Introduction
American Assets Trust, Inc. is a diversified real estate investment trust (REIT) that owns, operates, acquires, and develops high-quality retail, office, multifamily, and mixed-use properties in some of the nation's most dynamic and high-barrier-to-entry markets, primarily in Southern California, Northern California, Washington, Oregon, Texas, and Hawaii. Despite the economic uncertainties that have plagued the market in recent years, American Assets Trust has demonstrated remarkable resilience, leveraging its strategic positioning and operational excellence to navigate the challenges and deliver consistent performance.
Company History
Founded in 1967, American Assets Trust has a rich history spanning over five decades. The company was originally established as a family-owned business, focused on developing and managing commercial real estate properties in Southern California. Over the years, the company has evolved, expanding its geographic reach and diversifying its asset portfolio to capitalize on opportunities in high-growth markets across the western United States. American Assets Trust, Inc. was formally established on July 16, 2010, as a Maryland corporation, but did not commence operating activities until its initial public offering on January 19, 2011. The company was formed to acquire various controlling and noncontrolling interests in real estate assets owned and/or managed by Ernest S. Rady or his affiliates, including the Ernest Rady Trust. This strategic move allowed the company to consolidate its operations and position itself for future growth in the public markets.
Since its IPO, American Assets Trust has grown significantly, becoming a full-service, vertically integrated, and self-administered REIT. The company's growth strategy has been supported by the capital raised through its initial public offering, which provided funds for acquiring and developing high-quality real estate assets in its target markets. Additionally, American Assets Trust has strategically financed its operations and expansion over time, taking advantage of favorable debt markets to issue senior unsecured notes and secure revolving credit and term loan facilities.
Throughout its history, American Assets Trust has faced various challenges common to REITs, including navigating changing interest rate environments and economic conditions that impacted its tenants' operations. The company demonstrated its resilience during the COVID-19 pandemic from 2020 through 2022, particularly in the retail sector. Despite these challenges, American Assets Trust has been able to maintain relatively high occupancy levels and increase rental rates across its diversified portfolio through proactive property management and strategic redevelopment efforts.
Portfolio Overview
As of September 30, 2024, American Assets Trust's portfolio consisted of 31 properties, encompassing approximately 7.2 million rentable square feet of retail and office space, 2,110 residential units (including 120 RV spaces), and a 369-room hotel. The company's strategic focus on acquiring, redeveloping, and managing properties in prime locations has been a key driver of its success, allowing it to maintain high occupancy rates and command premium rents across its diversified asset base.
Financial Performance
American Assets Trust's financial performance has been impressive. For the nine months ended September 30, 2024, the company reported total revenue of $344.4 million, a 5% increase compared to the same period in the prior year. Net income attributable to common stockholders for the nine-month period was $47.8 million, or $0.79 per diluted share. Funds from operations (FFO), a widely accepted performance metric in the REIT industry, reached $155.4 million, or $2.03 per diluted share, for the nine-month period.
For the most recent quarter ended September 30, 2024, American Assets Trust reported revenue of $122.81 million, representing a 10.0% increase from $111.20 million in the same quarter of the previous year. Net income for the quarter rose significantly by 41.0% to $16.66 million, compared to $11.78 million in the third quarter of 2023. Operating cash flow (OCF) increased by 16.6% to $52.40 million, while free cash flow (FCF) grew by 18.6% to $27.97 million.
Looking at the full fiscal year 2023, American Assets Trust generated revenue of $441.16 million, with a net income of $64.69 million. The company's operating cash flow for 2023 was $188.75 million, and free cash flow stood at $105.77 million.
Balance Sheet and Liquidity
The company's strong financial position is further evidenced by its healthy balance sheet. As of September 30, 2024, American Assets Trust had $533 million in cash and cash equivalents, and $400 million of available capacity on its revolving line of credit, providing ample liquidity to fund ongoing operations, development projects, and strategic acquisitions. The company's net debt to EBITDA ratio stood at 6.0x on a trailing 12-month basis, well within its target range of 5.5x or below.
American Assets Trust's liquidity position is further strengthened by its third amended and restated credit facility, which provides for aggregate, unsecured borrowings of up to $500 million, consisting of a $400 million revolving line of credit and a $100 million term loan. The company's debt-to-equity ratio was 1.78 as of December 31, 2023, while its current ratio and quick ratio both stood at 1.94 as of the same date.
Portfolio Diversification and Performance
One of the key drivers of American Assets Trust's resilience has been its diversified portfolio, which includes a mix of retail, office, multifamily, and mixed-use properties. This diversification has helped the company mitigate the impact of challenges faced by specific sectors, such as the disruptions caused by the COVID-19 pandemic in the retail and hospitality industries.
