.