AMERICAN ASSETS TRUST, INC. Forward-Looking Statements
We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: •the impact of epidemics, pandemics, or other outbreaks of illness, disease or virus (such as the outbreak of COVID-19 and its variants) and the actions taken by government authorities and others related thereto, including the ability of our company, our properties and our tenants to operate;
•adverse economic or real estate developments in our markets;
•our failure to generate sufficient cash flows to service our outstanding indebtedness;
•defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants;
•difficulties in identifying properties to acquire and completing acquisitions;
•difficulties in completing dispositions;
•our failure to successfully operate acquired properties and operations;
•our inability to develop or redevelop our properties due to market conditions;
•fluctuations in interest rates and increased operating costs;
•risks related to joint venture arrangements;
•our failure to obtain necessary outside financing;
•on-going litigation;
•general economic conditions;
•financial market fluctuations;
•risks that affect the general office, retail, multifamily and mixed-use environment;
•the competitive environment in which we operate;
•decreased rental rates or increased vacancy rates;
•conflicts of interests with our officers or directors;
•lack or insufficient amounts of insurance;
•environmental uncertainties and risks related to adverse weather conditions and natural disasters;
•other factors affecting the real estate industry generally;
•limitations imposed on our business and our ability to satisfy complex rules in order forAmerican Assets Trust, Inc. to continue to qualify as a REIT, forU.S. federal income tax purposes; and •changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, or new information, data or methods, future events or other changes. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the section entitled "Item 1A. Risk Factors" contained herein and in our annual report on Form 10-K for the year endedDecember 31, 2022 . 29
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Overview
References to "we," "our," "us" and "our company" refer to
We are a full service, vertically integrated and self-administered REIT that owns, operates, acquires and develops high quality retail, office, multifamily and mixed-use properties in attractive, high-barrier-to-entry markets inSouthern California ,Northern California ,Washington ,Oregon ,Texas andHawaii . As ofMarch 31, 2023 , our portfolio was comprised of twelve retail shopping centers; twelve office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and six multifamily properties. Additionally, as ofMarch 31, 2023 , we owned land at three of our properties that we classified as held for development and/or construction in progress. Our core markets includeSan Diego, California ; theSan Francisco Bay Area ,California ;Bellevue, Washington ;Portland, Oregon andOahu, Hawaii . We are aMaryland corporation formed onJuly 16, 2010 to acquire the entities owning various controlling and noncontrolling interests in real estate assets owned and/or managed byErnest S. Rady or his affiliates, including the Ernest Rady Trust U/D/TMarch 13, 1983 , or theRady Trust , and did not have any operating activity until the consummation of our initial public offering onJanuary 19, 2011 . Our Company, as the sole general partner of ourOperating Partnership , has control of ourOperating Partnership and owned 78.8% of ourOperating Partnership as ofMarch 31, 2023 . Accordingly, we consolidate the assets, liabilities and results of operations of ourOperating Partnership .
Critical Accounting Policies
We identified certain critical accounting policies that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our annual report on Form 10-K for the year endedDecember 31, 2022 . We have not made any material changes to these policies during the periods covered by this report, other than those described in Footnote 1.
Same-store
We have provided certain information on a total portfolio, same-store and
redevelopment same-store basis. Information provided on a same-store basis
includes the results of properties that we owned and operated for the entirety
of both periods being compared except for properties for which significant
redevelopment or expansion occurred during either of the periods being compared,
properties under development, properties classified as held for development and
properties classified as discontinued operations. Information provided on a
redevelopment same-store basis includes the results of properties undergoing
significant redevelopment for the entirety or portion of both periods being
compared. Same-store and redevelopment same-store are considered by management
to be important measures because they assist in eliminating disparities due to
the development, acquisition or disposition of properties during the particular
period presented, and thus provide a more consistent performance measure for the
comparison of the company's stabilized and redevelopment properties, as
applicable. Additionally, redevelopment same-store is considered by management
to be an important measure because it assists in evaluating the timing of the
start and stabilization of our redevelopment opportunities and the impact that
these redevelopments have in enhancing our operating performance.
While there is judgment surrounding changes in designations, we typically
reclassify significant development, redevelopment or expansion properties into
same-store properties once they are stabilized. Properties are deemed stabilized
typically at the earlier of (i) reaching 90% occupancy or (ii) four quarters
following a property's inclusion in operating real estate. We typically remove
properties from same-store properties when the development, redevelopment or
expansion has or is expected to have a significant impact on the property's
annualized base rent, occupancy and operating income within the calendar year.
