AMERICAN ASSETS TRUST, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
The following discussion should be read in conjunction with the audited historical consolidated financial statements and notes thereto appearing in "Item 8. Financial Statements and Supplementary Data" of this report. As used in this section, unless the context otherwise requires, "we," "us," "our," and "our company" meanAmerican Assets Trust, Inc. , aMaryland corporation and its consolidated subsidiaries, includingAmerican Assets Trust, L.P. In statements regarding qualification as a REIT, such terms refer solely toAmerican Assets Trust, Inc. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth under "Item 1A. Risk Factors" or elsewhere in this document. See "Item 1A. Risk Factors" and "Forward-Looking Statements." Overview Our Company We are a full service, vertically integrated and self-administered REIT that owns, operates, acquires and develops high quality office, retail, multifamily and mixed-use properties in attractive, high-barrier-to-entry markets inSouthern California ,Northern California ,Oregon ,Washington ,Texas , andHawaii . As ofDecember 31, 2021 , our portfolio was comprised of eleven office properties; twelve retail shopping centers; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and six multifamily properties. Additionally, as ofDecember 31, 2021 , we owned land at three of our properties that we classified as held for development or construction in progress. Our core markets includeSan Diego, California ;San Francisco, California ;Portland, Oregon ,Bellevue; Washington andOahu, Hawaii . Our company, as the sole general partner of ourOperating Partnership , has control of ourOperating Partnership and owned 78.8% of ourOperating Partnership as ofDecember 31, 2021 . Accordingly, we consolidate the assets, liabilities and results of operations of ourOperating Partnership . Taxable REIT Subsidiary OnNovember 5, 2010 , we formedAmerican Assets Services, Inc. , aDelaware corporation that is wholly owned by ourOperating Partnership and which we refer to as our services company. We have elected, together with our services company, to treat our services company as a taxable REIT subsidiary for federal income tax purposes. A taxable REIT subsidiary generally may provide non-customary and other services to our tenants and engage in activities that we may not engage in directly without adversely affecting our qualification as a REIT, provided a taxable REIT subsidiary may not operate or manage a lodging facility or provide rights to any brand name under which any lodging facility is operated. We may form additional taxable REIT subsidiaries in the future, and ourOperating Partnership may contribute some or all of its interests in certain wholly owned subsidiaries or their assets to our services company. Any income earned by our taxable REIT subsidiaries will not be included in our taxable income for purposes of the 75% or 95% gross income tests, except to the extent such income is distributed to us as a dividend, in which case such dividend income will qualify under the 95%, but not the 75%, gross income test. Because a taxable REIT subsidiary is subject to federal income tax and state and local income tax (where applicable) as a regular corporation, the income earned by our taxable REIT subsidiaries generally will be subject to an additional level of tax as compared to the income earned by our other subsidiaries.
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 inSouthern California ,Northern California ,Oregon ,Washington andHawaii , which we believe 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 ofLa Jolla Commons and Lloyd Portfolio, as well as other redevelopments at Waikele Center. 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 on 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 44 -------------------------------------------------------------------------------- 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 credit facility, which may be repaid later with funds raised through the issuance of new equity or new long-term debt.
COVID-19[female[feminine
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it has and will impact our tenants and business partners. We are unable to predict the future impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic (including as the pandemic evolves due to future mutations of the COVID-19 virus), the ongoing governmental, business and individual actions taken to contain the pandemic or mitigate its impact, the availability and adoption of COVID-19 vaccines and the direct and indirect economic effects of the pandemic and containment measures, among others. The outbreak of COVID-19 in many countries, includingthe United States , has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the pandemic continues to rapidly evolve. Certain states and cities, including where we own properties, have development sites and where our principal place of business is located, have at various points in time, reacted by instituting quarantines, restrictions on travel, "stay-at-home" orders or "shelter in place" rules, social distancing measures, and restrictions on business operations and/or construction projects (including, required shut-downs in some instances). It is unclear how customers' concerns about COVID-19 transmission and sensitivities to the transmission of other diseases will impact their willingness to visit certain of our tenants' businesses. As a result, the COVID-19 pandemic has negatively impacted almost every industry directly or indirectly, including industries in which the Company and our tenants operate, and may continue to do so. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. In addition, we cannot predict the impact that COVID-19 will ultimately have on our tenants and other business partners; however, any material effect on these parties could adversely impact us. For the fourth quarter of 2021, we have collected to date approximately 100% of office rents, 97% of retail rents (including retail component of WaikikiBeach Walk ) and 97% of multifamily rents that were due during such period. Additionally, for the fourth quarter of 2021, we collected approximately$0.5 million or 96% of the deferred rent repayments due during such period. We believe our financial condition and liquidity are currently strong. Although there is uncertainty related to the the COVID-19 pandemic'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. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our tenants, vendors, and other third-party relationships, and developing new opportunities for growth. Due to the constantly changing nature of the COVID-19 pandemic, we cannot reasonably estimate with any degree of certainty the future impact the pandemic may have on our results of operations, financial position, and liquidity.
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 is considered by management to
be an important measure because it assists in eliminating disparities due to the
development, acquisition or disposition of properties during the particular
period presented, and thus provides 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 to
same-store properties once they are stabilized. Properties are deemed stabilized
typically at the earlier of (1) reaching 90% occupancy or (2) 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
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is expected to have a significant impact on the property's annualized base rent,
occupancy and operating income within the calendar year. Acquired properties are
classified to 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.
In our determination of same-store and redevelopment same-store properties, One
Beach Street has been identified as a same-store redevelopment property due to
significant construction activity.
Below is a summary of our same-store composition for the years ended
December 31, 2021 , 2020 and 2019. For the year ended December 31, 2021 , when
compared to the designations for the year ended December 31, 2020 , Waikele
Center was reclassified to same-store properties as there is currently no
redevelopment activity on the property. Waikiki Beach Walk-Retail and Embassy
Suites™ Hotel is classified as a non-same-store property due to significant
spalling repair activity impacting the hotel portion of the property's
operations, which was completed on September 30, 2020 . Eastgate Office Park is
classified as a non-same-store property, as it was acquired on July 7, 2021 .
Corporate Campus East III is also classified as a non-same-store property, as it
was acquired on September 10, 2021 .
For the year ended December 31, 2020 , when compared to the designations for the
year ended December 31, 2019 , Torrey Point was reclassified to same-store
properties as the property was placed into operations and became available for
occupancy in August 2018 . One Beach Street was reclassified to non-same-store
properties when compared to the designations for the year ended December 31,
2019 due to redevelopment activity to renovate the property. Waikiki Beach Walk
Retail and Embassy Suites™ Hotel is classified as a non-same-store properties
due to spalling repair activity disrupting the hotel portion of the property's
operations. Waikele Center is classified as a non-same-store property due to
significant redevelopment activity. La Jolla Commons is classified as a
non-same-store property, as it was acquired on June 20, 2019 .
