American Assets Trust, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. American Assets Trust is a diversified, vertically integrated REIT focused on retail, office, multifamily and mixed-use properties in California, Oregon and Hawaii. At quarter-end, it held interests in 22 operating properties and land at five properties for development or construction.
Financial highlights
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Total revenue | $57.8 million, up 13% year over year | $114.8 million, up 17% |
| Property operating income (NOI) | $35.9 million, up 15% | $72.3 million, up 16% |
| Net income | $2.6 million | $5.5 million |
| Net income attributable to company stockholders | $1.7 million; $0.04 per share | $3.5 million; $0.09 per share |
| Operating cash flow | Not separately reported for the quarter | $35.3 million, versus $28.7 million |
| FFO attributable to common stock and units | $17.2 million; $0.30 per diluted share/unit | $35.2 million; $0.62 per diluted share/unit |
Q2 NOI was approximately 62% of revenue, compared with 61% in Q2 2011. Six-month NOI was approximately 63% of revenue, versus 63% in 2011. Same-store NOI was $33.4 million in Q2, up 7%; for the first six months it was $47.4 million, essentially flat year over year. FFO and NOI are non-GAAP measures; the company cautions that neither substitutes for GAAP income or cash flow.
At June 30, total assets were $1.71 billion and secured notes payable were $964.5 million carrying value ($979.0 million principal). Cash and cash equivalents were $98.6 million, with $24.3 million in marketable securities. The undrawn revolving credit facility had $213.8 million of allowable availability; no borrowings were outstanding. The company reported compliance with debt and credit-facility covenants. Cash used in investing was $43.6 million and cash used in financing was $5.9 million for the six months. Dividends declared were $0.21 per share per quarter, or $0.42 for the half-year.
Changes and operating drivers
- Revenue growth reflected acquisitions, particularly Lloyd District Portfolio and One Beach Street, as well as improved hotel performance at Waikiki Beach Walk. The company acquired One Beach Street, a 97,000-square-foot San Francisco office property, in January for approximately $36.5 million cash.
- Q2 same-store office rental revenue rose 9%; retail rose 2%. Hotel occupancy for the six months was 90.4%, versus 87.3%, and revenue per available room was $225, versus $204.
- Overall six-month revenue and NOI increased, but the comparison is affected by portfolio acquisitions and the timing of 2011 formation transactions. 2011 also included a $46.4 million acquisition gain and $34.9 million of early-debt-extinguishment and loan-transfer/consent charges. Consequently, six-month net income fell from $14.1 million to $5.5 million despite higher property income.
- Debt principal increased to $979.0 million from $959.4 million at year-end, including the $21.9 million fixed-rate mortgage on One Beach Street. The debt portfolio is fixed-rate, with maturities extending through 2020; notable maturities include substantial balances in 2014–2017.
Outlook, risks and contingencies
The filing provides no specific earnings or FFO guidance. Management said it expects to fund near-term needs with operating cash flow, existing cash and, if needed, the credit facility; longer-term needs may be met through operating cash flow, debt and equity financing. On July 30, 2012, the company agreed to acquire City Center Bellevue, a 497,000-square-foot office tower, for approximately $229 million, expected to be funded with cash and credit-facility borrowings. Closing remained subject to customary conditions, with no assurance it would occur.
Key risks include tenant defaults, lease expirations or nonrenewals, vacancies and rents, real-estate market conditions, acquisition and development execution, financing access, interest rates and operating costs, and REIT qualification. Geographic and sector concentration is notable: 12 properties were in Southern California, and retail tenants generated 38.4% of six-month revenue. Del Monte Center has groundwater remediation underway, expected to conclude within two years; the company believes seller-funded escrow is sufficient but could bear excess costs. Waikiki hotel franchise termination could trigger a payment of up to $5.5 million. Tax-protection agreements restrict certain taxable property dispositions through January 2018 and could require indemnification payments. Management did not believe pending ordinary-course litigation would have a material adverse effect. Disclosure controls were reported effective, and no material changes in internal control were identified.
Important facts for investors to verify
- Whether the Bellevue acquisition closed, its financing mix and the resulting debt and liquidity position.
- Upcoming mortgage maturities, refinancing plans, and continuing covenant compliance.
- Same-store leasing, rents and occupancy—especially retail re-leasing and Waikiki hotel performance.
- Cash available for dividends after capital spending, debt service and acquisition needs; compare distributions with FFO and operating cash flow.
- Progress and remaining funding for Del Monte remediation, and potential exposure under the hotel franchise and tax-protection agreements.