American Assets Trust, Inc. Q3 FY2021 Earnings Call

Thank you for waiting, and welcome to the Third Quarter 2021 earnings conference call for American Assets Trust, Inc. This program is being recorded. I would like to introduce your host for today, Adam Wyll, President and Chief Operating Officer. Please proceed, Adam.

Thank you. Good morning, everyone. Welcome to American Assets Trust Third Quarter 2021 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. A telephonic replay and on-demand webcast will also be available for this call over the next week. During this call we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our earnings release and supplemental information. We will also be making forward-looking statements based on our current expectations, which statements are subject to risks and uncertainties discussed in our SEC filings. You are cautioned not to place undue reliance on these forward-looking statements. Actual events could cause our results to differ materially from these forward-looking statements for a number of reasons, including, as it may relate to the continuing impact of COVID-19. And with that, I'll turn the call over to Ernest Rady, our Chairman and CEO, to begin the discussion of our third quarter 2021 results. Ernest?

Thanks, Adam. And good morning, everyone. I am pleased to report that we continue to make great progress on all fronts as we rebound from the impact of COVID-19. We knew at the onset of the pandemic that we would not be impervious to its economic impact, but we were confident that the high-quality, irreplaceable properties and asset class diversity of our portfolio, combined with the strength of our balance sheet and ample liquidity would help us pull through and maybe even come out on the other side better off than at the beginning. We continue to be optimistic as we meaningfully rebounded in 2021 and anticipate further growth in 2022 and beyond. That's why we've aggregated the portfolio comprised of a well-balanced collection of office, retail, multifamily and mixed-use properties located in dynamic high barrier to entry markets, where we believe that the demographics, pent-up demand and local economies remain strong relative to others. Our properties are more resilient in our view to economic downturns as they are in the path of growth, education, and innovation and importantly can likely withstand the impact of long-term inflation, perhaps even benefit from the benefits of long-term inflation. Along those lines during the past quarter, we used our liquidity to acquire 2 complementary and accretive office properties in Bellevue, Washington, a market that we remain very bullish on and in which we expect continued rent growth. Meanwhile, our development of La Jolla Commons III into an 11 story, approximately 210,000 square foot Class A office tower remains on time and on budget for Q2 or Q3 2023 delivery. We are encouraged about the leasing prospects in the UTC submarket for high-quality, large blocks of space, where both tech and life science funding continues at record levels and same tenants continue to expand. But we don't have specific news to share on that front at this time. The same holds true for our One Beach Street development on the North Waterfront of San Francisco, which we believe to be a unique opportunity for a full building tenant with delivery expected in Q2 or Q3 of 2022. Additionally, I'm happy to inform you that our Board of Directors has approved the quarterly dividend of $0.30 a share for the third quarter, which we believe is supported by our expectations for operations to continue trending positively. It will be paid on December 23 to shareholders of record on December 9. Adam, Bob and Steve will go into more detail on our various asset segments, collections and financial results and guidance, and I will be available and we'll all be available for any questions that you may have at the conclusion of our prepared remarks. On behalf of all of us at American Assets Trust, we thank you for your confidence in allowing us to manage your company and for your continued support now more than ever as we aim to grow our earnings and net asset values for our shareholders on an accretive basis. I'm now going to turn the call back over to Adam. Adam, please.

