American Assets Trust(AAT) - 2021 Q4 - Annual Report

Explanatory Note This note clarifies the consolidated reporting structure of American Assets Trust, Inc. and its Operating Partnership Consolidated Reporting Structure This report combines the annual reports of American Assets Trust, Inc. and American Assets Trust, L.P., reflecting a single operating unit view - The report combines the 10-K filings for American Assets Trust, Inc. (REIT parent) and American Assets Trust, L.P. (Operating Partnership) to reflect a single operating unit view[6][8] - American Assets Trust, Inc. is the sole general partner of the Operating Partnership, holding approximately 78.8% partnership interest as of December 31, 2021, and exercises full control over its management and business operations[7][9] - Key differences between the two entities' financial statements are in noncontrolling interests and stockholders' equity/partners' capital, with the Operating Partnership holding substantially all company assets and conducting business operations[10][11] Forward-Looking Statements This section outlines the nature of forward-looking statements, emphasizing their inherent risks and uncertainties Nature of Forward-Looking Statements This section clarifies that the report contains forward-looking statements, which are predictions about future events and trends - Forward-looking statements are identified by terms like 'believes,' 'expects,' 'may,' 'will,' 'should,' 'seeks,' 'intends,' 'plans,' 'estimates,' or 'anticipates,' and relate to future events or trends[16] - These statements are not guarantees of future performance and depend on assumptions that may be incorrect or imprecise, involving numerous risks and uncertainties[17][18] Summary of Risk Factors An investment in the company's securities is subject to various risks, including geographical concentration, indebtedness, and market conditions - The company's property portfolio is geographically concentrated in California, Oregon, Washington, Texas, and Hawaii, making it susceptible to adverse regional economic conditions and natural disasters[19] - Significant risks include substantial indebtedness, potential defaults on debt obligations, and the adverse impact of the COVID-19 pandemic on business, financial condition, and ability to pay dividends[19] - Dependence on major office tenants (Google LLC, LPL Holdings, Inc., Autodesk, Inc.) and anchor retail tenants (Lowe's, Nordstrom Rack, Sprouts Farmers Market) poses risks if these tenants face bankruptcy, insolvency, or store closures[19] - Challenges in identifying and completing property acquisitions, high mortgage rates, and the illiquidity of real estate investments could impede growth and financial flexibility[19][21] - Real estate development activities are subject to risks like unanticipated expenses and delays, while the company's success relies on key personnel whose loss could adversely affect business management and growth strategies[21] - Potential losses from earthquakes in California, Oregon, Washington, and Hawaii may not be fully covered by insurance, and climate change-related laws and regulations could impose additional costs and liabilities[21] - Growth is dependent on external capital sources, which may not always be available on reasonable terms, potentially limiting the ability to meet capital needs or maintain REIT qualification[21] PART I This section covers the company's business operations, risk factors, property details, and legal proceedings ITEM 1. BUSINESS American Assets Trust, Inc. is a vertically integrated REIT owning and developing office, retail, multifamily, and mixed-use properties - American Assets Trust, Inc. is a full-service, vertically integrated, self-administered REIT[23] - As of December 31, 2021, the portfolio comprised 12 retail shopping centers, 11 office properties, a mixed-use property (369-room hotel and retail), and 6 multifamily properties, plus land for development[23] - Core markets include San Diego, San Francisco, Portland, Bellevue, and Oahu, characterized by high barriers to entry and strong real estate fundamentals[23][24] - Key competitive strengths include an irreplaceable portfolio, experienced senior management, extensive market knowledge, and internal growth prospects through development, redevelopment, and repositioning[24] - Business strategies focus on strategic acquisitions in high-barrier-to-entry markets, selective repositioning/redevelopment, disciplined capital recycling, and proactive asset/property management[27] - The company had 208 employees as of December 31, 2021, with 48% female and 52% ethnically diverse, emphasizing a commitment to human capital, safety, and diversity[28] - The company has elected to be taxed as a REIT since December 31, 2011, requiring annual distribution of at least 90% of net taxable income[30] - The company carries comprehensive liability, fire, extended coverage, business interruption, and earthquake insurance, but coverage may not fully cover all losses, especially from natural disasters[31] - Properties are subject to various laws (ADA, FHAA) and environmental regulations, with potential liabilities for non-compliance or contamination, such as ongoing remediation at Del Monte Center[32][34] - The company operates in four business segments: office, retail, multifamily, and mixed-use[38] Top Office Tenants by Annualized Base Rent (2021) | Tenant | % of Total Office Segment Revenues (2021) | | :--------------- | :---------------------------------------- | | Google LLC | 13.6% | | LPL Holdings, Inc.| 14.4% | ITEM 1A. RISK FACTORS This section details significant risks that could adversely affect the company's business, operations, and financial performance - The company's portfolio is geographically concentrated in California, Oregon, Washington, Texas, and Hawaii, making it highly susceptible to adverse economic conditions or natural disasters in these specific markets[46] - Approximately 55% of net operating income in 2021 was from office properties, making the company vulnerable to trends like remote work, which could reduce demand and rental rates for office space[47] Total Debt Outstanding (February 11, 2022) | Metric | Amount (Billions) | | :--------------- | :---------------- | | Total Debt | $1.66 | - Substantial indebtedness ($1.66 billion as of February 11, 2022) exposes the company to default risks, potential inability to borrow or refinance on favorable terms, and restrictive covenants in debt agreements[48][50] - Uncertainty surrounding LIBOR's phase-out and transition to alternative reference rates (like SOFR) may materially affect interest payments and the market value of LIBOR-based securities[51] Largest Office Tenants by Annualized Base Rent (December 31, 2021) | Tenant | % of Total Office Portfolio Annualized Base Rent | | :--------------- | :----------------------------------------------- | | Google LLC | 13.7% | | LPL Holdings, Inc.