American Assets Trust, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company completed its IPO and formation transactions on January 19, 2011 and acquired additional properties during the period. Accordingly, comparisons with 2010 are not like-for-like: 2010 reflects the Predecessor, while 2011 includes acquired properties only from their acquisition dates.
Business context
American Assets Trust is a newly public, vertically integrated REIT with retail, office, multifamily and mixed-use properties in California, Oregon, Hawaii and Texas. At June 30, 2011, it reported 21 operating properties, approximately 4.8 million rentable square feet of retail and office space, 922 residential units (including RV spaces), and a 369-room hotel.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $52.3 million, up 79% year over year | $100.3 million, up 72% |
| Operating income | $14.0 million, versus $12.1 million | $29.8 million, versus $24.3 million |
| Net income | $0.5 million, versus $5.8 million | $14.1 million, versus $6.4 million |
| Net income (loss) attributable to company stockholders | $0.2 million | $(0.5) million |
| Net income (loss) per common share | $0.01 | $(0.01) |
| Operating cash flow | Not separately reported for the quarter | $28.7 million, versus $25.0 million |
Six-month growth in reported net income included a $46.4 million acquisition gain, partly offset by $25.9 million of debt-extinguishment expense and $9.0 million of loan transfer and consent fees. The company reported FFO attributable to common stock and units of $14.6 million for Q2 and $24.4 million for the first half; diluted FFO per share/unit was $0.26 and $0.47, respectively. FFO is a non-GAAP measure and is not a measure of liquidity.
Property operating income was $32.1 million in Q2 and $63.6 million for the first half. Same-store property operating income was approximately flat: down 1% in Q2 and up 1% for the six months. Reported revenue and operating-income growth primarily reflects acquisitions, including Waikiki Beach Walk, the Solana Beach properties, The Landmark at One Market and First & Main. Q2 retail and office occupancy was 94.0% and 93.2%, respectively; multifamily occupancy was 97.7%. Mixed-use occupancy of 97.6% refers to the retail portion.
At June 30, cash and cash equivalents were $92.5 million and trading marketable securities were $31.4 million. Operating cash flow of $28.7 million was more than offset by $241.7 million of investing outflows, principally property acquisitions, the Lloyd District deposit and securities purchases. Financing provided $263.6 million, largely from IPO proceeds, alongside debt repayments and distributions.
Secured notes payable were $944.3 million; the company had no unsecured notes or affiliate notes payable at quarter-end. The debt carried fixed rates, with listed stated rates generally ranging from 3.965% to 7.22%. The $250 million revolving facility was undrawn, with a possible $150 million accordion subject to conditions. Management reported compliance with loan covenants. Total assets were $1.72 billion and total equity was $697.3 million.
Material changes and unusual items
- The January IPO issued 31.625 million shares at $20.50 per share and generated approximately $594.6 million in net proceeds. Proceeds funded debt repayment, transaction costs and acquisitions, among other uses.
- First & Main was acquired in March for approximately $128.9 million and financed in part with an $84.5 million, five-year fixed-rate mortgage at 3.965%.
- On July 1, 2011, after quarter-end, the company completed the approximately $92 million Lloyd District Portfolio acquisition; the related $91.6 million deposit was recorded at June 30.
- The company declared and paid a Q2 dividend of $0.21 per share and unit. The filing states that the credit facility limits annual distributions to the greater of 95% of FFO or the amount needed to maintain REIT status and avoid specified taxes, subject to default restrictions.
- The company intended to elect REIT tax treatment for the 2011 tax year; qualification depends on meeting statutory requirements, including distribution and asset tests.
Outlook, commentary and risks
The filing provides no quantified earnings or FFO guidance. Management expected to fund near-term needs from operations, cash reserves, IPO proceeds and, if necessary, the revolver; longer-term needs could be funded by operations, debt and equity issuance. Management cautioned that access to capital is not assured.
Risks highlighted include weak market or real estate conditions, tenant defaults and lease nonrenewals, acquisition and integration challenges, interest rates, operating costs, financing availability, REIT qualification, litigation and geographic and retail-sector concentration. Thirteen properties were in Southern California, and retail tenants generated 43% of first-half revenue. Borders announced it would close its remaining stores; it leased space at three company properties and represented $1.3 million of annualized base rent as of December 31, 2010. Foodland Super Market had ceased operating at its premises; its lease expires in 2014 and renewal was considered unlikely. Del Monte Center had ongoing groundwater remediation, funded by seller escrow that management believed sufficient, though additional costs could arise.
Management reported effective disclosure controls and procedures as of June 30, 2011 and no material change in internal control over financial reporting. It did not believe the pending litigation was expected to have a material adverse effect, while noting litigation involves uncertainty.
Investor verification priorities
- Separate acquisition-driven growth from underlying performance; review same-store trends and the limited comparability of the Predecessor periods.
- Reconcile net income to recurring property results, including the acquisition gain and debt-restructuring and consent costs; assess FFO alongside capital needs and cash flow.
- Review debt maturities, interest-only balances, defeasance or prepayment provisions, covenant headroom and the borrowing base and conditions on the undrawn revolver.
- Assess the post-quarter Lloyd District acquisition, its financing, purchase-price allocation and contribution to operations.
- Monitor Borders and Foodland leasing outcomes, tenant concentration, California tax reassessments and the Del Monte environmental escrow.
- Confirm REIT qualification and the sustainability of distributions, including the facility’s distribution limits and the Operating Partnership unit redemption rights.