American Assets Trust, Inc. Q2 FY2024 Earnings Call

Welcome to American Assets Trust Inc.'s Second Quarter 2024 Earnings Call. As a reminder, today's conference is being recorded. Please note that statements made on this conference call include forward-looking statements based on current expectations, which statements 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. Yesterday afternoon, American Assets Trust earnings release and supplemental information were furnished to the SEC on form 8-K. Both are now available on the Investors section of its website, americanassetstrust.com. It's now my pleasure to turn the call over to Ernest Rady, Chairman and CEO of American Assets Trust.

Good morning, everyone. At American Assets Trust, I can assure you every strategic and operational decision is driven by our commitment to maximize, both long and short-term value. This dedication is reflected in our efforts to maintain a robust balance sheet and our continuous investment in enhancing our irreplaceable properties, ensuring they remain optimistic in the respective markets. In Q2 2024, our operating fundamentals once again exceeded expectations, even amidst much of the pessimistic market sentiment surrounding commercial real estate, particularly in the office sector. Very upsetting to me, frankly. Our strong performance has prompted us to raise our full-year guidance once more, underscoring our confidence in our earnings trajectory for the remainder of 2024. This success highlights the exceptional quality of our properties, the exceptional ability of our people, and the expertise of our team who drive our long-term growth and shareholder wealth creation. On that note, I am pleased to announce that Adam Wyll, who's been with us now for 20 years, right?

Correct.

You joined us when you were three, right Adam? We have a young President. Our current President and CEO will be stepping into the role of CEO on January 1, 2025. Adam has been an integral part of our team, contributing at all levels of the organization for two decades. His leadership, expertise, executional skills, and deep understanding of the real estate industry in our portfolio have been invaluable to our success. Thank you, Adam. Adam's promotion to CEO is a natural progression for both him and American Assets Trust, reflecting the confidence of our Board and I have in his ability to steer our company toward continued success. Congratulations and again, thanks, Adam. To our investors and stakeholders, I want to assure you that this transition will be seamless. I'm in good health, thank goodness, and will assume the role of Executive Chairman on January 1, 2025, continuing to lead our Board meetings and strategy. Additionally, our incredibly talented, dedicated, long-term, and long-tenured executive management team will remain intact, including our CFO, Bob Barton, who suggests he has another decade on him at AAT at least. He joined when he was four. I am continually impressed by this team's cohesion, collaborative spirit, and experience, which fosters a strong sense of trust and mutual respect, enabling them to tackle challenges effectively and drive innovation. My colleagues Adam, Bob, Steve, Chris, and Abigail will cover our various asset segments, financial results, and updated guidance shortly. But first, I am pleased to announce the Board of Directors has approved a quarterly dividend of $0.335 per share for the third quarter. This decision highlights our strong financial performance and emphasizes the Board's belief in our continued success. The dividend will be paid on September 19th to shareholders of record September 5th. I'd like to express our sincere confidence and gratitude for your support and allowing us to steward your company. Now I'll hand the call over to Adam to commence a deeper dive into our quarterly performance and future outlook.