Our evaluation of significant impact related to development, redevelopment or
expansion activity is based on quantitative and qualitative measures including,
but not limited to, the following: the total budgeted cost of planned
construction activity compared to the property's annualized base rent, occupancy
and property operating income within the calendar year; percentage of
development, redevelopment or expansion square footage to total property square
footage; and the ability to maintain historic occupancy and rental rates. In
consideration of these measures, we generally remove properties from same-store
properties when we see a decline in a property's annualized base rent, occupancy
and operating income within the calendar year as a direct result of ongoing
redevelopment, development or expansion activity. Acquired properties are
classified into same-store properties once we have owned such properties for the
entirety of comparable period(s) and the properties are not under significant
development or expansion.
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Below is a summary of our same-store composition for the three months ended
March 31, 2023 and 2022. Bel-Spring 520 is classified as a non-same-store
property, as it was acquired on March 8, 2022 . In our determination of
same-store and redevelopment same-store properties for the three months ended
March 31, 2023 , One Beach Street has been identified as a same-store
redevelopment property due to significant redevelopment activity.
Retail same-store net operating income increased approximately 4.7% for the
three months ended
Three Months Ended March 31,
2023 2022
Same-Store 29 27
Non-Same-Store 2 4
Total Properties 31 31
Redevelopment Same-Store 30 28
Total Development Properties 3 3
Outlook
We seek growth in earnings, funds from operations and cash flows primarily
through a combination of the following: growth in our same-store portfolio,
growth in our portfolio from property development and redevelopments and
expansion of our portfolio through property acquisitions. Our properties are
located in some of the nation's most dynamic, high-barrier-to-entry markets
primarily in Southern California , Northern California , Washington , Oregon and
Hawaii , which allow us to take advantage of redevelopment opportunities that
enhance our operating performance through renovation, expansion, reconfiguration
and/or retenanting. We evaluate our properties on an ongoing basis to identify
these types of opportunities.
We intend to opportunistically pursue projects in our development pipeline,
including future phases of La Jolla Commons and Lloyd Portfolio, as well as
other redevelopments at Waikele Center and One Beach Street . The commencement of
these developments is based on, among other things, market conditions and our
evaluation of whether such opportunities would generate appropriate
risk-adjusted financial returns. Our redevelopment and development opportunities
are subject to various factors, including market conditions and may not
ultimately come to fruition.
We continue to review acquisition opportunities in our primary markets that
would complement our portfolio and provide long-term growth opportunities. Some
of our acquisitions do not initially contribute significantly to earnings
growth; however, we believe they provide long-term re-leasing growth,
redevelopment opportunities and other strategic opportunities. Any growth from
acquisitions is contingent upon our ability to find properties that meet our
qualitative standards at prices that meet our financial hurdles. Changes in
interest rates may affect our success in achieving earnings growth through
acquisitions by affecting both the price that must be paid to acquire a
property, as well as our ability to economically finance a property acquisition.
Generally, our acquisitions are initially financed by available cash, mortgage
loans and/or borrowings under our revolving line of credit, which may be repaid
later with funds raised through the issuance of new equity or new long-term
debt.
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COVID-19
We continue to closely monitor the impact of COVID-19 on our business. We are
unable to predict the future impact that COVID-19 will have on our financial
condition, results of operations and cash flows due to numerous uncertainties,
including the scope, severity and duration of the virus (including future
mutations), governmental, business and individual actions taken to stop its the
spread or to mitigate its impact, the availability and adoption of COVID-19
vaccines, and the economic effects of the virus and containment measures, among
others. Although many measures aimed to stop the spread of COVID-19 have been
lifted, we cannot predict whether they will be reinstated or whether more
restrictive measures may be imposed. It is also unclear whether customers'
concerns about the transmission of COVID-19 or other diseases will impact their
willingness to visit certain of our tenants' businesses.
We believe our financial condition and liquidity are currently strong. Although
there is uncertainty related to COVID-19's impact on our future results, we
believe our efficient business model and steps we have taken to strengthen our
balance sheet will continue to allow us to manage our business through this
evolving crisis.
