American Assets Trust, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing combines American Assets Trust, Inc. and its operating partnership, which management operates as one enterprise. The REIT owned approximately 73.2% of the partnership at year-end.
Business context
The company owns, operates, acquires and develops retail, office, multifamily and mixed-use properties, primarily in California, Oregon, Washington and Hawaii, with one retail property in Texas. Its 26-property portfolio included 12 retail centers, seven office properties, six multifamily properties and one mixed-use property with a 369-room hotel. It also had land or construction in progress at four properties.
Financial and operating results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $315.0 million | $295.1 million | +7% |
| Net operating income (NOI) | $198.3 million | $187.2 million | +6% |
| Operating income | $93.6 million | $97.9 million | -4% |
| Net income | $40.1 million | $45.6 million | -12% |
| Net income attributable to AAT stockholders | $29.1 million | $32.6 million | -11% |
| Basic and diluted EPS | $0.62 | $0.72 basic; $0.72 diluted | Lower |
| FFO attributable to common stock and units | $123.2 million | $116.8 million | +5% |
| FFO per diluted share/unit | $1.92 | $1.85 | +4% |
| Cash from operating activities | $145.9 million | $120.7 million | +$25.2 million |
| Cash, cash equivalents and restricted cash | $92.0 million | $54.8 million | +$37.2 million |
| Total debt principal outstanding | $1,329.9 million | $1,? million | — |
The filing’s selected financial data reports 2016 notes payable of $1,061.5 million; the debt table reports principal outstanding of $1,329.9 million at year-end 2017 and $1,047.0 million at year-end 2016. On that principal basis, debt rose approximately $282.9 million. Balance-sheet notes payable, net of issuance costs and other adjustments, were $1,325.0 million in 2017 versus $1,061.5 million in 2016.
Rental and real estate tax expenses rose 6% and 15%, respectively; depreciation and amortization increased 17% to $83.3 million, while interest expense increased 4% to $53.8 million. NOI was approximately 63.0% of property revenue in 2017, versus 63.4% in 2016. The filing presents NOI and FFO as supplemental, non-GAAP measures.
At year-end, total assets were $2.26 billion and total liabilities were $1.42 billion. The balance sheet showed $82.6 million of cash and cash equivalents plus $9.3 million restricted cash. No revolving credit balance was outstanding at December 31, 2017. Contractual debt principal payments were $75.2 million within one year; this schedule does not include all potential refinancing needs.
Quarterly common dividends increased to $0.27 per share in Q4 2017, from $0.26 in each of the first three quarters; full-year dividends declared were $1.05 per share, versus $1.01 in 2016.
Material changes versus 2016
- Revenue growth included the 2017 acquisitions of Pacific Ridge Apartments, a 533-unit San Diego community purchased for approximately $232 million, and Gateway Marketplace, a 128,000-square-foot retail center purchased for approximately $42 million. The company also acquired a building at Del Monte Center for approximately $5.3 million.
- Same-store rental revenue increased about 1%; same-store NOI increased about 0.5%. Total NOI growth was stronger, reflecting acquisitions and completed development activity.
- Multifamily revenue rose 49%, primarily reflecting Pacific Ridge Apartments and increased occupancy at Hassalo on Eighth. Office revenue rose 3%; retail revenue rose 3%. Mixed-use NOI declined 5%, primarily due to hotel bad debt and lower retail leasing.
- Net income fell despite revenue and NOI growth, as higher depreciation, G&A and interest costs more than offset the operating improvement. G&A included a one-time charge tied to vesting previously granted restricted stock awards.
- Operating cash flow increased, while investing outflow increased to $330.6 million, largely because of acquisitions. Financing provided $221.9 million, including $450 million of new unsecured notes, partly offset by debt repayments.
Outlook, management commentary and risks
- Management expected 2018 leasing volume to be broadly in line with historical averages and anticipated overall positive rental-income increases, while cautioning that individual lease results could be positive or negative and were not assured.
- Management planned to pursue development and redevelopment opportunities, including future phases of Lloyd District Portfolio and Solana Beach–Highway 101 and work at Solana Beach Corporate Centre and Lomas Santa Fe Plaza, subject to market conditions and return assessments. Management expected 2018 capital expenditures to be below 2017 levels, with higher tenant improvements and leasing commissions possible because of lease expirations.
- On January 9, 2018, the company increased unsecured credit-facility capacity from $350 million to $450 million, comprising a $350 million revolver and $100 million term loan; the revolver maturity is January 2022, subject to extension options. The $150 million term loan’s pricing was also amended, effective March 1, 2018, with management stating the revised terms were intended to be more favorable.
- Debt is a significant risk: principal outstanding was approximately $1.33 billion, with covenants, refinancing requirements and exposure to interest rates. Most debt was fixed-rate; $250 million was reported as variable-rate at year-end, with swaps used to hedge certain borrowings. The company said it complied with debt covenants.
- Other material risks include geographic concentration in California, Oregon, Washington and Hawaii; tenant and lease rollover risk; competition and retail-sector changes; natural disasters and earthquake insurance limits; development execution; environmental exposure; and maintaining REIT qualification.
- Kmart had ceased operating at Waikele Center but remained liable for rent through June 30, 2018; its lease represented approximately $4.9 million of annualized base rent. Salesforce.com represented 7.9% of annualized base rent across the office, retail and mixed-use retail portfolios. Leases representing 11.8% of relevant square footage and 15.3% of annualized base rent were due to expire in 2018.
- Del Monte Center remediation for former dry-cleaning solvent contamination remained in long-term monitoring, expected to continue five to seven years. The company expected the seller-funded escrow to cover remaining work but could face additional costs if requirements exceed available funds.
- The 2017 Tax Cuts and Jobs Act changed tax rules affecting REITs and investors; the company said it was assessing the full impact. No material legal proceeding was identified, and auditors gave unqualified opinions on the financial statements and, for the corporation, internal control over financial reporting.
Most important facts for investors to verify
- Reconcile year-over-year debt using the detailed debt note, including the change in principal, 2018–2019 maturities, refinancing and post-year-end facility amendments.
- Assess whether modest same-store NOI growth and leasing trends can sustain the dividend as expenses, tenant improvements and lease expirations evolve.
- Track the Kmart space at Waikele Center, 2018 office and retail lease expirations, and tenant concentration at major office properties.
- Review acquisition-level performance, especially Pacific Ridge Apartments, and the returns and funding needs of planned development and redevelopment projects.
- Monitor hotel bad debt and operating performance, Del Monte Center remediation, earthquake coverage and the company’s continuing compliance with REIT and debt-covenant requirements.