American Assets Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. American Assets Trust is a REIT operating through its Operating Partnership. The portfolio comprised 31 properties across office, retail, multifamily and mixed-use, including a 369-room hotel. The company owned approximately 78.8% of the Operating Partnership.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $109.7 million | $104.2 million | $217.5 million | $205.6 million |
| Operating income | $31.5 million | $28.3 million | $61.2 million | $56.7 million |
| Net income | $15.4 million | $13.6 million | $36.1 million | $27.1 million |
| Net income attributable to AAT stockholders | $12.0 million | $10.6 million | $28.1 million | $21.1 million |
| Diluted EPS | $0.20 | $0.18 | $0.47 | $0.35 |
| FFO per diluted share/unit | $0.59 | Not provided | $1.25 | Not provided |
Revenue rose 5% in Q2 and 6% year to date. Property operating income, used by management as NOI, increased 4% in both comparisons. Q2 property operating income was 63.7% of revenue versus 64.3% a year earlier. Net income growth for the first half included a $6.3 million net settlement received in January related to building systems at Hassalo on Eighth; this was reported in other income.
Net cash from operations was $98.1 million for the first half, up from $86.1 million. Investing activities used $49.1 million, versus $112.5 million, reflecting lower capital expenditures and no comparable property acquisition. Financing activities used $13.9 million, versus $52.4 million. Cash and cash equivalents were $84.7 million at June 30, 2023, compared with $49.6 million at year-end 2022.
Total assets were $3.012 billion and total liabilities $1.836 billion at June 30, 2023. Debt, net of issuance costs, included $74.6 million secured notes and $1.614 billion unsecured notes; the revolving line had no balance. Principal debt was approximately $1.7 billion. The $400 million revolving facility was undrawn, in addition to the $100 million Term Loan A. The Operating Partnership reported compliance with its debt covenants. Dividends declared were $0.33 per share for Q2 and $0.66 for the first half; first-half FFO attributable to common shares and units was $95.4 million.
Material changes and operating trends
- First-half rental income increased 5%. Growth came from higher rents and recoveries, new retail leases, multifamily rent increases, and improved hotel occupancy and room revenue.
- Property expenses rose 9% for the first half, including a 12% increase in rental expenses. Higher operating costs, utilities, insurance, repairs and hotel expenses partly offset revenue growth.
- Segment property operating income increased year over year for the first half: office 1%, retail 7%, multifamily 10% and mixed-use 10%.
- Leased percentages at June 30 were 87.4% office (91.0% in 2022), 94.6% retail (92.5%), 85.9% multifamily (92.0%) and 94.6% for the retail portion of mixed-use (94.9%).
- Interest expense increased 10% for the first half, primarily due to the larger amended term loan and related financing-cost amortization. Term Loans B and C were extended to January 2025, with one 12-month extension option; their hedged effective rates were approximately 5.47% in year one and 5.57% in year two, subject to leverage adjustments.
Outlook, risks and contingencies
Management gave no specific earnings or FFO guidance. It intends to pursue development and redevelopment, including potential future phases at La Jolla Commons and Lloyd Portfolio and work at Waikele Center and One Beach Street, subject to market conditions and acceptable risk-adjusted returns. Acquisitions are also being evaluated opportunistically. Management said liquidity was strong and considered available sources adequate for near-term needs, while noting that financing access and capital plans depend on market conditions. Projects may be delayed and acquisitions limited if conditions deteriorate.
Key disclosed risks include tenant defaults, nonrenewals or vacancies; rental-rate pressure; higher interest rates and operating costs; financing availability; development and redevelopment execution; and economic or market weakness affecting office, retail, multifamily and hotel demand. Office and retail tenants generated 47.4% and 23.7% of first-half revenue, respectively; 15 properties are in Southern California. Multifamily occupancy also declined year over year.
The company disclosed ongoing groundwater remediation at Del Monte Center, expected to involve monitoring for five to seven years. Seller-funded escrow is believed sufficient, but additional costs could arise. The Embassy Suites franchise termination payment could be as high as $7.0 million if termination follows specified defaults, including failure to complete required improvements. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to the prior annual report’s risk factors were reported.
Investor facts to verify
- How much of first-half earnings growth reflects the $6.3 million Hassalo on Eighth settlement, and what is the expected recurrence of similar items?
- Whether office and multifamily leasing and occupancy stabilize, given the year-over-year occupancy declines.
- Debt maturities, interest-rate exposure and refinancing options, especially the 2024–2025 notes and term loans; confirm covenant headroom and revolver availability.
- Whether rising property expenses continue to outpace revenue and pressure property-level margins and dividend coverage.
- Development spending, leasing commitments and the timing and returns of planned projects; assess the Del Monte Center remediation and hotel franchise obligations.