American Assets Trust, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2015, with comparisons to 2014. American Assets Trust is a REIT operating through its consolidated Operating Partnership, in which it held an approximately 71.4% interest. The portfolio comprised 23 operating properties across retail, office, multifamily and mixed-use, plus land under development or construction at five properties.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $66.8 million, up 7% | $132.8 million, up 5% |
| Operating income | $23.5 million, versus $17.7 million | $46.7 million, versus $38.1 million |
| Net income | $12.3 million, versus $5.4 million | $23.7 million, versus $12.0 million |
| Net income attributable to AAT stockholders | $8.7 million, versus $3.7 million | $16.7 million, versus $8.3 million |
| EPS, basic and diluted | $0.20, versus $0.09 | $0.38, versus $0.20 |
| FFO attributable to common stock and units | $27.5 million; $0.44 per diluted share/unit | $54.0 million; $0.88 per diluted share/unit |
| Dividends/distributions per share/unit | $0.2325, versus $0.2200 | $0.4650, versus $0.4400 |
Amounts are rounded. FFO is a non-GAAP measure and the filing cautions that it is not a substitute for GAAP income or operating cash flow.
- Property operations: Total property income (the company’s NOI measure) was $43.6 million for Q2, up 7%, and $86.9 million for the six months, up 6%. Same-store property income increased 9% in both periods. Office and retail gains reflected higher rents and occupancy; mixed-use gains were driven by improved hotel occupancy and room revenue following a 2014 room refresh.
- Cash flow: Six-month cash from operations was $57.7 million, versus $50.3 million. Investing used $93.9 million, versus $63.9 million, primarily reflecting increased redevelopment and construction spending. Financing provided $11.8 million, versus $43.4 million. Cash and cash equivalents ended at $34.9 million, down from $59.4 million at December 31, 2014.
- Balance sheet and debt: Total assets were $1.974 billion and total liabilities $1.164 billion at June 30, 2015. Debt consisted of $579.1 million secured notes, $450.0 million unsecured notes and $30.0 million drawn on the revolving line, or approximately $1.059 billion in total. American Assets Trust, Inc. itself had no debt; borrowings are held by the Operating Partnership. The company reported compliance with applicable debt covenants.
- Liquidity: The unsecured credit facility provides $250 million of revolving capacity; $30 million was drawn at quarter-end. Management stated that operating cash flow, cash reserves and available credit were expected to support short-term needs, and that the company had adequate working capital for its dividends over the next 12 months. This is management’s assessment, not a guarantee.
Material changes versus the prior comparable period
- Revenue growth reflected higher rental income, particularly in office and mixed-use; office occupancy was 92.9% versus 88.5% a year earlier. Retail occupancy was 98.5% versus 98.8%, multifamily 95.7% versus 98.8%, and mixed-use retail 100.0% versus 99.5%.
- Six-month interest expense fell 15% to $23.0 million, primarily after repayment of several property mortgages and increased capitalized interest. Depreciation and amortization declined 12%, largely because accelerated hotel furniture and fixture depreciation occurred in connection with the prior-year room refresh.
- Net income growth also reflects a $0.745 million acquisition-termination fee recorded in 2014 that did not recur, as well as higher 2015 hotel-related tax expense.
- Debt was substantially refinanced: the company repaid secured mortgages on The Shops at Kalakaua, Del Monte Center and The Landmark at One Market, while issuing $200 million of unsecured Series B and C notes in 2015. Secured notes fell from $812.8 million at year-end 2014 to $579.1 million at quarter-end; unsecured notes rose from $250 million to $450 million.
Outlook, risks and unusual items
- Management expected 2015 leasing volume to be in line with historical averages and anticipated overall positive rental-income increases, while cautioning that signed leases may not commence as planned and rental increases are not assured. Q2 comparable-space lease spreads were reported at 19.0% cash/16.3% straight-line for retail and 40.1% cash/50.0% straight-line for office; the office figure included substantial renewal spreads.
- Lloyd District redevelopment was expected to be completed in 2015, adding 657 multifamily units and approximately 47,000 square feet of retail. Estimated project cost was $192 million, with $184 million incurred by June 30; stabilization was expected in 2017, with an estimated initial yield of 6.25%–7.25%.
- Torrey Point was planned to add approximately 88,000 square feet of office space, with completion expected in 2016 and stabilization in 2017. Estimated cost was $50 million, with $8 million incurred; estimated stabilized yield was 8.25%–9.25%. Project timing, costs and yields are estimates and depend on market conditions.
- A sale agreement for Rancho Carmel Plaza at approximately $12.7 million was disclosed as a subsequent event; the property was classified as held for sale on July 24, 2015, after the buyer completed due diligence. Closing remained subject to customary conditions.
- Risks include market and tenant performance, lease defaults or nonrenewals, development and financing execution, interest-rate exposure, geographic concentration (12 consolidated properties in Southern California), and competition. Retail and office tenants represented 36.5% and 35.9% of six-month revenue, respectively. The company reported no material change to its previously disclosed risk factors.
- Other contingencies include ongoing groundwater remediation at Del Monte Center, funded from a seller-funded escrow believed sufficient by management; potential excess costs remain possible. Certain property dispositions before January 19, 2018 could trigger tax-protection payments to certain limited partners. The filing disclosed ordinary-course legal matters but no proceedings believed material.
Important facts for investors to verify
- Progress, remaining costs and delivery timing for Lloyd District and Torrey Point, and whether the projected yields remain achievable.
- Whether leasing, occupancy and hotel operating improvements persist, particularly given lower multifamily occupancy and the reliance on renewals in reported office lease spreads.
- Debt maturities, refinancing plans, revolver usage and covenant headroom; the filing states compliance but does not provide all covenant ratios’ actual values.
- Cash available after development spending and dividends, including whether the new ATM equity program is used and its effect on share dilution.
- Closing and proceeds from the Rancho Carmel Plaza sale, plus any changes in environmental remediation costs or tax-protection exposure.