Leasing
Our same-store growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in portfolio occupancy. Over the long-term, we believe that the infill nature and strong demographics of our properties provide us with a strategic advantage, allowing us to maintain relatively high occupancy and increase rental rates. Furthermore, we believe the locations of our properties and diversified portfolio will mitigate some of the potentially negative impact of the current economic environment. However, in the short-term due to COVID-19, we have seen a meaningful negative impact on certain of our tenants' operations and ability to pay rent, primarily in the retail sector; any reduction in our tenants' abilities to pay base rent, percentage rent or other charges, including as a result of COVID-19, will adversely affect our financial condition and results of operations. During the three months endedMarch 31, 2023 , we signed 15 office leases for a total of 79,862 square feet of office space including 56,139 square feet of comparable renewal office space leases (leases for which there was a prior tenant), at an average rental rate increase on a cash and GAAP basis of 10.1% and 22.5%, respectively. New office leases for comparable spaces were signed for 2,256 square feet at an average rental rate increase on a cash and GAAP basis of 23.2% and 20.6%, respectively. Renewals for comparable office spaces were signed for 53,883 square feet at an average rental rate increase on a cash and GAAP basis of 9.7% and 22.6%, respectively. Tenant improvements and incentives were$57.1 per square foot of office space for comparable new leases for the three months endedMarch 31, 2023 , mainly due to a tenant atSolana Crossing . During the three months endedMarch 31, 2023 , we signed 16 retail leases for a total of 35,589 square feet of retail space including 30,756 square feet of comparable renewal retail space leases (leases for which there was a prior tenant), at an average rental rate increase on a cash and GAAP basis of 9.5% and 27.7%, respectively. New retail leases for comparable spaces were signed for 1,598 square feet at an average rental rate increase on a cash basis of 48.5%. Renewals for comparable retail spaces were signed for 29,158 square feet at an average rental rate increase on a cash and GAAP basis of 8.3% and 22.7%, respectively. Tenant improvements and incentives were$9.39 per square foot of retail space for comparable new leases for the three months endedMarch 31, 2023 , mainly due to a tenant at Waikele Center. The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring leases and new leases is determined by including minimum rent and percentage rent paid on the expiring lease and minimum rent and, in some instances, projections of first lease year percentage rent, to be paid on the new lease. In some instances, management exercises judgment as to how to most effectively reflect the comparability of spaces reported in this calculation. The change in rental income on comparable space leases is impacted by numerous factors including current market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, capital investment made in the space and the specific lease structure. Tenant improvements and incentives include the total dollars committed for the improvement of a space as it relates to a specific lease, but may also include base-building costs (i.e. expansion, escalators or new entrances) which are required to make the space leasable. Incentives include amounts paid to tenants as an inducement to sign a lease that do not represent building improvements. The leases signed in 2023 generally become effective over the following year, though some may not become effective until 2024 and beyond. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However, we believe that these increases do provide information about the tenant/landlord relationship and the potential fluctuations we may achieve in rental income over time. 32
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Capitalized Costs
Certain external and internal costs directly related to the development and redevelopment of real estate, including pre-construction costs, real estate taxes, insurance, interest, construction costs and salaries and related costs of personnel directly involved, are capitalized. We capitalize costs under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. We consider a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but not later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with any remaining portion under construction.
We capitalized external and internal costs related to both development and
redevelopment activities combined of
We capitalized external and internal costs related to other property
improvements combined of
Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet placed in service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use as noted above. We make judgments as to the time period over which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not subtracted in calculating net income. If the time period for capitalizing interest is extended, however, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period. We capitalized interest costs related to development activities of$1.8 million and$1.2 million for the three months endedMarch 31, 2023 and 2022, respectively.
Results of Operations
For our discussion of results of operations, we have provided information on a total portfolio and same-store basis.
Comparison of the three months ended
The following summarizes our consolidated results of operations for the three months endedMarch 31, 2023 compared to our consolidated results of operations for the three months endedMarch 31, 2022 . As ofMarch 31, 2023 , our operating portfolio was comprised of 31 retail, office, multifamily and mixed-use properties with an aggregate of approximately 7.2 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, 2,110 residential units (including 120 RV spaces) and a 369-room hotel. Additionally, as ofMarch 31, 2023 , we owned land at three of our properties that we classified as held for development and/or construction in progress. As ofMarch 31, 2022 , our operating portfolio was comprised of 31 retail, office, multifamily and mixed-use properties with an aggregate of approximately 7.2 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, 2,110 residential units (including 120 RV spaces) and a 369-room hotel. Additionally, as ofMarch 31, 2022 , we owned land at three of our properties that we classified as held for development and/or construction in progress. 33
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The following table sets forth selected data from our unaudited consolidated statements of comprehensive income for the three months endedMarch 31, 2023 and 2022 (dollars in thousands): Three Months Ended March 31, 2023 2022 Change % Revenues Rental income$ 102,710 $ 96,986 $ 5,724 6 % Other property income 5,044 4,484 560 12 Total property revenues 107,754 101,470 6,284 6 Expenses Rental expenses 27,506 24,145 3,361 14 Real estate taxes 11,632 11,429 203 2 Total property expenses 39,138 35,574 3,564 10 Total property income 68,616 65,896 2,720 4 General and administrative (8,999) (7,142) (1,857) 26 Depreciation and amortization (29,901) (30,412) 511 (2) Interest expense, net (15,729) (14,666) (1,063) 7 Other (expense) income, net 6,679 (162) 6,841 (4,223) Total other, net (47,950) (52,382) 4,432 (8) Net income 20,666 13,514 7,152 53 Net income attributable to restricted shares (189) (155) (34) 22 Net income attributable to unitholders in the Operating Partnership (4,341) (2,836) (1,505) 53 Net income attributable toAmerican Assets Trust, Inc. stockholders$ 16,136 $ 10,523 $ 5,613 53 % Revenue Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased$6.3 million , or 6%, to$107.8 million for the three months endedMarch 31, 2023 compared to$101.5 million for the three months endedMarch 31, 2022 . The percentage leased was as follows for each segment as ofMarch 31, 2023 and 2022: Percentage Leased(1) March 31, 2023 2022 Office 88.1 % 91.5 % Retail 93.8 % 92.2 % Multifamily 91.8 % 94.8 % Mixed-Use (2) 95.0 % 94.3 %
(1)The percentage leased includes the square footage under lease, including
leases which may not have commenced as of
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The increase in total property revenue was attributable primarily to the new
acquisition of Bel-Spring 520, the increase in occupancy and rate at Waikiki
Beach Walk Embassy Suites™, the increase in monthly base rents in our
multifamily portfolio and factors discussed below.
