American Assets Trust, Inc. — Q1 2022 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2022, with comparisons to Q1 2021. American Assets Trust is a REIT operating through American Assets Trust, L.P.; the portfolio comprised 31 operating properties across office, retail, multifamily and mixed-use, plus land under development or construction. The company owned approximately 78.8% of the Operating Partnership.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $101.5 million | $84.0 million; up 21% |
| Operating income | $28.3 million | $20.1 million |
| Net income | $13.5 million | $1.7 million |
| Net income attributable to AAT stockholders | $10.5 million; diluted EPS $0.18 | $1.3 million; diluted EPS $0.02 |
| Property operating income (NOI) | $65.9 million | $54.4 million; up 21% |
| FFO attributable to common stock and units | $43.8 million; $0.57 per diluted share/unit | Comparable FFO not provided in the reported reconciliation |
| Cash from operating activities | $39.1 million | $42.5 million |
| Cash and cash equivalents at quarter-end | $73.6 million | $139.5 million at Dec. 31, 2021 |
| Total liabilities | $1.805 billion | $1.808 billion at Dec. 31, 2021 |
| Dividends declared per common share | $0.32 | $0.28 |
Property operating income was approximately 65% of total revenue. Rental income rose 20%; total property expenses increased 20%, while rental expenses rose 32%. The company reported $1.649 billion of net carrying-value notes payable ($111.0 million secured and $1.538 billion unsecured). The $400 million revolving facility had no balance outstanding. Management said the Operating Partnership was in compliance with debt covenants. The company had no indebtedness on a standalone basis.
Changes versus the prior comparable period
- Revenue and NOI growth reflected recent office acquisitions, higher collections and occupancy, and recovery in hotel activity. The mixed-use segment’s property operating income increased to $4.7 million from a loss of $0.1 million, as hotel occupancy rose to 72.8% from 47.5% and revenue per available room to $243 from $99.
- Same-store NOI increased 16% overall; retail rose 19.4%, office rose 0.4%, and multifamily rose 11%. Office rental revenue growth was mostly acquisition-related, while same-store office rental revenue increased modestly.
- Net income benefited from the absence of the $4.3 million early debt-extinguishment loss recorded in Q1 2021. Interest expense increased 5% to $14.7 million.
- Operating cash flow declined $3.4 million. Investing cash use increased to $77.3 million, including the Bel-Spring 520 acquisition and increased capital spending. Financing cash use was $27.8 million, versus $212.8 million of cash provided in Q1 2021 when the company issued senior notes.
Outlook, risks and notable items
- No specific earnings or FFO guidance was provided. Management described growth priorities as same-store leasing, development and redevelopment, and selective acquisitions; project timing depends on market conditions and expected risk-adjusted returns.
- Management stated it believed liquidity was strong and adequate for near-term dividend funding. It expected to fund needs through operating cash flow, cash reserves and, if needed, the credit facility; longer-term funding may include debt or equity issuance. These are expectations, not assurances.
- Management continued to monitor COVID-19 effects, especially tenant payment capacity, retail operations, tourism and development schedules. It said the future impact could not be estimated with certainty.
- Leasing was mixed: comparable office leases showed average cash rent increases of 12.5%; comparable retail leases showed a 5.8% cash rent decrease overall, including an 8.8% decrease on renewals. Reported lease statistics may not translate directly into current-period revenue.
- Debt maturities include a $111 million secured mortgage due November 2022 and $150 million of term loans due March 2023. After quarter-end, the company entered a rate lock for a prospective mortgage of up to $63 million, expected to close in Q3 2022, intended to repay the City Center Bellevue mortgage.
- Risks include tenant defaults or non-renewals, interest rates, access to capital, development execution, and concentration in Southern California and office and retail tenants. Office tenants generated 48.9% and retail tenants 24.5% of Q1 revenue. The filing disclosed ongoing groundwater remediation at Del Monte Center; seller-funded escrow was believed sufficient, but additional costs could arise. No material litigation was identified by management.
- COVID-related tenant concessions in Q1 2022 were described as immaterial. The company had up to $250 million available under its ATM equity program and sold no shares through it during the quarter.
Important facts for investors to verify
- Whether hotel recovery, retail collections and occupancy improvements persist, and how much reported growth came from acquisitions versus same-store operations.
- The refinancing plan and terms for the November 2022 mortgage and March 2023 term loans, including effects of changing interest rates.
- Whether planned development, redevelopment and capital spending can be funded while maintaining the $0.32 quarterly dividend.
- Current tenant credit and rent collection trends, office leasing demand, and the cash-rent declines on comparable retail renewals.
- Potential additional environmental remediation costs and the status of the prospective Lomas Santa Fe Plaza mortgage.
NOI and FFO are non-GAAP supplemental measures and should be considered alongside GAAP net income and cash flows; the filing cautions that these measures are not substitutes for them.