| 10.3% | | Autodesk, Inc. | 6.9% | | Aggregate Top 3 | 30.9% | - Dependence on significant office tenants (Google LLC, LPL Holdings, Inc., Autodesk, Inc. representing 30.9% of office annualized base rent) and anchor retail tenants (Lowe's, Nordstrom Rack, Sprouts Farmers Market representing 11.3% of retail annualized base rent) creates vulnerability to tenant bankruptcy, insolvency, or store closures[52][57] - Retail leases often contain 'co-tenancy' or 'go-dark' provisions, which, if triggered, could lead to reduced rent, cessation of operations, or lease terminations, negatively impacting retail property performance[58] - The inability to renew leases, lease vacant space, or re-let space as leases expire (8.7% of office/retail square footage expiring in 2022) could increase vacancies and adversely affect financial results[63] - Growth is limited by the availability of external capital on commercially reasonable terms, which is crucial for acquisitions, development, and maintaining REIT distribution requirements[64][110] - Real estate development activities are subject to risks like cost overruns, delays, and failure to achieve expected occupancy/rent levels, particularly exacerbated by the COVID-19 pandemic[93] - The company's success depends on key personnel (Messrs. Rady, Barton, Wyll), and their loss or inability to attract qualified personnel could adversely affect business management and growth strategies[95][96] - Properties in California, Oregon, Washington, and Hawaii are subject to earthquake risks, with insurance coverage potentially insufficient for full losses[100][102] - Climate change laws and regulations, as well as physical impacts like severe weather, could lead to increased costs, compliance obligations, and adverse effects on property values and operations[103][104][105] - Failure to maintain REIT qualification would result in significant adverse tax consequences, including corporate income tax liability and reduced funds for distribution[146][147] - The ongoing COVID-19 pandemic presents highly unpredictable and volatile risks, including reduced rent collections, potential lease concessions, decreased demand for space, and disruptions in financial markets and supply chains[161][163] Risks Related to Our Business and Operations This section outlines operational risks including geographic concentration, substantial debt, dependence on key tenants, and competition - The company's properties are concentrated in California, Oregon, Washington, Texas, and Hawaii, making it highly vulnerable to adverse economic conditions or natural disasters in these regions[46] - Office properties, which generated approximately 55% of net operating income in 2021, are susceptible to reduced demand due to trends like remote work and shared office spaces[47] Total Debt Outstanding (February 11, 2022) | Metric | Amount (Billions) | | :--------------- | :---------------- | | Total Debt | $1.66 | - Substantial debt ($1.66 billion as of Feb 11, 2022) poses risks of insufficient cash flow for payments, inability to borrow or refinance, forced property dispositions, and potential default on debt obligations[48][50] - Uncertainty regarding the phasing out of LIBOR and the transition to alternative reference rates (SOFR) may adversely affect interest rates on variable debt and the market value of LIBOR-based securities[51] Largest Office Tenants by Annualized Base Rent (December 31, 2021) | Tenant | % of Total Office Portfolio Annualized Base Rent | | :--------------- | :----------------------------------------------- | | Google LLC | 13.7% | | LPL Holdings, Inc.| 10.3% | | Autodesk, Inc. | 6.9% | | Aggregate Top 3 | 30.9% | - The company relies on significant tenants in its office and retail properties, and their financial distress or lease terminations could severely impact income[52][54][57] - Retail leases with 'co-tenancy' or 'go-dark' provisions can lead to reduced rent or early lease terminations if anchor tenants or occupancy levels are not maintained[58] - Difficulty in identifying and completing property acquisitions, or facing intense competition, may impede growth strategies[59][62] - Inability to renew leases or re-let vacant space (8.7% of office/retail square footage expiring in 2022) at favorable rates could increase vacancies and negatively impact financial performance[63] - Access to external capital is critical for growth, and unfavorable market conditions could limit financing, impacting acquisitions, developments, and REIT distribution requirements[64][66][110] - Mortgage debt obligations expose the company to foreclosure risks, potentially leading to loss of investment and taxable income without cash proceeds[67] - Future acquisitions may not yield expected returns due to competition, integration challenges, or unforeseen liabilities[68][69] - Inability to control operating costs, which may increase even if revenues decline, could adversely affect results of operations[70][71] - Balloon payment obligations on some financing arrangements create refinancing risks and could impact cash available for distributions[72][73] - Ineffective hedging against interest rate changes could adversely affect financial condition, while debt agreements restrict business activities like incurring additional debt or making capital expenditures[74][75] - Unsecured indebtedness is effectively subordinated to secured debt, reducing amounts available for payment in case of bankruptcy or liquidation[76] - Investments in mortgage receivables carry risks of borrower default, lower property values, and subordination to other liens[77] - Adverse economic and geopolitical conditions, including credit market dislocations, can decrease demand for space, reduce property values, and limit financing availability[78] - The retail environment faces risks from economic weakness, consumer spending levels, competition from discount and internet retailers, and the ongoing impact of COVID-19, affecting market rents and leasing ability[79][81] - Significant competition in the leasing market may lead to lower occupancy, reduced rental rates, and increased concessions or tenant improvements[82][83] - Actual rents may be less than asking rents, and lease roll-downs could negatively impact cash flow growth[84] - Acquisitions through tax-deferred contribution transactions may result in stockholder dilution and limit the ability to sell or refinance assets[85] - Ownership of hospitality properties (Waikiki Beach Walk-Embassy Suites, Santa Fe Park RV Resort) exposes the company to risks inherent in the hospitality and tourism industries, including competition, operating costs, and fluctuating demand[87] - Reliance on third-party management