Thanks, Ernest. I am honored to take on the CEO role at the start of 2025. Ernest, your entrepreneurial spirit, visionary leadership, business acumen, and mentorship have been pivotal, not only for my development but also for the entire management team for which we are immensely grateful. I sincerely appreciate the trust you and our Board have placed in my leadership. I'm also thankful for Bob's support as well as all of my colleagues on our exceptional management team. Our daily collaboration has fostered a true sense of family among us as we've navigated numerous challenges and celebrated many successes over the years. Teamwork and resilience thrive at American Assets Trust thanks to the tone Ernest has set at the top. Turning to our results, as Ernest mentioned, we have once again delivered strong operating performance across all segments of our diversified portfolio, including the highest quality office, retail, multifamily, and mixed-use properties. In times of economic and business unpredictability, it is crucial for us to focus on what we can control. This means adapting to and meeting evolving market demands in a volatile economy, particularly in commercial real estate. We have a proven track record of overcoming challenges with resilience, and we are confident that our high-quality operating platform and real estate portfolio will remain steadfast despite the volatile financial markets. Moving forward, we will continue to base our strategy and decision-making on actions we believe will drive long-term financial outperformance. On the office utilization front, our estimates and those of our tenants indicate that office usage has remained relatively stable from Q1 to Q2. Specifically, San Diego and San Francisco are experiencing utilization rates between 70% and 80%, with San Francisco largely driven by our two anchor tenants at Landmark, while Bellevue and Portland are at about 60% to 75%. We anticipate that a few more known return-to-office mandates from existing tenants will, once implemented, can increase these figures by year-end. Meanwhile, we understand that nationwide office utilization is just north of 50% of pre-pandemic levels. Of course, the quality and location of our office buildings and the robust amenities we offer are key differentiators in our higher utilization, not to mention leasing efforts compared to the competitors in our submarkets. In the retail sector, which represents 27% of our portfolio NOI, we are currently about 95% leased. We have successfully renewed nearly all lease expirations this year and have begun executing on our 2025 renewals. As anticipated, our comparable retail leasing spreads have continued to trend positively each quarter over the past several years, with a 6% increase on a cash basis and a 34% increase on a straight-line basis for Q2 transactions. We are often asked about consumer spending at our retail properties. While we are not completely insulated from a potential slowdown, we believe that consumer spending is more resilient in the densely populated areas with favorable demographics surrounding our top-tier shopping centers. Foot traffic has remained strong, supporting ongoing demand for the limited vacant space at our well-managed properties, especially given the very limited supply growth in our submarket. As a result, our retail portfolio achieved its highest average base rent per square foot in Q2 since our IPO, which ranks among the top two of the retail peers that we track. Turning to our multifamily portfolio, specifically at our San Diego communities, we ended Q2 with an occupancy rate of 89% and a leased percentage of 95%. The dip in occupancy is mainly due to the seasonal move-out of students at our Pacific Ridge apartments. We note that leases for vacant units were rented at an average rate approximately 4% lower than prior rents, largely due to expiring prior tenancies that saw premiums of over 20% over the base rate for month-to-month holdovers while renewed units experienced an average increase of 9%, resulting in a blended average increase of 4% with minimal concessions offered. While the year began with a slowdown in rents, the stronger spring and summer leasing season in Q2 has allowed us to increase rates, especially on renewals. In Q2, at our Hassalo on Eighth multifamily community in Portland, we maintained flat rates on a blended basis between new move-ins and renewals, with our lease percentage holding steady at 96% and minimal concessions offered. While we had hoped for a slight increase in blended rates, maintaining flat rates still represents an improvement over prior quarters in Portland. Q3 has begun positively at Hassalo, and we are optimistic about sustaining this momentum. Meanwhile, it's worth noting that our multifamily portfolio achieved its highest-ever average base rent in Q2 since our IPO, as we saw our same-store NOI increase almost 10% year-over-year for Q2 with very strong collections in Q2, and net effective rents for our entire multifamily portfolio are now 3% higher year-over-year compared to Q2 2023. Finally, we released our 2023 sustainability report in Q2, showcasing our operations and highlighting our initiatives and vision on various topics including environmental sustainability, social responsibility, corporate governance, and human capital. You can find it on our website, and we hope you find it informative. With that, I'll turn the call over to Bob to discuss financial results and updated guidance in more detail.