Thanks, Ernest. As we look at our portfolio, we are always reminded of the importance of owning and operating the preeminent properties in each of our markets. That's why we focused on continuing to enhance our best-in-class community shopping centers to promote a better experience for our shoppers with the expectation that this will further strengthen our properties as the dominant centers in our submarkets. And we understand the importance of modern state-of-the-art amenities in our office projects, which assist our tenants in the hiring and retention of talent in what is currently a very competitive job market. We feel strongly that consistently improving and monetizing our properties, including incorporating sustainability and health and wellness elements is critical to remaining competitive in the marketplace in order to attract the highest quality and highest credit tenants. Meanwhile, we are encouraged by our approximately 97% collection percentage in Q3, increased leasing activity across all asset classes, fewer tenant failures and bankruptcies than we expected and many modified leases hitting percentage rent thresholds sooner than expected and are collecting approximately 96% of deferred rents due during the third quarter, all validating the strategies we implemented during COVID to support our struggling retailers through the government-mandated closures as we were fortunate to have the financial ability to do so. Briefly on the retail front, we've seen an improved leasing environment over the past few quarters with positive activity engagement with new retailers for many of our vacancies, including recently signed new deals with Columbia Sportswear, Williams-Sonoma, Total Wine and First Hawaiian Bank to name a few, and renewals with Nordstrom's, Petco and Whole Earth among others as well as many other new deals and renewals in the lease documentation process. Retailers are choosing our best-in-class locations to improve their sales, all the while we remain selective in terms of merchandising our shopping centers for the longer term. Chris Sullivan and his team have done a tremendous job on that front despite some of the continuing headwinds at our Waikiki Beach Walk retail. On the multifamily front as of quarter end, we were 96% leased at Hassalo in Portland, and 98% leased in San Diego multifamily portfolio. All of the master lease units in San Diego that you've heard us discuss previously were absorbed by early August. Though multifamily collections have been particularly challenging in Portland due to COVID-related government restrictions, we have started receiving meaningful checks from government rental assistance programs to drive down our outstanding amounts owed and expect more checks to come. We are confident that Abigail's strong leadership at San Diego multifamily and Tania's new energy at Hassalo will drive improvements at our multifamily properties, both operationally and financially. With that, I'll turn the call over to Bob to discuss Q3 financial results in more detail.

Thanks, Adam. Good morning, everyone. Last night we reported third quarter 2021 FFO per share of $0.57, and third quarter 2021 net income attributable to common stockholders per share of $0.17. Third quarter results are primarily comprised of the following: actual FFO increased in the third quarter by approximately 11.4% on a FFO per share basis to $0.57 per FFO share compared to the second quarter of 2021, primarily from the following 4 items: first, the acquisitions of Eastgate Office Park in Corporate Campus East III in Bellevue, Washington, on July 7 and September 10, respectively, added approximately $0.023 of FFO per share in Q3. Second, Alamo Quarry in San Antonio added approximately $0.017 of FFO per share in Q3, resulting from 2019 and 2020 real estate tax refunds received during the third quarter of 2021, which reduced Alamo Quarry's real estate tax expense. Third, the decrease of bad debt expense at Carmel Mountain Plaza added approximately $0.005 per FFO share in Q3. And fourth, the Embassy Suites and Waikiki Beach Walk added approximately $0.012 of FFO per share in Q3 due to the seasonality over the summer months. Let me give you an update on our Waikiki Embassy Suites hotel. Due to the impact of the delta variant, Hawaiian Governor Ige made a formal announcement on the third week in August that if you have plans or are thinking of coming to Hawaii, please don't come until we tell you otherwise. It was not a mandate, but it did create a detrimental impact to our visitors to Hawaii and resulted in huge cancellations starting in August and into September. Our results for Q3 at Embassy Suites hotel were expected to be much higher. Overall, occupancy, ADR and RevPAR continued to increase on heading in the right direction. As of October 19, Governor Ige made another formal announcement to begin welcoming all essential and nonessential travel, starting November 1, 2021. We look forward to welcoming the fully vaccinated individuals and ramping up our visitor industry. On our Q2 earnings call, I mentioned that Japan, who was then approximately 9% fully vaccinated, is now over 65% fully vaccinated and is expected to hit 80% by November. All emergency measures in Japan were lifted on September 30 and lifted the intensive antivirus measures. It marks the first time since April that Japan is free of coronavirus declarations and intensive measures. We expect to start seeing the Japanese tourists beginning to slowly start revisiting the Hawaiian Islands beginning in November, including Waikiki. Now as we look at our consolidated statement of operations for the 3 months ended September 30, 2021, our total revenue increased approximately $6.5 million over Q2 '21, which is approximately a 7% increase. Approximately 43% of that was from the 2 new office acquisitions. Same-store cash NOI overall was strong at 14% year-over-year, with office consistently strong before, during and post-COVID and retail showing strong signs of recovery. Multifamily was flat primarily year-over-year as a result of higher bad debt expense at our Hassalo on 8 departments in Portland, but it was still approximately 5% higher than Q2 2021. As previously disclosed, we acquired Corpus Campus East III on September 10, comprised of an approximately 161,000 square foot office campus located just off Interstate 405 and 520 freeway interchange, less than 5 minutes away from downtown Bellevue, Washington. The 4 building campus is currently 86% leased to a diversified tenant base, which we saw as an opportunity when in-place rents were compared to what we were seeing in the marketplace. The purchase price of approximately $84 million was paid with cash on the balance sheet. The going-in cap rate was north of 3% as a result of the existing vacancy. Our expectation based on our underwriting is that this asset will produce a 5-year average cap rate over 6% and a strong unlevered IRR of 7%. Let's talk about liquidity. At the end of the third quarter, we had liquidity of approximately $522 million, comprised of approximately $172 million in cash and cash equivalents and $350 million of availability on our line of credit. Our leverage, which we measure in terms of net debt-to-EBITDA was 6.4x. Our focus is to maintain our net debt-to-EBITDA at 5.5x or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.9x. As we approach year-end, we are providing our 2021 guidance. The full year range of 2021 is $1.91 to $1.93 per FFO share with a midpoint of $1.92 per FFO share. With that midpoint, we would expect Q4 2021 to be approximately $0.46 per FFO share. The $0.11 estimated difference in Q4 FFO per share would be attributable to the following: approximately a negative $0.025 of FFO per share relating to nonrecurring collection of prior rents at one of our theaters in Q3 that will not occur in Q4 2021. Secondly, our mixed-use properties are expected to be down approximately $0.037 of FFO per share relating to the normal seasonality of the Embassy Suites hotel and the related parking. Third, Alamo Quarry is expected to be down approximately $0.02 of FFO per share relating to the nonrecurring property tax refund that was received in Q3 2021 for 2019 and 2020. And we expect G&A and interest expense to increase and therefore, decrease FFO by approximately $0.02 per FFO share. Additionally, we plan to issue 2022 full year guidance subject to Board approval when we announce year-end 2021 results in February of 2022. Historically, we have issued our full year guidance on the Q3 earnings call. We believe resetting the issuance and cadence of our guidance to the Q4 earnings call going forward is more in alignment with our peers and also gives us more clarity as to the following year guidance. As always, our guidance in these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancing 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, interpretations of our quarterly numbers. I'll now turn the call over to Steve Center, our Vice President of Office Properties for a brief update on our office segment.

