American Assets Trust, Inc. — Q2 2021 Form 10-Q
Business context and period. This filing covers the quarter and six months ended June 30, 2021. American Assets Trust is a REIT operating through American Assets Trust, L.P.; its portfolio included 28 retail, office, multifamily and mixed-use properties. The company owned approximately 78.8% of the Operating Partnership. Unless noted, amounts below are consolidated and in millions.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total property revenue | $91.8 | $82.1 | $175.8 | $178.9 |
| Property operating income / NOI | $61.0 | $56.2 | $115.4 | $119.3 |
| Operating income | $26.4 | $23.0 | $46.5 | $51.8 |
| Net income | $11.5 | $9.8 | $13.2 | $25.3 |
| Net income attributable to AAT stockholders | $8.9 | $7.7 | $10.2 | $19.7 |
| Basic and diluted EPS | $0.15 | $0.13 | $0.17 | $0.33 |
- Q2 revenue increased 12% and net income attributable to stockholders increased 17% year over year. H1 revenue declined 2%, while net income attributable to stockholders fell 48%, including a $4.3 million early debt-extinguishment charge.
- Q2 property operating income increased 9%; H1 declined 3%. H1 same-store retail NOI fell 12.8%, while same-store office NOI rose 2.0%.
- Interest expense was $14.9 million in Q2 and $28.9 million for H1, up 11% and 8%, respectively. H1 FFO attributable to common stock and units was $68.1 million, or $0.89 per diluted share/unit; FFO is a non-GAAP measure.
- H1 operating cash flow was $76.7 million, versus $69.1 million. Capital expenditures were $35.5 million and investing cash use was $37.1 million. Financing provided $191.3 million, mainly reflecting the new notes issuance. Cash, cash equivalents and restricted cash totaled $370.0 million at June 30.
- At June 30, total debt carrying value was approximately $1.648 billion: $110.9 million secured and $1.537 billion unsecured. No revolver balance was outstanding; the facility provides a $350 million revolving line. The Operating Partnership reported compliance with debt covenants. AAT, Inc. itself holds no debt; debt is held by the Operating Partnership.
- Declared dividends were $0.28 per share for Q2 and $0.56 for H1, compared with $0.20 and $0.50 in the respective 2020 periods.
Material changes and operating drivers
- Q2’s revenue rebound reflected stronger hotel activity in Hawaii and improved rent collection, including rent previously recognized on an alternate or cash basis. Mixed-use rental revenue rose $6.3 million year over year; hotel occupancy was 67% versus 17% and revenue per available room was $184 versus $34.
- For H1, retail property operating income declined $4.5 million, primarily due to lower base rents, pandemic-related tenant rent arrangements and the prior-year property tax refund. Office property operating income rose $1.0 million; mixed-use income declined $0.3 million.
- Leased percentages at June 30 were 90.3% office, 91.1% retail, 87.8% multifamily and 89.2% for the retail portion of mixed-use. These figures include some leases not yet commenced.
- In January, the Operating Partnership issued $500 million of 3.375% senior unsecured notes due 2031. Proceeds supported repayment of $150 million Series A notes, repayment of $100 million drawn on the revolver, development funding and general corporate purposes. The make-whole payment contributed to the $4.3 million extinguishment charge.
- Subsequent to quarter-end, on July 7, the company acquired Eastgate Office Park, a roughly 280,000-square-foot Bellevue office campus, for $125 million, excluding closing costs and prorations, using cash on hand.
Outlook, risks and contingencies
- Management expected leasing volume for the rest of 2021 to be below historical averages, with overall rental income decreases related to COVID-19. It expressed hope that reopening would support recovery, especially in Hawaii tourism, but said pandemic effects remained uncertain. No quantified earnings or FFO guidance was provided in the supplied filing text.
- For Q2, rent collection was approximately 99% for office, 92% for retail and 94% for multifamily; 94% of deferred-rent repayments due during the quarter had been collected. Management said liquidity was strong and adequate for dividend funding obligations over the next 12 months, while noting rent concessions continued to affect cash flow.
- Key risks include COVID-19 effects on tenants, guests and markets; lease defaults, non-renewals and vacancies; interest-rate and financing risks; development and acquisition execution; and REIT qualification requirements. Fifteen properties were in Southern California; retail and office tenants accounted for 25.5% and 50.6% of H1 revenue, respectively.
- Management reported no material legal proceeding expected to materially affect the company. Del Monte Center groundwater remediation continues, funded by seller escrow that management believes is sufficient; additional costs could arise if that balance proves inadequate. Potential Embassy Suites franchise termination payments were disclosed as up to $4.5 million based on performance through June 30.
- Both registrants reported effective disclosure controls and no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether rent collections, tenant credit quality and deferred-rent repayments continued improving after June 30, particularly in retail.
- Whether office leasing, occupancy and tenant return-to-office trends support rental growth; compare leased rates with commenced occupancy and cash collections.
- Whether hotel recovery in Hawaii offsets mixed-use operating costs and remains sustainable as travel conditions change.
- Debt maturities and refinancing exposure, including the 2022 secured note and Term Loan A maturities, variable-rate exposure, and available revolver capacity.
- Funding needs and returns for La Jolla Commons III and other development/redevelopment activity, plus the impact of the $125 million Eastgate acquisition on cash and liquidity.
- Performance measures and assumptions behind same-store NOI and FFO, which are non-GAAP measures and are not substitutes for GAAP results or operating cash flow.