American Assets Trust(AAT) - 2021 Q3 - Quarterly Report

EXPLANATORY NOTE This section clarifies the combined reporting of American Assets Trust, Inc. (REIT) and American Assets Trust, L.P. (Operating Partnership), highlighting the REIT's 78.8% ownership and the report's aim for efficiency and investor understanding - American Assets Trust, Inc. (REIT) is the sole general partner of American Assets Trust, L.P. (Operating Partnership), owning approximately 78.8% partnership interest as of September 30, 2021, with the Operating Partnership holding substantially all company assets and conducting operations[9][11] - The combined 10-Q filing aims to reflect management's view of the business as a single operating unit, enhance investor understanding, and improve efficiency by reducing duplicative disclosure[10] - Key differences between the two entities' financial statements are noncontrolling interests, stockholders' equity/partners' capital, and earnings per share/unit[12] PART 1. FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the company ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for both the REIT and Operating Partnership, including balance sheets, income statements, equity/capital statements, cash flow statements, and detailed accounting notes Consolidated Financial Statements of American Assets Trust, Inc. This sub-section provides the unaudited consolidated financial statements for American Assets Trust, Inc., detailing the REIT's financial position, performance, and cash flows Consolidated Balance Sheet Highlights (American Assets Trust, Inc.) | Metric (in thousands) | Sep 30, 2021 (unaudited) | Dec 31, 2020 | | :-------------------- | :----------------------- | :----------- | | Total Assets | $3,051,070 | $2,817,309 | | Real Estate, Net | $2,680,957 | $2,492,734 | | Cash & Equivalents | $171,923 | $137,333 | | Total Liabilities | $1,832,379 | $1,563,903 | | Unsecured Notes Payable, Net | $1,537,772 | $1,196,677 | | Total Equity | $1,218,691 | $1,253,406 | Consolidated Statements of Comprehensive Income Highlights (American Assets Trust, Inc.) | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | | Total Revenue | $98,286 | $84,374 | | Total Operating Expenses | $70,617 | $64,051 | | Operating Income | $27,669 | $20,323 | | Net Income | $12,895 | $6,490 | | Net Income Attributable to AAT, Inc. Stockholders | $10,041 | $5,038 | | Basic EPS | $0.17 | $0.08 | | Diluted EPS | $0.17 | $0.08 | | Dividends Declared Per Common Share | $0.30 | $0.25 | Consolidated Statements of Cash Flows Highlights (American Assets Trust, Inc.) | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | | Net Cash from Operating Activities | $129,632 | $109,149 | | Net Cash Used in Investing Activities | $(263,345) | $(53,574) | | Net Cash from Financing Activities | $168,303 | $(8,468) | | Net Increase in Cash & Equivalents | $34,590 | $47,107 | | Cash, Cash Equivalents & Restricted Cash, End of Period | $173,639 | $156,558 | Consolidated Financial Statements of American Assets Trust, L.P. This sub-section presents the unaudited consolidated financial statements for American Assets Trust, L.P., reflecting the Operating Partnership's financial position, performance, and cash flows Consolidated Balance Sheet Highlights (American Assets Trust, L.P.) | Metric (in thousands) | Sep 30, 2021 (unaudited) | Dec 31, 2020 | | :-------------------- | :----------------------- | :----------- | | Total Assets | $3,051,070 | $2,817,309 | | Real Estate, Net | $2,680,957 | $2,492,734 | | Cash & Equivalents | $171,923 | $137,333 | | Total Liabilities | $1,832,379 | $1,563,903 | | Unsecured Notes Payable, Net | $1,537,772 | $1,196,677 | Consolidated Statements of Comprehensive Income Highlights (American Assets Trust, L.P.) | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | | Total Revenue | $98,286 | $84,374 | | Total Operating Expenses | $70,617 | $64,051 | | Operating Income | $27,669 | $20,323 | | Net Income | $12,895 | $6,490 | | Net Income Attributable to AAT, L.P. | $12,750 | $6,403 | | Basic EPU | $0.17 | $0.08 | | Diluted EPU | $0.17 | $0.08 | | Distributions Per Unit | $0.30 | $0.25 | Consolidated Statements of Cash Flows Highlights (American Assets Trust, L.P.) | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | | Net Cash from Operating Activities | $129,632 | $109,149 | | Net Cash Used in Investing Activities | $(263,345) | $(53,574) | | Net Cash from Financing Activities | $168,303 | $(8,468) | | Net Increase in Cash & Equivalents | $34,590 | $47,107 | | Cash, Cash Equivalents & Restricted Cash, End of Period | $173,639 | $156,558 | Notes to Consolidated Financial Statements (unaudited) This section details significant accounting policies, recent real estate acquisitions, fair value measurements, debt, equity, and other financial disclosures for the unaudited consolidated statements - As of September 30, 2021, the company owned or had a controlling interest in 30 operating properties (office, retail, multifamily, mixed-use) and land held for development/construction in progress at three properties[49] - The company acquired Eastgate Office Park for approximately $125 million and Corporate Campus East III for approximately $84 million, both multi-tenant office campuses in Bellevue, Washington, during Q3 2021[64] Unsecured Notes Payable Outstanding (in thousands) | Description of Debt | Sep 30, 2021 Principal Balance | Dec 31, 2020 Principal Balance | Stated Interest Rate (Sep 30, 2021) | Stated Maturity Date | | :------------------ | :----------------------------- | :----------------------------- | :---------------------------------- | :------------------- | | 3.375% Senior Unsecured Notes | $500,000 | — | 3.38% | February 1, 2031 | | Total Unsecured Notes Payable | $1,550,000 | $1,200,000 | | | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of financial condition, operations, and cash flows, covering business overview, acquisitions, critical accounting policies, same-store performance, outlook, COVID-19 impact, leasing, capitalized costs, and key financial metrics like NOI and FFO Forward-Looking Statements This section identifies forward-looking statements and outlines various risk factors that could materially affect actual results, including pandemic impacts, economic downturns, and interest rate fluctuations - Forward-looking statements are identified by terms like 'believes,' 'expects,' 'may,' 'will,' 'should,' 'intends,' 'plans,' 'estimates,' or 'anticipates'[167] - Key risk factors include the adverse effects of the COVID-19 pandemic, economic or real estate downturns, insufficient cash flows for debt service, tenant defaults, acquisition/disposition difficulties, interest rate fluctuations, and changes in governmental regulations[167][168] Overview American Assets Trust, Inc. is a self-administered REIT owning and operating high-quality retail, office, multifamily, and mixed-use properties in key markets, holding a 78.8% interest in its Operating Partnership - The company's portfolio consists of 12 retail shopping centers, 11 office properties, a mixed-use property (hotel and retail), and 6 multifamily properties as of September 30, 2021[171] - Core markets include San Diego, San Francisco Bay Area, Portland, Bellevue, and Oahu[171] - American Assets Trust, Inc. owned 78.8% of its Operating Partnership as of September 30, 2021[171] Acquisitions The company completed two significant office property acquisitions in Bellevue, Washington, totaling approximately $209 million during Q3 2021, funded with cash on hand - Acquired Eastgate Office Park (280,000 sq ft) for approximately $125 million on July 7, 2021[172] - Acquired Corporate Campus East III (161,000 sq ft) for approximately $84 million on September 10, 2021[172] - Both acquisitions were funded with cash on hand[172] Critical Accounting Policies This section confirms no material changes to critical accounting policies during the reporting period, except as detailed in Footnote 1 - No material changes to critical accounting policies were made during the reporting period, except as noted in Footnote 1[173] Same-store This section defines and reports same-store and redevelopment same-store metrics, used to evaluate property performance by excluding properties under significant development, acquisition, or disposition, and details NOI changes for retail and office segments - Same-store and redevelopment same-store metrics are used to provide consistent performance comparisons by excluding properties with significant development, acquisition, or disposition activity[175] Same-Store Property Count | Category | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Same-Store | 26 | 25 | 26 | 24 | | Non-Same-Store | 4 | 3 | 4 | 4 | | Total Properties | 30 | 28 | 30 | 28 | - For the nine months ended September 30, 2021, retail same-store NOI increased approximately 3.1%, and office same-store NOI increased 0.7% compared to the same period in 2020, with office redevelopment same-store NOI increasing 0.1%[179] Outlook The company's growth