December 31,
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
Rental income consists of scheduled rent charges, straight-line rent adjustments
and the amortization of above market and below market rents acquired. We also
derive revenue from tenant recoveries and other property revenues, including
parking income, lease termination fees, late fees, storage rents and other
miscellaneous property revenues.
Office Leases. Our office portfolio included eleven properties with a total of
approximately 3.9 million rentable square feet available for lease as of
December 31, 2021 . As of December 31, 2021 , these properties were 90.4% leased.
For the year ended December 31, 2021 , the office segment contributed 49.6% of
our total revenue. Historically, we have leased office properties to tenants
primarily on a full service gross or a modified gross basis and to a limited
extent on a triple-net lease basis. We expect to continue to do so in the
future. A full-service gross or modified gross lease has a base year expense
stop, whereby the tenant pays a stated amount of certain expenses as part of the
rent payment, while future increases in property operating expenses (above the
base year stop) are billed to the tenant based on such tenant's proportionate
square footage of the property. The increased property operating expenses billed
are reflected as operating expenses and amounts recovered from tenants are
reflected as rental income in the statements of operations.
During the year ended December 31, 2021 , we signed 52 office leases for 255,485
square feet with an average rent of $49.05 per square foot during the initial
year of the lease term. Of the leases, 42 represent comparable leases where
there was a prior tenant, with an increase of 8.2% in cash basis rent and an
increase of 14.2% in straight-line rent compared to the prior leases.
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Retail Leases. Our retail portfolio included twelve properties with a total of
approximately 3.1 million rentable square feet available for lease as of
December 31, 2021 . As of December 31, 2021 , these properties were 92.6% leased.
For the year ended December 31, 2021 , the retail segment contributed 25.2%, of
our total revenue. Historically, we have leased retail properties to tenants
primarily on a triple-net lease basis, and we expect to continue to do so in the
future. In a triple-net lease, the tenant is responsible for all property taxes
and operating expenses. As such, the base rent payment does not include any
operating expense, but rather all such expenses, to the extent they are paid by
the landlord, are billed to the tenant. The full amount of the expenses for this
lease type, to the extent they are paid by the landlord, is reflected in
operating expenses, and the reimbursement is reflected as rental income in the
statements of operations.
During the year ended December 31, 2021 , we signed 105 retail leases for 408,397
square feet with an average rent of $40.30 per square foot during the initial
year of the lease term, including leases signed for the retail portion of our
mixed-use property. Of the leases, 85 represent comparable leases where there
was a prior tenant, with an decrease of 11.2% in cash basis rent and an decrease
of 5.4% in straight-line rent compared to the prior leases.
Multifamily Leases. Our multifamily portfolio included six apartment properties,
as well as an RV resort, with a total of 2,112 units (including 122 RV spaces)
available for lease as of December 31, 2021 . As of December 31, 2021 , these
properties were 96.0% leased. For the year ended December 31, 2021 , the
multifamily segment contributed 13.9% of our total revenue. Our multifamily
leases, other than at our RV resort, generally have lease terms ranging from 7
to 15 months, with a majority having 12-month lease terms. Tenants normally pay
a base rental amount, usually quoted in terms of a monthly rate for the
respective unit. Spaces at the RV resort can be rented at a daily, weekly, or
monthly rate. The average monthly base rent per leased unit; other than at our
RV resort, as of December 31, 2021 was $2,201 , compared to $2,238 at
December 31, 2020 .
Mixed-Use Property Revenue. Our mixed-use property consists of approximately
94,000 rentable square feet of retail space and a 369-room all-suite hotel.
Revenue from the mixed-use property consists of revenue earned from retail
leases, and revenue earned from the hotel, which consists of room revenue, food
and beverage services, parking and other guest services. As of December 31,
2021 , the retail portion of the property was 89.6% leased, and for the year
ended December 31, 2021 , the hotel had an average occupancy of 66.4%. For the
year ended December 31, 2021 , the mixed-use segment contributed 11.3%, of our
total revenue. We have leased the retail portion of such property to tenants
primarily on a triple-net lease basis, and we expect to continue to do so in the
future. As such, the base rent payment under such leases does not include any
operating expenses, but rather all such expenses, to the extent they are paid by
the landlord, are billed to the tenant. Rooms at the hotel portion of our
mixed-use property are rented on a nightly basis.
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. In the
short-term, however, due to the COVID-19 pandemic, we have seen a meaningful
negative impact on certain of our tenants' operations and ability to pay rent,
primarily in the retail sector; and any reduction in our tenants' abilities to
pay base rent, percentage rent or other charges, including as a result of the
COVID-19 pandemic, will adversely affect our financial condition and results of
operations.
During the twelve months ended December 31, 2021 , we signed 52 office leases for
a total of 255,485 square feet of office space including 189,531 square feet of
comparable space leases, at an average rental rate increase of 8.2% on a cash
basis and an average rental increase of 14.2% on a straight-line basis. New
office leases for comparable spaces were signed for 56,652 square feet at an
average rental rate increase of 21.9% on a cash basis and an average rental rate
increase of 32.4% on a straight-line basis. Renewals for comparable office
spaces were signed for 132,879 square feet at an average rental rate increase of
2.5% on a cash basis and increase of 6.4% on a straight-line basis. Tenant
improvements and incentives were $50.30 per square foot of office space for
comparable new leases for the twelve months ended December 31, 2021 . There were
$2.33 per square foot of office space of tenant improvement or incentives for
comparable renewal leases for the twelve months ended December 31, 2021 .
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During the twelve months ended December 31, 2021 , we signed 105 retail leases
for a total of 408,397 square feet of retail space including 333,338 square feet
of comparable space leases (leases for which there was a prior tenant), a
decrease of 11.2% on a cash basis and a decrease of 5.4% on a straight-line
basis. New retail leases for comparable spaces were signed for 60,983 square
feet at an average rental rate decrease of 33.4% on a cash basis and an average
rental rate decrease of 20.2% on a straight-line basis. Renewals for comparable
retail spaces were signed for 272,355 square feet at an average rental rate
decrease of 4.1% on a cash basis and an increase of 1.7% on a straight-line
basis. Tenant improvements and incentives were $59.59 per square foot of retail
space for comparable new leases for the twelve months ended December 31, 2021 .
There were $1.61 per square foot of retail space of tenant improvement or
incentives for comparable renewal leases for the twelve months ended December
31, 2021 .