for the Waikiki Beach Walk-Embassy Suites hotel limits control and could impact operational efficiency and revenue[88] - Deterioration of the relationship with the Embassy Suites franchisor or imposition of upgraded operating standards could adversely affect the hotel's business and financial results[89][91] - The franchisor's right of first offer for the Waikiki Beach Walk-Embassy Suites hotel may limit the company's ability to obtain the highest possible sale price[92] - Real estate development activities are subject to risks such as unanticipated expenses, construction delays, and failure to achieve expected occupancy/rent levels, which could adversely affect financial condition[93] - The company's success depends on key personnel (Messrs. Rady, Barton, Wyll), and their loss or inability to attract and retain qualified personnel could adversely affect business management and growth strategies[95][96] - Mr. Rady's involvement in outside businesses may interfere with his ability to devote full time and attention to the company's affairs[97] - Ongoing or future litigation could result in significant defense costs and judgments, potentially impacting financial condition and cash flow[98][99] - Properties in California, Oregon, Washington, and Hawaii are subject to earthquake risks, and insurance coverage may not be sufficient to cover full losses[100][102] - Laws and regulations related to climate change could lead to substantial compliance costs, increased energy costs, and retrofit expenditures, potentially impacting business and financial condition[103][104] - Geographic concentration makes the business more vulnerable to natural disasters, severe weather, and climate change impacts, potentially disrupting operations and increasing costs[105] - In the event of substantial property loss, rebuilding to existing specifications may not be possible due to zoning, building codes, and environmental restrictions[107] - Joint venture investments carry risks such as lack of sole decision-making authority, reliance on co-venturers' financial condition, and potential disputes[108] - Increased competition and affordability of residential homes could limit the ability to retain residents, lease apartments, or increase/maintain rents at multifamily properties[109] - Reliance on information technology means any breach, interruption, or security failure could negatively impact business, operations, and financial condition, including the disclosure of personal information[112][117] Risks Related to the Real Estate Industry This section highlights inherent risks within the real estate industry, such as local oversupply, reduced demand, and increased operating costs - Performance and value are subject to real estate industry risks, including local oversupply, reduced demand, adverse financial conditions of buyers/sellers/tenants, vacancies, and increased operating costs (e.g., insurance, taxes)[118][119] - Illiquidity of real estate investments limits the ability to quickly sell properties in response to changing market conditions, potentially hindering the realization of investment objectives[120] - Property taxes may increase due to rate changes or reassessments, adversely impacting cash flows and ability to pay dividends[121] - As a real estate owner, the company could incur significant costs and liabilities related to environmental matters, including contamination cleanup and third-party damages, potentially exceeding property value[122][124] - Properties may contain or develop harmful mold or other air quality issues, leading to costly remediation and potential liability for adverse health effects[125] - Significant costs may be incurred to comply with various federal, state, and local laws, regulations, and covenants (e.g., ADA, FHAA), and changes in these requirements could necessitate unanticipated expenditures[126][128] Risks Related to Our Organizational Structure This section addresses risks from the company's organizational structure, including significant influence by affiliates and potential conflicts of interest - Ernest S. Rady and his affiliates own approximately 33.9% beneficial interest on a fully diluted basis, allowing them to significantly influence stockholder actions and corporate transactions[129] - Conflicts of interest may arise between the interests of stockholders and Operating Partnership unitholders, as the general partner's fiduciary duties may prioritize the company's interests[130][131] - The company's charter and bylaws, along with Maryland law, contain provisions (e.g., ownership limits, board's power to issue stock) that may delay, defer, or prevent a change of control transaction[132][133][134][136] - Provisions in the Operating Partnership agreement can also delay or complicate unsolicited acquisitions or changes in control[137] - The board of directors can change investment and financing policies without stockholder approval, potentially leading to higher leverage and increased default risk[138][140] - Rights of stockholders to take action against directors and officers are limited by Maryland law, potentially restricting recovery for actions taken in good faith[141] - As a holding company, American Assets Trust, Inc. relies on distributions from the Operating Partnership to pay liabilities, and stockholder interests are structurally subordinated to the Operating Partnership's obligations[142] - The Operating Partnership may issue additional units to third parties without stockholder consent, diluting the company's ownership and distributions[143] - The operating structure exposes the company to increased hotel operating expenses, which could adversely affect the TRS lessee's ability to pay rent[144] - Future sales of common stock or units by directors and officers (or their pledgees) due to margin calls or foreclosures could adversely affect stock price and potentially result in a loss of company control[145] Risks Related to Our Status as a REIT This section details critical risks associated with maintaining REIT status, including adverse tax consequences and distribution requirements - Failure to maintain REIT qualification would result in significant adverse tax consequences, including corporate income tax, increased state/local taxes, and a four-year disqualification period, substantially reducing funds for distribution[146][147] - REIT qualification involves complex Code provisions and factual determinations, and changes in legislation or interpretations could adversely affect the company's status or investment desirability[147][159] - If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, the company would likely cease to qualify as a REIT and face corporate income tax[148][150] - Asset tests limit the ability to own taxable REIT subsidiaries (TRSs), and transactions with TRSs not