strategy focuses on same-store portfolio expansion, opportunistic development/redevelopment, and acquisitions in high-barrier-to-entry markets, subject to market conditions and interest rates - Growth strategy focuses on same-store portfolio growth, property development/redevelopment, and acquisitions in dynamic, high-barrier-to-entry markets[182] - The company intends to opportunistically develop future phases of Lloyd Portfolio and La Jolla Commons and redevelop One Beach Street, subject to market conditions and risk-adjusted returns[183] - Acquisitions are contingent on finding properties meeting qualitative standards and financial hurdles, with interest rates affecting pricing and financing[184] COVID-19 The company monitors the uncertain impact of COVID-19, but believes its strong financial position and increasing rent collections will help manage the crisis, with hopes for economic reopening - The COVID-19 pandemic's future impact remains highly uncertain due to factors like virus mutations, containment actions, vaccine adoption, and economic effects[185] - For Q3 2021, the company collected approximately 99% of office rents, 94% of retail rents, and 93% of multifamily rents, with approximately 96% of deferred rent repayments due also collected[186] - The company believes its financial condition and liquidity are strong, positioning it to manage through the crisis, and is encouraged by increasing rent collection and broader macroeconomic conditions related to economic reopening[187][188] Leasing Same-store growth is driven by rental rate increases and occupancy changes, with positive rental rate increases for office and new retail leases in Q3 2021, despite some retail renewal decreases - Same-store growth is primarily driven by increases in rental rates on new leases and renewals, and changes in portfolio occupancy[189] Leasing Activity (3 Months Ended Sep 30, 2021) | Segment | Leases Signed (sq ft) | Comparable Renewal Leases (sq ft) | Cash Basis Rent Change | GAAP Basis Rent Change | Tenant Improvements & Incentives (per sq ft) | | :------ | :-------------------- | :-------------------------------- | :--------------------- | :--------------------- | :------------------------------------------- | | Office | 13,064 | 9,269 | +8.4% | +13.5% | $39.17 (new leases) | | Retail | 129,325 | 116,877 | -2.2% | +6.7% | $215.00 (new leases) | - New office leases for comparable spaces saw a 12.0% cash basis increase, while new retail leases for comparable spaces saw a 34.6% cash basis increase[189][190] Capitalized Costs The company capitalizes external and internal costs for real estate development and redevelopment, totaling $34.6 million for development/redevelopment and $2.0 million for interest in the nine months ended September 30, 2021 - Capitalized external and internal costs for development and redevelopment combined were $34.6 million for the nine months ended September 30, 2021, a significant increase from $4.2 million in 2020[195] - Capitalized interest costs related to development activities were $2.0 million for the nine months ended September 30, 2021, up from $0.8 million in 2020[196] Results of Operations This section compares consolidated results for the three and nine months ended September 30, 2021, versus 2020, analyzing changes in revenue, expenses, operating income, and other financial metrics Comparison of the three months ended September 30, 2021 to the three months ended September 30, 2020 For Q3 2021, total property revenues increased by 16% to $98.3 million, driven by retail and mixed-use, while total property expenses rose 8% to $33.1 million, resulting in a 36% increase in operating income Consolidated Results of Operations (3 Months Ended Sep 30, in thousands) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Total Property Revenues | $98,286 | $84,374 | | Total Property Expenses | $33,110 | $30,699 | | Total Property Income | $65,176 | $53,675 | | Net Income Attributable to AAT, Inc. Stockholders | $10,041 | $5,038 | Total Rental Revenue by Segment (3 Months Ended Sep 30, in thousands) | Segment | 2021 | 2020 | | :------ | :--- | :--- | | Office | $46,174 | $43,453 | | Retail | $24,174 | $19,850 | | Multifamily | $12,224 | $11,821 | | Mixed-Use | $11,232 | $5,635 | | Total | $93,804 | $80,759 | - Mixed-use rental revenue nearly doubled (+99%) due to lifting of COVID-19 travel restrictions, leading to increased hotel occupancy (78% vs 66%) and revenue per available room ($240 vs $138)[208] Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020 