Business context and reporting period
American Assets Trust, Inc. is a REIT operating through its consolidated Operating Partnership. This Form 10-K covers the fiscal year ended December 31, 2018; it also reports unaudited fourth-quarter results. The portfolio comprised 27 operating properties across retail, office, multifamily and mixed-use, plus land and construction in progress in California, Oregon, Washington, Texas and Hawaii.
Financial and operating metrics
Unless noted otherwise, amounts are in U.S. dollars.
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $330.9 million | $315.0 million |
| Net operating income (NOI) | $209.4 million | $198.3 million |
| Operating income | $79.5 million | $93.6 million |
| Net income | $27.2 million | $40.1 million |
| Net income attributable to AAT stockholders | $19.7 million | $29.1 million |
| Diluted earnings per share | $0.42 | $0.62 |
| FFO attributable to common stock and units | $134.0 million | $123.2 million |
| Cash from operating activities | $136.5 million | $145.9 million |
| Cash, cash equivalents and restricted cash at year-end | $57.3 million | $92.0 million |
NOI grew 6%, while FFO attributable to common stock and units rose approximately 9%. The filing cautions that FFO is a supplemental non-GAAP measure and is not a measure of liquidity or cash available for dividends or debt service.
At December 31, 2018, total debt outstanding was approximately $1.297 billion excluding debt issuance costs. This included $182.8 million of secured debt, $1.050 billion of unsecured notes and $64.0 million drawn on the revolving facility. The facility has a $350 million revolver and a $100 million term loan; the revolver had approximately $286 million of nominal unused capacity, subject to covenants and availability. Total assets were $2.198 billion and total liabilities were $1.396 billion. The company reported compliance with debt covenants.
Retail and office portfolios were 93.9% and 90.9% leased, respectively; multifamily was 93.6% leased and mixed-use retail was 96.1% leased. Hotel occupancy was 93.0%. Annual dividends declared increased to $1.09 per share from $1.05 in 2017.
Material changes versus the prior comparable period
- Revenue increased 5% year over year, including 4% growth in rental income and 32% growth in other property income. Higher office lease-termination fees contributed to the latter increase.
- Property expenses rose 4%, and NOI increased 6%. Same-store NOI increased 4% overall; retail, office, multifamily and mixed-use same-store NOI rose approximately 3%, 6%, 2% and 2%, respectively.
- Net income fell 32% and diluted EPS declined from $0.62 to $0.42. Depreciation and amortization rose 29% to $107.1 million, primarily due to Waikele Center redevelopment and accelerated depreciation following lease terminations at Lloyd District. Interest expense declined 3% to $52.2 million.
- Operating cash flow declined $9.3 million, partly because 2017 included cash settlements of forward interest-rate derivatives. Investing cash outflow fell substantially as 2018 had no acquisitions, versus major acquisitions in 2017. Financing activities used $106.8 million in 2018, compared with $221.9 million provided in 2017, reflecting debt repayments and the absence of 2017 note issuances.
- Capital expenditures totaled $64.3 million, compared with $52.4 million in 2017. Year-end cash and restricted cash decreased by $34.7 million during 2018.
Outlook, commentary, risks and unusual items
- Management expected 2019 leasing volume to be near historical averages with overall positive rental-income growth, while noting individual lease changes could be positive or negative and future rent increases were not assured.
- Management planned to pursue development and redevelopment selectively, including potential future phases of the Lloyd District Portfolio and Solana Beach–Highway 101, and redevelopment at Waikele Center. It expected 2019 capital expenditures to increase from 2018, including Waikele work and a planned hotel refresh. Timing depends on market conditions and projected risk-adjusted returns.
- Management believed operating cash flow, cash on hand, the ATM equity program, the revolving facility and capital-market access would fund operations, debt service and capital expenditures. It said projects or acquisitions could be delayed or limited and the dividend policy reconsidered if market conditions deteriorated.
- Debt maturities scheduled at year-end included $120.8 million within one year. Subsequent to year-end, on January 9, 2019, the company extended the $100 million Term Loan A maturity to January 2021, subject to three one-year extension options. A January 2019 credit-facility amendment also revised pricing.
- Interest-rate exposure includes $314 million of variable-rate debt; management estimated a 1% rate increase would raise annual interest expense by about $0.6 million, taking hedges into account. The filing also cites uncertainty around LIBOR’s potential phaseout after 2021.
- Key risks include geographic concentration, significant leverage and refinancing needs, tenant concentration in the office portfolio, retail anchor/co-tenancy exposure, lease expirations, rising property costs, development execution, natural disasters and earthquake insurance limitations, environmental liabilities, REIT qualification and access to capital. The three largest office tenants represented 28.3% of office annualized base rent.
- Del Monte Center groundwater remediation remained in long-term monitoring, expected to continue for five to seven years. The company expected seller-funded escrow to cover remaining work, but could bear excess costs. The hotel franchise agreement could entail a termination payment of up to approximately $7.6 million if specified conditions apply.
- No acquisitions or dispositions occurred in 2018, and the filing reported no material legal proceedings. The independent auditor issued unqualified opinions on the financial statements; management and the auditor reported effective internal control over financial reporting.
Fourth-quarter snapshot
Unaudited Q4 2018 revenue was $82.6 million, net income was $9.2 million, net income attributable to AAT stockholders was $6.7 million, and diluted EPS was $0.14. Q4 2017 revenue was $81.7 million, net income was $9.7 million, stockholder-attributable income was $7.1 million, and diluted EPS was $0.15.
Important facts for investors to verify
- Review the full debt maturity schedule, post-year-end Term Loan A extension, covenant headroom, variable-rate exposure and available revolver capacity.
- Assess whether reported NOI and FFO growth is repeatable, separating same-store performance from acquisitions, lease-termination fees and redevelopment effects; also consider capital expenditures and leasing costs excluded from FFO.
- Track office and retail lease expirations, tenant renewals, occupancy and tenant concentration, including significant office tenants and retail anchor/co-tenancy provisions.
- Confirm the expected cost and funding of Waikele redevelopment, the planned hotel refresh, and the adequacy of Del Monte remediation escrow and insurance coverage.
- Evaluate liquidity and dividend coverage alongside REIT distribution requirements, planned capital spending, debt service and potential reliance on external financing or equity issuance.