conducted on arm's length terms could incur a 100% penalty tax[151] - To maintain REIT status, the company must distribute at least 90% of net taxable income, potentially forcing it to borrow funds during unfavorable market conditions or dispose of assets at inopportune times[152][158] - Future dividends may be payable partly in common stock, requiring stockholders to pay tax in excess of cash received, potentially leading to stock sales and adverse effects on trading price[153][155] - REIT dividends generally do not qualify for reduced tax rates available for other dividends, potentially making REIT investments less attractive to certain investors[156] - The 100% penalty tax on 'prohibited transactions' (sales of property held primarily for sale) may limit the company's ability to engage in certain sales for federal income tax purposes[157] The ongoing COVID-19 pandemic and governmental restrictions intended to prevent its spread could adversely impact our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. The COVID-19 pandemic and related restrictions continue to pose unpredictable risks to the company's business, operations, and liquidity - The COVID-19 pandemic and related restrictions (quarantines, travel bans, 'stay-at-home' orders) have significantly impacted global economic activity and financial markets, with unpredictable future effects on the company[161] - The company provided lease concessions (rent deferrals and abatements) to certain tenants, primarily in the retail segment, amounting to approximately 1% of contracted rent for 2021[161] - Key adverse impacts include financial condition of tenants, ability to collect rent, need to defer/forgive rent, decreased demand for office/retail space due to remote work, and disruptions in financial markets and supply chains[161][163] ITEM 1B. UNRESOLVED STAFF COMMENTS The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[164] ITEM 2. PROPERTIES The company's operating portfolio consists of 30 properties across office, retail, multifamily, and mixed-use segments, totaling 7.1 million square feet - As of December 31, 2021, the operating portfolio comprised 30 properties: 12 retail shopping centers, 11 office properties, a mixed-use property (hotel and retail), and 6 multifamily properties[166] Portfolio Composition (December 31, 2021) | Property Type | Net Rentable Square Feet (Office/Retail) | Residential Units (incl. RV spaces) | Hotel Rooms | | :------------ | :--------------------------------------- | :---------------------------------- | :---------- | | Total | ~7.1 million | 2,112 | 369 | - The company also owned land at three properties classified as held for development and construction in progress[166] Office Portfolio Summary (December 31, 2021) | Metric | Value | | :------------------------- | :------------- | | Number of Buildings | 37 | | Net Rentable Square Feet | 3,895,812 | | Percentage Leased | 90.4% | | Annualized Base Rent | $181,664,229 | | Annualized Base Rent per Leased Square Foot | $51.58 | Retail Portfolio Summary (December 31, 2021) | Metric | Value | | :------------------------- | :------------- | | Number of Buildings | 107 | | Net Rentable Square Feet | 3,092,616 | | Percentage Leased | 92.6% | | Annualized Base Rent | $71,756,002 | | Annualized Base Rent per Leased Square Foot | $25.06 | Mixed-Use Portfolio Summary (December 31, 2021) | Metric | Value | | :------------------------- | :------------- | | Retail Net Rentable Square Feet | 93,925 | | Retail Percent Leased | 89.6% | | Hotel Units | 369 | | Hotel Average Occupancy | 66.4% | | Hotel Average Daily Rate | $278.87 | | Hotel Revenue per Available Room | $185.13 | Multifamily Portfolio Summary (December 31, 2021) | Metric | Value | | :------------------------- | :------------- | | Number of Buildings | 121 | | Units | 2,112 | | Percentage Leased | 96.0% | | Annualized Base Rent | $53,557,320 | | Average Monthly Base Rent per Leased Unit | $2,201 | - The operating portfolio had approximately 810 office and retail leases and 1,910 residential leases as of December 31, 2021[175] Top Tenants by Annualized Base Rent (Combined Office, Retail, Mixed-Use Retail, December 31, 2021) | Tenant | Annualized Base Rent | % of Total Annualized Base Rent | | :--------------- | :------------------- | :------------------------------ | | Google LLC | $24,904,188 | 9.6% | | LPL Holdings, Inc.| $18,724,794 | 7.2% | | Autodesk, Inc. | $12,615,795 | 4.9% | | Smartsheet, Inc. | $6,664,187 | 2.6% | | VMware, Inc | $5,584,938 | 2.1% | | Total Top 5 | $68,493,902 | 26.4% | Geographic Diversification (Office, Retail, Mixed-Use Retail, December 31, 2021) | Region | Net Rentable Square Feet | Percentage of Total Net Rentable Square Feet | | :------------------ | :----------------------- | :------------------------------------------- | | Southern California | 2,885,421 | 40.7% | | Northern California | 1,231,010 | 17.4% | | Oregon | 920,478 | 13.0% | | Washington | 933,653 | 13.2% | | Texas | 588,148 | 8.3% | | Hawaii | 523,643 | 7.4% | | Total | 7,082,353 | 100.0% | Segment Diversification by Property Operating Income (Year Ended December 31, 2021) | Segment | Number of Properties | Property Operating Income (thousands) | Percentage of Property Operating Income | | :---------- | :------------------- | :------------------------ | :-------------------------------------- | | Office | 11 | $136,133 | 55.4% | | Retail | 12 | $66,679 | 27.1% | | Mixed-Use | 1 | $29,104 | 11.8% | | Multifamily | 6 | $14,138 | 5.7% | | Total | 30 | $246,054 | 100.0% | Lease Expirations (Office, Retail, Mixed-Use Retail, December 31, 2021) | Year of Lease Expiration | Square Footage of Expiring Leases | Percentage of Portfolio Net Rentable Square Feet | Annualized Base Rent | | :----------------------- | :-------------------------------- | :----------------------------------------------- | :------------------- | | Available | 613,558 | 8.7% | $— | | Month to Month | 66,621 | 0.9% | $1,077,249 | | 2022 | 614,263 | 8.7% | $23,525,088 | ITEM 3. LEGAL PROCEEDINGS The company is not currently involved in any material legal proceedings that would significantly impact its business or financial condition - The company is not currently a party to any legal proceedings deemed material or expected to have a material adverse effect on its business, financial condition, or results of operations[185] - The company expects to be party to various lawsuits and claims in the ordinary course of business but intends to vigorously defend itself[185] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Item 4. Mine Safety Disclosures is not applicable to the registrant[186] PART II This section details market information, selected financial data, management's discussion, and financial statements ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES This section covers common stock market, stockholder matters, and equity security purchases, including dividend policy and stock performance - American Assets Trust, Inc.'s common stock is listed on the NYSE under the symbol 'AAT'[188] - As of February 4, 2022, there were 81 stockholders of record for American Assets Trust, Inc.'s common stock and 20 holders of record for American Assets Trust, L.P.'s operating partnership units (which have no established trading market)[188][189] - The company intends to continue paying regular quarterly dividends to common stockholders and Operating Partnership unitholders to meet REIT distribution requirements and minimize income/excise taxes[190] - No unregistered equity securities were sold, and no equity securities were purchased by the issuer during 2021[191] - A stock performance graph compares the cumulative total return of the company's common stock against the S&P 500 Index and the SNL US REIT Equity Index from December 31, 2016, through December 31, 2021[195][196] ITEM 6. SELECTED FINANCIAL DATA This section provides a five-year summary of selected consolidated financial data, including revenues, net income, and FFO Selected Statement of Operations Data (in thousands) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :-------------------------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Total revenues | $375,828 | $344,573 | $366,741 | $330,867 | $314,983 | | Total operating expenses | $275,959 | $255,992 | $253,056 | $251,332 | $221,337 | | Operating income | $99,869 | $88,581 | $113,685 | $79,535 | $93,646 | | Interest expense | $(58,587) | $(53,440) | $(54,008) | $(52,248) | $(53,848) | | Net income | $36,593 | $35,588 | $60,188 | $27,202 | $40,132 | | Net income attributable to American Assets Trust, Inc. stockholders | $28,376 | $27,660 | $45,718 | $19,686 | $29,077 | | Basic earnings per share | $0.47 | $0.46 | $0.84 | $0.42 | $0.62 | | Diluted earnings per share | $0.47 | $0.46 | $0.84 | $0.42 | $0.62 | | Dividends declared per share | $1.16 | $1.00 | $1.14 | $1.09 | $1.05 | Selected Balance Sheet Data (in thousands) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :------------------------------------ | :---------- | :---------- | :---------- | :---------- | :---------- | | Net real estate | $2,681,981 | $2,492,734 | $2,523,475 | $2,039,853 | $2,076,707 | | Total assets | $3,017,927 | $2,817,309 | $2,790,333 | $2,198,250 | $2,259,864 | | Notes payable and line of credit | $1,649,203 | $1,406,751 | $1,357,659 | $1,290,772 | $1,325,020 | | Total liabilities | $1,807,804 | $1,563,903 | $1,496,661 | $1,395,779 | $1,415,720 | | Stockholders' equity | $1,238,964 | $1,271,442 | $1,313,917 | $802,977 | $833,710 | Funds from Operations (FFO) (in thousands) | Metric | 2021 | 2020 | 2019 | 2018 | 2017 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Funds from operations (FFO) | $152,899 | $143,880 | $155,760 | $134,295 | $123,410 | | FFO attributable to common stock and units | $152,342 | $143,503 | $155,384 | $133,990 | $123,174 | - FFO is a non-GAAP measure used to evaluate operating performance, excluding gains/losses from property sales and real estate depreciation/amortization[200][326] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes the company's financial condition, operations, and liquidity, highlighting business model, strategies, and COVID-19 impact - The company is a full-service, vertically integrated REIT operating in high-barrier-to-entry markets, with a portfolio of office, retail, multifamily, and mixed-use properties[204] - Growth strategies include capitalizing on acquisition opportunities, repositioning/redevelopment of properties, disciplined capital recycling, and proactive asset/property management[206][207] - The COVID-19 pandemic has negatively impacted tenant operations, particularly in retail, leading to rent deferrals and abatements, though the company maintains strong financial condition and liquidity[209][211] Rent Collection Rates (Q4 2021) | Segment | Collection Rate | | :----------------------- | :-------------- | | Office | ~100% | | Retail (incl. Waikiki) | 97% | | Multifamily | 97% | | Deferred Rent Repayments | 96% | - Same-store and redevelopment same-store metrics are used to evaluate performance, excluding properties under significant development or recent acquisition[212][213][214] Same-Store Composition (Number of Properties) | Category | 2021 | 2020 | 2019 | | :----------------- | :--- | :--- | :--- | | Same-Store | 26 | 24 | 25 | | Non-Same Store | 4 | 4 | 3 | | Total Properties | 30 | 28 | 28 | | Redevelopment Same-Store | 27 | 26 | 26 | | Total Development Properties | 3 | 3 | 3 | - Revenue is derived from rental income (base rent, cost reimbursements, percentage rents) and other property income (parking, fees, hotel services)[219] Office Segment Leasing Activity (Year Ended December 31, 2021) | Metric | Value | | :----------------------------------- | :------------- | | Square Feet Leased | 255,485 | | Average Rent (initial year) | $49.05/sq ft | | Comparable Leases (cash basis rent increase) | 8.2% | | Comparable Leases (straight-line rent increase) | 14.2% | | Tenant Improvements & Incentives (new leases) | $50.30/sq ft | Retail Segment Leasing Activity (Year Ended December 31, 2021) | Metric | Value | | :----------------------------------- | :------------- | | Square Feet Leased | 408,397 | | Average Rent (initial year) | $40.30/sq ft | | Comparable Leases (cash basis rent decrease) | 11.2% | | Comparable Leases (straight-line rent decrease) | 5.4% | | Tenant Improvements & Incentives (new leases) | $59.59/sq ft | - Multifamily properties were 96.0% leased as of December 31, 2021, with an average monthly base rent of $2,201 per leased unit[223] - The mixed-use property's retail portion was 89.6% leased, and the hotel had an average occupancy of 66.4% for 2021[224] - Critical accounting policies involve significant estimates for revenue recognition (straight-line rent, collectability), real estate valuation (purchase price allocation, useful lives), and capitalized costs (development, interest)[231][233][237][240][241][245][247] Capitalized Costs (in thousands) | Category | 2021 | 2020 | | :------------------------------------- | :---------- | :---------- | | Development & Redevelopment Activities | $53,300 | $8,400 | | Other Property Improvements | $40,200 | $56,700 | | Interest Costs (Development & Redevelopment) | $3,000 | $1,100 | - No impairment charges were recorded for real estate properties in 2021, 2020, or 2019[256] - In 2021, the company acquired Eastgate Office Park ($125 million) and Corporate Campus East III ($84 million) in Bellevue, Washington, using cash on hand[260][261] - In 2019, the company acquired La Jolla Commons ($525 million) and sold Solana Beach - Highway 101 ($9.4 