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 2021 will typically become effective in 2022, though some
may not become effective until 2023. 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that in certain circumstances
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities, and revenues and expenses. These estimates are prepared
using management's best judgment, after considering past and current events and
economic conditions. In addition, information relied upon by management in
preparing such estimates includes internally generated financial and operating
information, external market information, when available, and when necessary,
information obtained from consultations with third party experts. Actual results
could differ from these estimates. A discussion of possible risks which may
affect these estimates is included in the section above entitled "Item 1A. Risk
Factors." Management considers an accounting estimate to be critical if changes
in the estimate could have a material impact on our consolidated results of
operations or financial condition.
Our significant accounting policies are more fully described in the notes to the
consolidated financial statements included elsewhere in this report; however,
the most critical accounting policies, which involve the use of estimates and
assumptions as to future uncertainties and, therefore, may result in actual
amounts that differ from estimates, are as follows:
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Revenue Recognition and Accounts Receivable
Our leases with tenants are classified as operating leases. Substantially all
such leases contain fixed rent escalations which occur at specified times during
the term of the lease. Base rents are recognized on a straight-line basis from
when the tenant controls the space through the term of the related lease, net of
valuation adjustments, based on management's assessment of credit, collection
and other business risks. When we determine that we are the owner of tenant
improvements and the tenant has reimbursed us for a portion or all of the tenant
improvement costs, we consider the amount paid to be additional rent, which is
recognized on a straight-line basis over the term of the related lease. For
first generation tenants, in instances in which we fund tenant improvements and
the improvements are deemed to be owned by us, revenue recognition will commence
when the improvements are substantially completed and possession or control of
the space is turned over to the tenant. When we determine that the tenant is the
owner of tenant improvements, tenant allowances are recorded as lease incentives
and we commence revenue recognition and lease incentive amortization when
possession or control of the space is turned over to the tenant for tenant work
to begin. Percentage rents, which represent additional rents based upon the
level of sales achieved by certain tenants, are recognized at the end of the
lease year or earlier if we have determined the required sales level is achieved
and the percentage rents are collectible. Real estate tax and other cost
reimbursements are recognized on an accrual basis over the periods in which the
related expenditures are incurred.
Other property income includes parking income, general excise tax billed to
tenants, fees charged to tenants at our multifamily properties and food and
beverage sales at the hotel portion of our mixed-use property. Other property
income is recognized when we satisfy performance obligations as evidenced by the
transfer of control of our services to customers. For a tenant to terminate its
lease agreement prior to the end of the agreed term, we may require that they
pay a fee to cancel the lease agreement. Lease termination fees for which the
tenant has relinquished control of the space are generally recognized on the
later of the termination date or the satisfaction of all conditions precedent to
the lease termination, including, without limitation, payment of all lease
termination fees. When a lease is terminated early but the tenant continues to
control the space under a modified lease agreement, the lease termination fee is
generally recognized evenly over the remaining term of the modified lease
agreement.
Current accounts receivable from tenants primarily relate to contractual minimum
rent and percentage rent as well as real estate tax and other cost
reimbursements. Accounts receivable from straight-line rent is typically longer
term in nature and relates to the cumulative amount by which straight-line
rental income recorded to date exceeds cash rents billed to date under the
contractual lease agreement.
We recognize revenue on the hotel portion of our mixed-use property from the
rental of hotel rooms and guest services when we satisfy performance obligations
as evidenced by the transfer of control when the rooms are occupied and services
have been provided. Food and beverage sales are recognized when the customer has
been served or at the time the transaction occurs. Revenue from room rental is
included in rental revenue on the statement of comprehensive income. Revenue
from other sales and services provided is included in other property income on
the statement of comprehensive income.
We make estimates of the collectability of our current accounts receivable and
straight-line rents receivable which requires significant judgment by
management. The collectability of receivables is affected by numerous different
factors including current economic trends, including the impact of the COVID-19
pandemic on tenant's businesses and changes in tenants' payment patterns, tenant
bankruptcies, the status of collectability of current cash rents receivable,
tenants' recent and historical financial and operating results, changes in our
tenants' credit ratings, communications between our operating personnel and
tenants, the extent of security deposits and letters of credits held with
respect to tenants, and the ability of the tenant to perform under the terms of
their lease agreement when evaluating the adequacy of the allowance for doubtful
accounts. If our assessment of these factors indicates it is probable that we
will be unable to collect substantially all rents, we recognize a charge to
rental income and limit our rental income to the lesser of lease income on a
straight-line basis plus variable rents when they become accruable or cash
collected. If we change our conclusion regarding the probability of collecting
rent payments required by a lessee, we may recognize an adjustment to rental
income in the period we make a change to our prior conclusion.
Due to the nature of the accounts receivable from straight-line rents, the
collection period of these amounts typically extends beyond one year. Our
experience relative to unbilled straight-line rents is that a portion of the
amounts otherwise recognizable as revenue is never billed to or collected from
tenants due to early lease terminations, lease modifications, bankruptcies and
other factors. Accordingly, the extended collection period for straight-line
rents along with our evaluation of tenant credit risk may result in the
nonrecognition of a portion of straight-line rental income until the collection
of such income is reasonably assured. Any changes to our conclusion regarding
these assessments of collectability would have a direct impact on our net
income.