Rental revenues. Rental revenue includes minimum base rent, cost reimbursements,
percentage rents and other rents. Rental revenue increased $5.7 million , or 6%,
to $102.7 million for the three months ended March 31, 2023 compared to $97.0
million for the three months ended March 31, 2022 . Rental revenue by segment was
as follows (dollars in thousands):
Total Portfolio Same-Store Portfolio(1)
Three Months Ended March 31, Three Months Ended March 31,
2023 2022 Change % 2023 2022 Change %
Office $ 49,692 $ 48,411 $ 1,281 3 $ 48,909 $ 48,212 $ 697 1
Retail 25,312 24,517 795 3 25,312 24,517 795 3
Multifamily 14,605 12,974 1,631 13 14,605 12,974 1,631 13
Mixed-Use 13,101 11,084 2,017 18 13,101 11,084 2,017 18
$ 102,710 $ 96,986 $ 5,724 6 % $ 101,927 $ 96,787 $ 5,140 5 %
(1)For this table and tables following, the same-store portfolio excludes: (i)
One Beach Street , due to significant redevelopment activity; (ii) Bel-Spring
520, which was acquired on March 8, 2022 ; (iii) the 710 building at Lloyd
District Portfolio which was placed into operations on November 1, 2022 ,
approximately one year after completing renovations of the building and (iv)
land held for development.
Total office rental revenue increased $1.3 million for the three months ended
March 31, 2023 compared to the three months ended March 31, 2022 primarily due
to the recent acquisition of Bel-Spring 520, which accounted for $0.6 million of
the increase. Same-store office rental revenue increased by $0.7 million due to
higher occupancy at Torrey Reserve Campus, and higher annualized base rents at
La Jolla Commons and The Landmark at One Market.
Total retail rental revenue increased $0.8 million for the three months ended
March 31, 2023 compared to the three months ended March 31, 2022 primarily due
to new tenant leases and prior tenants on alternate rent reverting back to basic
monthly rent. These increases were primarily related to Carmel Mountain Plaza ,
Alamo Quarry Market, Del Monte Center and Lomas Santa Fe Plaza .
Multifamily revenue increased $1.6 million for the three months ended March 31,
2023 compared to the three months ended March 31, 2022 primarily due to an
overall increase in average monthly base rent, with an overall decrease in
occupancy. Average monthly base rent and occupancy was $2,514 and 93.0%,
respectively for the three months ended March 31, 2023 compared to $2,217 and
95.1%, respectively for the three months ended March 31, 2022 .
Total mixed-use rental revenue increased $2.0 million for the three months ended
March 31, 2023 compared to the three months ended March 31, 2022 primarily due
to lifting of COVID-19 travel restrictions, which led to an increase in average
occupancy and revenue per available room to 81.9% and $302 for the three months
ended March 31, 2023 , respectively, compared to 72.8% and $243 for three months
ended March 31, 2022 , respectively.
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Other property income. Other property income increased$0.6 million , or 12%, to$5.0 million for the three months endedMarch 31, 2023 compared to$4.5 million for the three months endedMarch 31, 2022 . Other property income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended March 31, Three Months Ended March 31, 2023 2022 Change % 2023 2022 Change % Office$ 1,278 $ 1,158 $ 120 10$ 1,271 $ 1,130 $ 141 12 Retail 315 324 (9) (3) 315 324 (9) (3) Multifamily 958 915 43 5 958 915 43 5 Mixed-Use 2,493 2,087 406 19 2,493 2,087 406 19$ 5,044 $ 4,484 $ 560 12 %$ 5,037 $ 4,456 $ 581 13 %
Office other property income increased by
Mixed-use other property income increased by$0.4 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to increased tourism and hotel occupancy which led to an increase in other room rental income and excise tax at the hotel portion of our mixed-use property.