million)[263][264] Consolidated Results of Operations (Year Ended December 31, 2021 vs. 2020, in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------------------------------- | :---------- | :---------- | :---------- | :------- | | Total property revenues | $375,828 | $344,573 | $31,255 | 9% | | Total property expenses | $129,774 | $121,119 | $8,655 | 7% | | Net operating income | $246,054 | $223,454 | $22,600 | 10% | | General and administrative | $(29,879) | $(26,581) | $(3,298) | 12% | | Depreciation and amortization | $(116,306) | $(108,292) | $(8,014) | 7% | | Interest expense | $(58,587) | $(53,440) | $(5,147) | 10% | | Loss on early extinguishment of debt | $(4,271) | $— | $(4,271) | 100% | | Net income | $36,593 | $35,588 | $1,005 | 3% | | Net income attributable to American Assets Trust, Inc. stockholders | $28,376 | $27,660 | $716 | 3% | - Total property revenue increased by $31.3 million (9%) in 2021, driven by new office acquisitions and higher rents in office and mixed-use segments, partially offset by retail lease concessions[271][272][273] - Total property expenses increased by $8.7 million (7%) in 2021, mainly due to new office acquisitions and increases in utilities, repairs, maintenance, and insurance across segments as COVID-19 restrictions eased[278][279][281][282][283][284] - Net operating income (NOI) increased by $22.6 million (10%) in 2021, primarily from new office acquisitions and improved performance in retail and mixed-use segments[288][289][290] - General and administrative expenses increased by $3.3 million (12%) in 2021 due to higher employee-related costs and increased insurance/legal costs[291] - Depreciation and amortization increased by $8.0 million (7%) in 2021, mainly from new office acquisitions and tenant improvements[292][293] - Interest expense increased by $5.1 million (10%) in 2021, driven by the issuance of 3.375% Senior Notes, partially offset by debt repayments and capitalized interest[294] - A $4.3 million loss on early extinguishment of debt was recorded in 2021 due to the repayment of Senior Guaranteed Notes, Series A[295] - American Assets Trust, Inc. (unconsolidated) relies on distributions from the Operating Partnership to pay dividends and meet obligations, with its liquidity dependent on the Operating Partnership's cash flow[298][300][301][302][303] - Short-term liquidity needs include dividends, operating expenses, debt service, and capital expenditures, met by cash from operations and credit facility borrowings[304][312] - Long-term liquidity needs for debt repayment, acquisitions, and capital improvements are met by cash from operations, long-term debt, and equity issuances[312] Contractual Obligations (in thousands) | Obligation Type | Total | Within 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | | :------------------------------ | :------------ | :------------ | :------------ | :------------ | :---------------- | | Principal payments on long-term indebtedness | $1,661,000 | $211,000 | $250,000 | $200,000 | $1,000,000 | | Interest payments | $347,187 | $58,668 | $100,148 | $76,556 | $111,815 | | Operating lease | $33,229 | $3,232 | $6,756 | $7,115 | $16,126 | | Tenant-related commitments | $22,963 | $18,013 | $4,273 | $677 | $— | | Construction-related commitments | $115,335 | $109,420 | $5,915 | $— | $— | | Total | $2,179,714| $400,333 | $367,092 | $284,348 | $1,127,941 | - The company has no off-balance sheet arrangements[318] Cash Flow Summary (Year Ended December 31, 2021 vs. 2020, in thousands) | Cash Flow Activity | 2021 | 2020 | Change | | :--------------------------- | :---------- | :---------- | :---------- | | Net cash provided by operating activities | $168,329 | $126,985 | +$41,344 | | Net cash used in investing activities | $(312,278) | $(69,077) | $(243,201) | | Net cash provided by (used in) financing activities | $144,424 | $(28,310) | +$172,734 | - Net Operating Income (NOI) is a non-GAAP measure used to evaluate property performance, excluding corporate-level expenses and non-operating items[323] NOI Reconciliation to Net Income (in thousands) | Metric | 2021 | 2020 | 2019 | | :-------------------------------------------------------- | :---------- | :---------- | :---------- | | Net operating income | $246,054 | $223,454 | $234,761 | | General and administrative | $(29,879) | $(26,581) | $(24,871) | | Depreciation and amortization | $(116,306) | $(108,292) | $(96,205) | | Interest expense | $(58,587) | $(53,440) | $(54,008) | | Loss on early extinguishment of debt | $(4,271) | $— | $— | | Gain on sale of real estate | $— | $— | $633 | | Other income (expense), net | $(418) | $447 | $(122) | | Net income | $36,593 | $35,588 | $60,188 | - Funds from Operations (FFO) is a non-GAAP measure, calculated per NAREIT standards, to assess operational performance by excluding non-cash items like depreciation and gains/losses from property sales[326][327] FFO Reconciliation to Net Income (in thousands) | Metric | 2021 | 2020 | 2019 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Net income | $36,593 | $35,588 | $60,188 | | Plus: Real estate depreciation and amortization | $116,306 | $108,292 | $96,205 | | Less: Gain on sale of real estate | $— | $— | $(633) | | Funds from operations, as defined by NAREIT | $152,899| $143,880| $155,760| | FFO attributable to common stock and units | $152,342 | $143,503 | $155,384 | | FFO per diluted share/unit | $2.00 | $1.89 | $2.20 | - The company believes contractual rent increases and expense escalations in leases, along with short-term multifamily leases and daily hotel room rate adjustments, mitigate exposure to inflation[330] Overview This section introduces the company as a vertically integrated REIT, outlining its portfolio, growth strategies, and COVID-19 impact - American Assets Trust, Inc. is a full-service, vertically integrated, self-administered REIT, owning, operating, acquiring, and developing high-quality office, retail, multifamily, and mixed-use properties[204] - As of December 31, 2021, the portfolio included 11 office properties, 12 retail shopping centers, a mixed-use property (hotel and retail), and 6 multifamily properties, with additional land held for development[204] - The company's core markets are San Diego, San Francisco, Portland, Bellevue, and Oahu, characterized as attractive, high-barrier-to-entry locations[204] - American Assets Trust, Inc. is the sole general partner of its Operating Partnership, owning 78.8% as of December 31, 2021, and consolidates its assets, liabilities, and results of operations[204] - The company has a Taxable REIT Subsidiary (American Assets Services, Inc.) to provide non-customary services and engage in activities not permitted directly by a REIT, subject to federal and state income taxes[205] - Primary business objectives are to increase operating cash