Thanks, Adam, and good morning, everyone. First of all, I want to congratulate Adam on his promotion to CEO. Well-deserved and it's been a pleasure working with Adam over the years. I look forward to many more years working with Adam, Ernest, and this great group of professionals at American Assets Trust, which is a tight-knit family focused on creating wealth for all of our shareholders and having fun while we do it. Last night, we reported second-quarter 2024 FFO of $0.60 per share. Second quarter 2024 net income attributable to common stockholders was $0.20 per share. Second quarter 2024 FFO decreased by approximately $0.11 to $0.60 per FFO share compared to the first quarter of 2024, primarily due to three things. First, as you may recall, we previously received a one-time $10 million litigation settlement in Q1 '24, which was approximately $0.13 of FFO per share, reducing the FFO by approximately $0.13 per FFO share in the second quarter. Second, our multifamily properties contributed to approximately $0.01 per FFO share of outperformance in Q2 '24 that was not previously included in our updated '24 guidance. And third, our retail properties contributed approximately $0.01 per FFO share of outperformance in Q2 '24, that was not previously included in our updated '24 guidance. These three items taken together reduced the FFO from $0.71 per FFO share in Q1 '24 to $0.60 in Q2 '24. Same-store cash NOI for all sectors combined was 2.1% growth year over year for the second quarter. Breaking it out by segment and each compared to Q2 2023 is as follows. Our same-store office portfolio's NOI was flat in Q2, primarily due to contractual rent abatements related to office lease renewals at our Solana Crossing in San Diego and Corporate Campus East III in Bellevue. Our same-store retail portfolio's NOI was positive 3.2% in Q2, primarily due to higher base rents at our Solana Beach Towne Centre in San Diego, Del Monte Center in Monterey, and Waikele Center in Oahu, Hawaii. Our same-store multifamily portfolio's NOI was a positive 9.5% in Q2, primarily due to higher-than-expected revenue and lower-than-expected expenses at our San Diego multifamily properties, particularly Pacific Ridge. At our mixed-use portfolios, NOI was a positive 2.2% in Q2, primarily due to higher revenue at the Embassy Suites Waikiki. Specifically in Q2 '24, paid occupancy was approximately 86% compared to 84% in Q2 '23. RevPAR was $317 compared to $312 million in Q2 '23. ADR was $367 compared to $370 in Q2 '23. NOI was approximately $3.4 million compared to $3.3 million in Q2 '23. Liquidity, at the end of the second quarter, we had liquidity of approximately $515 million, comprised of approximately $115 million in cash and cash equivalents and $400 million of availability on our revolving line of credit. Subsequent to quarter-end, we drew down on our line of credit to pay off the $100 million Series F notes that matured on July 19. As of the end of the second quarter, our leverage, which we measure in terms of net debt to EBITDA, was 6.4 times on a quarter annualized basis and 6.3 times on a trailing 12-month basis. Our objective is to achieve and maintain a net debt to EBITDA of 5.5 times or below. Our interest coverage and fixed charge coverage ratios were 3.6 times for the quarter on both an annualized basis and trailing 12-month basis. Please note while we have access to capital from many sources, we are closely monitoring the public debt markets to manage our upcoming debt maturities. We anticipate taking action on this before the end of the year. Let's talk about our 2024 guidance. We are increasing our 2024 FFO per share guidance range to $2.48 to $2.54 per FFO share with a midpoint of $2.51 per FFO share, a 9.6% increase from our previously updated guidance that had a range of $2.24 to $2.34 with a midpoint of $2.29. Let's walk through the items that make up most of this increase in our '24 FFO guidance. First, our retail properties have contributed an additional approximately $0.02 per FFO share this year from lower bad debt and operating expenses, and higher percentage rents that were not previously included in our updated '24 guidance. Second, our office properties have contributed an additional approximately $0.02 per FFO share this year from lower bad debt and operating expenses that were not previously included in our '24 guidance. And third, lower G&A and higher interest income has contributed an additional approximately $0.02 per FFO share this year. Fourth, our multifamily properties have contributed an additional $0.01 per FFO share this year that was not previously included in our updated '24 guidance. And fifth, we have received a lease termination fee from a tenant at our Torrey Reserve property in San Diego that will be recognized and contribute approximately an additional $0.15 per FFO share in Q3 2024. The tenant has also paid their existing rent through their new termination date of September 30 '24. And the termination fee will cover approximately four of the five remaining years of base rent on the lease for turnkey space that we are optimistic we can re-let within the next few years, if not earlier. These adjustments, when added together, will be approximately $0.22 per FFO share and represent a net increase in the 2024 midpoint over our previously updated guidance. While we believe the '24 guidance is our best estimate as of this date of this earnings call, we do believe that it is also possible that we could perform towards the upper end of this range. In order to do that, first, the majority of the office or retail tenants that we reserve for must continue to pay their rents through the year-end. As of the end of Q2, we have approximately $0.03 of FFO per share reserves remaining, $0.01 for office and $0.02 for retail. Second, we need to outperform our multifamily guidance by continuing to see increasing rents and occupancy and/or less expenses. Third, tourism and travel to Waikiki needs to see a more meaningful return from our Japanese guests, which we are cautiously optimistic about, if not later this year then in the ensuing years to come. It's just a matter of timing. As always, our guidance, our NOI bridge, and these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances, or 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, Senior Vice President of Office Properties, for a brief update on our office segment.