Thanks, Bob. Our office portfolio grew by approximately 440,000 square feet or nearly 13% in Q3 with the 2 new office acquisitions. We brought up these assets on board at approximately 92% leased with approximately 20% rolling through 2022, which provides us with the opportunity to deliver start rates from approximately 10% to 30% over ending rents. At the end of the third quarter at One Beach, which remains under redevelopment, our office portfolio was approximately 93% leased with 1.5% expiring through the end of 2021, approximately 9% expiring in 2022 with tour and proposed activity that has increased significantly. Our office portfolio has weathered the storm well. In the second and third quarters, we executed 57,000 annual square feet of comparable new and renewal leases with increases over prior rent of 9.2% and 14.5% on a cash and straight-line basis, respectively. New start rates for the 2021 rollover are estimated to be approximately 17% above the ending rates. In fact, we are at least documentation for over half of the space rolling in 2021 as start rates are nearly 28% over ending rates. New start rates for the 2022 rollovers are estimated to be approximately 18% above the ending rates. We are employing multiple initiatives to drive rent growth and occupancy, including renovating buildings with significant vacancy, adding or enhancing amenities, aggregating and white boxing larger loss of space where there is a scarcity of such blocks and improving our smaller spaces to be move-in ready. By way of a few examples, we are just completing renovations of 2 buildings at Torrey Reserve in San Diego. Those 2 buildings represent 80% of the total project vacancy. We now have leases signed or in documentation for over half of that vacancy at premium rates. We will be completing similar renovations at Eastgate Office Park where leasing activity is already robust, but we anticipate taking this property to the next level of quality. We are adding new fitness and conference facilities at Torrey Reserve, City Center Bellevue and Corporate Campus East III and will be further enhancing the employee amenities building at Eastgate. We believe that our continued strategic investments in our portfolio will position us to capture more than our fair share of that absorption at premium rents as the markets improve. And we have more to look forward to with redevelopments and development. In addition to One Beach Street and La Jolla Commons previously mentioned by Ernest, construction is nearly complete on the redevelopment of 7 Tower Square in the Portland market, which will add another 32,000 rentable square feet to the office portfolio. In summary, our office portfolio is well-positioned as we move forward into the rest of 2021 and beyond. Operator, I'll now turn the call over to you for questions.

Our first question comes from Todd Thomas from KeyBanc Capital Markets. Please go ahead with your question.