flows, generate long-term growth, and maximize stockholder value through same-store growth, property development/redevelopment, and strategic acquisitions[206][207] - The COVID-19 pandemic's impact is closely monitored, with uncertainties regarding its scope, severity, duration, and economic effects on tenants and financial markets[209] Rent Collection Rates (Q4 2021) | Segment | Collection Rate | | :----------------------- | :-------------- | | Office | ~100% | | Retail (incl. Waikiki) | 97% | | Multifamily | 97% | | Deferred Rent Repayments | 96% | - The company uses 'same-store' and 'redevelopment same-store' metrics to evaluate performance, excluding properties under significant development, acquisition, or discontinued operations[212][213][214] Same-Store Composition (Number of Properties) | Category | 2021 | 2020 | 2019 | | :----------------- | :--- | :--- | :--- | | Same-Store | 26 | 24 | 25 | | Non-Same Store | 4 | 4 | 3 | | Total Properties | 30 | 28 | 28 | | Redevelopment Same-Store | 27 | 26 | 26 | | Total Development Properties | 3 | 3 | 3 | Revenue Base The company's revenue primarily consists of rental income and other property income, with varied lease structures across segments - Rental income includes scheduled rent, straight-line rent adjustments, and amortization of above/below market rents[219] - Other property revenues include parking income, lease termination fees, late fees, and storage rents[219] - The office portfolio (3.9 million sq ft) was 90.4% leased as of December 31, 2021, contributing 49.6% of total revenue in 2021, primarily through full-service gross or modified gross leases[220] - The retail portfolio (3.1 million sq ft) was 92.6% leased as of December 31, 2021, contributing 25.2% of total revenue in 2021, primarily through triple-net leases[222] - The multifamily portfolio (2,112 units) was 96.0% leased as of December 31, 2021, contributing 13.9% of total revenue in 2021, with average monthly base rent of $2,201[223] - The mixed-use property (94,000 sq ft retail, 369-room hotel) contributed 11.3% of total revenue in 2021, with the retail portion 89.6% leased and the hotel at 66.4% average occupancy[224] - The COVID-19 pandemic has had a meaningful negative impact on certain tenants' operations and ability to pay rent, particularly in the retail sector[225] Leasing Leasing activities in 2021 showed varied performance, with office leases seeing rent increases and retail leases experiencing decreases - Same-store growth is primarily driven by increases in rental rates on new leases and renewals, and changes in portfolio occupancy[225] Office Leasing Activity (Twelve Months Ended December 31, 2021) | Metric | Value | | :----------------------------------- | :------------- | | Total Leases Signed | 52 | | Total Square Feet | 255,485 | | Comparable Space Leases | 189,531 sq ft | | Average Rental Rate Increase (Cash Basis) | 8.2% | | Average Rental Rate Increase (Straight-Line Basis) | 14.2% | | Tenant Improvements & Incentives (Comparable New Leases) | $50.30/sq ft | | Tenant Improvements & Incentives (Comparable Renewal Leases) | $2.33/sq ft | Retail Leasing Activity (Twelve Months Ended December 31, 2021) | Metric | Value | | :----------------------------------- | :------------- | | Total Leases Signed | 105 | | Total Square Feet | 408,397 | | Comparable Space Leases | 333,338 sq ft | | Average Rental Rate Decrease (Cash Basis) | 11.2% | | Average Rental Rate Decrease (Straight-Line Basis) | 5.4% | | Tenant Improvements & Incentives (Comparable New Leases) | $59.59/sq ft | | Tenant Improvements & Incentives (Comparable Renewal Leases) | $1.61/sq ft | - The change in rental income on comparable space leases is influenced by market rates, location, tenant creditworthiness, space use, and capital investment[229] - There is a risk that new tenants may not take possession or pay contractual rent due to various operational or financial issues[230] Critical Accounting Policies and Estimates This section details critical accounting policies and estimates requiring significant management judgment, impacting financial results - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, disclosures, revenues, and expenses[231] - Revenue recognition for operating leases involves straight-line recognition of base rents, treatment of tenant improvement reimbursements as additional rent, and recognition of percentage rents based on sales levels[233] - Other property income (parking, fees, hotel sales) is recognized when performance obligations are satisfied, and lease termination fees are recognized upon termination or satisfaction of conditions[234][236] - Estimates of collectability for current and straight-line rent receivables require significant judgment, considering economic trends, tenant bankruptcies, and financial performance[237][238] - Lease concessions due to COVID-19 (rent deferrals and abatements) were accounted for as lease modifications, totaling approximately $3.9 million (1% of contracted rent) in 2021[239] - Real estate assets (land, buildings, improvements) are recorded at cost, with depreciation computed using the straight-line method over estimated useful lives (30-40 years for buildings)[240] - Acquisition costs are allocated to land, buildings, and intangibles (in-place leases, above/below market leases) based on estimated fair values, impacting depreciation and rental income recognition[241][242] - External and internal costs related to real estate development and redevelopment, including interest, are capitalized until the property is substantially complete and available for occupancy[245][247] Segment Capital Expenditures (in thousands) | Segment | 2021 Total Capital Expenditures | 2020 Total Capital Expenditures | | :---------------- | :------------------------------ | :------------------------------ | | Office Portfolio | $93,116 | $52,882 | | Retail Portfolio | $7,232 | $8,596 | | Multifamily Portfolio | $5,841 | $3,897 | | Mixed-Use Portfolio | $1,541 | $3,702 | | Total | $107,730 | $69,077 | - Capital expenditures increased in 2021, primarily due to tenant buildouts at The Landmark at One Market and First & Main, new development at La Jolla Commons Tower 3, and modernization of One Beach Street[251][252][253] - Derivative instruments (interest rate swaps) are used to manage variable interest rate risk and are recorded at fair value, with effective portions recognized in other comprehensive income[254] - Impairment is recognized for properties held for use when expected undiscounted cash flows are less than carrying amount, requiring estimates of future cash flows and market conditions[255] - The company elected REIT taxation status, requiring annual distribution of at least 90% of net taxable income, while its taxable REIT subsidiary is subject to federal and state income