American Assets Trust - Q2 2024
July 31, 2024
Transcript
Operator (participant)
Welcome to American Assets Trust, Inc.'s second quarter 2024 earnings call. As a reminder, today's conference is being recorded. Please note the 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 investor 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.
Ernest Rady (Executive Chairman)
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 top-tier in their 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?
Adam Wyll (President and CEO)
Correct.
Ernest Rady (Executive Chairman)
You joined us when you were three, right, Adam?
Adam Wyll (President and CEO)
Sure. Yeah.
Ernest Rady (Executive Chairman)
We have a young president. Our current President 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 our organization for two decades. His leadership, expertise, executional skills, and deep understanding of the real estate industry and our portfolio has 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 that 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, and long-term, 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 upgrade guidance, update 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 emphasize the board's belief in our continued success. The dividend will be paid on September nineteenth to shareholders of record, September fifth. I'd like to express our sincere confidence and gratitude for your support and allow 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.
Adam Wyll (President and CEO)
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 70-80%, with San Francisco largely driven by our two anchor tenants at Landmark. While Bellevue and Portland are at about 60%-75%. We anticipate that a few more known return-to-office mandates from existing tenants, 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 submarkets. As a result, our retail portfolio achieved its highest average base rent per sq ft 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 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 the 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. 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.
Robert Barton (EVP and CFO)
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 2024, 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 approximately $0.01 per FFO share of outperformance in Q2 2024. That was not previously included in our updated 2024 guidance. And third, our retail properties contributed approximately $0.01 per FFO share of outperformance in Q2 2024. That was not previously included in our updated 2024 guidance. These three items, taken together, reduced the FFO from $0.71 per FFO share in Q1 2024 to $0.60 in Q2 2024. Same-store cash NOI for all sectors combined was 2.1% growth year-over-year for the second quarter.
Breaking it out by segment, 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 portfolio's NOI was a positive 2.2% in Q2, primarily due to higher revenue at the Embassy Suites, Waikiki.
Specifically, in Q2 2024, paid occupancy was approximately 86%, compared to 84% in Q2 2023. RevPAR was $317, compared to $312 in Q2 2023. ADR was $367, compared to $370 in Q2 2023. NOI was approximately $3.4 million, compared to $3.3 million in Q2 2023. 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 19th.
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 twelve-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 twelve-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-$2.54 FFO per share, with a midpoint of $2.51 FFO per share, a 9.6% increase from our previously updated guidance that had a range of $2.24-$2.34, with a midpoint of $2.29. Let's walk through the items that make up most of this increase in our 2024 FFO guidance. First, our retail properties have contributed an additional approximately $0.02 FFO per share this year from lower bad debt and operating expenses, and higher percentage rents that were not previously included in our updated 2024 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 2024 guidance. 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 2024 guidance. 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, 2024, and the termination fee will cover approximately 4 of the 5 remaining years of base rent on the lease.
For turnkey space, that we are optimistic that we can relet within the next few years, if not earlier. These adjustments, when added together, will be approximately $0.22 per FFO share and represent the net increase in the 2024 midpoint over our previously updated guidance. While we believe the 2024 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 acquisitions, future debt refinancings or repayments other than what we've already discussed. We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers. I also want to briefly note that any non-GAAP financial measures that we've discussed, like NOI, are reconciled to our GAAP financial results in our earnings release and supplemental information.
I'll now turn the call over to Steve Center, our Senior Vice President of Office Properties, for a brief update on our office segment. Steve?
Steve Center (SVP of Office Properties)
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 sq ft, comprised of two comparable new leases for approximately 21,000 rentable sq ft, with rent increases of 4% on a cash basis and 26% on a straight-line basis, including a 20,000 rentable square foot office tenanted at First & Main in Portland.
10 comparable renewal leases for approximately 32,000 rentable sq ft, with rent increases of 6% on a cash basis and 10% on a straight-line basis, including an 11,000 rentable sq ft office lease at The Coastal Collection, Torrey Reserve in San Diego. Six non-comparable leases totaling approximately 43,000 rentable sq ft, including 2 leases totaling 23,000 rentable sq ft at City Center Bellevue, 3 leases totaling 16,000 rentable sq ft at The Coastal Collection, Torrey Reserve in San Diego, and a 5,000 rentable sq ft lease at First & Main in Portland. The leasing momentum has continued into Q3 as follows: We've executed 7 leases today, totaling approximately 57,000 rentable sq ft. We have 9 deals in lease documentation totaling approximately 79,000 rentable sq ft, approximately 62,000 rentable sq ft of which is new leasing.