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-------------------------------------------------------------------------------- During the year endedDecember 31, 2021 , due to the impacts of the COVID-19 pandemic, we provided lease concessions to certain tenants, primarily within the retail segment, in the form of rent deferrals and abatements. These lease concessions generally included an increase in our rights as a lessor. We assess each lease concession and determine whether it represents a lease modifications under Accounting Standards Codification Topic 842, Leases ("ASC 842"). The FASB staff provided guidance that entities may elect to account for COVID-19-related lease concessions consistent with how those concessions would be accounted for under ASC 842 as though enforceable rights and obligations for such concessions existed in the existing lease contract. We have elected to account for such COVID-19-related concessions as lease modifications. As ofDecember 31, 2021 , we entered into lease modifications that resulted in COVID-19-related adjustments (including rent deferrals and other monetary lease concessions) for approximately$3.9 million , or 1% of the rent originally contracted for the year endedDecember 31, 2021 . Real Estate Depreciation and maintenance costs relating to our properties constitute substantial costs for us. Land, buildings and improvements are recorded at cost. Depreciation is computed using the straight-line method. Estimated useful lives range generally from 30 years to a maximum of 40 years on buildings and major improvements. Minor improvements, furniture and equipment are capitalized and depreciated over useful lives ranging from 3 to 15 years. Maintenance and repairs that do not improve or extend the useful lives of the related assets are charged to operations as incurred. Tenant improvements are capitalized and depreciated over the life of the related lease or their estimated useful life, whichever is shorter. If a tenant vacates its space prior to contractual termination of its lease, the undepreciated balance of any tenant improvements are written off if they are replaced or have no future value. Our estimates of useful lives have a direct impact on our net income. If expected useful lives of our real estate assets were shortened, we would depreciate the assets over a shorter time period, resulting in an increase to depreciation expense and a corresponding decrease to net income on an annual basis. Acquisitions of properties are accounted for in accordance with the authoritative accounting guidance on acquisitions and business combinations. Our methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is based on estimated fair values, replacement cost and appraised values. When we acquire operating real estate properties, the purchase price is allocated to land and buildings, intangibles such as in-place leases, and to current assets and liabilities acquired, if any. Such valuations include a consideration of the noncancelable terms of the respective leases as well as any applicable renewal period(s). The fair values associated with below market renewal options are determined based on a review of several qualitative and quantitative factors on a lease-by-lease basis at acquisition to determine whether it is probable that the tenant would exercise its option to renew the lease agreement. These factors include: (1) the type of tenant in relation to the property it occupies, (2) the quality of the tenant, including the tenant's long term business prospects, and (3) whether the fixed rate renewal option was sufficiently lower than the fair rental of the property at the date the option becomes exercisable such that it would appear to be reasonably assured that the tenant would exercise the option to renew. Each of these estimates requires a great deal of judgment, and some of the estimates involve complex calculations. These allocation assessments have a direct impact on our results of operations because if we were to allocate more value to land, there would be no depreciation with respect to such amount. If we were to allocate more value to the buildings, as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the remaining terms of the leases. The value allocated to in-place leases is amortized over the related lease term and reflected as depreciation and amortization in the consolidated statements of comprehensive income. The value of above and below market leases associated with the original noncancelable lease terms are amortized to rental income over the terms of the respective noncancelable lease periods and are reflected as either an increase (for below market leases) or a decrease (for above market leases) to rental income in the consolidated statement of comprehensive income. If a tenant vacates its space prior to contractual termination of its lease or the lease is not renewed, the unamortized balance of any in-place lease value is written off to rental income and amortization expense. The value of the leases associated with below market lease renewal options that are likely to be exercised are amortized to rental income over the respective renewal periods. We make assumptions and estimates related to below market lease renewal options, which impact revenue in the period in which the renewal options are exercised and could result in significant increases to revenue if the renewal options are not exercised at which time the related below market lease liabilities would be written off as an increase to revenue. Transaction costs related to the acquisition of a business, such as broker fees, transfer taxes, legal, accounting, valuation, and other professional and consulting fees, are expensed as incurred and included in "general and administrative expenses" in our consolidated statements of comprehensive income. For asset acquisitions not meeting the definition of a business, transaction costs are capitalized as part of the acquisition cost. 50 --------------------------------------------------------------------------------
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 have capitalized external and internal costs related to the combined development and redevelopment activities of
We have capitalized external and internal costs related to other property improvements combined with
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, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period. We capitalized interest costs related to both development and redevelopment activities combined of$3.0 million and$1.1 million for the years endedDecember 31, 2021 and 2020, respectively.
Segment capital expenditures for the years ended
Year Ended December 31, 2021
Total Tenant
Improvements,
Leasing
Commissions and
Tenant Improvements Maintenance Maintenance
and Leasing Capital Capital Redevelopment and Total Capital
Segment Commissions Expenditures Expenditures Expansions New Development Expenditures
Office Portfolio $ 38,309 $ 11,334 $ 49,643 $ 16,486 $ 26,987 $ 93,116
Retail Portfolio 5,506 1,705 7,211 21 - 7,232
Multifamily Portfolio 9 5,702 5,711 130 - 5,841
Mixed-Use Portfolio 274 1,267 1,541 - - 1,541
Total $ 44,098 $ 20,008 $ 64,106 $ 16,637 $ 26,987 $ 107,730
Year Ended December 31, 2020
Total Tenant
Improvements,
Leasing
Commissions and
Tenant Improvements Maintenance Maintenance
and Leasing Capital Capital Redevelopment and Total Capital
Segment Commissions Expenditures Expenditures Expansions New Development Expenditures
Office Portfolio $ 35,732 $ 8,745 $ 44,477 $ 4,096 $ 4,309 $ 52,882
Retail Portfolio 4,504 4,089 8,593 3 - 8,596
Multifamily Portfolio - 3,897 3,897 - - 3,897
Mixed-Use Portfolio 36 3,666 3,702 - - 3,702
Total $ 40,272 $ 20,397 $ 60,669 $ 4,099 $ 4,309 $ 69,077
51