Property Expenses
Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased$3.6 million , or 10%, to$39.1 million , for the three months endedMarch 31, 2023 compared to$35.6 million for the three months endedMarch 31, 2022 . Rental Expenses. Rental expenses increased$3.4 million , or 14%, to$27.5 million for the three months endedMarch 31, 2023 compared to$24.1 million for the three months endedMarch 31, 2022 . Rental expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended March 31, Three Months Ended March 31, 2023 2022 Change % 2023 2022 Change % Office$ 9,528 $ 8,240 $ 1,288 16$ 9,111 $ 8,025 $ 1,086 14 Retail 4,052 4,004 48 1 4,052 4,004 48 1 Multifamily 4,745 4,315 430 10 4,745 4,315 430 10 Mixed-Use 9,181 7,586 1,595 21 9,181 7,586 1,595 21$ 27,506 $ 24,145 $ 3,361 14 %$ 27,089 $ 23,930 $ 3,159 13 % Office rental expense increased$1.3 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to$0.2 million related to the recent acquisition of Bel-Spring 520. Same-store office rental expenses increased$1.1 million due to an increase in repairs and maintenance services, utilities expenses and facility services and other operating expenses as our tenants' employees have started returning to the office in-person. Multifamily rental expense increased$0.4 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to an increase in repairs and maintenance, facilities services and employee related costs. Mixed-use rental expense increased$1.6 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to an increase in hotel room expenses, general excise tax expenses and employee related costs at the hotel portion of our mixed-use property and general excise tax expense and employee related costs at the retail portion of our mixed-use property. These increases are in line with increased tourism and higher hotel occupancy as travel restrictions toHawaii have been relaxed since the three months endedMarch 31, 2022 . 36
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Real Estate Taxes. Real estate taxes increased$0.2 million , or 2%, to$11.6 million for the three months endedMarch 31, 2023 compared to$11.4 million for the three months endedMarch 31, 2022 . Real estate tax expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended March 31, Three Months Ended March 31, 2023 2022 Change % 2023 2022 Change % Office$ 5,293 $ 5,090 $ 203 4$ 5,166 $ 5,024 $ 142 3 Retail 3,652 3,724 (72) (2) 3,652 3,724 (72) (2) Multifamily 1,786 1,764 22 1 1,786 1,764 22 1 Mixed-Use 901 851 50 6 901 851 50 6$ 11,632 $ 11,429 $ 203 2 %$ 11,505 $ 11,363 $ 142 1 % Office real estate taxes increased$0.2 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to the recent acquisition of Bel-Spring 520 and increase in property value assessments atEastgate Office Park and Corporate Campus East III. Retail real estate taxes decreased$0.1 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to a one-time real estate tax refund received during the three months endedMarch 31, 2023 forCarmel Mountain Plaza andGeary Marketplace for prior tax assessments years. Mixed-use real estate taxes increased$0.1 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due an increase in property value assessments.
Property Operating Income
Property operating income increased$2.7 million , or 4%, to$68.6 million for the three months endedMarch 31, 2023 , compared to$65.9 million for the three months endedMarch 31, 2022 . Property operating income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended March 31, Three Months Ended March 31, 2023 2022 Change % 2023 2022 Change % Office$ 36,149 $ 36,239 $ (90) -$ 35,903 $ 36,293 $ (390) (1) Retail 17,923 17,113 810 5 17,923 17,113 810 5 Multifamily 9,032 7,810 1,222 16 9,032 7,810 1,222 16 Mixed-Use 5,512 4,734 778 16 5,512 4,734 778 16$ 68,616 $ 65,896 $ 2,720 4 %$ 68,370 $ 65,950 $ 2,420 4 % Same-store office property operating income decreased$0.4 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 , primarily due to higher rental expenses of$1.1 million as our tenants' employees have started returning to the office in-person and higher real estate taxes. These increases in expenses are offset by higher parking income and increase in rental revenue due to higher occupancy at Torrey Reserve Campus, and higher annualized base rents atLa Jolla Commons and The Landmark at One Market. Total retail property operating income increased$0.8 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to new tenant leases and prior tenants on alternate rent reverting back to basic monthly rent. Additionally, real estate taxes decreased primarily due to a one-time real estate tax refunds received during the three months endedMarch 31, 2023 forCarmel Mountain Plaza andGeary Marketplace . Total multifamily property operating income increased$1.2 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to an overall increase in average monthly base rent of$2,514 for the three months endedMarch 31, 2023 compared to$2,217 for the three months endedMarch 31, 2022 . Average occupancy decreased to 93.0% for the three months endedMarch 31, 2023 compared to 95.1% for the three months endedMarch 31, 2022 . This increase in revenue was partially offset by an increase in rental expenses related to repairs and maintenance and facilities services. 37
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Total mixed-use property operating income increased$0.8 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 primarily due to increase in tourism and related increase in hotel occupancy. This led to an increase in average occupancy and revenue per available room to 81.9% and$302 , respectively, for the three months endedMarch 31, 2023 , compared to 72.8% and$243 , respectively, for three months endedMarch 31, 2022 . This also led to an increase in other room rental income and excise tax at the hotel portion of our mixed-use property. These increases were offset by higher hotel room expenses, general excise tax expenses and employee related costs at both the hotel and retail portions of our mixed-use property.
