American Assets Trust, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This summary covers American Assets Trust, Inc. and its consolidated Operating Partnership, American Assets Trust, L.P. The company is a REIT focused on retail, office, multifamily and mixed-use properties in Western U.S. markets and Texas; it owned 23 operating properties at year-end. The public company owned 71.7% of the Operating Partnership, which holds substantially all assets and debt.
Financial and operating results
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $275.6 million | $260.0 million | Up 6% |
| Property operating income (NOI) | $177.6 million | $168.8 million | Up 5% |
| Operating income | $94.2 million | $83.7 million | Up 13% |
| Net income | $53.9 million | $31.1 million | Up 73% |
| Net income attributable to AAT stockholders | $38.5 million | $21.8 million | Up 77% |
| Diluted EPS | $0.86 | $0.51 | Up 69% |
| FFO attributable to common stock and units | $110.0 million | $97.6 million | Up 13% |
| Operating cash flow | $110.7 million | $105.6 million | Up $5.1 million |
| Cash and cash equivalents at year-end | $39.9 million | $59.4 million | Down $19.4 million |
| Debt principal outstanding | $1,064.0 million | — | Year-end 2015 balance |
NOI margin was approximately 64.4% of revenue, compared with 64.9% in 2014; operating margin was approximately 34.2%, compared with 32.2%. FFO and NOI are non-GAAP measures; the company cautions that FFO is not a measure of liquidity or cash available for dividends or debt service. Capital expenditures were $138.6 million, including $91.4 million for new development; net cash used in investing was $127.3 million.
Quarterly common dividends increased to $0.25 per share in the fourth quarter from $0.2325 in each of the first three quarters. Dividends declared for 2015 totaled $0.9475 per share. The company states that it believes operating cash flow, cash on hand, its ATM program, revolving credit facility and capital-market access will fund operations, debt service and capital expenditures; it determined working capital was adequate for dividend needs over the next 12 months.
Material changes versus 2014
- Revenue rose 6%, led by office leasing, the opening and lease-up of Hassalo on Eighth, and improved hotel occupancy and room revenue.
- NOI increased 5%. Same-store NOI rose 7%; same-store office NOI increased approximately 9.9% and redevelopment same-store office NOI approximately 5.1%.
- Net income included a $7.1 million gain on the August 2015 sale of Rancho Carmel Plaza, which generated approximately $12.3 million of net proceeds. There were no acquisitions in 2015.
- Interest expense fell 11% to $47.3 million, principally following repayment of property mortgages and increased capitalized interest. General and administrative expense rose 8%, partly due to business-transition costs related to former CEO John W. Chamberlain’s resignation.
- Year-end debt declined from $1,312.8 million in 2014 to $1,059.7 million on the balance sheet in 2015, excluding fair-value adjustments; principal debt was $1,064.0 million. Secured debt repayments were partly offset by $200 million of new senior notes and $30 million outstanding on the revolver.
- Cash flow from operations increased, but cash declined as investing outflows remained substantial and financing cash flow turned negative. The company issued shares through its ATM program and a related-party private placement.
Portfolio, outlook and significant risks
- Retail and office portfolio occupancy was 98.6% and 92.4%, respectively, at year-end. Multifamily occupancy was 73.4%, down from 97.1% a year earlier, primarily reflecting the newly completed Hassalo on Eighth development, which was 42.3% leased at year-end. The retail portion of the mixed-use property was 100% leased; hotel occupancy was 89.6%, up from 79.8% in 2014.
- Management expected 2016 leasing volume to be near historical averages with overall positive rental-income increases, while cautioning that individual lease outcomes could be positive or negative. Leases representing 8.1% of office, retail and mixed-use retail square footage and 9.6% of annualized base rent were due to expire in 2016.
- Torrey Point development began in July 2015: two planned Class A office buildings totaling approximately 88,000 square feet. Estimated total cost is $53 million, approximately $12 million had been incurred by year-end, and management expected remaining costs in 2016–2017. Stabilization was projected for 2018, with estimated stabilized cash yield of 7.54%–8.55%.
- Management expected 2016 capital expenditures to be below 2015 levels as Torrey Reserve Campus and Lloyd District activity was substantially completed, but anticipated higher tenant-improvement and leasing-commission needs from lease expirations. Other development plans remain subject to market conditions and return assessments.
- The company received investment-grade ratings in 2015: Moody’s Baa3, S&P BBB- and Fitch BBB. At December 31, it was in compliance with debt covenants. The $100 million term loan was subsequently extended in January 2016 to January 9, 2017; $30 million was outstanding on the $250 million revolving line within the $350 million credit facility at year-end.
- Debt maturities are concentrated in the near term: scheduled principal payments were $114.0 million in 2016, $190.1 million in 2017, $75.2 million in 2018 and $142.7 million in 2019. Total contractual obligations, including interest, leases and commitments, were $1.33 billion.
- Key exposures include geographic concentration in California, Oregon, Washington and Hawaii; real estate and interest-rate conditions; tenant defaults, lease rollover and retail co-tenancy provisions; substantial leverage and refinancing needs; and development execution. The three largest office tenants represented 25.9% of office annualized base rent; Salesforce alone represented 7.9% of total annualized base rent across retail, office and mixed-use retail.
- Other notable exposures include earthquake insurance limits and deductibles, environmental and regulatory liabilities, and REIT qualification and distribution requirements. Del Monte Center remediation is in final stages with monitoring expected for five to seven years; the company expects the seller-funded escrow to cover remaining work, but could bear excess costs. No legal proceedings were identified as material, and management reported no property impairment at year-end.
- The Embassy Suites franchise could require capital improvements; termination for noncompliance could result in a payment estimated at up to $6.8 million. Tax-protection agreements restrict taxable dispositions of specified properties through January 19, 2018 and could require indemnification payments.
Most important facts for investors to verify
- Whether Hassalo on Eighth’s lease-up improves multifamily occupancy and operating contribution without materially pressuring expenses.
- Execution, remaining funding, leasing and projected returns for Torrey Point and other development or redevelopment projects.
- Upcoming debt maturities, refinancing arrangements, credit-facility availability, covenant headroom and the effect of interest rates on financing costs.
- 2016 lease rollover, renewal spreads, tenant-improvement costs and exposure to major office and retail tenants, including anchor and co-tenancy risks.
- Cash available for dividends after recurring capital needs and debt service; FFO should not be treated as a cash-flow substitute.
- Related-party arrangements and governance implications, including Mr. Rady’s ownership and influence, and the company’s share issuances to affiliated entities.
- Progress and remaining funding for Del Monte Center environmental monitoring, and the adequacy of insurance against earthquake and other property losses.