AAT

Business Context and Reporting Period

Company: American Assets Trust, Inc. (AAT)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: AAT is a vertically integrated, self-administered Real Estate Investment Trust (REIT) focused on retail, office, multifamily, and mixed-use properties in Southern California, Northern California, Hawaii, and Texas. The company was formed in July 2010 and completed its Initial Public Offering (IPO) and Formation Transactions on January 19, 2011. The financial data presented for 2010 reflects the "Predecessor" entities (controlled by Ernest S. Rady and affiliates) prior to the IPO consolidation.

Key Financial Metrics (Predecessor Basis)

Note: The filing states total debt was $1.2 billion at December 31, 2010, which includes Predecessor debt and Noncontrolled Entity debt. Upon IPO completion in Jan 2011, outstanding indebtedness was reduced to $879.0 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 10% to $128.95 million in 2010 compared to 2009. This was driven primarily by the acquisition of The Landmark at One Market (San Francisco) in June 2010, which contributed $10.0 million in revenue for the remainder of the year.
• Expense Increases: Real estate taxes increased 55% to $12.85 million, largely due to the absence of a one-time $2.7 million property tax refund received in 2009 and the inclusion of The Landmark property. Rental expenses increased 14% due to the new acquisition.
• Net Income Decline: Net income attributable to the Predecessor decreased 32% to $4.38 million. This decline was primarily due to increased interest expense ($46.8 million vs. $43.3 million) and higher depreciation/amortization ($37.6 million vs. $29.9 million) associated with the new property.
• Joint Venture Performance: Loss from real estate joint ventures improved significantly, decreasing from $4.87 million in 2009 to $0.11 million in 2010. This improvement was driven by a $4.3 million gain recognized on the acquisition of the outside ownership interest in The Landmark at One Market.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Dividend Policy: The company intends to pay regular quarterly dividends to maintain REIT status. An initial dividend of $0.21 per share (annualized $0.84) was declared for the period Jan 19, 2011, to March 31, 2011.
• Growth: Strategy focuses on acquisitions in high-barrier-to-entry markets, repositioning/redevelopment, and disciplined capital recycling.
• Capital Resources: Post-IPO, the company entered a $250 million revolving credit facility. Net proceeds of ~$594.8 million were used to repay $342 million of debt and fund operations.

Key Risks and Contingencies:

• Tenant Concentration: Three largest office tenants (salesforce.com, Del Monte Corp, Insurance Co. of the West) represented 36.1% of office portfolio annualized base rent. Borders filed for bankruptcy in Feb 2011, affecting three properties with $1.3 million in annualized rent.
• Geographic Concentration: 19 of 20 properties are located in California and Hawaii, exposing the company to regional economic downturns and natural disasters (earthquakes).
• Debt Service: Significant indebtedness ($879 million post-IPO) creates risk of default if cash flows are insufficient. Many loans have balloon payments or fixed rates.
• Environmental Liabilities: Del Monte Center is undergoing remediation for dry cleaning solvent contamination (estimated $3.5 million, funded by escrow).
• REIT Qualification: Failure to qualify as a REIT would result in significant corporate taxation and reduced cash available for distribution.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities and the company's ability to refinance or repay the $879 million outstanding debt, particularly the $262 million due in 2014 and $236 million due in 2015.
• Tenant Leases: Confirm the status of leases for major tenants, specifically the expansion of salesforce.com and the potential impact of Borders' bankruptcy on Waikele Center, Del Monte Center, and Alamo Quarry Market.
• Property Tax Reassessments: Assess the impact of property tax reassessments in California following the IPO, which could significantly increase operating expenses.
• Environmental Escrow: Verify the sufficiency of the escrow funds for the Del Monte Center remediation and potential exposure to overages.
• FFO vs. Net Income: Analyze the divergence between Net Income and Funds From Operations (FFO) to understand the impact of non-cash depreciation and amortization on reported earnings.