American Assets Trust, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. The company is a REIT operating through American Assets Trust, L.P.; the company owned approximately 78.8% of the Operating Partnership at year-end.
Business context
The company owns, operates, acquires and develops retail, office, multifamily and mixed-use properties, concentrated in California, Oregon, Washington, Texas and Hawaii. At year-end, its portfolio included 28 operating properties, approximately 6.6 million rentable square feet of office and retail space, 2,112 residential units (including RV spaces), and a 369-room hotel.
Financial and operating performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $344.6 million | $366.7 million | Down 6% |
| Net operating income (NOI) | $223.5 million | $234.8 million | Down 5% |
| Operating income | $88.6 million | $113.7 million | Down 22% |
| Net income | $35.6 million | $60.2 million | Down 41% |
| Net income attributable to common stockholders | $27.7 million | $45.7 million | Down 39% |
| Basic and diluted EPS | $0.46 | $0.84 | Down 45% |
| FFO attributable to common stock and units | $143.5 million | $155.4 million | Down 8% |
| Annual dividends declared per share | $1.00 | $1.14 | Down 12% |
Approximate margins were 64.8% for NOI, 25.7% for operating income and 10.3% for net income, measured against revenue. FFO and NOI are non-GAAP measures; the company cautions they are not substitutes for GAAP income or operating cash flow.
Net cash from operating activities was $127.0 million, versus $153.8 million in 2019. Investing used $69.1 million, compared with $599.2 million in 2019, when the company acquired La Jolla Commons. Financing used $28.3 million, versus $497.5 million provided in 2019, largely reflecting the prior-year equity offering. Cash, cash equivalents and restricted cash totaled $139.0 million at year-end.
At December 31, 2020, the balance sheet reported $2.817 billion in assets, $1.564 billion in liabilities and $2.493 billion in net real estate. Debt principal was approximately $1.411 billion, including $1.311 billion of notes and $100 million drawn on the revolver; balance-sheet carrying amounts differ due to issuance costs and discounts. The company reported compliance with debt covenants.
Material changes and drivers
- COVID-19 materially affected retail rent collections and hotel operations. The company collected approximately 99% of office, 78% of retail and 96% of multifamily rents due during 2020. It recorded approximately $13.4 million of pandemic-related lease modifications, including deferrals and concessions, and an $18.4 million collectability adjustment against rental income.
- Office revenue benefited from the 2019 La Jolla Commons acquisition; same-store office rental revenue increased. Office occupancy was 93.0%, down from 95.0%.
- Retail property operating income fell 21% to $60.9 million; retail occupancy declined to 90.7% from 97.8%. Comparable retail lease renewals and new leases signed in 2020 had average cash rent decreases of 7.1% and 12.8%, respectively.
- Multifamily occupancy was 86.2% at year-end, compared with 92.8%; average monthly base rent per leased unit increased to $2,238 from $2,099.
- Mixed-use property operating income fell 83% to $4.2 million. Hotel occupancy dropped to 51.3% from 91.7%, and RevPAR to approximately $127 from $299.
- General and administrative expense increased 7%, and depreciation and amortization increased 13%. Interest expense decreased 1% to $53.4 million.
- No acquisitions or dispositions occurred in 2020; the $525 million La Jolla Commons acquisition occurred in 2019.
Outlook, risks and unusual items
Management said it could not reliably estimate COVID-19’s future effects. It expected 2021 leasing volume below historical averages and overall rental income decreases because of the pandemic. Hotel revenue and property income in Hawaii were expected to remain substantially reduced through at least the first half of 2021 or until vaccine distribution was generally available. Management also anticipated higher 2021 capital spending, including La Jolla Commons development, One Beach Street renovations and Google tenant improvements.
Management described liquidity as strong and believed operating cash flow, cash on hand, the revolver and capital-market access would support operations, debt service and capital expenditures. It noted that deteriorating markets could lead to delays in development, fewer acquisitions, expense reductions or a reassessment of dividends. The company continued regular quarterly distributions, but reduced the quarterly rate from $0.30 in the first quarter of 2020 to $0.20 in the second quarter and $0.25 in each of the third and fourth quarters.
After year-end, the company issued $500 million of 3.375% senior unsecured notes due 2031, receiving approximately $489.9 million net. Proceeds were used primarily to repay $150 million of Series A notes and the $100 million revolver balance, with the remainder intended for La Jolla Commons development and general corporate purposes. The filing reported total debt of $1.66 billion as of February 16, 2021, reflecting this financing and repayments.
Principal risks include continued pandemic effects, tenant defaults or lease non-renewals, retail co-tenancy provisions, concentrated exposure to western U.S. markets, substantial indebtedness and refinancing needs, capital-market access, interest-rate and LIBOR transition risks, natural disasters and potentially insufficient insurance. The Del Monte Center groundwater remediation is in long-term monitoring; the company expects seller-funded escrow to cover remaining costs, but could face overruns. The filing also discloses approximately $6.6 million accrued for transfer taxes and a potential hotel franchise termination payment of up to approximately $5.5 million under specified circumstances. The company reported no legal proceedings it believed would have a material adverse effect. Auditors issued unqualified opinions; internal controls were reported effective. Key audit matters included property impairment assessments and receivable collectability.
Most important facts for investors to verify
- Whether pandemic-related rent concessions, arrears and collectability adjustments stabilize or worsen, particularly in retail and hotel operations.
- Actual 2021 occupancy, leasing spreads, hotel recovery and the timing and cost of planned development and redevelopment.
- Debt maturities, refinancing terms, covenant headroom, revolver availability and the effect of the 2031 notes on leverage and interest costs.
- Dividend sustainability relative to cash flow, capital spending and REIT distribution requirements.
- Assumptions behind real estate impairment assessments and collection of the $79.4 million of accounts and straight-line rent receivables reported at year-end.
- Whether environmental escrow funds cover Del Monte Center monitoring and any additional remediation requirements.