Including deals and lease documentation, approximately 55% of the rentable sq ft is new leasing, which is the first time since 2019 that our new, new leasing has outpaced renewals on a rentable sq ft 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 sq ft. This includes the early termination of the tenant that Bob mentioned at Torrey Reserve for approximately 46,000 rentable sq ft, 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 sq ft.
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 tenth floor. We have been shortlisted by a law firm for two floors. We have several tenants that have toured that are expected to engage with RFPs for up to 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+ competitor has just three direct vacancies, two that are about 4,000 rentable sq ft and one that is 11,000 rentable sq ft. 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.
Robert Barton (EVP and CFO)
Good job, Steve. Adam, wow.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you'd like to ask a question, please press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Haendel St. Juste with Mizuho. Please go ahead.
Haendel Emmanuel St. Juste (Managing Director and Senior REIT Analyst)
Hey, 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, you know, short, medium-term goals or strategic priorities that you might have in mind as you transition to the CEO role.
Steve Center (SVP of Office Properties)
Oh, thanks, first and foremost, Haendel. I appreciate it. Don't anticipate any G&A impact this year. It's all going to be effective as of January next year.
... So you can rely on Bob's modeling going forward through this year. And in terms of change of what we're looking at, I mean, I think in a lot of respects, it's the same team, the same group of folks. We have the same strategy, and not a lot will change on that front. But we'll continue to brainstorm and look for ways to create value, you know? Same thing you've heard from us for the past 10 years.
Haendel Emmanuel St. Juste (Managing Director and Senior REIT Analyst)
Got it. Got it, okay. And then maybe one on the lease termination fee in the quarter. I'm curious what you can tell us perhaps about the tenant, maybe why they terminated. Sounds like you're optimistic on backfilling here in the next couple years, I think Bob mentioned. And then any read-through here for office, or are you hearing or expecting any more or having any more similar conversations?
Adam Wyll (President and CEO)
Well, on this situation, specifically, this tenant was actually one we had on our reserve list that we had mentioned with guidance earlier this year, Hendel, and it was a life science tenant whose FDA approvals were not going in the right direction, and they had a fair amount of cash on the balance sheet. So, with their cash burn and their situation going forward, we engaged with them to come up with a mutually acceptable deal, and so we were pleased with the outcome. I think they were as well. They're also a public company, but as Bob mentioned in his script, this is space at our old headquarters. That is, they, they did a great build-out. It's turnkey space. Steve can chime in on the leasing prospects for that space and in general.
But net-net, that was a deal where we could have seen this tenant run out of money within 12 months and not seen the fruits of the lease, and so it turned out to be a great situation, we think, for both sides.
Yeah, 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 45,000 contiguous sq ft on one floor, which is unique in the marketplace. So we're encouraged by our prospects there.
Haendel Emmanuel St. Juste (Managing Director and Senior REIT Analyst)
Got it. Got it. Steve, and 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 a year. 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 an uptick in leasing CapEx. So any color on that would be appreciated. Thanks.
Adam Wyll (President and CEO)
It's interesting. Our CapEx, hitting on that last point, is actually at the historic average over the last 7 years, so it hasn't ticked up, although costs are up. So, it just speaks to, you know, 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 roll that we built out in the last 7 years that are not expensive to retenant. And many renewals are, you know, 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. And 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 were monster—was a monster year. So leasing activity is up, and furthermore, the average deal size from a dollar per square foot 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, and even with tenants that are rightsizing, and we still experience that, they're staying with us. So they may downsize, but they renew their leases at higher rental rates. So we're 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're not tenants, they're customers, which serves us well.
Haendel Emmanuel St. Juste (Managing Director and Senior REIT Analyst)
Thank you. I'll yield.
Operator (participant)
Thank you. And our next question comes from Antara Nag Chaudhuri with KeyBanc Capital Markets. Please go ahead.
Speaker 8
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. I just had a couple-
Adam Wyll (President and CEO)
Wait a minute. Wait a minute. Wait a minute. Wait a minute. I ain't retiring. You know, I, I've got a lot, millions of reasons why this company is so important to me. I'm glad Adam has got the job, and congratulations, but do not think of me as retiring. God, help me if I do.
Steve Center (SVP of Office Properties)
You knew better, Antara.
Speaker 8
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 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?
