American Assets Trust, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are identified separately. The filing combines American Assets Trust, Inc. and its operating partnership, which together own and operate the business.
Business context
The REIT owns, operates, acquires and develops retail, office, multifamily and mixed-use properties, primarily in California, Oregon, Washington, Texas and Hawaii. At year-end, the portfolio included 23 operating properties, approximately 5.8 million rentable square feet of retail and office space, 922 residential units (including RV spaces), and a 369-room hotel. The company owned 70.7% of the operating partnership.
Financial and operating metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $260.0 million | $255.1 million | Up 2% |
| Net operating income (NOI) | $168.8 million | $165.1 million | Up 2% |
| Operating income | $83.7 million | $81.1 million | Up 3% |
| GAAP net income | $31.1 million | $22.6 million | Up 38% |
| Net income attributable to company stockholders | $21.8 million | $15.2 million | Up 43% |
| Diluted earnings per share | $0.51 | $0.38 | Up |
| FFO attributable to common stock and units | $97.6 million | $89.0 million | Up 10% |
| Diluted FFO per share/unit | $1.62 | $1.54 | Up 5% |
| Cash from operating activities | $105.6 million | $92.7 million | Up $12.9 million |
| Cash and cash equivalents at year-end | $59.4 million | $49.0 million | Up $10.4 million |
NOI margin was approximately 64.9% of revenue versus 64.7% in 2013. FFO and NOI are non-GAAP measures; the filing cautions that they are not substitutes for GAAP earnings or operating cash flow.
- Portfolio occupancy improved year over year: retail 98.6% versus 97.0%; office 91.4% versus 89.8%; multifamily 97.1% versus 96.4%; and the retail portion of mixed-use 99.6% versus 97.8%.
- Cash used in investing was $152.8 million, mainly reflecting $144.7 million of capital expenditures and $5.1 million of leasing commissions. Cash provided by financing was $57.6 million; dividends and distributions paid were $54.3 million.
- Year-end total debt was approximately $1.07 billion before unamortized fair-value adjustments; balance-sheet notes payable were $1.063 billion. Debt consisted of $812.8 million of secured notes and $250.0 million of unsecured notes. The $250 million revolving facility had no balance outstanding at year-end; the separate $100 million term loan was outstanding and hedged to an intended rate of approximately 3.08%.
- Declared distributions were $0.8925 per share/unit for 2014, including $0.2325 for the fourth quarter, compared with $0.85 for 2013.
Changes versus 2013
- Revenue rose 2% and NOI rose 2%; same-store NOI increased 2%.
- Stockholder-attributable earnings and diluted EPS increased, while FFO per diluted share/unit rose to $1.62 from $1.54.
- Interest expense fell 9% to $53.0 million, helped by interest capitalization on development projects and repayment of mortgages on Alamo Quarry Market and Waikele Center. General and administrative expense increased 8% to $18.5 million, primarily reflecting personnel and incentive-plan costs.
- Hotel occupancy fell to 79.8% from 87.2%, as room refresh work in both towers temporarily reduced availability; the average daily rate increased to $315.36 from $299.24.
- Capital expenditures increased substantially, to $144.7 million from $55.7 million, principally for development and redevelopment.
Outlook, material projects and risks
- Management expected 2015 leasing volume to be in line with historical averages, with overall positive rental-income increases, but gave no assurance that rent increases would continue. About 7.0% of retail and office portfolio square footage and 10.2% of annualized base rent was scheduled to expire in 2015.
- Lloyd District Phase I was expected to complete in 2015, adding approximately 47,000 square feet of retail and 657 multifamily units. Estimated project cost was $192 million, with $135 million incurred; management expected to invest about $56.3 million more. Stabilization was anticipated in 2017, with an estimated 6.25%–7.25% yield.
- Torrey Reserve Campus redevelopment was expected to add approximately 81,500 square feet of office space and complete in 2015. Estimated cost was $34 million, with about $32 million incurred; estimated stabilized yield was 8.6%.
- Construction at Sorrento Pointe was intended to start in the first half of 2015. The planned 88,000-square-foot office project had an estimated cost of $46 million, with about $7 million incurred, and a projected 8.25%–9.25% stabilized yield. These estimates are management projections and projects remain subject to market and execution risks.
- The 2015 contractual principal schedule showed $236.0 million due as of year-end. After year-end, the company repaid the $19 million Shops at Kalakaua mortgage on February 2, 2015 and the $82.3 million Del Monte Center mortgage on February 6, 2015. The $133 million Landmark at One Market loan was still scheduled to mature in July 2015.
- The operating partnership issued $150 million of Series A notes in 2014; it issued $100 million of Series B notes on February 2, 2015, and expected to issue a further $100 million of Series C notes on April 1, 2015, subject to customary conditions.
- Key risks include substantial leverage and refinancing needs; geographic concentration in California, Oregon, Washington and Hawaii; tenant and lease-renewal exposure; retail-sector competition; development costs and delays; earthquake and other uninsured-loss exposure; and REIT qualification and distribution requirements. The three largest office tenants represented about 26.3% of office annualized base rent.
- Del Monte Center remained subject to long-term groundwater monitoring for prior dry-cleaning contamination. Management expected the seller-funded escrow to cover remaining work, but could not rule out additional costs.
Most important facts for investors to verify
- Near-term refinancing and repayment status for the remaining 2015 maturities, particularly the Landmark at One Market loan, and the completed Series B and planned Series C note issuances.
- Actual completion costs, leasing, stabilization timing and realized yields for Lloyd District, Torrey Reserve and Sorrento Pointe.
- Whether hotel occupancy recovered after the 2014 room refresh and how hotel operating performance affects mixed-use results.
- Lease expirations, tenant retention and rent changes, including exposure to major office tenants and retail anchors.
- Cash available for distributions after debt service, development spending, tenant improvements and leasing commissions; FFO is not a measure of liquidity.
- Progress and funding sufficiency for Del Monte Center remediation, and the terms and potential cost of REIT-related tax protection obligations.