Thanks, Bob. At the end of the second quarter, our office portfolio was 86.6% leased, an increase of 20 basis points over the prior quarter. While we continue to experience some rightsizing of existing tenants and a few small office closings, they were more than offset by Q2 leasing activity as follows. In the second quarter, we executed 18 leases totaling approximately 96,000 rentable square feet, comprised of two comparable new leases for approximately 21,000 rentable square feet, with rent increases of 4% on a cash basis and 26% on a straight-line basis, including a 20,000 rentable square foot office tenant at First & Main in Portland. 10 comparable renewal leases for approximately 32,000 rentable square feet, with rent increases of 6% on a cash basis and 10% on a straight-line basis, including an 11,000 rental square foot office lease at the Coastal Collection, Torrey Reserve in San Diego, and six non-comparable leases totaling approximately 43,000 rentable square feet, including two leases totaling 23,000 rentable square feet at City Center Bellevue, three leases totaling 16,000 rentable square feet at the Coastal Collection, Torrey Reserve in San Diego, and a 5,000 rentable square foot lease at First & Main in Portland. The leasing momentum has continued into Q3 as follows. We've executed seven leases to date totaling approximately 57,000 rentable square feet. We have nine deals in lease documentation totaling approximately 79,000 rentable square feet, approximately 62,000 rentable square feet of which is new leasing. Including deals in lease documentation, approximately 55% of the rentable square feet is new leasing, which is the first time since 2019 that our new leasing has outpaced renewals on a rentable square foot basis. Our lease expiration exposure is modest through 2025. We're down to approximately 4% rolling in 2024 given deals signed year to date, with the average deal size of the remainder of approximately 8,000 rentable square feet. This includes the early termination of the tenant that Bob mentioned at Torrey Plaza for approximately 46,000 rentable square feet or 1% of the portfolio that will hit on October 1. We have approximately 8% of the portfolio rolling in 2025 with the average deal size of approximately 6,800 rentable square feet. Concluding with some insights on our new development, La Jolla Commons III in the UTC submarket of San Diego. We are currently in lease documentation for the third floor. We are one of two alternatives for a lease on the 10th floor. We have been shortlisted by a law firm for two floors. We have several tenants that have toured and are expected to engage with RFPs for a total of four floors, and we are in discussions with one prospective tenant for most, if not all of the remaining vacancy. Prospective tenants' industries include software, legal, advisory, tax and insurance, construction, banking, energy, and management consulting and technology. They are seeking the best environment and experience with which to attract and keep the best talent and engage their customers. Note that the UTC submarket of San Diego remains strong. Net of Tower III's vacancy, the Class A direct vacancy is just 4.5%. The only A-plus competitor has just three direct vacancies. Two that are about 4,000 rentable square feet and one that is 11,000 rentable square feet. We are excited about our prospects for success at Tower III and throughout our entire office portfolio. I'll now turn the call back over to the operator for Q&A.

Good job, Steve, Adam, and Bob.

Today's first question comes from Haendel St. Juste with Mizuho. Please go ahead.

