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American Assets Trust Reit Inc (NYSE:AAT)
Q3 2021 Earnings Call
Oct 27, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Third Quarter 2021 American Assets Trust, Inc.'s Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host for today's program, Adam Wyll, President and Chief Operating Officer. Please go ahead, sir.

Adam Wyll -- President and Chief Operating Officer

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?

Ernest Rady -- Chairman and Chief Executive Officer

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 two 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 nine.

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.

Adam Wyll -- President and Chief Operating Officer

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 of 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 are 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 assistant 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.

Robert Barton -- Executive Vice President and Chief Financial Officer

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 four items: first, the acquisitions of Eastgate Office Park in Corporate Campus East III in Bellevue, Washington, on July seven 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, 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 cancellation 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 corona virus 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 three 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 two 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 eight 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 multi-tenant office campus located just off Interstate 405 and 520 freeway interchange, less than five minutes away from downtown Bellevue, Washington. The four 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 five 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 6.4 times. Our focus is to maintain our net debt-to-EBITDA at 5.5 times or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.9 times.

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 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, 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. Steve?

Steve Center -- Vice President of Office Properties

Thanks, Bob. Our office portfolio grew by approximately 440,000 square feet or nearly 13% in Q3 with the two 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 is 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 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 two buildings at Torrey Reserve in San Diego. Those two 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 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's 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 seven Tower Square in the, on our market at Portland, which will add another 32,000 rentable square feet to the office portfolio. In summary, our office portfolio is on us as we move forward into the rest of 2021 and beyond.

Operator, I'll now turn the call over to you for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your question please.

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

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 22 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?

Ernest Rady -- Chairman and Chief Executive Officer

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.

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

Thank you, just one more here. Can you please comment on One Beach Street, noticed the percent lease rate dropped from 15 to zero, was there a 10 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?

Adam Wyll -- President and Chief Operating Officer

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 cost because we were having to work around that tenant in place. So that was a strategic termination.

Ernest Rady -- Chairman and Chief Executive Officer

I hope that answers your question. If you -- do you want any more detail?

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

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

Ernest Rady -- Chairman and Chief Executive Officer

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.

Adam Wyll -- President and Chief Operating Officer

I would add to that, that having the full building versus a big block of space with another 10 in the building is more desirable.

Operator

Our next question comes from the line of Haendel St. Juste from Mizuho.

Yufei Jiang -- Mizuho -- Analyst

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?

Ernest Rady -- Chairman and Chief Executive Officer

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

Adam Wyll -- President and Chief Operating Officer

In general -- in general, retail is turned back on, the critical thing I always preach is school going back. People are spending money in our collections have come back up significantly with the majority of our tenants paying the rent without a fight. I didn't really -- you asked a lot of other questions in there on some numbers. I have to rely on Bob to chime in on that.

Ernest Rady -- Chairman and Chief Executive Officer

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?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes. This is Lydia, right?

Yufei Jiang -- Mizuho -- Analyst

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

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes, I'm not sure, it's on your end or our end, but we've got a lot of echo. So we're, kind of, at a loss here. But generally, what you're saying is -- correct me if I'm wrong, is you're asking about the change in the percentage occupancy from Q2 to Q3. Is that correct?

Yufei Jiang -- Mizuho -- Analyst

Yes.

Adam Wyll -- President and Chief Operating Officer

In collection.

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes. I mean, if you look on the earnings release, Page four, I mean, office is flat, but I don't know if there's much room to go. It's from 99.5% to 99.5%, I mean I think it's -- I think office is strong. Retail is on track. We're having much better collections. And I think in -- if you read through Adam's comments, he mentioned many of the tenants that we have recently signed in the retail. So retail is coming along. It's still a tough go from some perspective only because we're coming out of COVID.

So we have some modifications, but I think we're past a negotiation standpoint. Now everybody is coming back to the -- to each of our centers. We're starting to see the theaters start to have people back in them, especially with the issuance of the Bond movie recently. And multifamily, I think Abigail and Ernest spoke on that. So that continues to be on an upward trend overall. And mixed-use the highs and the lows over Q3, we -- that's the high season for the Embassy Suites.