-------------------------------------------------------------------------------- The increase in tenant improvements and leasing commissions for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was primarily related to tenant buildouts at The Landmark at One Market and First & Main, partially offset by tenant buildouts at Lloyd Portfolio, City Center Bellevue,La Jolla Commons andTorrey Plaza that were completed in the prior year. The increase in new development expenditures for the year endedDecember 31, 2021 compared to the year endedDecember 21, 2020 was primarily related to costs incurred for the development of Tower 3 atLa Jolla Commons . The increase in redevelopment expenditures for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , was primarily related to the modernization costs ofOne Beach Street . Our capital expenditures during the year endingDecember 31, 2022 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of our held for development and construction in progress properties. While the amount of future expenditures will depend on numerous factors, we expect expenditures incurred in the year endingDecember 31, 2022 to increase from the year endingDecember 31, 2021 in connection with our development activities atLa Jolla Commons , renovations atOne Beach Street , and completion of various tenant improvements. Derivative Instruments We may use derivative instruments to manage exposure to variable interest rate risk. We may enter into interest rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the issuance of debt. Any interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in other comprehensive income which is included in accumulated other comprehensive income on our consolidated balance sheet and our consolidated statement of equity. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not match, such as notional amounts, settlement dates, reset dates, calculation periods and the use of LIBOR or SOFR, as the case may be. In addition, we evaluate the default risk of the counterparty by monitoring the credit worthiness of the counterparty which includes reviewing debt ratings and financial performance. However, management does not anticipate non-performance by the counterparty. If a cash flow hedge is deemed ineffective, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected. Impairment of Long-Lived Assets We review for impairment on a property by property basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows including revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions used to estimate the future recoverability of book value requires significant management judgment. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income because recording an impairment charge results in a negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to fair value and such loss could be material. No impairment charges were recorded for the years endedDecember 31, 2021 , 2020 or 2019. 52 -------------------------------------------------------------------------------- Income Taxes We elected to be taxed as a REIT under the Code commencing with the taxable year endedDecember 31, 2011 . To maintain our qualification as a REIT, we are required to distribute at least 90% of our net taxable income to our stockholders, excluding net capital gains, and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders. If we fail to maintain our qualification as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, our taxable income generally would be subject to regularU.S. federal corporate income tax. Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions toAmerican Assets Trust, Inc.'s stockholders orAmerican Assets Trust, L.P.'s unitholders. We, together with one of our subsidiaries, have elected to treat such subsidiary as a taxable REIT subsidiary for federal income tax purposes. A taxable REIT subsidiary is subject to federal and state income taxes. Property Acquisitions and Dispositions 2021 Acquisitions and Dispositions OnJuly 7, 2021 , we acquiredEastgate Office Park , consisting of an approximately 280,000 square feet, multi-tenant office campus inBellevue, Washington . The purchase price was approximately$125 million , excluding closing costs of approximately$0.2 million . OnSeptember 10, 2021 , we acquired Corporate Campus East III inBellevue, Washington , consisting of an approximately 161,000 square feet, multi-tenant office campus. The purchase price was approximately$84 million , less seller credits of (i) approximately$1.1 million of future rent abatement (ii) approximately$2.1 million of contractual tenant improvements and closing costs of approximately$0.1 million . The properties were acquired with cash on hand. During 2021, there were no dispositions. 2020 Acquisitions and Dispositions During 2020, there were no acquisitions or dispositions. 2019 Acquisitions and Dispositions OnJune 20, 2019 , we acquiredLa Jolla Commons , consisting of two office towers totaling approximately 724,000 square feet, an entitled development parcel and two parking structures, located inSan Diego, California . The purchase price was approximately$525 million , less seller credits of (i) approximately$11.5 million for speculative lease-up, (ii) approximately$4.2 million for assumed contractual liabilities, and(iii) and approximately$1.7 million for closing prorations, excluding closing costs of approximately$0.2 million . The property was acquired with proceeds from an underwritten public offering and borrowings under our Second Amended and Restated Credit Facility. OnMay 22, 2019 , we soldSolana Beach -Highway 101 . The property is located inSan Diego, California and was previously included in our retail segment. The sales price of this property of approximately$9.4 million , less costs to sell, resulted in net proceeds to the company of approximately$9.4 million . Accordingly, we recorded a gain on sale of approximately$0.6 million for the year endedDecember 31, 2019 . Results of Operations For our discussion of results of operations, we have provided information on a total portfolio and same-store basis. For our discussion related to the results of operations and liquidity and capital resources for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 please refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2020 Form 10-K, filed with theSecurities and Exchange Commission onFebruary 16, 2021 . 53 -------------------------------------------------------------------------------- Comparison of the Year EndedDecember 31, 2021 to the Year EndedDecember 31, 2020 The following summarizes our consolidated results of operations for the year endedDecember 31, 2021 compared to our consolidated results of operations for the year endedDecember 31, 2020 . As ofDecember 31, 2021 , our operating portfolio was comprised of 30 office, retail, multifamily and mixed-use properties with an aggregate of approximately 7.1 million rentable square feet of office and retail space (including mixed-use retail space), 2,112 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as ofDecember 31, 2021 , we owned land at three of our properties that we classified as held for development and construction in progress. As ofDecember 31, 2020 , our operating portfolio was comprised of 28 office, retail, multifamily and mixed-use properties with an aggregate of approximately 6.6 million rentable square feet of office and retail space (including mixed-use retail space), 2,112 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as ofDecember 31, 2020 , we owned land at three of our properties that we classified as held for development or construction in progress. The following table sets forth selected data from our consolidated statements of comprehensive income for the years endedDecember 31, 2021 and 2020 (dollars in thousands): Year Ended December 31, 2021 2020 Change % Revenues Rental income$ 360,208 $ 330,312 $ 29,896 9 % Other property income 15,620 14,261 1,359 10 Total property revenues 375,828 344,573 31,255 9 Expenses Rental expenses 86,980 79,178 7,802 10 Real estate taxes 42,794 41,941 853 2 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 % Other income (expense), net (418) 447 (865) (194) Net income 36,593 35,588 1,005 3 Net income attributable to restricted shares (564) (383) (181) 47
Net income attributable to unitholders as of
(7,653) (7,545) (108) 1 Net income attributable toAmerican Assets Trust, Inc. stockholders$ 28,376 $ 27,660 $ 716 3 % Revenue Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased$31.3 million , or 9%, to$375.8 million for the year endedDecember 31, 2021 , compared to$344.6 million for the year endedDecember 31, 2020 . The percentage leased was as follows for each segment as ofDecember 31, 2021 and 2020: Percentage Leased (1) Year Ended December 31, 2021 2020 Office 90.4 % 93.0 % Retail 92.6 % 90.7 % Multifamily 96.0 % 86.2 % Mixed-Use (2) 89.6 % 89.2 % 54
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(1) Percentage leased includes area leased, including leases that may not have commenced on