Hi. Good morning and my congratulations to Adam and the team. I had a question I guess for you, Adam, first on, I guess maybe a two-parter. I guess first, more broadly, any G&A impact we should expect from the announcement in this year's guide. And second, I guess I'm curious, I know it's early, but if there's any short, medium-term goals or strategic priorities that you might have in mind as you transition to the CEO role?

I appreciate it, Haendel. I don't expect any impact on G&A this year; it will all take effect in January next year. So, you can count on Bob's modeling for the remainder of this year. Regarding changes, I believe we have the same team, the same group of people, maintaining the same strategy, with not much alteration in that area. However, we will keep brainstorming and seeking ways to create value, just as we've communicated for the past decade.

Got it. I'm curious about the lease termination fee for the quarter. Can you share some insights about the tenant and why they terminated? It sounds like you’re optimistic about filling the space again in the next couple of years, as Bob mentioned. Are there any implications for the office sector, or are you expecting or having any more similar discussions?

In this specific situation, the tenant was one we had on our reserve list that we mentioned earlier this year. They were a life science tenant whose FDA approvals were not progressing positively. They had a significant amount of cash on their balance sheet. Considering their cash burn and future prospects, we worked with them to create a mutually acceptable deal. We were satisfied with the outcome, and I believe they were as well. They are a public company, and as Bob pointed out, this is at our former headquarters where they did a great build-out, providing a turnkey space. Steve can provide insights on the leasing prospects for that space and generally. Overall, this was a situation where we could have seen this tenant run out of money within a year without yielding any benefits from the lease. Ultimately, we think it turned out to be a favorable situation for both parties.

Yes. The lease rates in place, Haendel, are about $12 annually below market. So we've got a below-market situation. We've got really well-built-out space, and it's a 45,000 contiguous square feet on one floor, which is unique in the marketplace. So we're encouraged by our prospects there.

Got it. Got it. Steven, while I have you maybe some color. I think you mentioned that new leasing in your office segment outpaced renewals for the first time in years. So I guess I'm curious what the prospects for the near term look like, the level of tours and interest that you're seeing? And then I guess I assume with more new leasing going on than renewals, that should result in a uptick in leasing CapEx. So any color on that would be appreciated. Thanks.

It's interesting. Our CapEx, hitting on that last point, is actually at the historic average over the last seven years. So it hasn't ticked up, although costs are up. So it just speaks to, we're very judicious about what we build out and we're conscientious about what we get back. So we've had numerous instances where we had spaces rolled that we built out in the last seven years that are not expensive to re-tenant. And many renewals are as is. So you'll see that our costs on a weighted average basis are pretty muted. What was your first question in terms of activity? Activity is up. I mean, Q3 or Q2 is 96,000 feet. We're on pace to do much higher than that in Q3. If this trend continues, it'll be our third-best year from a leasing volume perspective. And keep in mind, 2018 was the Google year and Autodesk year, which was a monster year, so leasing activity is up. Furthermore, the average deal size from a dollar-per-deal perspective is the highest ever in the last seven years. So we're bullish. Our investments in our properties are paying off. Our margins remain good. We are the property of choice. Even with tenants that are rightsizing, we still experience that, they're staying with us. So they may downsize, but they renew their leases at higher rental rates, so we are excited about the prospects.

The property of choice is a very important strategy. We maintain our properties well and we look after our tenants. Steve has introduced a culture of they are not tenants, they are customers, which serves us well.

Thank you. I'll yield.

Thank you. And our next question comes from Antara Nag-Chaudhuri with KeyBanc Capital Markets. Please go ahead.

Hi, this is Antara on the line for Todd Thomas. First, just wanted to say congrats on the promotion, Adam, and good luck on retirement, Ernest.

Wait a minute, I’m not retiring. I have a lot of reasons why this company is so important to me. I'm glad Adam has the job, and congratulations to him, but don’t think of me as retiring. I would be in trouble if I did.

You knew better, Antara.