Other
General and Administrative. General and administrative expenses increased to$9.0 million for the three months endedMarch 31, 2023 , compared to$7.1 million for the three months endedMarch 31, 2022 . This increase was primarily due to an increase in stock-based compensation expense, general legal expenses and employee-related costs, including, without limitation, with respect to base pay for certain salaried and hourly workers and benefits. Depreciation and Amortization. Depreciation and amortization expense decreased to$29.9 million for the three months endedMarch 31, 2023 , compared to$30.4 million for the three months endedMarch 31, 2022 . This was due to acceleration of assets related to tenants vacating space during the three months endedMarch 31, 2022 at City Center Bellevue,Eastgate Office Park and Corporate Campus East III. This decrease was partially offset by new building and tenant improvement assets put into service in 2022 at Bel-Spring 520, First & Main and Torrey Reserve Campus. Interest Expense, net. Interest expense increased by$1.1 million , or 7%, to$15.7 million for the three months endedMarch 31, 2023 , compared to$14.7 million for the three months endedMarch 31, 2022 . This increase was primarily due to higher interest on our$225 million Amended and Restated Term Loan Agreement and related amortization of loan fees. These increases were offset by an increase in capitalized interest related to our development projects. Other (Expense) Income, Net. Other income, net increased$6.8 million , or 4,223%, to other income, net of$6.7 million for the three months endedMarch 31, 2023 , compared to other expense, net of$0.2 million for the three months endedMarch 31 , 2022,primarily due to the net settlement payment of approximately$6.3 million received onJanuary 3, 2023 related to certain building systems at our Hassalo on Eighth property and an increase of$0.4 million in interest and investment income attributed to higher yield on our average cash balance during the period.
Liquidity and Capital Resources of
In this "Liquidity and Capital Resources of
The company's business is operated primarily through theOperating Partnership , of which the company is the parent company and sole general partner, and which it consolidates for financial reporting purposes. Because the company operates on a consolidated basis with theOperating Partnership , the section entitled "Liquidity and Capital Resources ofAmerican Assets Trust, L.P. " should be read in conjunction with this section to understand the liquidity and capital resources of the company on a consolidated basis and how the company is operated as a whole. The company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by theOperating Partnership . The company itself does not have any indebtedness, and its only material asset is its ownership of partnership interests of theOperating Partnership . Therefore, the consolidated assets and liabilities and the consolidated revenues and expenses of the company and theOperating Partnership are the same on their respective financial statements. However, all debt is held directly or indirectly by theOperating Partnership . The company's principal funding requirement is the payment of dividends on its common stock. The company's principal source of funding for its dividend payments is distributions it receives from theOperating Partnership . As ofMarch 31, 2023 , the company owned an approximate 78.8% partnership interest in theOperating Partnership . The remaining approximately 21.2% are owned by non-affiliated investors and certain of the company's directors and executive officers. As the sole general partner of theOperating Partnership ,American Assets Trust, Inc. has the full, exclusive and complete authority and control over theOperating Partnership's day-to-day management and business, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies. The company causes theOperating Partnership to distribute such portion of its available cash as the company may in its discretion determine, in the manner provided in theOperating Partnership's partnership agreement. 38
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The liquidity of the company is dependent on theOperating Partnership's ability to make sufficient distributions to the company. The primary cash requirement of the company is its payment of dividends to its stockholders. The company also guarantees some of theOperating Partnership's debt, as discussed further in Note 7 of the Notes to Consolidated Financial Statements included elsewhere herein. If theOperating Partnership fails to fulfill certain of its debt requirements, which trigger the company's guarantee obligations, then the company will be required to fulfill its cash payment commitments under such guarantees. However, the company's only significant asset is its investment in theOperating Partnership . We believe theOperating Partnership's sources of working capital, specifically its cash flow from operations, and borrowings available under its unsecured line of credit, are adequate for it to make its distribution payments to the company and, in turn, for the company to make its dividend payments to its stockholders. As ofMarch 31, 2023 , the company has determined that it has adequate working capital to meet its dividend funding obligations for the next 12 months. However, we cannot assure you that theOperating Partnership's sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distribution payments to the company. The unavailability of capital could adversely affect theOperating Partnership's ability to pay its distributions to the company, which would in turn, adversely affect the company's ability to pay cash dividends to its stockholders. Our short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to the company's stockholders, operating expenses and other expenditures directly associated with our properties, interest expense and scheduled principal payments on outstanding indebtedness, general and administrative expenses, funding construction projects, capital expenditures, tenant improvements and leasing commissions. The company may from time to time seek to repurchase or redeem theOperating Partnership's outstanding debt, the