In the retail segment, which accounts for approximately 23% of American Assets Trust's total revenue, the company has demonstrated its ability to adapt to evolving consumer trends. The retail portfolio has consistently maintained high occupancy rates, with 94.5% of its retail space leased as of September 30, 2024. Notably, the company has been able to achieve positive leasing spreads, with a 4.4% increase on a cash basis and an 18.7% increase on a straight-line basis for its third-quarter 2024 retail transactions. For the nine months ended September 30, 2024, retail rental revenue increased 3% to $78.79 million compared to the same period in 2023, primarily due to new tenant leases, scheduled rent increases, and tenants reverting back to basic monthly rent. Retail property operating income increased 2.3% to $56.19 million for the same period.
The company's office portfolio, which generates approximately 48% of its total revenue, has also shown resilience. While the office sector has faced headwinds due to the shift towards remote and hybrid work arrangements, American Assets Trust has been able to maintain steady occupancy levels, with its office properties 87% leased as of the end of the third quarter of 2024. The company's strategic focus on high-quality, amenity-rich office properties in desirable locations has been a key factor in its ability to navigate the challenging office market. For the nine months ended September 30, 2024, office rental revenue was $148.28 million, a 2% decrease compared to the same period in 2023. However, office property operating income increased 8.5% to $118.60 million, primarily due to a $11 million lease termination fee received at Torrey Reserve Campus and lower real estate taxes.
In the multifamily segment, which accounts for approximately 15% of American Assets Trust's total revenue, the company has continued to deliver strong performance. As of September 30, 2024, the company's multifamily properties were 90.3% leased, with average monthly base rent of $2.71 per square foot. The company's multifamily portfolio has also contributed to its overall revenue growth, with same-store NOI increasing by 4% year-over-year in the third quarter of 2024. For the nine months ended September 30, 2024, multifamily revenue increased 7% to $46.06 million compared to the same period in 2023, primarily due to an increase in average monthly base rent and occupancy. Multifamily property operating income increased 9.3% to $27.69 million for the same period.
American Assets Trust's mixed-use property, Waikiki Beach Walk, which combines retail and hospitality assets, has faced more significant headwinds due to the pandemic-related disruptions in the travel and tourism industry. However, the company has remained focused on positioning the property for a strong recovery, with occupancy levels in the retail portion of the mixed-use asset reaching 96.3% as of the end of the third quarter of 2024. For the nine months ended September 30, 2024, mixed-use rental revenue increased 1.8% to $42.54 million compared to the same period in 2023, primarily due to an increase in average occupancy. Mixed-use property operating income decreased slightly by 0.3% to $18.08 million, primarily due to an increase in real estate taxes and higher rental expenses.
Geographic Distribution
American Assets Trust's properties are primarily located in Southern California, Northern California, Washington, Oregon, Texas, and Hawaii. Approximately 50% of the company's cash NOI is generated from properties in Southern California, with the San Diego market being a key contributor. This geographic concentration in high-barrier-to-entry markets has been a strategic advantage for the company, allowing it to benefit from strong economic fundamentals and sustained demand for high-quality real estate assets.
Future Outlook
Looking ahead, American Assets Trust remains cautiously optimistic about its future prospects. The company has provided updated guidance for the full year 2024, increasing its FFO per share guidance range to $2.51 to $2.55 per share, with a midpoint of $2.53 per share. This revised guidance represents a 1% increase from the company's previous outlook, primarily driven by stronger-than-expected performance in its retail portfolio, with lower bad debt and operating expenses as well as higher percentage rents.
It's worth noting that excluding one-time litigation settlement income and lease termination fees collected in 2024 (over $22 million in aggregate), the adjusted 2024 FFO guidance midpoint would be $2.24 per share. The company expects the increased net interest expense from the new $525 million bond issuance to reduce FFO by approximately $0.04 per share in 2025 compared to 2024.
American Assets Trust has over $450 million of invested capital in several office development and redevelopment projects, which are expected to contribute over $0.03 per share of FFO once stabilized at 93% occupancy, likely in 2026. The company believes it is possible to perform towards the upper end of the 2024 guidance range, primarily if tenants continue to pay rents and the multifamily portfolio continues to outperform.
However, the company acknowledges the continued economic uncertainty and potential headwinds facing its various asset classes. American Assets Trust remains vigilant in monitoring market conditions and is prepared to adapt its strategies accordingly. The company's strong balance sheet, diversified portfolio, and experienced management team position it well to navigate the challenges and capitalize on new opportunities that may arise.
Conclusion
In conclusion, American Assets Trust has demonstrated its resilience and adaptability in the face of an ever-changing market environment. The company's strategic focus on high-quality, well-positioned properties, combined with its disciplined financial management and operational excellence, have enabled it to deliver consistent performance and create long-term value for its shareholders. As the company continues to navigate the evolving landscape, investors can expect American Assets Trust to remain a reliable and dynamic player in the REIT industry.