The increase in total property revenue was attributable primarily to the factors discussed below. Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased$29.9 million , or 9%, to$360.2 million for the year endedDecember 31, 2021 , compared to$330.3 million for the year endedDecember 31, 2020 . Rental revenue by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio (1) Year Ended December 31, Year Ended December 31, 2021 2020 Change % 2021 2020 Change % Office$ 181,916 $ 171,955 $ 9,961 6 %$ 175,296 $ 170,707 $ 4,589 3 % Retail 93,249 86,204 7,045 8 93,249 86,204 7,045 8 Multifamily 48,896 47,274 1,622 3 48,896 47,274 1,622 3 Mixed-Use 36,147 24,879 11,268 45 - - - -$ 360,208 $ 330,312 $ 29,896 9 %$ 317,441 $ 304,185 $ 13,256 4 % (1)For this table and tables following, the same-store portfolio excludes (i)One Beach Street , due to significant redevelopment activity; (ii)Eastgate Office Park which was acquired onJuly 7, 2021 ; (iii) Corporate Campus East III which was acquired onSeptember 10, 2021 ; (iv) Waikiki Beach Walk-Embassy SuitesTM and Waikiki Beach Walk Retail, due to significant spalling repair activity which was completed inSeptember 2020 and (v) land held for development. Total office rental revenue increased$10.0 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the new acquisitions ofEastgate Office Park and Corporate Campus East III during the third quarter of 2021, which had incremental rental revenue of approximately$7.0 million during the period. The increase in total office rental revenue is partially offset by the decrease in rental revenue of approximately$1.6 million atOne Beach Street due to the expiration of leases to allow for the modernization of the property. Same-store office rental revenue increased$4.6 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to higher annualized base rents atLa Jolla Commons , The Landmark at One Market, City Center Bellevue andTorrey Point . Total retail rental revenue increased$7.0 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to approximately$6.7 million related to tenants who were changed to alternate rent or to cash basis of revenue recognition during the year endedDecember 31, 2021 and 2020, as collectability was determined to be no longer probable for certain tenants atCarmel Mountain Plaza , Del Monte Center, Alamo Market Quarry and Waikele Center. Some of these tenants have since reverted back to contractual basic monthly rent as compared to alternate rent as their gross sales have increased in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , and their alternate rent periods came to an end. Additionally, the increase in total retail rental revenue is also attributable to an increase in real estate cost reimbursements of approximately$0.5 million due to higher property taxes. Multifamily rental revenue increased$1.6 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the increase in average occupancy to 92.1% for the year endedDecember 31, 2021 compared to 88.5% for the year endedDecember 31, 2020 . The increase in occupancy primarily related to Loma Palisades,Pacific Ridge Apartments ,Imperial Beach Garden andSanta Fe Park RV Resort . The increase in average occupancy is partially offset by a decrease in average base rent per unit to$2,160 for the year endedDecember 31, 2021 compared to$2,166 for the year endedDecember 31, 2020 , primarily due to lower rents at Hassalo on Eighth - Residential. Mixed-use rental revenue increased$11.3 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to$7.7 million related to the hotel potion of our mixed-use property. The increase was due to higher rates of tourism inHawaii during the year endedDecember 31, 2021 , which led to an increase in average occupancy and revenue per available room to 66.4% and$185 for the year endedDecember 31, 2021 compared to 51.3% and$127 for the year endedDecember 31, 2020 , respectively. The retail portion of our mixed-use property had an increase in rental revenue of$3.5 million as tenants were changed to alternate rent or to cash basis of revenue recognition during the year endedDecember 31, 2020 as collectability was determined to be no longer probable for most tenants. 55
-------------------------------------------------------------------------------- Other property income. Other property income increased$1.4 million , or 10%, to$15.6 million for the year endedDecember 31, 2021 , compared to$14.3 million for the year endedDecember 31, 2020 . Other property income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2021 2020 Change % 2021 2020 Change % Office$ 4,450 $ 5,599 $ (1,149) (21) %$ 4,040 $ 5,572 $ (1,532) (27) % Retail 1,413 2,076 (663) (32) 1,413 2,076 (663) (32) Multifamily 3,419 3,053 366 12 3,419 3,053 366 12 Mixed-Use 6,338 3,533 2,805 79 - - - -$ 15,620 $ 14,261 $ 1,359 10 %$ 8,872 $ 10,701 $ (1,829) (17) % Same-store office other property income decreased$1.5 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the decrease in parking garage income at City Center Bellevue and Lloyd Portfolio during the period as a substantial portion of our tenants employees and their guests continue to partially work from home during the period. Additionally, there was a decrease in lease termination fees at Torrey Reserve Campus and City Center Bellevue received during the year endedDecember 31, 2020 and a decrease in tenant improvement management fees received atLa Jolla Commons and Lloyd Portfolio in the year endedDecember 31, 2020 . Retail other property income decreased$0.7 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to lease termination fees received at Alamo Quarry Market andCarmel Country Plaza during the year endedDecember 31, 2020 . Multifamily other property income increased$0.4 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to an increase in security deposits earned atPacific Ridge Apartments and Loma Palisades, parking garage income at Hassalo on Eighth - Residential and meter income atLoma Palisades and Sante Fe Park RV Resort . Mixed-use other property income increased$2.8 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due increased tourism and hotel occupancy in the year endedDecember 31, 2021 which led to an increase in other room rental income and excise tax at the hotel portion of our mixed-use property and an increase in parking garage income at the retail 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 by$8.7 million , or 7%, to$129.8 million for the year endedDecember 31, 2021 , compared to$121.1 million for the year endedDecember 31, 2020 . This increase in total property expenses was attributable primarily to the factors discussed below. Rental Expenses. Rental expenses increased$7.8 million , or 10%, to$87.0 million for the year endedDecember 31, 2021 , compared to$79.2 million for the year endedDecember 31, 2020 . Rental expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2021 2020 Change % 2021 2020 Change % Office$ 30,506 $ 28,234 $ 2,272 8 %$ 28,341 $ 27,341 $ 1,000 4 % Retail 15,676 15,446 230 1 15,676 15,446 230 1 Multifamily 16,269 15,324 945 6 16,269 15,324 945 6 Mixed-Use 24,529 20,174 4,355 22 - - - -$ 86,980 $ 79,178 $ 7,802 10 %$ 60,286 $ 58,111 $ 2,175 4 % Total office rental expenses increased$2.3 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the new acquisitions ofEastgate Office Park and Corporate Campus East III during the third quarter of 2021, which had incremental rental expenses of approximately$1.3 million during the period. Same-store office rental expenses increased$1.0 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 56 -------------------------------------------------------------------------------- primarily due to increases in utilities, repairs and maintenance and insurance expenses as the "stay-at home" orders issued by state and local governments related to the COVID-19 pandemic were relaxed in early 2021 and our tenants' employees have started returning to the office in-person. Additionally, there was also an increase in sublease expense related to the Annex Lease extension option exercised inSeptember 2020 . Total retail rental expenses increased$0.2 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to increases in insurance expense, utilities expense and facilities services as restrictions on business operations from orders issued by state and local governments related to the COVID-19 pandemic were eased earlier in 2021. These increases were partially offset by lower marketing expense and repairs and maintenance expenses. Multifamily rental expensed increased$0.9 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to an increase in day porter and facilities services, utilities expenses, insurance expenses and marketing expenses during such period. Mixed-use rental expenses increased$4.4 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to an increase in hotel room expenses, sales and marketing expenses, and general excise tax expenses at the hotel portion of our mixed-use property during the period. These increases are due to the return of tourism and related increase in hotel occupancy as travel toHawaii has increased during the year endedDecember 31, 2021 . Real Estate Taxes. Real estate tax expense increased$0.9 million , or 2%, to$42.8 million for the year endedDecember 31, 2021 , compared to$41.9 million for the