Hi, good morning. This is Ravi Vaidya on the line for Todd Thomas. It seems that the multifamily portfolio continues to recover. Rents were up nicely on a sequential basis and occupancy has also rebounded. Annualized multifamily NOI is still just a touch under the 2022 NOI forecast that you recently disclosed. Is it fair to assume that multifamily is tracking ahead or do you expect it to pull back a bit in the near term?

This is Ernest. Actually, multifamily is looking like it's on an uptrend. So the rental market is tight in San Diego. Abigail is nodding her head in affirmation. And Portland, which adds a degree of uncertainty is still doing much better than it did during the height of the pandemic or the pit of the problems it went through. So we're very optimistic on our multifamily portfolio, and thank you for asking.

Thank you. Just one more here. Can you please comment on One Beach Street, noticed the percent lease rate dropped from 15 to 0, was there a tenant fallout? And can you discuss the leasing environment a bit more broadly? Have you seen any delays in lease signings or are companies indicating at all to you that they are rethinking their office needs?

That was a strategic lease termination. We had an existing tenant on the third floor that the construction activity is so significant. It was just too disruptive. And rather than fight over it, we came to a mutual agreed upon termination settlement, moved them out and that accelerates construction and also lowers costs because we were having to work around that tenant in place. So that was a strategic termination.

I hope that answers your question. Do you want any more detail?

No, that's fine. Thank you. Appreciate it.

Okay. It's going to be a beautiful building, by the way, and we're really excited about it, and it's the right thing for the market. And you have to see it to see how well it's turning out relative to what it was.

I would add to that, that having the full building versus a big block of space with another tenant in the building is more desirable.

Thank you.

Thank you. Our next question comes from the line of Haendel St. Juste from Mizuho. Your question please.

Hi, good morning. This is Lydia Jiang for Haendel. Thank you for taking my question. Can you provide more detail on what is driving the changes in rent collections, particularly retail increasing from 93% in July versus 96% in October as well as mixed-use which dropped meaningfully from 85% in July to 72% in October?

You're not coming through clearly. So I don't know how to handle this, but maybe you can answer it generally.

In general, retail activity has resumed, and the key factor I always emphasize is the return to school. Consumers are spending money, and our collections have improved significantly, with most of our tenants paying their rent without issues. Regarding the other questions you raised about numbers, I will need to defer to Bob for those details.

Or if we can't, we're just going to guess at the answers you're looking for. But if you don't receive them, please do call Bob Barton. And hopefully, the transmission will be clear, and we'll be able to understand the question. Bob, do you want to just give some overview?

Yes. This is Lydia, right?

Yes. Hi, this is Lydia. Sorry about the connection.

Hi, Lydia. I'm not sure if the issue is on your end or ours, but there's a lot of echo. We're a bit confused here. What you're asking about is the change in the percentage occupancy from Q2 to Q3, correct?

Yes.

If you refer to the earnings release on Page 4, you'll see that the office sector remains stable at 99.5%. While I believe the office market is resilient, there's not much potential for growth. On the other hand, retail is performing well with improved collections. Adam highlighted several tenants we've recently signed in the retail space, indicating positive momentum despite the challenges posed by the transition out of COVID. We're moving past negotiations, and more people are returning to our centers. We've started to see an increase in theater attendance, particularly with the recent release of the Bond movie. Regarding multifamily, Abigail and Ernest covered that topic, and the trend continues to be positive. In terms of mixed-use properties, Q3 tends to be the peak season for Embassy Suites, and we typically anticipate an increase in FFO by about $0.02 during this period. We aim for an occupancy rate of 88% throughout the year, adjusting our rates based on demand and the season. I hope this clarifies your questions.

Lydia, I've always said when it comes to retail, we're going to do as well as anybody. And that's how it's playing out. We're doing as well as anybody, period. So the quality of our portfolio is coming through. And since we're having trouble communicating, please, if you have any additional questions, call Bob directly. We want to answer all your questions as clearly as we can. Thank you.

Thank you. Our next question comes from the line of Richard Hill from Morgan Stanley. Your question please.

Hey, I'm Adam Kramer on for Richard. Good morning, guys. Hope you are well. So look, we appreciate, kind of providing the '21 guide, but kind of wanted to discuss your expectations for '22. And obviously recognize that you haven't provided formal guidance at this point. But in the most recent investor deck, it seemed like expectations for '22 NOI were lowered slightly versus the prior presentation. So I just want to ask about that change in '22 NOI expectations. And then kind of related to that, your thoughts around the recovery to pre-COVID NOI in multifamily and retail.