company's shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. For the company to maintain its qualification as a REIT, it must pay dividends to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. While historically the company has satisfied this distribution requirement by making cash distributions toAmerican Assets Trust, Inc.'s stockholders orAmerican Assets Trust, L.P.'s unitholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the company's own stock. As a result of this distribution requirement, theOperating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. The company may need to continue to raise capital in the equity markets to fund the operating partnership's working capital needs, acquisitions and developments. Although there is no intent at this time, if market conditions deteriorate, the company may also delay the timing of future development and redevelopment projects as well as limit future acquisitions, reduce theOperating Partnership's operating expenditures, or re-evaluate its dividend policy. The company is a well-known seasoned issuer. As circumstances warrant, the company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. When the company receives proceeds from preferred or common equity issuances, it is required by theOperating Partnership's partnership agreement to contribute the proceeds from its equity issuances to theOperating Partnership in exchange for partnership units of theOperating Partnership .The Operating Partnership may use the proceeds to repay debt, to develop new or existing properties, to acquire properties or for general corporate purposes. InJanuary 2021 , the company filed a universal shelf registration statement on Form S-3ASR with theSEC , which became effective upon filing and which replaced the prior Form S-3ASR that was filed with theSEC inFebruary 2018 . The universal shelf registration statement permits the company from time to time to offer and sell equity securities of the company. However, there can be no assurance that the company will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include investor perception of our prospects and the general condition of the financial markets, among others. OnDecember 3, 2021 , we entered into a new ATM equity program with five sales agents under which we may, from time to time, offer and sell shares of our common stock having an aggregate offering price of up to$250.0 million . The sale of shares of our common stock made through the ATM equity program are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended. For the three months endedMarch 31, 2023 , no shares of common stock were sold through the ATM equity program. 39
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We intend to use the net proceeds to fund development or redevelopment activities, repay amounts outstanding from time to time under our amended and restated credit facility or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of the company's common stock and the company's capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program.
Liquidity and Capital Resources of
In this "Liquidity and Capital Resources ofAmerican Assets Trust, L.P. " section, the terms "we," "our" and "us" refer to theOperating Partnership together with its consolidated subsidiaries, or theOperating Partnership andAmerican Assets Trust, Inc. together with their consolidated subsidiaries, as the context requires.American Assets Trust, Inc. is our sole general partner and consolidates our results of operations for financial reporting purposes. Because we operate on a consolidated basis withAmerican Assets Trust, Inc. , the section entitled "Liquidity and Capital Resources ofAmerican Assets Trust, Inc. " should be read in conjunction with this section to understand our liquidity and capital resources on a consolidated basis. Due to the nature of our business, we typically generate significant amounts of cash from operations. The cash generated from operations is used for the payment of operating expenses, capital expenditures, debt service and dividends toAmerican Assets Trust, Inc.'s stockholders and our unitholders. As a REIT,American Assets Trust, Inc. must generally make annual distributions to its stockholders of at least 90% of its net taxable income. As ofMarch 31, 2023 , we held$87.3 million in cash and cash equivalents. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements, dividend payments toAmerican Assets Trust, Inc.'s stockholders required to maintain its REIT status, distributions to our unitholders, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash and, if necessary, borrowings available under our credit facility. Our long-term liquidity needs consist primarily of funds necessary to pay for the repayment of debt at maturity, property acquisitions, tenant improvements and capital improvements. We expect to meet our long-term liquidity requirements to pay scheduled debt maturities and to fund property acquisitions and capital improvements with net cash from operations, long-term secured and unsecured indebtedness and, if necessary, the issuance of equity and debt securities. We also may fund property acquisitions and capital improvements using our amended and restated credit facility pending permanent financing. We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot be assured that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our company. Our overall capital requirements for the remainder of 2023 and first quarter 2024 will depend upon acquisition opportunities and the level of improvements and redevelopments on existing properties. Our capital investments will be funded on a short-term basis with, among other sources of capital, cash on hand, cash flow from operations and/or our revolving line of credit. On a long-term basis, our capital investments may be funded with additional long-term debt, including, without limitation, mortgage debt and unsecured notes. Our ability to incur additional debt will be dependent on a number of factors, including, without limitation, our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our capital investments may also be funded by issuing additional equity including, without limitation, shares issued byAmerican Assets Trust, Inc. under its ATM equity program or through an underwritten public offering. Although there is no intent at this time, if market conditions deteriorate or fail to improve, we may also delay the timing of future development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy. InJanuary 2021 , theOperating Partnership filed a universal shelf registration on Form S-3 ASR with theSEC which provided for the registration of an unspecified amount of debt securities by theOperating Partnership . However, there can be no assurance that theOperating Partnership will be able to complete any such offerings of debt securities. Factors influencing the availability of additional financing include investor perception of our prospects and the general condition of the financial markets, among others. 40