Robert Barton (EVP and CFO)
Yeah, Antara, this is Bob here. We've, as I mentioned in the script, we've paid off $100 million that was due July 19th. We had the ability to either write a check for it, we have cash on the balance sheet or draw on the line of credit. We decided to draw on the line of credit. We keep the cash on the balance sheet, and which is earning 5%+ return on that. In terms of the remaining $425 million that's coming due in 2025, we're on it. We've been monitoring the market since probably early 2024, just to see where we are and what's the right time to lock in a swap contract, possibly. We've noticed that the market continues to fall a little bit.
We've noticed it came down. I think it was like 10 basis points this morning on the Treasury. So we have a good team, part of our banking syndicate that we're working with, and we're just looking for the right entry point. But I, you know, if you look at our past experience, we've been very successful at the transactions that we've done. So we're engaged, we're hopeful, and, you know, hopefully we put something to bed before the end of this year, hopefully sooner.
Speaker 8
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?
Adam Wyll (President and CEO)
Uh-
Ernest Rady (Executive Chairman)
What's the question?
Steve Center (SVP of Office Properties)
Known move-outs. So 2024, no, we're in good shape. 2025, we know the CLEAResult will be vacating 4 floors. They're actually a tenant in 5 floors, and we've already leased one of those floors to an existing subtenant. So, we've got 4 floors to go. We're in negotiations with a portion of one of those floors with an existing subtenant as well.
That's first in May.
First in May, yeah. 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.
Ernest Rady (Executive Chairman)
You know, 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. Third of all, we treat our tenants as customers and really look after them as best we can. Fourth 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 off at it, and the properties speak for themselves.
Speaker 8
Okay, got it. Makes sense. If I could just sneak one more in. What is the progress on leasing at One Beach in La Jolla? I was wondering if you have any additional updates that you could provide on leasing?
Steve Center (SVP of Office Properties)
You want to cover that?
You're asking about La Jolla Commons III?
Adam Wyll (President and CEO)
One Beach.
Steve Center (SVP of Office Properties)
One Beach.
Yeah.
Adam Wyll (President and CEO)
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 gonna take some time for the average size requirement in San Francisco to get there. Our prospects at Tower III at La Jolla Commons and UTC are excellent.
Ernest Rady (Executive Chairman)
I think you covered that earlier.
Steve Center (SVP of Office Properties)
Yeah, yeah. We've got a lot of activity there.
Ernest Rady (Executive Chairman)
If you look at the transcript, I think you covered it very well.
Steve Center (SVP of Office Properties)
Yeah. Yeah. 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.
Ernest Rady (Executive Chairman)
For One Beach, the problem is not ours, the problem is San Francisco's.
Steve Center (SVP of Office Properties)
Yeah.
Ernest Rady (Executive Chairman)
We have a great property and a great location that's completely repositioned, but the market is the market.
Haendel Emmanuel St. Juste (Managing Director and Senior REIT Analyst)
Got it. Thank you.
Ernest Rady (Executive Chairman)
Thank you for the question.
Operator (participant)
Our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Hey, first, congrats, Adam, and, you know, obviously, congrats to Ernest, too, on your continued role and engagement, not a retirement. So congrats to everyone. Really, really well deserved. So just on, just switching gears to office just a little bit here. You know, I think you—the opening comment seems like there's been sort of a lot of activity, in the portfolio and so forth. I was just hoping you could give a little bit color on sort of the broader trends in the market. And do you think that, your activity is sort of just more of a reflection of flight to quality, or are we actually starting to see some signs that the broader market, is starting to see better, better trends?
Steve Center (SVP of Office Properties)
You know, it's interesting, and you know, one of our strongest markets is San Diego, and yet when you read CBRE's account of the market, it's not strong. It's challenging. So I think a large part it's a flight to quality. And I've said it before, you know, even in a negative net absorption market, which many of our submarkets are, I don't need positive net absorption on the market to succeed. I need people to pick our properties. And we've been fortunate to have that happen. So, you know, much of the new leasing is tenants that are, many of them are downsizing, but when they downsize, they're looking for the best environment to get their people back in the office. So they want all of the amenities we've talked about.
They want really nice properties.... So that's how we're winning. So I would say our activity is more indicative of a flight to quality than it is the strength of the market. I will say, though, that up in Bellevue, in particular, that market's recovering. Our City Center Bellevue property continues to really do well, and then the suburbs are picking up. So I'm encouraged there. We've got 281,000 sq ft in the I-90 Corridor. We've got multiple tours and proposals going on there, which is a big chunk of our vacancy in our overall portfolio. And then our two properties up on the 520 corridor are active as well. So Bellevue is improving.
