American Assets Trust, Inc. annual report, FY2022

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Business context and reporting period

American Assets Trust, Inc. (NYSE: AAT) filed this joint annual report with American Assets Trust, L.P. for the fiscal year ended December 31, 2022. AAT is a REIT whose operating partnership owns and operates a diversified portfolio of office, retail, multifamily and mixed-use properties, concentrated in California, Washington, Oregon, Texas and Hawaii. At year-end, the portfolio comprised 31 operating properties, approximately 7.2 million rentable square feet of office and retail space, 2,110 residential units and a 369-room hotel. AAT owned 78.8% of the Operating Partnership.

Financial performance and liquidity

  • Full-year results: Total revenue was $422.6 million, up 12% from $375.8 million in 2021. Net operating income (NOI) was $270.2 million, up 10%; consolidated net income was $55.9 million, versus $36.6 million. Net income attributable to AAT stockholders was $43.5 million, or $0.72 per diluted share, compared with $28.4 million, or $0.47 per share.
  • Operating metrics: Same-store NOI increased 7% to $258.1 million. Year-end occupancy was 88.9% in office, 93.5% in retail, 91.8% in multifamily and 93.8% in the mixed-use property’s retail portion. Office generated 54% of property operating income.
  • Fourth quarter: Revenue was $106.0 million, compared with $101.7 million in Q4 2021. Net income was $12.4 million; net income attributable to AAT stockholders was $9.6 million, or $0.16 per diluted share, versus $8.1 million and $0.14 per share, respectively, a year earlier.
  • Margins and costs: NOI was approximately 64% of total revenue, while operating income was $114.7 million. Property expenses rose 17% to $152.4 million, faster than revenue, including a 24% increase in rental expenses. Depreciation and amortization rose 6% to $123.3 million. Interest expense was $58.2 million, slightly below 2021.
  • Cash flow: Operating cash flow was $179.1 million, up from $168.3 million. Investing activities used $166.3 million and financing activities used $102.7 million. Cash and cash equivalents ended the year at $49.6 million, down from $139.5 million.
  • Debt and liquidity: Year-end balance-sheet debt carrying values totaled approximately $1.65 billion, including $34.1 million drawn on the revolving credit line; AAT itself has no direct indebtedness, as debt is held by the Operating Partnership. The filing reports $1.70 billion of total debt outstanding as of February 10, 2023. The $500 million credit facility includes a $400 million revolver and $100 million Term Loan A. On January 5, 2023, Term Loans B and C were refinanced and expanded to $225 million, with maturity extended to January 2025 and one 12-month extension option; the $36 million revolver balance was repaid on January 6, 2023. Management said available operating cash flow, cash, credit capacity and capital-market access were expected to fund operations, debt service and capital expenditures.
  • FFO and distributions: NAREIT FFO attributable to common stock and units was $178.6 million, or $2.34 per diluted share/unit, versus $152.3 million, or $2.00, in 2021. Annual dividends per common share increased to $1.28 from $1.16.

Material changes versus 2021

  • Revenue growth reflected higher hotel activity after travel restrictions eased, recovery in retail rents and recoveries, multifamily rent and occupancy gains, and the contribution of three Bellevue office acquisitions, including Bel-Spring 520, acquired for approximately $45.5 million in March 2022.
  • Mixed-use property operating income increased 54%, with hotel occupancy rising to 76.9% from 66.4% and RevPAR increasing to approximately $283 from $185. Retail property operating income increased 6%; multifamily increased 10%; office increased 7%, including acquisition contributions.
  • Higher property operating costs partially offset revenue gains. The company recorded no impairment charges in 2022, 2021 or 2020. In contrast to 2021, which included a $4.3 million loss on early extinguishment of debt, there was no such charge in 2022.
  • Capital expenditures were $121.2 million, up from $107.7 million, including $52.7 million for new development. The company acquired no properties in 2021? Correction: it acquired Eastgate Office Park and Corporate Campus East III in 2021; it acquired Bel-Spring 520 in 2022. There were no dispositions in either year.

Outlook, risks and unusual items

Management described its objectives as growing earnings, FFO and cash flow through same-store leasing, development and redevelopment, and selective acquisitions. It expects 2023 capital expenditures to decrease from 2022 as La Jolla Commons development and One Beach Street modernization near completion. Development starts remain subject to market conditions and acceptable risk-adjusted returns. The filing provides no numerical earnings or FFO guidance.

  • Key exposures include the portfolio’s geographic concentration, office demand changes associated with remote and flexible work, significant office tenants, retail anchor and co-tenancy provisions, lease rollover, rising operating costs and interest rates, refinancing and capital-market access, and natural disasters and potentially inadequate insurance.
  • Leases covering 6.8% of office, retail and mixed-use retail square footage and 9.9% of annualized base rent were scheduled to expire in 2023; 9.1% of that space was available at year-end. Management anticipated a similar level of leasing activity and overall positive rent growth, but gave no assurance.
  • COVID-related tenant concessions continued during 2022, primarily in retail, though management said these concessions were immaterial. Adjustments affected approximately 1% of rent originally contracted for 2022.
  • Del Monte Center remediation is in its final stages, with five to seven years of monitoring expected; the company expects seller-funded escrow to cover remaining costs but could face overruns. The Embassy Suites franchise agreement carries a potential termination payment of up to approximately $6.0 million if specified obligations are not met.
  • A January 2023 settlement related to building systems at Hassalo on Eighth generated a net payment of approximately $6.3 million. The independent auditor issued unqualified opinions on the financial statements and AAT’s internal control over financial reporting.

Important facts for investors to verify

  1. Review the debt maturity schedule and the terms, pricing and covenants of the January 2023 term-loan refinancing, including the impact of higher rates on future interest expense.
  2. Track office occupancy, leasing spreads, tenant improvement costs and renewals for major tenants, particularly Google, LPL Holdings and Autodesk.
  3. Assess whether hotel recovery and retail and multifamily operating trends can persist as expenses, insurance costs and property taxes rise.
  4. Compare development spending and leasing commitments with operating cash flow, liquidity and dividends; evaluate the availability and potential dilution of the $250 million ATM equity program.
  5. Monitor Del Monte Center remediation, the Embassy Suites franchise requirements and other disclosed environmental, insurance and property-related contingencies.