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Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Cash Flows
Comparison of the three months ended
Cash, cash equivalents, and restricted cash were
Net cash provided by operating activities increased$12.8 million to$52.0 million for the three months endedMarch 31, 2023 compared to$39.1 million for the three months endedMarch 31, 2022 . The increase in cash from operations was primarily due to the net settlement received related to certain building systems at our Hassalo on Eighth, increase in rental revenue in multifamily and the hotel portion of our mixed-use property, and changes in operating assets and liabilities. Net cash used in investing activities decreased$51.6 million to$25.7 million for the three months endedMarch 31, 2023 compared to$77.3 million for the three months endedMarch 31, 2022 . The decrease in cash used was primarily due to our newest acquisition of Bel-Spring 520 onMarch 8, 2022 , and decrease in capital expenditures at La Jolla Commons III andOne Beach Street . Net cash provided by financing activities increased$39.3 million to$11.5 million for the three months endedMarch 31, 2023 compared to cash used in financing activities of$27.8 million for the three months endedMarch 31, 2022 . The increase in cash provided by financing activities was primarily due to the term loan agreement that was amended and restated, among other things, to increase the fully drawn borrowings from$150 million to$225 million . This was partially offset by the repayment of the outstanding balance on the revolving line of credit. Net Operating Income Net Operating Income, or NOI, is a non-GAAP financial measure of performance. We define NOI as operating revenues (rental income, tenant reimbursements, lease termination fees, ground lease rental income and other property income) less property and related expenses (property expenses, ground lease expense, property marketing costs, real estate taxes and insurance). NOI excludes general and administrative expenses, interest expense, depreciation and amortization, acquisition-related expense, other non-property income and losses, gains and losses from property dispositions, extraordinary items, tenant improvements, and leasing commissions. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to the NOIs of other REITs. NOI is used by investors and our management to evaluate and compare the performance of our properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by (1) the cost of funds of the property owner, (2) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP or (3) general and administrative expenses and other gains and losses that are specific to the property owner. The cost of funds is eliminated from net income because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our retail, office, multifamily or mixed-use properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is intended to be captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs. 41
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However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest income and other expense, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income, which further limits its usefulness. NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the components of net income that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do. The following is a reconciliation of our NOI to net income for the three months endedMarch 31, 2023 and 2022 computed in accordance with GAAP (in thousands): Three Months Ended March 31, 2023 2022 Net operating income$ 68,616 $ 65,896 General and administrative (8,999) (7,142) Depreciation and amortization (29,901) (30,412) Interest expense, net (15,729) (14,666) Other (expense) income, net 6,679 (162) Net income$ 20,666 $ 13,514 Funds from Operations We calculate funds from operations ("FFO"), in accordance with the standards established by theNational Association of Real Estate Investment Trusts ("NAREIT"). FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, impairment losses, real-estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real-estate related depreciation and amortization and gains and losses from property dispositions, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP. 42
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The following table sets forth a reconciliation of our FFO for the three months endedMarch 31, 2023 to net income, the nearest GAAP equivalent (in thousands, except per share and share data): Three Months Ended March 31, 2023 Funds from Operations (FFO) Net income$ 20,666 Plus: Real estate depreciation and amortization 29,901 Funds from operations 50,567
Less: Nonforfeitable dividends on incentive restricted stock awards
(187)
FFO attributable to common stock and units $ 50,380
FFO per diluted share/unit $ 0.66
Weighted average number of common shares and units, diluted (1) 76,330,711
(1)The weighted average common shares used to compute FFO per diluted share
include unvested restricted stock awards that are subject to time vesting, which
were excluded from the computation of diluted EPS, as the vesting of the
restricted stock awards is dilutive in the computation of FFO per diluted share
but is anti-dilutive for the computation of diluted EPS for the period. Diluted
shares exclude incentive restricted stock as these awards are considered
contingently issuable.
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