So we always expect to be up over -- in Q3 about $0.02 of FFO. Our occupancy, we manage toward 88% year-round. And we adjust the rate accordingly based on the demand and the season that we're entering into. So I hope that answers your questions.

Ernest Rady -- Chairman and Chief Executive Officer

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.

Operator

Our next question comes from the line of Richard Hill from Morgan Stanley.

Adam Kramer -- Morgan Stanley -- Analyst

Hey, you have Adam Kramer on for Richard. Good morning guys, I hope you're all 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.

Ernest Rady -- Chairman and Chief Executive Officer

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?

Robert Barton -- Executive Vice President and Chief Financial Officer

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.

Ernest Rady -- Chairman and Chief Executive Officer

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 four billion dollars or five billion dollars 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.

Adam Kramer -- Morgan Stanley -- Analyst

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?

Ernest Rady -- Chairman and Chief Executive Officer

We were fortunate in that we bought out most of what we're spending this year, last year at the height of 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.

Jerry Gammieri -- Vice President of Construction and Development

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 industrywide, but I think on the two development projects that we have under construction now, One Beach and Lo 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.

Ernest Rady -- Chairman and Chief Executive Officer

And grateful.

Adam Kramer -- Morgan Stanley -- Analyst

Got it. Got it. And then just a final one for me. Obviously kind of congrats you guys on closing those two 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?

Ernest Rady -- Chairman and Chief Executive Officer

What you're asking us to expose is the debate that goes on continuously within the company. Bob doesn't want to spend any money because he wants us to have liquidity. I want to buy assets because I think inflation is going to create value for our stockholders. So we're on the hunt. Anything that we buy is going to have to be compelling and accretive, and we're looking every day. And every day Bob tells me that our net debt-to-EBITDA, our cash, etc, etc. So we'll keep you informed as the debate continues. Is that a good way of putting it? Let me clarify that. Is there -- my view...

Adam Kramer -- Morgan Stanley -- Analyst

We've got a buying demand there.

Ernest Rady -- Chairman and Chief Executive Officer

[Indecipherable]. 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.

Adam Kramer -- Morgan Stanley -- Analyst

Got it. Really appreciate the time, really appreciate the time. Thank you guys.

Ernest Rady -- Chairman and Chief Executive Officer

Thank you. Thanks for the question.

Operator

Our next question comes from the line of Victoria Francis from Bank of America.

Victoria Francis -- Bank of America -- Analyst

Good morning, my question is on your multifamily leasing strategy. Occupancy was up nine percent 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?

Ernest Rady -- Chairman and Chief Executive Officer

You want me to handle it, Abigail, or should I handle -- or should you want to handle? Okay. Yes. I'm good to go. You want to go?

Abigail Rex -- Director, Multifamily, San Diego

How about you going?

Ernest Rady -- Chairman and Chief Executive Officer

Okay. Well, first of all, last year, the rental increases were constricted by the government regulation. Those are now coming off gradually. Last year, collections were aided by government payments. Those will probably come to an end. But in the market in San Diego, there is a very tight rental market, a very tight housing market, which provides us an opportunity provided there's no more government regulation to increase rents more than certainly they did last year. In addition to that, we're spending money on our projects to take them to another level. I think those two, and I hope those two factors will allow us to give -- provide a pleasant surprise as far as rental income. Abigail, do you want to add something to that?

Abigail Rex -- Director, Multifamily, San Diego

Sure. Hi, Victoria. I think our strategy for multifamily, both in San Diego and in Portland is not only how the high 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.

Ernest Rady -- Chairman and Chief Executive Officer

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.

Victoria Francis -- Bank of America -- Analyst

Great, thank you very much.

Operator

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

Tammy Feet -- Wells Fargo Securities -- Analyst

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?

