Business context and reporting period
American Assets Trust, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. The company is a newly public, vertically integrated REIT, formed through an IPO and formation transactions completed January 19, 2011. Its 2011 results include acquired properties only from their acquisition dates; 2010 and 2009 results largely reflect the Predecessor. Accordingly, year-over-year comparisons are not like-for-like.
At year-end, the portfolio comprised 21 properties: 10 retail, six office, four multifamily and one mixed-use property with a 369-room hotel. Retail and office space totaled about 5.3 million rentable square feet; multifamily included 922 units, including RV spaces. The portfolio was concentrated in California, Oregon and Hawaii.
Financial and operating performance
| Metric | FY 2011 | Comparison / detail |
|---|---|---|
| Total revenue | $209.8 million | Up 68% from $124.5 million; principally reflects acquisitions and consolidation of Waikiki Beach Walk. |
| Property operating income (NOI) | $130.3 million | Up 45% from $89.9 million; NOI margin was about 62% of revenue. |
| Operating income | $58.8 million | After $57.6 million depreciation and amortization and $13.9 million general and administrative expense. |
| Net income | $19.3 million | Includes $46.4 million acquisition gain and $5.1 million income from discontinued operations, including a $4.0 million property-sale gain. |
| Net income attributable to company stockholders | $2.9 million; $0.08 per share | Continuing-operations loss attributable to common stockholders was $0.01 per share; discontinued operations contributed $0.09 per share. |
| FFO | $74.6 million | FFO attributable to common stock and units was $57.3 million, or $1.05 per diluted share/unit; non-GAAP measure. |
| Cash from operations | $65.4 million | Compared with $48.3 million in 2010. |
| Cash and marketable securities | $140.9 million | $112.7 million cash and $28.2 million GNMA securities at year-end. |
| Debt | $959.4 million principal | Fixed-rate debt; weighted average rate 5.45%. Balance-sheet debt carrying value was $943.5 million after fair-value adjustment. |
| Liquidity / distributions | $191.8 million maximum available under $250 million revolver | No facility borrowings outstanding at year-end. Declared dividends of $0.80 per share for 2011. |
Year-end leased rates were 95.0% retail, 94.4% office, 91.8% multifamily and 99.2% for the retail portion of the mixed-use property; hotel average occupancy was 88.4%. Same-store rental revenue increased 1%, while same-store property operating income declined 4%.
Fourth-quarter 2011 revenue was $55.5 million, operating income $14.7 million, net income $0.7 million and income attributable to stockholders $0.3 million, or $0.01 per share. Quarterly results include acquisition and discontinued-operation effects.
Material changes versus prior comparable period
- Reported revenue and NOI increased substantially, largely because of the IPO-era portfolio expansion, including First & Main, Lloyd District Portfolio, Solana Beach properties and Waikiki Beach Walk; this does not represent equivalent same-store growth.
- Same-store retail and office property operating income each declined 3%; multifamily property operating income declined 7%. Management cited expenses, tax accruals, leasing economics and, for retail, a Kmart deferred-rent allowance.
- Property operating expenses rose 129% to $79.5 million, reflecting the larger portfolio and hotel operations; depreciation and amortization rose 59% to $57.6 million.
- Interest expense increased 24% to $56.5 million. IPO-related debt repayment generated $25.9 million of early-extinguishment expense and $9.0 million of loan-transfer and consent fees.
- Cash and cash equivalents increased from $42.0 million to $112.7 million. Investing cash outflow increased to $231.7 million, principally due to acquisitions and securities purchases; financing cash inflow was $237.1 million, principally reflecting IPO proceeds and debt activity.
Outlook, risks, contingencies and unusual items
The filing provides no quantified earnings, revenue or FFO guidance. Management’s stated strategy is to pursue acquisitions in high-barrier-to-entry markets, selectively develop or redevelop assets, recycle capital and grow operating cash flows. A February 2012 shelf registration may permit up to approximately $500 million of additional securities, but no offering is assured.
- In January 2012, the revolver was amended to extend maturity to January 2016, with a one-year extension option, reduce borrowing spreads and revise covenants; availability subsequently increased to approximately $214.2 million.
- Debt maturities are concentrated in 2014 and 2015: scheduled principal payments are $262.1 million and $236.0 million, respectively. The company reported compliance with debt covenants at year-end.
- Geographic concentration, tenant renewals and vacancies, retail anchor closures, property-tax reassessments, operating-cost inflation, refinancing and capital-market access are key risks. Leases representing 8.9% of relevant retail and office square footage and 9.3% of annualized base rent were due to expire in 2012.
- California properties had no earthquake insurance; earthquake coverage for certain Oregon and Hawaii properties was limited and subject to deductibles and policy limits.
- Del Monte Center has ongoing groundwater remediation. Management expected seller-funded escrow to cover remaining work, but additional required work could create company costs.
- Tax-protection agreements restrict taxable dispositions of specified properties through January 2018 and could require indemnification payments. REIT qualification and required distributions are also material considerations.
- The company sold Valencia Corporate Center in August 2011 for $31.0 million and recorded a $4.0 million gain. In January 2012, it acquired One Beach Street for approximately $36 million.
- Management said no current legal proceedings were expected to have a material adverse effect; it disclosed litigation involving the company’s executive chairman and predecessor-related matters. The independent auditor issued an unqualified financial-statement opinion; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Separate acquisition-driven reported growth from same-store operating trends, and review the unaudited pro forma results and acquisition contributions.
- Assess the sustainability of earnings and FFO after excluding acquisition gains, sale gains and IPO-related debt costs; reconcile FFO to GAAP income and cash flow.
- Review debt maturities, refinancing plans, covenant headroom and the terms and availability of the amended revolver.
- Check tenant rollover and leasing progress, particularly near-term expirations, the DLA Piper space, Kmart exposure and the expected leasing of vacant space.
- Verify cash available for dividends after recurring capital expenditures, tenant improvements, leasing commissions and REIT distribution requirements.
- Review the hotel’s operating performance and required brand improvements, earthquake-insurance exposure, environmental remediation funding and tax-protection restrictions.