This is Ernest. From my point of view, 2022 is going to be a formative year. And we are confident, if not hopeful, that 2023 is going to provide some significantly good news, which we can't comment on now because they're in process. Bob, do you want to add anything?

Yes. First of all, to your question on the bridge that we've tried to keep people informed about and be as transparent as possible through this COVID period, I think we're still on track for that bridge. I don't think we're too far off. We made some adjustments in the third quarter on that, which we did publish. But some went down, some went up. It's more of a timing issue than anything. And when you drop in the G&A and interest expense, which is not on the bridge and come down to an FFO, I think we're still on track. So while you have a little bit of noise in the third quarter and the fourth quarter, trying to come out with a run rate, that's what we're just finalizing that now. And we think that it's likely that we'll issue the guidance for 2022 on the fourth quarter earnings call. So it shouldn't be too far off of what you've seen so far.

From a macro point of view, at the moment, there is significant inflation in the cost of construction. If our portfolio were to be valued at $4 billion or $5 billion and you add the 14% inflation, the replacement cost of this real estate has increased. The timing of that translating into increased rents is your guess is as good as mine. But we are really happy with what we own.

Got it. No, that's really helpful. And then just, Ernest, you kind of mentioned about the kind of inflation in cost of construction. And it's a really good point. So maybe if I could just kind of press you guys on that a little bit. I think you mentioned kind of the development projects are on schedule. What are you seeing in terms of cost of labor, cost for construction, cost for materials, raw materials? Is that kind of having an impact and maybe if you can quantify what that impact has been so far or what you're seeing for expectations for these projects?

We were fortunate in that we bought out most of what we're spending this year, last year at the height of the pandemic. We are seeing on a go-forward basis significant inflation in construction costs, and I'm going to ask Jerry Gammieri who heads that department to cover it in more detail if you prefer.

Yes. And to Ernest's point, we were very successful in buying out the majority of these projects pre this construction inflation, which has occurred over the last year. It is a real problem industry-wide, but I think on the 2 development projects that we have under construction now, One Beach and La Jolla Commons III, we were very successful in making a good buy. And as Ernest alluded to earlier, those costs today are up in excess of probably close to 15% beyond what we bought it at. So we feel pretty good about where we are.

And grateful.

Got it. Got it. And then just a final one for me. Obviously congrats you guys on closing those 2 deals in Bellevue. Just wanted to ask about kind of the outlook for further acquisitions. I recognize the liquidity bridge that you kind of gave earlier, which is really helpful, but just kind of outlook for further acquisitions, appetite for further acquisitions and what you're kind of seeing in the market now?

What you're asking us to reveal is the ongoing discussion within the company. Bob is cautious about spending money because he wants to maintain liquidity. I, on the other hand, am interested in acquiring assets as I believe inflation will increase value for our stockholders. We're actively looking for opportunities. Any purchase we consider will need to be both compelling and beneficial, and we evaluate options daily. Each day, Bob updates me on our net debt-to-EBITDA ratio, cash position, and more. We will keep you updated as this discussion progresses. Would that be an accurate way to express it? Let me clarify my perspective...

I love this guide. I love to spend money when it's accretive for the investors. And we do focus on a conservative debt profile. That's a fair summary. Thank you, Bob.

That’s a fair summary. Thank you, Bob.

I really appreciate the time. Thank you, guys.

Thank you. Thanks for the question.

Thank you. Our next question comes from Victoria Francis from Bank of America. Please go ahead with your question.

Good morning. My question is on your multifamily leasing strategy. Occupancy was up 9% this quarter to 97%, but average rent was still down year-over-year. Are you focused on regaining occupancy? And do you think you can push rents from here and to what extent do you think your multifamily portfolio has pricing power?

You want me to handle it, Abigail, or do you want to take care of it? Okay, I'm ready. Do you want to go ahead?

How about you going?

Last year, rental increases were limited by government regulation, but those restrictions are gradually lifting. Additionally, collections were supported by government payments, which are likely ending soon. However, the San Diego rental and housing markets are very tight, creating an opportunity to raise rents more than we did last year, assuming no further government regulation. We are also investing in our projects to enhance their quality. I believe these two factors will contribute to a positive surprise in rental income. Abigail, would you like to add anything?

