American Assets Trust, Inc. annual report, FY2012

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American Assets Trust, Inc. — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter report; quarterly figures are identified where relevant. American Assets Trust is a diversified REIT focused on retail, office, multifamily and mixed-use properties in the western U.S. and Hawaii. At year-end it owned 23 operating properties, approximately 5.8 million square feet of retail and office space, 922 residential units (including RV spaces), and a 369-room hotel, plus development land at five properties.

Financial and operating performance

  • Revenue: $235.5 million, up 16% from $202.8 million in 2011. Rental income was $225.2 million; other property income was $10.2 million.
  • Property income and margins: Property operating income (NOI) was $149.4 million, up 19%, or about 63.4% of total revenue. Same-store NOI increased 6% to $94.0 million. GAAP operating income was $71.9 million (about 30.5% of revenue), compared with $56.3 million.
  • Profit: Income from continuing operations was $13.9 million, versus $13.7 million. Net income was $51.6 million; net income attributable to company stockholders was $34.9 million, or $0.90 per share. Results included a $36.7 million gain on the sale of 160 King Street; continuing-operations EPS was $0.24.
  • FFO: NAREIT FFO was $77.9 million, compared with $74.6 million; FFO per diluted share/unit was $1.35 versus $1.05. FFO is a non-GAAP measure and is not cash available for dividends or debt service.
  • Cash flow and investment: Operating cash flow was $75.9 million, investing cash outflow $194.3 million, and financing cash inflow $48.1 million. Cash and cash equivalents fell to $42.5 million from $112.7 million. Reported total capital expenditures, including tenant improvements and leasing commissions, were $38.0 million, versus $13.2 million in 2011.
  • Debt and liquidity: Gross debt principal was $1,057.7 million, all fixed-rate, with a weighted-average rate of 5.26%; balance-sheet secured notes payable were $1,044.7 million after fair-value adjustments. The $250 million revolving facility had no year-end balance and $226.3 million of maximum allowable borrowing availability. The company reported compliance with debt covenants.
  • Assets and equity: Total assets were $1,827.6 million; total liabilities $1,141.9 million; total equity $685.7 million. Net real estate was $1,668.2 million.
  • Dividend: $0.84 per common share for 2012, or $0.21 quarterly. The 2012 distribution was classified for tax purposes as 66.7% ordinary income and 33.3% return of capital.

Material changes versus 2011

  • Revenue growth reflected both acquisitions and portfolio performance. Same-store rental revenue rose 4%; same-store NOI rose 6%. Retail and multifamily occupancy improved, while office occupancy edged down and the mixed-use retail occupancy declined.
  • 2012 acquisitions were One Beach Street ($36.5 million), City Center Bellevue ($228.8 million, with $6.9 million of purchase-price credits), and Geary Marketplace ($21.0 million). The acquisitions increased property scale and office exposure.
  • The company sold 160 King Street for $93.8 million in December 2012 and reported a $36.7 million gain. The disposition was structured as a reverse tax-deferred exchange with the City Center Bellevue acquisition. Cash proceeds and property sales helped fund investment activity and repay a temporary $164 million credit-facility draw.
  • Interest expense increased 5% to $57.3 million, principally due to acquired-property mortgage debt. General and administrative expense increased 14% to $15.6 million; depreciation and amortization increased 11% to $61.9 million.
  • Debt principal increased from $928.0 million to $1,057.7 million. Scheduled principal maturities are concentrated in 2014 ($234.0 million), 2015 ($236.0 million) and 2017 ($190.1 million).

Outlook, risks and unusual items

  • Management expected 2013 capital spending to exceed 2012 levels, citing development and redevelopment at Torrey Reserve Campus and the Lloyd District Portfolio, and higher tenant-improvement and leasing costs. Management anticipated a similar level of leasing activity to prior years and expected overall positive rental-income increases, but gave no quantified earnings or FFO guidance.
  • Leases representing 8.9% of retail, office and mixed-use retail square footage and 9.6% of annualized base rent were scheduled to expire in 2013; an additional 4.7% of square footage was available at year-end. Renewal rents and lease-up outcomes were not assured.
  • Management identified refinancing and maturity risk, especially the 2014–2015 maturities; regional concentration in California, Oregon, Washington and Hawaii; tenant defaults and retail anchor/co-tenancy risks; development costs and delays; and dependence on capital markets. It also warned that insurance may not fully cover earthquake or other catastrophic losses.
  • Del Monte Center is undergoing groundwater remediation for former dry-cleaning solvent contamination. The seller-funded escrow was expected to cover remaining work, but additional required costs could become the company’s responsibility.
  • Tax-protection agreements restrict taxable dispositions of specified properties through January 19, 2018 and may require indemnification payments. Those properties represented 29.0% of portfolio annualized base rent under the filing’s stated calculation.
  • The company reported no material legal proceeding and no property impairment at year-end. It disclosed ongoing ordinary-course claims and potential environmental, regulatory and insurance exposures. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Separate recurring operating performance from the $36.7 million sale gain; review continuing-operations earnings and same-store NOI alongside reported net income.
  • Assess the funding and refinancing plan for 2014–2015 maturities, debt covenants, available revolver capacity and the effect of future borrowing costs.
  • Track occupancy, renewals and leasing costs for the 2013 expirations, as well as office tenant concentration and retail anchor/co-tenancy exposure.
  • Evaluate whether development spending and leasing commitments can be funded while maintaining liquidity and the dividend; compare FFO with operating cash flow and capital needs.
  • Confirm progress and remaining escrow funds for Del Monte Center remediation, and quantify any potential liability beyond escrow.
  • Review the assumptions underlying acquisition contributions, the 160 King Street disposition gain, and the tax-deferred exchange and tax-protection restrictions.