I’m grateful. Good morning to everyone of you. Welcome to the results call for American Assets Trust’s third quarter of 2023. Our results announcement and other data were sent to the SEC on Form 8-K yesterday afternoon. Both may now be found on our website, americanassetstrust.com, in the Investors section. After giving a little introduction, I’ll give the call to Ernest Rady, our Chairman and CEO, so we can start talking about the results of our third quarter of 2023. Ernest, huh?
Adam, good morning to all of you. Given the unpredictability of the current business and economic environments, it is critical that we concentrate on our controllable issues, such as our ability to adjust to changing consumer wants in a volatile market. In keeping with this, we have a track record of persevering through adversity, and we have faith that our superior operational platform and real estate portfolio will hold up in the face of unfavourable market conditions. As we deal with ongoing inflation, longer-term, rising federal funds rates, tougher lending requirements, and regrettable geopolitical instability in conflict. We are well aware of the widespread unfavourable perception that appears to be held towards the office sector in particular.
It could take some time before the office industry witnesses a significant divide in terms of performance and value between office developments with more modern facilities, like ours, and commodity offices. However, we are sure that we will come out on top in that calculation. In addition, I believe that today’s real estate pricing for prime houses will be a steal in the future because replacement costs for properties like ours are skyrocketing and will probably continue to do so in the years to come. In the meanwhile, despite the unfavourable environment for commercial real estate, we were once again pleased in Q3 2023 by our operating fundamentals, which outperformed our estimates.
Sincerely, given the current state of the economy and other global issues, the future beyond this year is less predictable, at least in the short term. However, I can assure you that we will continue to work diligently, give it our all, and eagerly await delivering our ’24 advice in February of next year. More information about our several asset segments, financial performance, and guidance will be provided by Adam, Bob, and Steve. To start with, though, I would like to state that the Board of Directors has decided to stick with a quarterly dividend of $0.33 per share for the fourth quarter. This decision was made because the board is confident in our predicted performance and feels it is supported by our financial results.
To stockholders who were of record on December 7th, the dividend will be paid under December 21st. Once more, from all of us at American Assets Trust, we appreciate your trust and ongoing support in entrusting us with the management of your business.
Our fortress financial sheet, our debt profile with a well-staggered debt maturity schedule, our property locations and demographics that favour towns with transient climates, higher household incomes, and education levels close to internationally renowned universities and transit centres. Our economic ESG activities, our integration of property technologies to create operational cost savings and efficiency, and our honesty and openness in our business transactions and interactions with our stakeholders.
In our opinion, these elements—along with merely making improvements to our properties—are essential to maintaining our position as the best among our competitors and to maintaining a strong competitive edge in the market. This will allow us to sustain our long-term success despite the inevitable cycles of the real estate market, like the one we are currently trapped in. We had, in fact, the highest average monthly base rent per square foot for our office and retail portfolios as well as the highest average monthly rent per unit for our multifamily portfolio since our IPO as of the end of Q3.
Quite pleased with that. In a nutshell, regarding office utilisation, a recent Resume Builder study revealed that 90% of businesses intend to implement return-to-work policies in the next 12 to 14 months, and a sizable portion of those businesses also stated they would threaten to fire employees who don’t comply.
Naturally, this coincides with the growing number of CEOs arguing that productivity, engagement, cooperation, and mentorship among staff members are all negatively impacted by remote work. Not shocking at all.
We think a lot more big businesses will start to commit to their future space plans as labour forces become more flexible and worries about the recession lessen. Based on data from tenant card swipes, access control records, and property manager estimates, we have observed that, since our last report at the end of Q2, office utilisation at our properties has increased by an average of a few percentage points, with Bellevue demonstrating the most notable improvement. We continue to observe a better leasing environment post-COVID on the retail front, where we stand just under 95% leased and compose 27% of our portfolio NOI. This is because retail fundamentals have remained solid for the most part despite persistent challenges.
In Q3, we saw a considerable amount of retail renewal activity. With an 8% increase on a cash basis and a 19% increase on a straight-line basis for Q3 transactions, as well as an 8% increase on a cash basis and a 15% increase on a straight-line basis for the previous four quarters, our comparable retail lease spreads have continued on their positive trend over the last year. This unquestionably attests to our best-in-class and well managed retail assets, which dominate their respective trade sectors and are situated in highly populated, supply-constrained regions with hospitable demographics.
Regarding our apartment buildings, rent growth is still strong but is slowing down since we achieved better-than-expected Q3 results. We believe that a greater number of applicants who do not fulfil our income and credit standards, in addition to the overall financial strain on people and families, is a contributing factor in the slowdown of rent rise.
However, in San Diego, we observed that the average rent for unoccupied apartments climbed by 3% compared to previous rentals, and the average rise in rent for renewed units was 11% compared to previous rents, resulting in a blended average increase of almost 6%. Furthermore, as of the third quarter of this year, net effective rents in San Diego for our multifamily leases have increased by 9% year over year.
As anticipated, with the arrival of USD students this autumn, our occupancy at Pacific Ridge Apartments increased from slightly under 70% at the end of Q2 to over 90% at the end of Q3. Since the conclusion of Q3, this has increased by a few more percentage points due to higher occupancy or more units in October. We saw a blended increase of roughly 4% in Q3 at our Hassalo on Eighth location in Portland as a result of move-ins and renewals, with concessions being given on longer-term leases.
Even while the net effective rents for our multifamily leases at Hassalo are around 3% higher year-over-year when compared to the third quarter of 2022, our occupancy has softened and the multifamily market in the Pacific Northwest has remained slow. I’ll now give the call to Bob so we can talk in more detail about the financial performance and the updated forecast.
In comparison to the second quarter of 2023, the third quarter FFO for 2023 was unchanged. The third quarter saw a 1.8% year-over-year increase in same-store cash NOI. Due in substantial part to non-recurring rent deferral payments made during the comparable period, our same-store office portfolio was unchanged in Q3. If the payments from Q3 2022 had not been received, the office same-store percentage for Q3 ’23 would have been 2.1%, and the overall same-store cash NOI would have been 3%. Regarding individual offices, Torrey Reserve witnessed high same-store growth of around 11%, Torrey Point saw roughly 5% growth, Landmark saw approximately 2.5% increase, and La Jolla Commons saw approximately 7% growth.
Despite the present market challenges, we remain confident that our portfolio’s strategic investments will place us in a position to continue capturing more than our fair share of net absorption at premium rents. Even though the current circumstances can cause more attrition, it is believed that the recently mentioned new leasing activity would more than balance the attrition, which is already decreasing. With a median suite size of around 3,600 rentable square feet, we have about 7% of the portfolio rolling in 2024. At that point, about 30% of the rentable square feet rolling are already negotiated.