AAT Debt IPO Flashcards
Walk me through this AAT Debt IPO
Sure thing…we were invited to serve as an active bookrunner on American Asset Trust’s $500MM investment grade debt IPO. American Assets Trust is a North American, vertically integrated, self-administered diversified REIT. AAT owns, operates and develops high quality retail, office and multifamily properties in high-barrier-to-entry markets like Southern California, Northern California, Oregon, Washington, Texas and Hawaii.
What is a vertically integrated REIT?
A vertically integrated REIT is when an organization is set up to handle many or even all the aspects of commercial real estate investment. For instance, its investment fund team would raise capital to acquire the property. Its acquisitions team would then purchase the property. Its property management team would take responsibility for day-to-day management. Its construction and development team would rehab or upgrade the property as needed.
Why did AAT launch this debt IPO?
AAT intended to use the proceeds to pay down its upcoming term loan maturity, pay down the balance on its line of credit and the remainder was for the development of its 200,000 sq ft office property in San Diego, La Jolla Commons. Additionally, credit agencies had advised the company that it could increase its credit rating over the long term if it engaged in the public debt market
What were the terms on the notes?
AAT priced a $500MM offering of 10-year notes at T+237.5 (treasury yield was about 1.127%)
Was the debt IPO a good idea?
I think it was a good idea for two primary reasons.
1) Since their 2011 IPO, AAT’s office segment has been among the company’s fastest growing and reliable segments. Given AAT’s strong foothold in San Diego and the robust office space demand, I think capitalizing on their advantage by investing in La Jolla commons is a smart management play.
2) Given management’s stated interest in levering up their business to pursue more accretive acquisitions in the future, I think taking measures to increase AAT’s credit rating is a smart decision. Especially given that their current net debt/EBITDA is 6.0x compared to a peer median of 7.7x
How does AAT differentiate itself from its competitors?
There are two main ways that AAT differentiates itself from its competition.
1) AAT is one of the only vertically integrated diversified REITs, which has translated into superior market expertise relative to peers whose expertise is largely limited to the acquisition and disposition of properties.
2) AAT adheres to a long term portfolio strategy that focuses on concentration in high growth, high barrier-to-entry markets. Unlike its peers who acquire and dispose of assets far more frequently. This differentiated strategy is largely responsible for AAT being the only diversified REIT that consistently trades below 5.0% cap rates (trades at a 4.8%)
What were some risks in pursuing the deal?
I’d say the major risk was getting the right pricing and maturity profile for the notes. Management was determined to price below 3% and was even willing to issue 5 yr notes instead of 10 yr notes to make it happen. This risk was exacerbated by the potential pricing pressure resulting from a busy REIT calendar (many REIT were tapping into capital markets at the beginning of the year).
What is AAT’s Agg value/TEV?
$3.4Bn TEV
Who are some of AAT’s peers?
I think the most comparable companies from a portfolio composition and size standpoint are:
1) JBG Smith Properties
2) Vornado Realty Trust
3) Mack-Cali Realty Corp
4) Colony Capital Corp
Would you invest in AAT? Why or why not?
No I would not, at least not in the short to medium term. The main reason being that AAT trades at a consistent premium to its diversified REIT peers and I’m not confident in being able to invest at an attractive price. I would consider investing in the long term if the company’s cap rate increased and once its development projects are no longer in their infancy. Presently, AAT’s development pipeline is too early stage and highly levered for me to predict how value additive they’ll be.
What was your role on the deal?
I had two main responsibilities on the deal. I spent the majority of my time drafting the company’s roadshow presentation reviewing the company’s portfolio strategy, and composition, as well as management objectives and valuation considerations. My other responsibility was to create a comprehensive case study on the transaction to be presented to firm management in light of the success of the process in the midst of a challenging pricing environment.
What was AAT’s EBITDA?
$210MM (2019)
What was AAT’s leverage?
6.0x net debt/EBITDA
What’s AAT’s revenue?
$360MM (2019)
What’s AAT’s revenue trend?
AAT’s revenue has been growing at a 7.5% CAGR over the last 4 years
