Business Context and Reporting Period
Company: American Assets Trust, Inc. (AAT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
AAT is a vertically integrated, self-administered REIT focused on retail, office, multifamily, and mixed-use properties. The reporting period is significantly impacted by the company's Initial Public Offering (IPO) and "Formation Transactions" completed on January 19, 2011. These transactions consolidated the company's predecessor assets and acquired controlling interests in the Waikiki Beach Walk and Solana Beach Centre entities. Consequently, the 2011 results include these new assets, whereas the 2010 comparative period reflects only the predecessor's operations.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenue | $47,772 | $28,932 |
| Operating Income | $15,791 | $12,165 |
| Net Income | $13,596 | $524 |
| Net Loss Attributable to Stockholders | $(698) | — |
| Funds From Operations (FFO) | $26,774 | — |
| FFO Attributable to Common Stock/Units | $9,751 | — |
| Cash and Cash Equivalents | $100,396 | $24,288 |
| Total Debt (Secured Notes Payable) | $860,127 | $851,547 |
| Net Cash Provided by Operating Activities | $15,270 | $10,337 |
Note: Net income includes a $46.4 million gain on acquisition. Net loss attributable to stockholders reflects the allocation of earnings to noncontrolling interests and predecessor equity.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 65% to $47.8 million, driven primarily by the acquisition of Solana Beach Towne Centre, Solana Beach Corporate Centre, Waikiki Beach Walk, and First & Main (acquired March 11, 2011).
- Acquisition Gain: A one-time gain of $46.4 million was recognized on the acquisition of controlling interests in Solana Beach and Waikiki Beach Walk entities.
- Debt Restructuring Costs: The quarter included significant one-time expenses related to the IPO and debt refinancing:
- Early extinguishment of debt: $25.9 million (including $24.3 million in defeasance costs).
- Loan transfer and consent fees: $9.0 million.
- Balance Sheet Expansion: Total assets increased from $1.12 billion to $1.65 billion, and total equity increased from $155 million to $708 million, reflecting the capital raised in the IPO and the fair value adjustment of acquired assets.
Guidance, Outlook, and Risks
Capital Resources: The company raised approximately $594.6 million in net proceeds from its IPO. As of March 31, 2011, approximately $105.6 million remained for general working capital, future acquisitions, and capital expenditures. The company entered into a $250 million revolving credit facility (undrawn) with an accordion feature to increase availability to $400 million.
Dividends: A dividend of $0.17 per share/unit was declared and paid for the period from January 19, 2011, to March 31, 2011.
Risks and Contingencies:
- REIT Qualification: The company intends to qualify as a REIT for the taxable year ending December 31, 2011. Failure to qualify would subject the company to corporate income tax.
- Concentration Risk: Thirteen of 21 consolidated properties are located in Southern California, and retail tenants accounted for 45% of total revenue.
- Legal Proceedings: The company is not currently a party to material legal proceedings, though prior investors in the predecessor entities are involved in litigation regarding fiduciary duties. Plaintiffs in that litigation consented to the Formation Transactions and waived claims against the company.
- Environmental: Ongoing environmental remediation at Del Monte Center is funded by an escrow account; the company believes funds are sufficient but may face overage costs.
Investor Verification Checklist
- Acquisition Accounting: Verify the $46.4 million gain on acquisition and the fair value adjustments made to the Solana Beach and Waikiki Beach Walk entities.
- Debt Covenants: Confirm compliance with the new credit facility covenants, specifically the maximum leverage ratio (65% through 2011, 60% thereafter) and fixed charge coverage ratio (1.50x).
- FFO Reconciliation: Review the reconciliation of Net Income to Funds From Operations (FFO), noting the exclusion of the acquisition gain and the inclusion of depreciation.
- Use of Proceeds: Track the deployment of the $594.6 million IPO proceeds, specifically the $129 million used for the First & Main acquisition and the $342 million used for debt repayment.
- Noncontrolling Interests: Analyze the allocation of net income/loss between the company's stockholders and the noncontrolling interests (unitholders in the Operating Partnership and predecessor owners).