taxes[258][259] Property Acquisitions and Dispositions In 2021, the company acquired two office campuses in Bellevue, Washington, for approximately $209 million, with no dispositions - On July 7, 2021, the company acquired Eastgate Office Park (280,000 sq ft office campus) in Bellevue, Washington, for approximately $125 million, using cash on hand[260] - On September 10, 2021, the company acquired Corporate Campus East III (161,000 sq ft office campus) in Bellevue, Washington, for approximately $84 million, using cash on hand[261] - There were no property dispositions in 2021[261] - There were no acquisitions or dispositions in 2020[262] - On June 20, 2019, the company acquired La Jolla Commons (two office towers, 724,000 sq ft) in San Diego, California, for approximately $525 million[263] - On May 22, 2019, the company sold Solana Beach - Highway 101 for approximately $9.4 million, resulting in a gain on sale of approximately $0.6 million[264] Results of Operations Consolidated results for 2021 showed increased total property revenues and net operating income, driven by acquisitions and improved segment performance Consolidated Results of Operations (Year Ended December 31, 2021 vs. 2020, in thousands) | Metric | 2021 | 2020 | Change | % Change | | :-------------------------------------------------------- | :---------- | :---------- | :---------- | :------- | | Total property revenues | $375,828 | $344,573 | $31,255 | 9% | | Total property expenses | $129,774 | $121,119 | $8,655 | 7% | | Net operating income | $246,054 | $223,454 | $22,600 | 10% | | General and administrative | $(29,879) | $(26,581) | $(3,298) | 12% | | Depreciation and amortization | $(116,306) | $(108,292) | $(8,014) | 7% | | Interest expense | $(58,587) | $(53,440) | $(5,147) | 10% | | Loss on early extinguishment of debt | $(4,271) | $— | $(4,271) | 100% | | Net income | $36,593 | $35,588 | $1,005 | 3% | | Net income attributable to American Assets Trust, Inc. stockholders | $28,376 | $27,660 | $716 | 3% | - Total property revenue increased by $29.9 million (9%) to $360.2 million in 2021, driven by new office acquisitions and higher annualized base rents in same-store office properties[272] - Retail rental revenue increased by $7.0 million (8%) due to tenants reverting to contractual rent and higher real estate cost reimbursements[273] - Multifamily rental revenue increased by $1.6 million (3%) due to higher average occupancy (92.1% in 2021 vs. 88.5% in 2020)[273] - Mixed-use rental revenue increased by $11.3 million (45%) due to increased tourism and hotel occupancy in Hawaii[273] - Other property income increased by $1.4 million (10%) to $15.6 million, primarily from mixed-use properties due to increased tourism, partially offset by decreases in office and retail segments[274][277] - Total property expenses increased by $8.7 million (7%) to $129.8 million, driven by new office acquisitions and increases in utilities, repairs, maintenance, and insurance as COVID-19 restrictions eased[278][279][281][282][283][284] - Real estate tax expense increased by $0.9 million (2%) to $42.8 million, mainly due to new office acquisitions and higher assessed values in office and multifamily segments, partially offset by a decrease in mixed-use taxes[285][286][287] - Property operating income increased by $22.6 million (10%) to $246.1 million, primarily from new office acquisitions and improved performance in retail and mixed-use segments[288][289][290] - General and administrative expenses increased by $3.3 million (12%) due to higher employee-related costs and increased insurance/legal costs[291] - Depreciation and amortization expense increased by $8.0 million (7%) due to new office acquisitions and tenant improvements[292][293] - Interest expense increased by $5.1 million (10%) due to the issuance of 3.375% Senior Notes, partially offset by debt repayments and capitalized interest[294] - A $4.3 million loss on early extinguishment of debt was recorded in 2021 due to the repayment of Senior Guaranteed Notes, Series A[295] - Other expense, net increased by $0.9 million, primarily due to higher income tax expense for the taxable REIT subsidiary and lower interest/investment income[296] Liquidity and Capital Resources of American Assets Trust, Inc. American Assets Trust, Inc. operates as a holding company, relying on Operating Partnership distributions to fund dividends and obligations - American Assets Trust, Inc. operates as a holding company, with its business conducted primarily through the Operating Partnership[299] - The company's only material asset is its ownership of partnership interests in the Operating Partnership (78.8% as of Dec 31, 2021), and it has no direct indebtedness[300][301] - The company relies on distributions from the Operating Partnership to pay dividends on its common stock and meet other obligations[300][302] - The company guarantees some of the Operating Partnership's debt, including its credit facility and carve-out guarantees on property-level debt[302] - Short-term liquidity requirements include future dividends, operating expenses, interest expense, and capital expenditures[304] - To maintain REIT status, the company must distribute at least 90% of its REIT taxable income annually, which may necessitate raising capital in equity markets[306][307] - In December 2021, the company established a new at-the-market (ATM) equity program to offer and sell up to $250.0 million in common stock, with proceeds intended for development, debt repayment, acquisitions, or general corporate purposes[310][311] Liquidity and Capital Resources of American Assets Trust, L.P. The Operating Partnership generates significant cash from operations, used for expenses, debt service, and distributions, maintaining a conservative capital structure - The Operating Partnership generates significant cash from operations, used for operating expenses, capital expenditures, debt service, and distributions[312] - Short-term liquidity requirements are met through net cash from operations, existing cash reserves, and borrowings under its third amended and restated credit facility[312] - Long-term liquidity needs (debt repayment, property acquisitions, capital improvements) are funded by net cash from operations, long-term secured/unsecured indebtedness, and equity/debt securities issuances[312] - The Operating Partnership aims to maintain a conservative capital structure and investment-grade debt ratings (Moody's Baa3, S&P BBB-, Fitch BBB)[315] - Current cash flows from operations, cash on hand, the 2021 ATM Program, and the credit facility are believed to be sufficient to finance operations, debt service, and capital expenditures[316] Contractual Obligations As of December 31, 2021, total contractual obligations amounted to approximately $2.18 billion, including princip