Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) for
The Rating Outlook is Stable.
The ratings and Outlook reflect Fitch's expectation that the company will return to metrics appropriate for the level within the forecast period, including leverage of approximately 6.0x, fixed charge covered above 2.0x, and 2.0x unencumbered asset coverage. AAT's stabilized office assets continue to generate strong internal growth, and the
Key Rating Drivers
Investment Grade Credit Metrics: Over the forecast period through 2025, Fitch expects REIT leverage (net debt excluding preferred/recurring operating EBITDA) to trend toward 6.0x. The company's long-term leverage policy is 5.5x, compared to 6.8x at 1Q22, and the pace of improvement will depend on the recovery at its mixed-use assets and the successful lease up of developments under construction.
In the long run, Fitch anticipates fixed-charge coverage to remain in the 2.5x range, and as of
Diversified Tenant & Industry Exposures: The company's retail exposure is well-diversified by tenant, with no tenant accounting for more than 1.5% of total annualized base rent (ABR). As of
AAT's mixed-use property located in
Asset Concentration Mitigated by Tenant Quality: Fitch generally considers concentration in an individual asset above 10% as high. The company has high individual office/retail asset concentrations, with
West Coast Office Driving Growth: The office segment TTM 1Q22 saw robust new leasing spreads of 13% on a cash basis and 19% on a straight-line basis. Fitch expects same store NOI growth in 2022 in the low-single digits due in particular to strong office leasing activity. AAT also plans to grow NOI from the office segment with the development of
The broad rollout out of work from home (WFH) since the onset of the pandemic has led to the possibility that demand for office space will not return to prior levels, or could diminish over time. Several prominent tech companies have stated their employees will be allowed additional WFH flexibility, even after the pandemic has subsided. However, it appears that the majority of employers, initially will look to maintain similar square footage footprints as prior to the pandemic; therefore, a hybrid working model will not necessarily reduce demand for office space.
Strong Markets: Fitch views AAT's
Derivation Summary
AAT's diversified portfolio of office, retail and multifamily assets focused in
AAT's market exposure lends comparison to a number of property-sector-focused REITs, including shopping center owner
Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties. No Country Ceiling or operating environment aspects have an impact on the rating.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Occupancy growth of 70bps in fiscal 2022, 110bps in 2023, and with 50bps of recovery in 2024-2025;
SSNOI growth in the low-to-mid-single digit range;
Recurring capex returns to normalized range consistent with guidance in fiscal 2022;
Development capex of
No disposition activity in the forecast period;
Annual dividend of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of leverage sustaining below 5.5x;
Fitch's expectation of FCC sustaining above 3.0x;
Continued access to the unsecured debt markets, in particular execution of public unsecured debt offerings consistent with higher-rated peers.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of leverage sustaining above 6.5x;
Fitch's expectation of FCC sustaining below 2.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: Fitch estimates AAT's base case liquidity coverage at 1.2x through YE 2023, which is adequate for the rating. Liquidity coverage improves to 1.4x if the company were to refinance 80% of its secured maturities.
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex and forecast (re)development costs.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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