American Assets Trust, Inc. — 2018 Q3 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2018. American Assets Trust is a REIT operating through its consolidated Operating Partnership, in which it held a 73.2% interest. The portfolio comprised 27 retail, office, multifamily and mixed-use properties, including a 369-room hotel.
Key financial metrics
| Metric | Q3 2018 | Nine months 2018 | Comparison |
|---|---|---|---|
| Total revenue | $82.5 million | $248.3 million | Q3 +0.2%; nine months +6% year over year |
| Net income | $14.3 million | $18.0 million | Q3 +14%; nine months −41% |
| Net income attributable to AAT stockholders | $10.4 million | $13.0 million | Q3 +14%; nine months −41% |
| Diluted earnings per share | $0.22 | $0.28 | Prior year: $0.19 and $0.47, respectively |
| FFO attributable to common stock and units | $34.1 million | $103.8 million | $0.53 and $1.62 per diluted share/unit; comparable 2017 FFO is not shown in the provided filing text |
| Cash from operating activities | — | $118.9 million | Down from $125.7 million |
| Cash, cash equivalents and restricted cash | $66.1 million at September 30 | — | $104.3 million at September 30, 2017 |
| Total liabilities | $1.381 billion | — | $1.416 billion at December 31, 2017 |
| Dividends declared per common share | $0.27 | $0.81 | Prior year: $0.26 and $0.78 |
At September 30, total debt carrying value was approximately $1.271 billion: $204.8 million secured notes, $1.046 billion unsecured notes and $20.2 million on the unsecured line of credit. The $350 million revolving facility had $22 million outstanding. The company reported compliance with debt covenants. The REIT parent itself does not hold debt; borrowings are held by the Operating Partnership.
Q3 operating income was $27.3 million on revenue of $82.5 million (approximately 33% operating margin). Nine-month property operating income, a company-defined measure, was $159.6 million, up 8%; it is not a GAAP measure or a measure of cash available.
Changes versus prior comparable periods
- Q3 revenue was nearly unchanged, while net income increased, helped by lower depreciation and interest expense. Q3 interest expense fell 7% year over year, partly following repayment of the Loma Palisades mortgage.
- Nine-month revenue rose 6%, but net income fell 41%. Depreciation and amortization increased 36% to $86.0 million, including higher depreciation at Waikele Center and accelerated depreciation associated with Lloyd District lease terminations.
- Nine-month revenue growth included acquisitions and higher other property income. The latter rose 41% to $17.1 million, primarily due to lease termination fees, including at Lloyd District Portfolio and Torrey Point. Same-store property operating income increased 4%.
- Q3 total retail property operating income declined 4%, primarily after the Kmart lease at Waikele Center expired in June 2018. Multifamily and office leasing and occupancy supported growth in other segments.
- Operating cash flow decreased $6.7 million. The filing attributes much of the comparison to 2017 cash proceeds from settlement of forward-starting interest rate swaps. Investing cash outflow was $36.8 million, versus $316.6 million in 2017, which included the Pacific Ridge Apartments acquisition. Financing used $107.9 million, compared with $240.6 million provided in 2017.
Outlook, risks and unusual items
- No numerical earnings or FFO guidance is provided. Management expected leasing volume for the remainder of 2018 to be broadly in line with historical averages and anticipated overall positive rent increases, while cautioning that signed leases may not commence or produce all contractual rent.
- For Q3 comparable-space leases, reported average rent increases were 18.8% cash / 21.7% GAAP for retail and 11.0% / 12.6% for office. Office tenant improvements and incentives averaged $72.01 per square foot for comparable new leases. Management described its leasing outlook as cautiously optimistic.
- Management said operating cash flow and available credit were expected to support near-term needs and stated that the company had adequate working capital for its dividend funding obligations over the next 12 months. This is not an assurance that capital will remain available; development and acquisition spending may be adjusted if conditions deteriorate.
- On November 2, 2018, after quarter-end, the company signed a lease with Google for approximately 235,574 square feet at Landmark at One Market. Anticipated GAAP base rent is $14.4 million in 2019 and $23.6 million annually thereafter during the initial term, which is expected to run through 2029. A related Annex sublease is subject to Paramount’s consent. The company also agreed, subject to conditions, to pay Salesforce an approximately $2.9 million lease termination fee.
- Risks include tenant defaults, vacancies and lease non-renewals; exposure to retail and office demand; concentration in Southern California; interest rates and refinancing; access to capital; development execution; REIT qualification; and environmental matters. Del Monte Center groundwater remediation continues, with remaining work expected to be funded by seller-funded escrow, though additional costs could arise.
- The company reported no material change to previously disclosed risk factors, no material legal proceeding expected to affect the business, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Investor facts to verify
- Track Waikele Center leasing and the financial effect of the expired Kmart lease and redevelopment.
- Assess how much of revenue and property operating income growth is recurring same-store performance versus acquisitions and lease termination fees.
- Review the timing and refinancing plans for debt maturities, particularly the $100 million Term Loan A due January 2019 and the One Beach Street mortgage due April 2019; confirm current revolver availability and covenant headroom.
- Monitor cash flow, capital spending, leasing costs and dividend coverage; FFO is supplemental and does not represent cash available for distributions.
- Confirm commencement, occupancy, concessions and economics of the Google leases, the related Salesforce surrender and fee, and required third-party consent for the Annex sublease.