American Assets Trust, Inc. — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. American Assets Trust is a REIT whose operating business is conducted through American Assets Trust, L.P. The company owned 71.8% of the Operating Partnership at year-end. Its portfolio included 24 properties across retail, office, multifamily and mixed-use, with approximately 5.9 million rentable square feet, 1,579 residential units including RV spaces, and a 369-room hotel.
Financial and operating metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $295.1 million | $275.6 million | +7% |
| Property operating income (NOI) | $187.2 million | $177.6 million | +5% |
| Operating income | $97.9 million | $94.2 million | +4% |
| Net income | $45.6 million | $53.9 million | -15% |
| Net income attributable to AAT stockholders | $32.6 million | $38.5 million | -15% |
| Diluted EPS | $0.72 | $0.86 | Down |
| FFO attributable to common stock and units | $116.8 million | $110.0 million | +6% |
| Cash from operating activities | $122.7 million | $110.7 million | +$11.9 million |
| Cash and cash equivalents at year-end | $44.8 million | $39.9 million | +$4.9 million |
| Capital expenditures and leasing commissions | $63.2 million | $138.6 million | Down substantially |
At year-end, total assets were $2.0 billion, net real estate was $1.83 billion, total liabilities were $1.15 billion, and total equity was $838.6 million. Debt outstanding was reported as $1.067 billion before unamortized fair-value adjustments and debt issuance costs; the balance sheet reported notes payable of $1.062 billion. Debt is held by the Operating Partnership, not the parent company. It comprised $445.2 million secured notes, $596.4 million unsecured notes and $20.0 million on the unsecured revolving line. The company reported compliance with debt covenants.
Retail and office portfolios were 96.6% and 90.1% leased, respectively; multifamily was 90.3% leased. The mixed-use retail component was 98.7% leased and hotel occupancy averaged 89.8%. Retail and office same-store NOI increased about 0% and 3.1%, respectively; total same-store NOI increased 3%.
Material changes versus prior periods
- Revenue growth reflected higher rents and reimbursements, completion and lease-up of Hassalo on Eighth, and improved hotel revenue per available room. Multifamily revenue rose 49%, largely due to Hassalo on Eighth coming into operation.
- Property expenses grew 10%, faster than revenue, including a 14% increase in real estate taxes. NOI nevertheless increased 5%.
- Net income fell despite higher NOI, principally because 2015 included a $7.1 million gain from the Rancho Carmel Plaza sale, while 2016 had higher depreciation and interest expense. Interest expense rose 10%, partly because interest capitalization ended as Hassalo on Eighth buildings entered service.
- Operating cash flow increased, while investing cash outflow fell as major redevelopment work at Torrey Reserve Campus and Lloyd District Portfolio was completed. Financing activities used $54.3 million in cash, compared with $2.9 million in 2015, partly reflecting fewer ATM share sales.
- Declared dividends rose to $1.01 per share for 2016 from $0.9475 in 2015; the fourth-quarter dividend was $0.26 per share.
Outlook, commentary, risks and unusual items
- Management said 2017 leasing volume was expected to be in line with historical averages, with overall positive rental-income increases, but gave no quantified earnings or FFO guidance and cautioned that lease-level rent changes could be positive or negative.
- Torrey Point, an approximately 88,000-square-foot office development, had projected costs of about $56 million, with approximately $32 million incurred by year-end. Management expected to spend the remaining approximately $23.7 million in 2017, with stabilization expected in 2018 and estimated stabilized cash yield of 7%–8%. Other potential projects remain subject to market conditions and return assessments.
- Management said cash from operations, cash on hand, the ATM program, revolving credit facility and capital-market access were expected to fund operations, debt service and capital needs. The $250 million revolver had $20 million drawn at year-end. Management noted it could delay development, limit acquisitions, reduce spending or reassess dividends if market conditions deteriorated.
- Near-term refinancing exposure is material: scheduled principal payments were $167.1 million in 2017 and $75.2 million in 2018. A $250 million private placement of senior unsecured notes, at a stated 4.29% fixed rate and due in 2027, was expected to close around March 1, 2017, subject to customary conditions. Subsequent to year-end, related swaps were settled for a $10.4 million gain; the company expected an accounting fixed rate of about 3.73% after the swap benefit.
- Kmart stopped operating at Waikele Center in December 2016 but remained liable for rent through June 2018; its annualized base rent was about $4.5 million. Management cited potential nonrenewal or bankruptcy and risks to customer traffic and other leasing. Sports Authority’s bankruptcy and the Kmart closure announcement also contributed to retail bad-debt expense.
- The three largest office tenants—Salesforce, Autodesk and the Veterans Benefits Administration—represented 26.7% of office annualized base rent. Leases covering 11.1% of retail and office portfolio area and 13.4% of its annualized base rent were due to expire in 2017.
- Key risks include concentration in California, Oregon, Washington and Hawaii; tenant defaults and vacancies; retail-sector disruption; interest rates, refinancing and leverage; earthquake exposure and potentially incomplete insurance; development execution; REIT qualification and distribution requirements; and environmental liabilities. Del Monte Center remediation is in final stages with monitoring expected for five to seven years; seller-funded escrow was expected to cover remaining costs, but overruns could become the company’s responsibility.
- No material legal proceeding was reported. The company reported no impairment charges in 2016 or 2015. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the timing and final terms of the proposed $250 million Series D notes, and reconcile their proceeds with the 2017 debt maturities and any refinancing plans.
- Track Kmart’s lease obligations and replacement leasing at Waikele Center, plus exposure to other major tenants and 2017 lease expirations.
- Assess whether same-store NOI growth, occupancy and rent increases are keeping pace with property expense and tax growth.
- Review the cost, schedule, leasing progress and eventual stabilized performance of Torrey Point and other development opportunities.
- Compare dividends and capital spending with operating cash flow and debt-service needs; remember FFO and NOI are supplemental non-GAAP measures, not measures of liquidity or cash available for distributions.
- Monitor debt covenants, interest-rate swaps, insurance adequacy, earthquake exposure and the remaining environmental remediation escrow.