Ernest Rady -- Chairman and Chief Executive Officer

Well, this -- we had a question comparable to that earlier. And there's a constant debate. Obviously, we have more than enough cash on the balance sheet to complete our construction. And then we would love to acquire something, both Bob and I would love to acquire something that's accretive for our stockholders. We do have in mind our liquidity as being a significant factor in the valuation of our securities. So with that in mind, we're going to do what we can to enhance the value. Real estate, the replacement cost of real estate is -- I hate to use the word, but it's going up dramatically, maybe even going through the roof. So anything you can buy today is going to cost us a lot more to replace tomorrow. And that's what drives me. And of course, Bob provides a balanced approach and that liquidity is important also. So we weigh those two factors going forward, and we hope that we make the right decisions for all our stockholders.

Tammy Feet -- Wells Fargo Securities -- Analyst

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 5.5 times target that you outlined?

Ernest Rady -- Chairman and Chief Executive Officer

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

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes. Tammy, we've got that echo going on here. Yes, when it will happen, that's -- we'll try to give some more insight on that in our 2022 guidance. We're going through that at this point in time. Where we are now, we may tick up a little bit and then will start coming down. Keep in mind, we have cash that's been put to work on La Jolla Commons redevelopment, on One Beach. And we don't have offsetting earnings coming in at this point in time. So where we are now is that we expect that One Beach will be completed in '22, and we're expecting to see revenue from One Beach coming in '23 or La Jolla Commons III and University Town Center here in San Diego, which is a dynamic, a very strong market, we expect that to be finished, completed in '23 with revenue coming in '24. So while it may tick up a little bit, it's going to come back down and we do see in our corporate operating model where we will hit that 5.5%. So I just can't give you the -- I'd rather give that to you later in our '22 guidance next quarter.

Ernest Rady -- Chairman and Chief Executive Officer

This is a macro strategy. You will recall that we offered -- 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 was -- that interest rate is locked in for -- at three and three for 10 years. I think that is going to prove to be a really good move as inflation becomes more of a factor. And if feds have to tighten interest rates, we're going to be very glad we have that fixed rate for 10 years, also as the replacement cost of our real estate increases significantly.

Tammy Feet -- Wells Fargo Securities -- Analyst

Got it. Maybe just one more. Bob, you mentioned I think that higher G&A and interest expenses were contributing to sort of the drop in Q3 -- in Q4 versus Q3 FFO. I guess I'm just wondering if you can elaborate on what's driving that?

Robert Barton -- Executive Vice President and Chief Financial Officer

Yes. Working with COVID, we're expecting higher costs in the fourth quarter on G&A. And just to replace some of our people, it's -- the market is strong out there, to say the least. In terms of interest, we have the rate and even on our line of credit, I mean, costs are going up. So what we're seeing all in all is that we expect some of these costs to increase in the fourth quarter. Hopefully, it's not as much as that. We always want to under-promise and over-deliver. So we'll do the best we can to keep our G&A down and get the best cost of capital as we go forward.

Ernest Rady -- Chairman and Chief Executive Officer

What we're going through is no different than what the economy is going through. The -- it's an inflationary environment. Inflationary environment works against us in the short-term expenditure, but works for us in the long-term replacement cost of our properties. And that's a good question.

Tammy Feet -- Wells Fargo Securities -- Analyst

That makes sense. Thank you very much for your time.

Operator

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 Chief Operating Officer, for any further remarks.

Ernest Rady -- Chairman and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Adam Wyll -- President and Chief Operating Officer

Ernest Rady -- Chairman and Chief Executive Officer

Robert Barton -- Executive Vice President and Chief Financial Officer

Steve Center -- Vice President of Office Properties

Jerry Gammieri -- Vice President of Construction and Development

Abigail Rex -- Director, Multifamily, San Diego

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

Yufei Jiang -- Mizuho -- Analyst

Adam Kramer -- Morgan Stanley -- Analyst

Victoria Francis -- Bank of America -- Analyst

Tammy Feet -- Wells Fargo Securities -- Analyst

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