Sure. Hi, Victoria. I think our strategy for multifamily, both in San Diego and in Portland is not only to regain occupancy, but also to ensure that the rental rates are comparing or trending upwards with not only the county and the state but also in the local region. So I think effectively for us occupancy is a determining factor. But obviously, our rental rates are what we want to push upwards. When we look at San Diego, the multifamily portfolio here is actually trending higher than that of the county's market rates. Our loss to lease is actually pretty low in comparison in the market, and we just continue to push forward. And I think I'd say the same for Portland as well. I think our strategy is to capitalize on what renters are looking for. We're obviously looking to amenitize, reposition and offer great experiences to the residents to prove value for them.

That's very well put, Abigail. And I think the long and the short of this, we're going to get what we can, and we're going to earn it by improving the properties we have and Abigail has put it and Portland has put in place excellent management. So we're optimistic. Actually more than optimistic if you want to know the truth.

Thank you very much.

Thank you. Our next question comes from the line of Tammy Feet from Wells Fargo Securities. Your question please.

Thanks, good morning. Maybe just going back on the $70 million of cash on the balance sheet I guess I'm just wondering, is that your mark for the development program or what do you think is the capacity for acquisitions on the balance sheet today?

We received a question similar to that earlier. There is an ongoing discussion about it. Clearly, we have ample cash on hand to finish our construction projects. Both Bob and I are keen to pursue acquisitions that would benefit our shareholders. We consider our liquidity to be an important aspect of our securities' valuation. Keeping that in mind, we will take steps to enhance our value. The replacement cost of real estate is rising significantly, and anything we purchase today will be much more expensive to replace in the future. This drives our strategy, and Bob helps provide a balanced perspective while also considering the importance of liquidity. We will evaluate these two factors moving forward, aiming to make the best decisions for our shareholders.

Okay. Great. Thanks. And then maybe just sticking with the balance sheet. The leverage net debt-to-EBITDA ticked up slightly in the third quarter versus the second quarter, presumably, as you put some of the cash on the balance sheet to work. I guess I'm wondering, Bob, when do you think you can get to that 5.5x target that you outlined?

We had trouble hearing you. Did you hear it, Bob?

Yes, Tammy, we have some background noise here. Regarding the timing, we'll provide more details in our 2022 guidance. We're currently assessing our position. Right now, we might see a slight increase followed by a decrease. It's important to note that we have invested cash in the La Jolla Commons redevelopment and One Beach, and we currently do not have corresponding earnings coming in. We anticipate that One Beach will be finished in 2022, with revenue expected in 2023, while La Jolla Commons III and University Town Center in San Diego, a strong market, are expected to be completed in 2023, with revenue starting in 2024. Although there may be a slight uptick, we expect it to decline again, and our corporate operating model indicates we will reach that 5.5%. However, I'd prefer to provide more clarity during our 2022 guidance next quarter.

This is a macro strategy. You will recall that when private placement debt became more expensive than public issuance, we offered $0.5 billion of bonds, which were 4.5 times oversubscribed, and that interest rate is locked in at 3% for 10 years. I think that is going to prove to be a really good move as inflation becomes more of a factor. If the Federal Reserve has to tighten interest rates, we're going to be very glad we have that fixed rate for 10 years, especially as the replacement cost of our real estate significantly increases.

Got it. Maybe just one more. Bob, you mentioned that higher general and administrative and interest expenses were contributing to the drop in Q3 and in Q4 FFO. I’m wondering if you can elaborate on what’s driving that.

Yes. Due to COVID, we anticipate increased costs in the fourth quarter for general and administrative expenses. The job market is very competitive as we try to fill positions. Additionally, interest rates are rising, which is affecting our line of credit and overall costs. Overall, we expect these expenses to rise in the fourth quarter, although we hope it won't be as significant as expected. We aim to manage our general and administrative costs effectively and secure the best possible capital costs moving forward.

What we're experiencing is similar to the overall economic situation. It's an inflationary environment. While inflation affects our short-term expenses negatively, it positively impacts the long-term replacement costs of our properties. That's a valid question.

Thank you very much for your time.

Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Ernest Rady, Chairman and CEO, for any further remarks.

Okay. Thank you all for your interest. We've all been through a very difficult period. I've always hoped and I've said that we've had difficult times before, and we will come out at the other end of this better off than we went in. I'm still hopeful that's the case, if not confident that's the case. With the properties we have, the projects we have in place. And what we see in the economy and the strong markets we have, I'm really - I'm really excited and glad where - with what we have, where we have and the team we have working on. So thank you all very much for your interest.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.