Business context and reporting period
American Assets Trust, Inc. is a vertically integrated REIT owning retail, office, multifamily and mixed-use properties in California, Oregon, Washington, Texas and Hawaii. This Form 10-K reports the fiscal year ended December 31, 2013; quarterly figures are also presented. At year-end, the portfolio comprised 23 operating properties, approximately 5.8 million rentable square feet, 922 residential units (including RV spaces) and a 369-room hotel. The company reported no property acquisitions or dispositions during 2013.
Financial and operating highlights
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $255.1 million | $235.5 million |
| Property operating income / NOI | $165.1 million | $149.4 million |
| Operating income | $81.1 million | $71.9 million |
| Net income | $22.6 million | $51.6 million |
| Net income attributable to company stockholders | $15.2 million | $34.9 million |
| Basic and diluted EPS | $0.38 | $0.90 |
| FFO attributable to common stock and units | $89.0 million | $77.5 million |
| FFO per diluted share/unit | $1.54 | $1.35 |
| Cash provided by operating activities | $92.7 million | $75.9 million |
| Cash and cash equivalents at year-end | $49.0 million | $42.5 million |
| Total debt principal, including line of credit | $1,055.3 million | — |
Revenue rose 8%, property operating income rose 11%, and continuing-operations income increased 62%. NOI was approximately 64.7% of revenue, compared with 63.4% in 2012. Net income fell 56% because 2012 included a $36.7 million gain on the sale of 160 King Street; 2013 had no discontinued-operation income or sale gain. FFO is a non-GAAP measure and does not represent cash available for dividends, debt service or capital spending.
Retail, office, multifamily and mixed-use occupancy at year-end was 97.0%, 89.8%, 96.4% and 97.8% for the retail portion, respectively; hotel average occupancy was 87.2%. Office occupancy was down from 93.3% in 2012, while multifamily occupancy improved from 94.7%. Same-store property operating income increased 4% overall.
Cash, debt and capital
Cash from investing activities was negative $58.3 million and cash from financing activities was negative $28.0 million. Capital expenditures were $58.7 million, including $13.7 million for redevelopment and expansions and $24.6 million for new development. Dividends paid to common stockholders and Operating Partnership unitholders totaled $49.5 million; dividends declared per share were $0.85 for the year, including $0.22 for the fourth quarter.
At December 31, 2013, secured notes had principal of $962.3 million and the revolving credit facility had $93.0 million outstanding. The company reported compliance with loan covenants. Contractual obligations included $142.3 million of principal payments due within one year and $50.1 million of interest payments within one year. On January 9, 2014, the company amended and restated its facility as $350 million of unsecured capacity: a $250 million revolver and a $100 million term loan. It drew the full term loan; as of February 21, 2014, the term loan was outstanding and the revolver had no balance. A swap was intended to fix the term-loan rate at approximately 3.08%, subject to leverage-based adjustments.
Changes, outlook and risks
- Revenue growth reflected a full year of contributions from 2012 acquisitions, higher hotel revenue and improved multifamily leasing and rents. Same-store revenue grew more modestly; office same-store property operating income increased 1% for the year.
- Management expected 2014 leasing activity to be near historical levels with overall positive rental-income increases, while noting that individual lease outcomes could be positive or negative and were not assured.
- Development commitments were substantial. Lloyd District redevelopment was projected at approximately $192 million, with about $31 million incurred by year-end; completion was expected in 2015 and stabilization in 2017. Torrey Reserve redevelopment was projected at approximately $34 million, with about $20 million incurred and completion expected in 2014. Management expected higher capital spending in 2014.
- Key risks include geographic concentration, leasing and tenant-credit risk, significant debt and near-term maturities, refinancing and interest-rate exposure, development cost and schedule risk, and potential limits on distributions from debt covenants. Retail co-tenancy provisions and tenant departures could also pressure rents and occupancy.
- Further risks include earthquake and other uninsured losses, environmental liabilities (including ongoing Del Monte Center remediation, expected to be funded by seller escrow), REIT qualification and distribution requirements, and tax-protection agreements that may constrain dispositions. Management reported no material legal proceeding and no property impairment at year-end.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the debt maturity and refinancing plan for the $140.7 million Waikele Center loan due November 2014 and the major 2015 maturities.
- Track office occupancy, lease expirations, tenant retention and rent changes, particularly given the decline in reported office occupancy and material office tenants.
- Review development budgets, remaining funding needs, construction progress and lease-up assumptions for Lloyd District and Torrey Reserve.
- Assess whether operating cash flow can support dividends alongside required debt service, leasing costs and development spending; do not treat FFO as available cash.
- Monitor the Del Monte Center remediation escrow and any additional environmental, insurance or tax-protection exposure.