Ernest Rady (Executive Chairman)
I think, Steve, you would paraphrase it as equate 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.
Steve Center (SVP of Office Properties)
Top tier.
Ernest Rady (Executive Chairman)
All those categories.
Steve Center (SVP of Office Properties)
You know, really good point, Ernest. It's not just the real estate itself. It is, you know, our balance sheet. Bob's our balance sheet is, is our strength, as well as our customer service, also our flexibility. You'll, you'll see, actually, our, our weighted average lease term is, is shorter this quarter than the previous quarters, in part because we, we flex with our customers. You know, some need shorter-term solutions that, you know, we don't jam them for. You know, we work with them. And so, that, you know, that goes a long way, too. We've got a law firm that just expanded into a 4,000 sq ft spec suite, and the principal called me up and said, "Hey, here's the term I need.
I know we're gonna revisit our deal, you know, two and a half years from now, but I need this short-term expansion. I'll contribute free rent to pay for the tenant improvements, and will you work with me?" And the answer was yes. So it's all those things. So it's a good point, Ernest. Great.
Ernest Rady (Executive Chairman)
So I hope the market, because being painted with the same brush, that everybody in that part of the real estate market, it's really disappointing. We are not the average office landlord. We are, I believe, very qualified and do an excellent job.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Great. And then, look, my second question was just sort of on the capital allocation. You know, I mean, clearly, the priorities are, you know, leasing capital and rounding out the development that you're working through. But when does sort of acquisitions come back into the picture? And you know, how do you sort of balance that with trying to get leverage below six times? So just how are you guys thinking about capital allocation, protecting that balance sheet, but also potentially looking to play offense on the acquisition, or is that even a thing right now?
Ernest Rady (Executive Chairman)
Well, first of all, we are not looking at acquisitions at the moment. Bob Barton, who is, can be violent on occasion, wants that net debt to EBITDA fall into a range that maintains and perhaps even enhances our, 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, our, our wish list because of the, of the, reputation it seems to have, even though we continue to perform in a top-tier fashion.
Steve Center (SVP of Office Properties)
Yeah, let me, let me just add to, to what Ernest just said, Ron, is that, yeah, the capital allocation is really important, and we do want to protect the balance sheet. We think it's prudent, like Ernest mentioned, is to let's, let's finish the leasing La Jolla Commons III. You know, with La Jolla Commons III, we have about $215 million invested over there with a great, great property in the market, and, you know, that's, that's... You know, we need to get a return on that. So let's lease that up first. We are continuing to look at assets, but one thing that, you know, we've, we've told many is that we're not looking to buy any more office. We love what we got. We got great assets. Steve is, is overseeing all that, and we got great returns.
We'd like to pivot to multifamily and probably throw in a sprinkle of retail along the way. But, you know, if you look at the history of this company, we have dedicated ourselves to creating value for each of our investors, and I'm a big believer that we will continue to do that from here on out as well.
Ernest Rady (Executive Chairman)
You know, while we're not acquiring, we are investing daily in improving our properties. So Jerry, who handles the construction, how many projects do you have going now to improve what we have?
Steve Center (SVP of Office Properties)
We have well over 100 projects going.
Ernest Rady (Executive Chairman)
Yeah. So we're not sitting back on our, you know what, waiting for something to happen. We're improving and making it better, and that's an investment without the risk of acquisition.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Great. Super helpful. Congrats again. That's it for me. Thanks so much.
Ernest Rady (Executive Chairman)
Thanks, Ron.
Operator (participant)
Thank you. Our next question comes from Dylan Burzinski with Green Street. Please go ahead.
Dylan Burzinski (Senior Analyst and Equity Research)
Hey, guys. All my questions have been asked, but just wanted to say congrats to Adam. Well deserved.
Adam Wyll (President and CEO)
Thanks, Dylan. Great questions.
Ernest Rady (Executive Chairman)
You can see why he got the job. He's not only good-looking, he's not only intelligent, he has a great sense of humor!
Operator (participant)
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.
Ernest Rady (Executive Chairman)
Thanks, 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.
Operator (participant)
Thank you, ladies and gentlemen. This concludes our conference call. You may now disconnect your lines and have a wonderful rest of the day.