American Assets Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The filing combines American Assets Trust, Inc. and its operating partnership, American Assets Trust, L.P. The REIT owned 73.3% of the partnership. The portfolio comprised 27 operating properties across retail, office, multifamily and mixed-use, plus land and construction in progress.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $85.3 million | $80.7 million |
| Operating income | $28.8 million | $12.9 million |
| Consolidated net income (loss) | $15.2 million | $(0.7) million |
| Net income (loss) attributable to AAT stockholders | $11.1 million | $(0.5) million |
| Basic and diluted EPS | $0.24 | $(0.01) |
| Net operating income (NOI; non-GAAP) | $55.5 million | $51.8 million |
| FFO attributable to common stock and units (non-GAAP) | $35.7 million; $0.56 per diluted share/unit | $32.5 million; $0.51 per diluted share/unit |
| Cash from operations | $36.8 million | $44.0 million |
| Capital expenditures and leasing commissions | $22.4 million | $11.4 million |
| Cash and cash equivalents at period end | $54.5 million | — |
| Dividends declared per share | $0.28 | $0.27 |
Revenue grew 6%; rental income rose 1%, while other property income increased 87%. Property operating income was $55.5 million, or approximately 65% of revenue (calculated). Total liabilities were $1.412 billion, including $162.7 million of secured notes, $1.046 billion of unsecured notes and $86.4 million carrying value on the unsecured line of credit. The company itself has no debt; borrowings are held by the operating partnership. Cash, cash equivalents and restricted cash totaled $64.3 million.
Changes versus prior period
- Net income improved from a small loss to $15.2 million. The increase reflected higher property income and a $12.7 million decline in depreciation and amortization, largely because the prior-year period included higher Waikele Center redevelopment depreciation.
- Other property income included $4.5 million of lease termination income associated with surrender of the former Sears building at Carmel Mountain Plaza; this was a material, noncash contributor to the year-over-year improvement.
- NOI rose 7%. Retail NOI increased 15%, office 3% and multifamily 5%; mixed-use NOI declined 3%. Retail same-store NOI increased 26.9%, with redevelopment same-store retail NOI up 15.1%.
- Operating cash flow fell $7.1 million, while investing outflows increased $11.1 million, primarily reflecting tenant improvements at Waikele Center and redevelopment at Lloyd District Portfolio.
- The company adopted lease accounting Topic 842 on January 1, 2019. It recognized approximately $7.7 million of right-of-use assets and lease liabilities and combined about $7.8 million of qualifying non-lease components with rental income.
Outlook, risks and contingencies
- No numeric earnings or FFO guidance was provided. Management expected 2019 leasing volume to be broadly in line with historical averages and anticipated overall positive rental-income increases, while cautioning that signed leases may not commence or produce all contracted rent.
- Management described itself as cautiously optimistic about leasing trends. Growth plans include same-store leasing, redevelopment and development, and selective acquisitions; future projects and acquisitions depend on market conditions, returns and access to capital.
- At March 31, 2019, the company reported compliance with debt covenants and believed operating cash flow, cash reserves and credit availability were adequate for near-term needs. It cautioned that financing availability is not assured. The $350 million revolver had $88 million outstanding; annual interest expense was estimated to change by approximately $0.9 million for a 1% change in market rates on variable-rate debt.
- Key exposures include geographic concentration (14 properties in Southern California), retail and office tenant concentration (34.5% and 32.6% of revenue, respectively), tenant defaults or non-renewals, interest rates, development execution, and REIT qualification. No tenant represented more than 10% of rental revenue.
- The filing reports ordinary-course legal matters that management did not expect to have a material adverse effect. Del Monte Center groundwater remediation is expected to involve five to seven years of monitoring; existing seller-funded escrow is believed sufficient, but overruns could create costs. A hotel franchise termination payment could be as high as $7.5 million under specified circumstances.
- The operating partnership repaid the $19.6 million Torrey Reserve—North Court mortgage in March. Other disclosed maturities include $100 million of Term Loan A and $150 million of Series A notes in 2021, and $111 million of secured City Center Bellevue debt in 2022. Management reported no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- How much of the reported revenue and earnings improvement is recurring, given the $4.5 million noncash lease termination income and lower prior-year-comparison depreciation?
- Whether leasing, occupancy and rent growth hold up: office occupancy was 92.3% versus 94.6% a year earlier, while retail and multifamily occupancy improved.
- Capital spending and redevelopment requirements, especially at Waikele Center and Lloyd District Portfolio, and their expected returns and funding needs.
- Debt maturity and refinancing plans, revolver availability, interest-rate exposure and continued covenant compliance.
- Progress and remaining funding for Del Monte Center remediation, and compliance with the Waikiki hotel franchise improvement requirements.