year endedDecember 31, 2020 . Real estate tax expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2021 2020 Change % 2021 2020 Change % Office$ 19,727 $ 19,190 $ 537 3 %$ 18,962 $ 18,475 $ 487 3 % Retail 12,307 11,928 379 3 12,307 11,928 379 3 Multifamily 6,942 6,750 192 3 6,942 6,750 192 3 Mixed-Use 3,818 4,073 (255) (6) - - - -$ 42,794 $ 41,941 $ 853 2 %$ 38,211 $ 37,153 $ 1,058 3 % Total office real estate taxes increased$0.5 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the new acquisitions ofEastgate Office Park and Corporate Campus East III during the third quarter of 2021, which had incremental real estate taxes of approximately$0.5 million . There was a decrease of$0.5 million atOne Beach Street due to the capitalization of real estate taxes as the property is under redevelopment. Same-store office real estate taxes increased$0.5 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to an increase in the assessed values of City Center Bellevue and First & Main. Retail real estate taxes increased$0.4 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to higher assessed values for Alamo Quarry Market and Waikele Center. Multifamily real estate taxes increased$0.2 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to an increase in assessed values atPacific Ridge Apartments , Lomas Palisades and Hassalo on Eighth - Residential. Mixed-use real estate taxes decreased$0.3 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to the COVID-19 pandemic and its financial burden on the hospitality industry, as a result of whichHonolulu County reduced the tax burden for hotels for the year endedDecember 31, 2021 through 2022. Property Operating Income. Property operating income increased$22.6 million , or 10%, to$246.1 million for the year endedDecember 31, 2021 , compared to$223.5 million for the year endedDecember 31, 2020 . Property operating income by segment was as follows (dollars in thousands): 57 --------------------------------------------------------------------------------
Total Portfolio Same-Store Portfolio
Year Ended December 31, Year Ended December 31,
2021 2020 Change % 2021 2020 Change %
Office $ 136,133 $ 130,130 $ 6,003 5 % $ 132,033 $ 130,463 $ 1,570 1 %
Retail 66,679 60,906 5,773 9 66,679 60,906 5,773 9
Multifamily 29,104 28,253 851 3 29,104 28,253 851 3
Mixed-Use 14,138 4,165 9,973 239 - - - -
$ 246,054 $ 223,454 $ 22,600 10 % $ 227,816 $ 219,622 $ 8,194 4 %
Total office property operating income increased $6.0 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020 primarily due to
the new acquisitions of Eastgate Office Park and Corporate Campus East III
during the third quarter of 2021, which had incremental property operating
income of approximately $5.2 million during the period. The increase in total
office property operating income was partially offset by a decrease in property
operating income of approximately $0.7 million at One Beach Street due to the
expiration of leases to allow for the modernization of the property. Same-store
property operating income increased $1.6 million for the year ended December 31,
2021 compared to the year ended December 31, 2020 primarily due to higher
annualized base rents at La Jolla Commons , The Landmark at One Market, City
Center Bellevue and Torrey Point , offset by decreases in lease termination fees,
tenant improvement management fees and increases in rental expenses as COVID-19
restrictions were relaxed in early 2021 and our tenants' employees returned to
the office in-person.
Retail property operating income increased $5.8 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020 primarily due to
approximately $6.7 million related to tenants who were changed to alternate rent
or to cash basis of revenue recognition during the year ended December 31, 2021
and the year ended December 31, 2020 , as collectability was determined to be no
longer probable for certain tenants at Carmel Mountain Plaza , Del Monte Center,
Alamo Market Quarry and Waikele Center. Some of these tenants have since
reverted back to basic monthly rent as compared to alternate rent as their gross
sales have increased in the year ended December 31, 2021 compared to the year
ended December 31, 2020 , and their alternate rent periods came to an end. This
increase was partially offset by a decrease of $0.7 million related to lease
termination fees received at Alamo Quarry Market and Carmel Country Plaza during
2020. The increase was further offset by an increase in real estate taxes,
insurance expense, utilities expense and facilities services of $0.6 million
Multifamily property operating income increased $0.9 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020 primarily due to
the increase in average occupancy to 92.1% for the year ended December 31, 2021
compared to 88.5% for the year ended December 31, 2020 , primarily related to
Loma Palisades, Pacific Ridge Apartments , Imperial Beach Garden and Santa Fe
Park RV Resort . This increase was partially offset by higher rental expenses due
to an increase in day porter and facilities services, utilities expenses,
insurance expenses and marketing expenses during the period.
Mixed-use property operating income increased $10.0 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020 primarily due to
the return of tourism and related increase in hotel occupancy as travel to
Hawaii has increased during the year ended December 31, 2021 . This led to an
increase in average occupancy and revenue per available room to 66.4% and $185
for the year ended December 31, 2021 compared to 51.3% and $127 for the year
ended December 31, 2020 , respectively. This also led to an increase in other
room rental income and excise tax at the hotel portion of our mixed-use property
and an increase in parking garage income at the retail portion of our mixed-use
property. These increases were offset by higher hotel room expenses, sales and
marketing expenses, and general excise tax expenses at the hotel portion of our
mixed-use property during the period.
Other
General and administrative. General and administrative expenses increased $3.3
million , or 12%, to $29.9 million for the year ended December 31, 2021 , compared
to $26.6 million for the year ended December 31, 2020 . This increase was
primarily due to an increase in employee related costs, including, without
limitation, with respect to base pay for certain salaried and hourly workers,
benefits, annual bonus and stock-based compensation, as well as an increase in
insurance and legal costs relating to corporate and property matters.
Depreciation and amortization. Depreciation and amortization expense increased
$8.0 million , or 7%, to $116.3 million for the year ended December 31, 2021 ,
compared to $108.3 million for the year ended December 31, 2020 . This increase
was primarily due to $5.3 million related to the new acquisitions of Eastgate
Office Park and Corporate Campus East III acquired
58
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during the third quarter of 2021. Additionally, there was higher depreciation
and amortization at Carmel Mountain Plaza , due to acceleration of assets related
to tenant vacating space, and The Landmark at One Market due to new tenant
improvements that were put into service in 2020 and 2021.
Interest expense. Interest expense increased $5.1 million , or 10%, to $58.6
million for the year ended December 31, 2021 compared with $53.4 million for the
year ended December 31, 2020 . This increase was primarily due to the closing of
our 3.375% Senior Notes offering on January 26, 2021 partially offset by a
decrease in interest expense related to our repayment of the Series A Notes on
January 26, 2021 , a decrease in the weighted average interest rate for our Term
Loan A, which became an unhedged variable rate loan when the interest rate swap
expired on January 9, 2021 , a decrease in the Revolver Loan interest expense and
an increase in capitalized interest related to our development projects.
Loss on early extinguishment of debt. Early extinguishment of debt expense
increased $4.3 million for the year ended December 31, 2021 due to the repayment
of the Senior Guaranteed Notes, Series A, with make-whole payments thereon, on
January 26, 2021 .
Other Income (Expense), Net. Other expense, net increased $0.9 million , or 194%,
to other expense, net of $0.4 million for the year ended December 31, 2021
compared to other income, net of $0.4 million for the year ended December 31,
2020 , primarily due to an increase in income tax expense related to taxable
income for our taxable REIT subsidiary and a decrease in interest and investment
income attributed to lower weighted average interest rates on our money market
balances.
