Business context and reporting period
American Assets Trust, Inc. (AAT) filed this combined Form 10-K with American Assets Trust, L.P. for the fiscal year ended December 31, 2019. AAT is a REIT and owned approximately 78.5% of the Operating Partnership, which holds substantially all assets and conducts the business. The portfolio comprised 28 operating properties across retail, office, multifamily and mixed-use, plus land held for development.
At year-end, the portfolio included about 6.6 million rentable square feet of office and retail space, 2,112 residential units and RV spaces, and a 369-room hotel. Portfolio occupancy was 95.0% for office, 97.8% for retail, 92.8% for multifamily and 91.7% average hotel occupancy.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $366.7 million | $330.9 million | +11% |
| Net operating income (NOI) | $234.8 million | $209.4 million | +12% |
| Operating income | $113.7 million | $79.5 million | +43% |
| Consolidated net income | $60.2 million | $27.2 million | +121% |
| Net income attributable to AAT stockholders | $45.7 million | $19.7 million | +132% |
| Diluted earnings per share | $0.84 | $0.42 | +100% |
| FFO attributable to common stock and units | $155.4 million | $134.0 million | +16% |
| FFO per diluted share/unit | $2.20 | $2.09 | +5% |
NOI margin was approximately 64.0% and operating margin approximately 31.0%, based on reported revenue. FFO and NOI are non-GAAP measures; the filing cautions that FFO is not a measure of liquidity or cash available for dividends or debt service.
For Q4 2019, revenue was $98.9 million versus $82.6 million in Q4 2018; consolidated net income was $16.5 million versus $9.2 million, and net income attributable to AAT stockholders was $12.8 million versus $6.7 million. Diluted EPS was $0.22 versus $0.14.
- Net cash provided by operating activities was $153.8 million, up from $136.5 million. Net cash used in investing activities was $599.2 million, largely reflecting the La Jolla Commons acquisition. Financing provided $497.5 million; year-end cash, cash equivalents and restricted cash totaled $109.5 million.
- Year-end debt principal was approximately $1.362 billion, excluding debt issuance costs; balance-sheet notes payable and line of credit were $1.358 billion. The company reported $161.9 million secured debt, $1.196 billion unsecured notes and no revolver balance. Its facility had $350 million of revolving capacity, alongside a $100 million term loan.
- Interest expense was $54.0 million, up 3%. The company reported $1.112 billion of fixed-rate debt and $250 million of variable-rate debt; swaps hedge variable-rate exposure, and management estimated a 1% rate change would have approximately no annual interest expense impact at year-end.
- Dividends declared rose to $1.14 per share for 2019 from $1.09 in 2018. The quarterly dividend increased to $0.30 in Q4 from $0.28 a year earlier.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the June 2019 acquisition of La Jolla Commons, which added approximately $20.1 million of rental revenue after acquisition, as well as higher same-store office rents and improved leasing. Same-store NOI increased 7% overall; same-store office NOI rose 13% and retail 4%.
- La Jolla Commons, acquired for approximately $525 million before seller credits and closing costs, added two office towers, a development parcel and parking structures. A June 2019 public offering raised net proceeds of approximately $472.6 million; AAT also issued $150 million of Series G notes at 3.91% due 2030.
- Depreciation and amortization fell 10% to $96.2 million, partly because 2018 included elevated charges related to Waikele Center redevelopment and lease terminations. Interest expense rose modestly, including the effect of Series G notes.
- Property expenses increased 9%, including a 14% increase in real estate taxes. Retail rental revenue was down 2%, partly due to the expiration of the Kmart lease at Waikele Center.
- Common shares outstanding increased from 47.3 million to 60.1 million, primarily reflecting the 10.925 million-share public offering and ATM sales. Net proceeds supported the acquisition and the company’s capital needs.
Outlook, risks and unusual items
Management expected 2020 leasing volume to be in line with historical averages and anticipated overall positive rental income increases, while noting that individual lease results could be positive or negative and were not assured. It expected 2020 expenditures to increase from 2019, including La Jolla Commons development, One Beach Street renovations and a planned hotel refresh. No numerical earnings or FFO guidance was provided.
Management described itself as cautiously optimistic about leasing trends and planned to pursue selective acquisitions, development, redevelopment and asset recycling, subject to market conditions and return hurdles. It stated that operating cash flow, cash on hand, the ATM program, the revolving facility and capital-market access were expected to fund operations, debt service and capital spending; it noted that financing availability is not assured.
- Significant risks include geographic concentration in California, Oregon, Washington and Hawaii; economic or property-market weakness; tenant defaults and lease expirations; retail-sector disruption; and reliance on major office tenants. The three largest office tenants represented 31.8% of office annualized base rent.
- Approximately 8.7% of office, retail and mixed-use retail square footage, representing 8.2% of annualized base rent, was scheduled to expire in 2020. Debt maturities included $250 million in 2021 and $111 million in 2022.
- Other material exposures include interest-rate and LIBOR transition risk, refinancing and covenant constraints, development and redevelopment execution, natural disasters and earthquake insurance limits, and environmental liabilities. Del Monte Center remediation was expected to require monitoring for five to seven years; the company expected seller-funded escrow to cover remaining costs, but could face additional expense.
- Unusual items included a $0.6 million gain on the sale of Solana Beach–Highway 101 and lease-termination income associated with the surrender of the former Sears building at Carmel Mountain Plaza. The filing reported no impairment charges in 2019.
- The company reported compliance with debt covenants and effective disclosure and internal financial controls. The independent auditor gave an unqualified opinion and identified property impairment assessment and the La Jolla Commons asset acquisition as critical audit matters.
Important facts for investors to verify
- Confirm the sustainability of same-store rent and NOI growth, including leasing assumptions, concessions, tenant improvements and collection trends.
- Review debt maturities, refinancing plans, covenant headroom, the status of the revolving facility and exposure to LIBOR-linked borrowing.
- Assess the returns and funding needs of La Jolla Commons and planned development, redevelopment and capital projects against the increased share count and dividend burden.
- Monitor 2020 lease expirations, major office tenant concentration, retail anchor and co-tenancy risks, and the operating performance of the Waikiki hotel.
- Evaluate dividend coverage using operating cash flow and required capital spending, rather than relying on FFO alone; the filing does not provide a numerical 2020 earnings or FFO forecast.