All right, got it. But just regarding the balance sheet, I know you paid down the Series F notes using the line, and you have a couple of maturities in 2025 that are around $425 million. So do you have any updated thoughts given the move in the debt markets? And are you looking to permanently refinance some of that in advance?

Yes, this is Bob. As I mentioned, we paid off $100 million that was due on July 19. We have the option to pay with available cash or draw on our line of credit, and we chose to utilize the line of credit, which allows us to keep our cash on the balance sheet earning over a 5% return. Regarding the remaining $425 million due in 2025, we're closely monitoring the market. Since early 2024, we've been evaluating the best time to secure a swap contract. The market has seen a slight decline, with treasury rates decreasing about 10 basis points this morning. Our banking team is working diligently to find the right entry point. Based on our past transactions, we have been quite successful, and we are optimistic about finalizing something before the end of this year, ideally sooner.

Okay, perfect. And are there any other known move-outs in the office segment that we should be aware of as we're thinking about the end of 2024 and just 2025.

What's the question?

Known move-outs. So 2024, no, we're in good shape. 2025, we know the clear result will be vacating four floors. They are actually tenants in five floors, and we've already leased one of those floors to an existing subtenant as well.

That's First & Main.

First & Main, yes. And it's a best-in-class building. We're just completing by the end of the year amenities program there as well. And so, we're well positioned to backfill that space. It's beautiful space. It's top of the stack. Building top signage is available, so we're optimistic there.

Office has this aura about it, which is concerning. But there's office and then there's office. First of all, Steve does a great job. Second of all, we've got properties that are very well located. Third of all, we maintain them in first-class shape. Fourth of all, we treat our tenants as customers and really look after them as best we can. Fifth of all, a lot of the competition is not blessed with the advantages we have. The liquidity we have assures our tenants, A, that we'll maintain the quality of our properties and B, that we'll do the tenant improvements and pay the leasing commissions. So there's office and then there's office. We're not the office that bears the black mark that the market seems to lay on it. We're the best in class. We're proud of what we do and we think that the team does very well, and the properties speak for themselves.

Okay, got it. Makes sense. And if I could just sneak one more in? What is the progress on leasing at One Beach and La Jolla? I was wondering if you have any additional updates that you could provide on leasing.

Steve, you want to cover that?

You're asking about La Jolla Commons III?

And One Beach.

And One Beach.

Yes.

One Beach, I'll just be candid. San Francisco is a small tenant market right now. This building is either a single tenant or three tenants. So it's going to take some time for this average size requirement in San Francisco to get there. Our prospects at Tower III at La Jolla Commons in UTC are excellent.

I think you covered that earlier.

Yes. We've got a lot of activity there.

If you look at the transcript, I think you covered it very well.

Yes. We're very busy at Tower III and as I mentioned, the direct vacancy in that submarket for Class A space is just 4.5%. So it's got to be the healthiest submarket, I think, in the country. So we think our prospects are really good.

And for One Beach, the problem is not ours, the problem is San Francisco's. We have a great property in a great location that's completely repositioned, but the market is the market.

Got it. Thank you.

Thank you for the question.

And our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hi, first, congratulations to Adam and also to Ernest for your continued roles and engagement, not a retirement. Congratulations to everyone, it’s truly well deserved. Now, shifting gears to the office sector a bit, it seems there has been a lot of activity in the portfolio. Can you provide some insight into the broader market trends? Do you think your activity reflects the quality of the properties, or are we beginning to see signs of improvement in the overall market?

One of our strongest markets is San Diego, which is interesting because CBRE describes the market as challenging. I believe this is largely due to a flight to quality. Even in markets with negative net absorption, which many of our submarkets are experiencing, I don't require positive net absorption to succeed. I need tenants to choose our properties, and we've been fortunate in that regard. Most of our new leasing activity involves tenants who are downsizing, yet they are seeking the best possible environment for their employees to return to the office. They desire all the amenities we've discussed and attractive properties, which is how we are succeeding. Therefore, our activity reflects a flight to quality rather than the strength of the market. However, Bellevue, in particular, is recovering. Our City Center Bellevue property is performing well, and the suburbs are showing improvement as well. We have 281,000 square feet in the I-90 corridor, with several tours and proposals taking place, which is a significant portion of our overall vacancy. Our two properties on the 520 corridor are also active. Overall, Bellevue is showing signs of improvement.