59
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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 ofDecember 31, 2021 , the company owned an approximate 78.8% partnership interest in theOperating Partnership . The remaining 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. 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 ofDecember 31, 2021 , 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, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the company's own stock. 60 -------------------------------------------------------------------------------- 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. 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 preferred or common 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 may permit 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 , the company entered into a new at-the-market, or ATM, equity program with five sales agents under which the company may, from time to time, offer and sell shares of common stock having an aggregate offering price of up to$250.0 million , or the 2021 ATM Program. The sales of shares of the company's common stock made through the 2021 ATM Program are to be made in "at-the-market" offerings as defined in Rule 415 of the Securities Act. As ofDecember 31, 2021 , the company had not issued any shares of common stock under the 2021 ATM Program. The company intends to use the net proceeds from any issuances of common stock under the 2021 ATM Program to fund development or redevelopment activities, repay amounts outstanding from time to time under our third amended and restated credit facility or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As ofDecember 31, 2021 , the company had the capacity to issue up to an additional$250.0 million in shares of common stock under the 2021 ATM Program. 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. The company has no obligation to sell the remaining shares available for sale under the 2021 ATM Program. Liquidity and Capital Resources ofAmerican Assets Trust, L.P. 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. 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 other 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 third amended and restated 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 third 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, noting that during the third quarter of 2015, the company obtained investment grade credit ratings from Moody's Investors Service (Baa3),Standard & Poor's Ratings Services (BBB-) andFitch Ratings, Inc. (BBB), and the issuance 61 -------------------------------------------------------------------------------- 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. Given our past ability to access the capital markets, we expect debt or equity to be available to us. Although there is no intent at this time, if market conditions deteriorate, 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. Our overall capital requirements will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of developments. Our capital investments will be funded on a short-term basis with cash on hand, cash flow from operations and/or our third amended and restated credit facility. We intend to operate with and maintain a conservative capital structure that will allow us to maintain strong debt service coverage and fixed-charge coverage ratios as part of our commitment to investment grade debt ratings. In the short and long term, we may seek to obtain funds through the issuance of additional equity, unsecured and/or secured debt financings, and property dispositions that are consistent with this conservative structure. We currently believe that cash flows from operations, cash on hand, our 2021 ATM Program, our third amended and restated credit facility and our general ability to access the capital markets will be sufficient to finance our operations and fund our debt service requirements and capital expenditures. Contractual Obligations The following table outlines the timing of required payments related to our commitments as ofDecember 31, 2021 (dollars in thousands): Payments by Period Within More than Contractual Obligations Total 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years Principal payments on long-term indebtedness (1)$ 1,661,000 $ 211,000 $ 150,000 $ 100,000 $ 200,000 $ -$ 1,000,000 Line of credit (1) - - - - - - - Interest payments 347,187 58,668 51,414 48,734 38,851 37,705 111,815 Operating lease 33,229 3,232 3,328 3,428 3,531 3,584 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 $ 214,930 $ 152,162 $ 243,059 $ 41,289 $ 1,127,941 (1) On January 5, 2022, we entered into the third amended and restated credit facility, which provides for aggregate, unsecured borrowings of up to$500 million , consisting of a revolving line of credit of$400 million , or the 2022 Revolver Loan, and a term loan of$100 million , or the 2022 Term Loan A"). The 2022 Revolver Loan initially matures onJanuary 5, 2026 , subject to two, six-month extension options. The 2022 Term Loan A matures onJanuary 5, 2027 , with no further extension options. Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements. Cash Flows Comparison of the year endedDecember 31, 2021 to the year endedDecember 31, 2020 Total cash, cash equivalents, and restricted cash were$139.5 million and$139.0 million atDecember 31, 2021 and 2020, respectively. Net cash provided by operating activities increased$41.3 million to$168.3 million for the year endedDecember 31, 2021 , compared to$127.0 million for the year endedDecember 31, 2020 . The increase in cash from operations was primarily due to an increase in rental revenue from our mixed-use and office properties, including the incremental increase from our two new office acquisitions during the third quarter of 2021. Additionally, there was an increase in collections from our retail portfolio. The change in interest payable related to the 3.375% Senior Notes and other liabilities further increased the cash from operations. 62 -------------------------------------------------------------------------------- Net cash used in investing activities increased$243.2 million to$312.3 million for the year endedDecember 31, 2021 , compared to$69.1 million for the year endedDecember 31, 2020 . The increase was primarily due to the acquisition ofEastgate Office Park onJuly 7, 2021 and Corporate Campus East III onSeptember 10, 2021 , and increase in capital expenditures at The Landmark at One Market, La Jolla Commons III andOne Beach Street . Net cash provided by financing activities was$144.4 million for the year endedDecember 31, 2021 , compared to net cash used in financing activities of$28.3 million for the year endedDecember 31, 2020 . The increase in cash provided by financing activities was primarily due to the closing of our issuance of 3.375% Senior Notes onJanuary 26, 2021 , partially offset by the repayment of the outstanding balance on the revolving line of credit and the Senior Guaranteed Notes, Series A onJanuary 26, 2021 . 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 expenses, 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 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 office, retail, 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. 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. 63 -------------------------------------------------------------------------------- The following is a reconciliation of our NOI to net income for the years endedDecember 31, 2021 , 2020 and 2019 computed in accordance with GAAP (in thousands): Year Ended December 31, 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) Gain on sale of real estate - - 633 Loss on early extinguishment of debt (4,271) - - Other income (expense), net (418) 447 (122) Net income$ 36,593 $ 35,588 $ 60,188 Funds from Operations We present FFO because we consider FFO an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. We calculate FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts , or NAREIT. FFO represents net income (loss) (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. The following table sets forth a reconciliation of our FFO for the years endedDecember 31, 2021 , 2020 and 2019 to net income, the nearest GAAP equivalent (in thousands, except per share and share data):
Year ended
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 Less: Nonforfeitable dividends on restricted stock awards (557) (377) (376) FFO attributable to common stock and units$ 152,342 $ 143,503 $ 155,384 FFO per diluted share/unit$ 2.00 $ 1.89 $ 2.20 Weighted average number of common shares and units, diluted (1) 76,175,004 76,122,842 70,788,597 64
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(1)For the years endedDecember 31, 2021 , 2020 and 2019 the weighted average common shares used to compute FFO per diluted share include unvested restricted stock awards that are subject to time vesting, as the vesting of the restricted stock awards is dilutive in the computation of FFO per diluted shares, but is anti-dilutive for the computation of diluted EPS for the periods. Diluted shares exclude incentive restricted stock as these awards are considered contingently issuable. Inflation Substantially all of our office and retail leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above. In addition, our multifamily leases (other than at our RV resort where spaces can be rented at a daily, weekly or monthly rate) generally have lease terms ranging from seven to 15 months, with a majority having 12-month lease terms, and generally allow for rent adjustments at the time of renewal, which we believe reduces our exposure to the effects of inflation. For the hotel portion of our mixed-use property, we possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit our ability to raise room rates.
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