For the nine months ended September 30, 2021, total property revenues increased 4% to $274.1 million, but net income decreased 18% to $26.1 million, primarily due to a $4.3 million early debt extinguishment expense Consolidated Results of Operations (9 Months Ended Sep 30, in thousands) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Total Property Revenues | $274,081 | $263,226 | | Total Property Expenses | $93,526 | $90,254 | | Total Property Income | $180,555 | $172,972 | | Net Income | $26,115 | $31,800 | | Early Extinguishment of Debt | $(4,271) | — | | Net Income Attributable to AAT, Inc. Stockholders | $20,239 | $24,762 | Total Rental Revenue by Segment (9 Months Ended Sep 30, in thousands) | Segment | 2021 | 2020 | | :------ | :--- | :--- | | Office | $133,092 | $128,714 | | Retail | $68,183 | $66,226 | | Multifamily | $35,864 | $35,525 | | Mixed-Use | $25,434 | $21,594 | | Total | $262,573 | $252,059 | - Mixed-use rental revenue increased by $3.8 million (+18%), largely due to a $3.7 million increase from the Waikiki Beach Walk hotel, driven by increased occupancy (64.3% vs 52.8%) and revenue per available room ($175 vs $138) following relaxed COVID-19 travel restrictions[233] Liquidity and Capital Resources of American Assets Trust, Inc. The REIT's liquidity depends on Operating Partnership distributions for dividend payments, with the company maintaining an ATM equity program for opportunistic capital raising - American Assets Trust, Inc. relies on distributions from its Operating Partnership for liquidity, as it does not generate capital or hold debt directly[250] - The company's primary cash requirement is dividend payments to stockholders, and it guarantees some of the Operating Partnership's debt[250][252] - As of September 30, 2021, the company had capacity to issue up to an additional $132.6 million in common stock under its ATM equity program[258] Liquidity and Capital Resources of American Assets Trust, L.P. The Operating Partnership meets short-term liquidity needs through cash from operations and credit facilities, while long-term needs are funded by operations, debt, and equity issuances, with $171.9 million in cash as of September 30, 2021 - The Operating Partnership's short-term liquidity requirements are met through net cash from operations, existing cash reserves, and borrowings under its unsecured line of credit[259] - Long-term liquidity needs for debt repayment, acquisitions, and capital improvements are expected to be met by net cash from operations, long-term debt, and equity issuances[260] - As of September 30, 2021, the Operating Partnership held $171.9 million in cash and cash equivalents[259] Off-Balance Sheet Arrangements The company currently has no off-balance sheet arrangements - The company has no off-balance sheet arrangements[264] Cash Flows For the nine months ended September 30, 2021, operating cash flow increased by $20.5 million, investing cash flow decreased by $209.8 million due to acquisitions, and financing cash flow increased by $168.3 million from new unsecured notes Cash Flow Summary (9 Months Ended Sep 30, in thousands) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Net Cash Provided by Operating Activities | $129,632 | $109,149 | | Net Cash Used in Investing Activities | $(263,345) | $(53,574) | | Net Cash Provided by (Used in) Financing Activities | $168,303 | $(8,468) | | Cash, Cash Equivalents, and Restricted Cash, End of Period | $173,639 | $156,558 | - The increase in cash from operations was linked to changes in accounts payable, increased depreciation/amortization from acquisitions, and early debt extinguishment[265] - Investing activities were heavily impacted by the acquisition of Eastgate Office Park and Corporate Campus East III, and capital expenditures at La Jolla Commons III and One Beach Street[266] Net Operating Income NOI, a non-GAAP measure, increased to $180.6 million for the nine months ended September 30, 2021, reflecting core property performance by excluding financing, depreciation, and administrative expenses - NOI is defined as operating revenues less property and related expenses, excluding general and administrative expenses, interest, depreciation, and other non-property items[267] - NOI is a supplemental measure to understand core property operations and trends in occupancy, rental rates, and operating costs, but it is not a substitute for GAAP net income[268][270] Reconciliation of NOI to Net Income (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Operating Income | $65,176 | $53,675 | $180,555 | $172,972 | | Net Income | $12,895 | $6,490 | $26,115 | $31,800 | Funds from Operations FFO, a non-GAAP measure per NAREIT standards, was $111.5 million for the nine months ended September 30, 2021, with diluted FFO per share/unit of $1.46, excluding non-operating items - FFO is a supplemental non-GAAP measure, calculated per NAREIT standards, used to measure operational performance by excluding non-operating items like depreciation and property disposition gains/losses[272][273] Reconciliation of FFO to Net Income (in thousands, except per share/unit data) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Net Income | $12,895 | $26,115 | | Plus: Real Estate Depreciation and Amortization | $30,680 | $85,827 | | Funds from Operations | $43,575 | $111,942 | | FFO Attributable to Common Stock and Units | $43,432 | $111,530 | | FFO Per Diluted Share/Unit | $0.57 | $1.46 | | Weighted Average Number of Common Shares and Units, Diluted | 76,173,444 | 76,169,626 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the company's interest rate risk management, showing that a 1.0% increase in rates would decrease fixed-rate debt fair value by $73.9 million and increase variable-rate debt annual interest expense by $1.0 million - The company manages market risk by matching anticipated cash inflows and outflows, primarily focusing on interest rate risk[276] - At September 30, 2021, the company had $1.411 billion of fixed-rate debt, where a 1.0% increase in interest rates would decrease its fair value by approximately $73.9 million, while a 1.0% decrease would increase it by $88.1 million[279] - At September 30, 2021, the company had $250.0 million of variable-rate debt, where a 1.0% increase in market interest rates would increase annual interest expense by approximately $1.0 million, with a corresponding decrease in net income and cash flows[280] ITEM 4. CONTROLS AND PROCEDURES Both American Assets Trust, Inc. and L.P. maintain effective disclosure controls and procedures, with no material changes to internal control over financial reporting identified as of September 30, 2021 - American Assets Trust, Inc. and American Assets Trust, L.P. maintain disclosure controls and procedures designed for timely and accurate reporting[281][285] - As of September 30, 2021, management concluded that the disclosure controls and procedures for both entities were effective[282][286] - No material changes to internal control over financial reporting were identified during the period[283][287] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and a list of exhibits ITEM 1. LEGAL PROCEEDINGS The company is not currently involved in any material legal proceedings expected to adversely affect its business or financial condition, anticipating only routine litigation - The company is not currently involved in any material legal proceedings that would significantly impact its business or financial condition[288] ITEM 1A. RISK FACTORS No material changes to the risk factors previously disclosed in the company's annual report on Form 10-K for the year ended December 31, 2020, were reported - No material changes to risk factors were reported since the last annual report on Form 10-K[289] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No unregistered sales of equity securities or use of proceeds occurred during the reporting period - No unregistered sales of equity securities or use of proceeds occurred[289] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported during the period - No defaults upon senior securities were reported[291] ITEM 4. MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[291] ITEM 5. OTHER INFORMATION No other information is reported in this section - No other information to report[292] ITEM 6. EXHIBITS This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley and XBRL documents - The report includes certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act for both American Assets Trust, Inc. and American Assets Trust, L.P.[292] - XBRL (eXtensible Business Reporting Language) documents are filed, including schema, calculation, label, presentation, and definition linkbase documents[292] SIGNATURES The report was signed by Ernest Rady (Chairman and CEO) and Robert F. Barton (EVP, CFO) on October 29, 2021, for both American Assets Trust, Inc. and L.P - The report was signed by Ernest Rady (Chairman and CEO) and Robert F. Barton (EVP, CFO) on October 29, 2021[295][296]