I think, Steve, you paraphrased it which is flight to quality from the landlord's point of view, from the building's point of view, from the financial ability of the landlord to perform from the ability of the landlord to work with the leasing agents. So it's a multi-tier market, and we're, I believe, in the top tier, and that's really significant top tier in all those categories.

You raise a great point, Ernest. Our strength lies not only in the real estate itself but also in our balance sheet and customer service, as well as our flexibility. Notably, our weighted average lease term is shorter this quarter compared to previous quarters, partly because we adapt to our customers' needs. Some require shorter-term solutions, and we accommodate them instead of forcing a longer commitment. For example, a law firm recently expanded into a 4,000-square-foot spec suite and reached out to discuss their term needs. They mentioned they would revisit the deal in 2.5 years but required a short-term solution. They even offered free rent to cover the tenant improvements, and we agreed to work with them. These aspects contribute significantly to our approach, so it’s a valid point, Ernest.

…paint it with the same brush that everybody in that part of the real estate market is really disappointing. We are not the average office landlord. We are, I believe, very qualified and do an excellent job.

Great. And then, look, my second question was just sort of on a capital allocation. I mean, clearly, the priorities are leasing capital and rounding out developments that you're working through. But when does sort of acquisitions come back into the picture? And how do you sort of balance that with trying to get leverage below 5 times? So just how you guys think about capital allocation, protecting that balance sheet, but also potentially looking to play offense on the acquisition or is that even the thinking right now?

First of all, we are not looking at acquisitions at the moment. Bob Barton who can be violent on occasion wants that net debt to EBITDA fall into a range that maintains and perhaps even enhances our credit rating. The secret to that is La Jolla Commons III. And Steve went through that. So at the moment, we're sitting back watching and waiting for the success of La Jolla Commons III to come about and then we'll see what we can do. But I think that at the moment, office is kind of off our wish list because of the reputation it seems to have, even though we continue to perform in a top-tier fashion.

Yes. Let me add to what Ernest just mentioned. Capital allocation is crucial, and we aim to protect the balance sheet. We believe it’s wise to complete the leasing for La Jolla Commons III. We have invested around $215 million in that property, which is a valuable asset in the market, and we need to see a return on that investment. So, we need to focus on leasing it up first. We are still exploring asset opportunities, but we have made it clear that we are not looking to purchase any more office space. We are pleased with our current assets and are seeing great returns under Steve's management. We are considering a shift towards multifamily properties and possibly a bit of retail as well. Historically, our company has been committed to creating value for our investors, and I firmly believe we will continue to do so moving forward.

You know, while we're not acquiring, we are investing daily in improving our properties. So, Jerry, who handles construction, how many projects do you have going now to improve what we have?

We have well over 100 projects going on right now.

We're not sitting back on, you know what. We are waiting for something to happen. We're improving and making it better, and that's an investment without the risk of acquisition.

Great. Super helpful. Congrats again. That's it for me. Thanks so much.

Thanks, Ron.

Thank you. And our next question comes from Dylan Burzinski with Green Street. Please go ahead.

Hi guys. All my questions have been asked, but just wanted to say congrats to Adam. Well deserved.

Thanks, Dylan. Great questions.

See what, he's not only good-looking, he's not only intelligent, he has a great sense of humor.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Rady for any closing remarks.

Thanks to all of you for your interest in our company. We continue to do our best on your behalf. We hope at some point the market will recognize the difference between us and the average real estate company are significant, and the results will prove it. So thank you all for your interest and your good questions.

Thank you. Ladies and gentlemen, this concludes our conference call. You may now disconnect your lines and have a wonderful rest of the day.