American Assets Trust, Inc. — Q3 2011 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2011. American Assets Trust is a newly public, vertically integrated REIT that owns retail, office, multifamily and mixed-use properties, primarily in California, Oregon and Hawaii. It completed its IPO and formation transactions on January 19, 2011; accordingly, 2011 results include acquired assets only from their acquisition dates, while 2010 comparatives largely reflect the Predecessor. The periods are not directly comparable.
Financial performance and liquidity
- Revenue: Q3 total revenue was $56.3 million, up 61% from $35.0 million; nine-month revenue was $154.3 million, up 70% from $91.0 million. Much of the growth reflects acquisitions, including Waikiki Beach Walk, First & Main and the Lloyd District Portfolio.
- Operating performance: Q3 operating income was $15.2 million versus $11.4 million; nine-month operating income was $44.1 million versus $34.8 million. Property operating income was $34.7 million in Q3 and $96.8 million for nine months. On a same-store basis, property operating income declined 5% and 3%, respectively.
- Profit: Consolidated net income was $4.6 million for Q3, compared with a $1.2 million loss; nine-month net income was $18.7 million versus $5.2 million. Net income attributable to company stockholders was $3.1 million for Q3 and $2.6 million for nine months. Basic and diluted EPS were $0.08 for Q3 and $0.07 for the nine-month period. Results include significant acquisition-related gains and debt-related costs.
- Cash flow: Nine-month operating cash flow was $51.8 million; investing cash use was $220.9 million and financing cash provided was $250.4 million. Cash increased $81.3 million to $123.2 million.
- Liquidity: The company also held $29.6 million of marketable securities. Its $250 million revolving facility had $197.5 million of maximum allowable borrowing capacity at quarter-end and had not been drawn; actual borrowing capacity is subject to borrowing-base and other conditions.
- Debt: Balance-sheet secured notes payable were $943.9 million, including a $16.7 million unamortized fair-value adjustment; principal balance was $960.6 million. Debt was predominantly fixed-rate. The company reported compliance with loan covenants. The revolver includes leverage, coverage, net-worth and distribution covenants.
- Dividends: Dividends declared were $0.21 per share for Q3; $34.0 million was paid to common stockholders and Operating Partnership unitholders during the nine months.
Material changes versus prior comparable period
- Portfolio expansion increased the reported portfolio to 21 properties, with approximately 5.2 million rentable square feet of retail and office space, 922 residential units and a 369-room hotel. First & Main was acquired in March for approximately $128.9 million; the Lloyd District Portfolio in July for approximately $91.6 million; and Solana Beach–Highway 101 land in September for approximately $6.8 million.
- Valencia Corporate Center was sold on August 30 for $31.0 million, generating a $4.0 million gain, and was presented as discontinued operations. The sale was structured as a reverse tax-deferred exchange alongside the First & Main acquisition.
- Acquisitions drove reported revenue and property operating income higher, but same-store property operating income weakened. Management cited Borders store closures, lower office rental rates and occupancy, and increased maintenance, marketing and property-tax costs. Same-store rental revenue was down 1% in Q3 and broadly flat for nine months.
- Q3 rental expenses rose 171% and nine-month rental expenses rose 178%, reflecting the acquired mixed-use hotel and expanded portfolio as well as operating costs. General and administrative expense and depreciation also increased.
Outlook, risks and unusual items
- No specific earnings, revenue or FFO guidance is provided. Management said it may evaluate further development at the Lloyd District and Solana Beach–Highway 101 sites, but gave no assurance that development will proceed. It expects short-term needs to be met with operating cash, cash reserves and, if needed, the credit facility; longer-term needs may be funded through operating cash, debt or equity.
- Nine-month results include a $46.4 million gain on acquisition of controlling interests, $25.9 million of early-extinguishment-of-debt expense and $9.0 million of loan-transfer and consent fees. The filing reports nine-month FFO of $58.2 million, or $0.77 per diluted share/unit; FFO is a non-GAAP measure and should not be treated as cash available for dividends or debt service.
- The company intends to qualify as a REIT beginning with tax year 2011. Failure to qualify could result in corporate-level income taxes. The filing also describes risks from tenant defaults or nonrenewals, market and interest-rate changes, refinancing, acquisitions, retail exposure, geographic concentration, development, and regulatory requirements.
- Thirteen consolidated properties were in Southern California, and retail tenants represented 42% of nine-month revenue. The company disclosed ongoing groundwater remediation at Del Monte Center, expected to conclude within three years; seller-funded escrow was believed sufficient, but excess costs could fall to the company.
- Management did not expect ongoing legal matters to have a material adverse effect, while noting litigation is uncertain. A separate California shareholder dispute involving AAI, the Rady Trust and Ernest Rady remained ongoing. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of reported revenue and profit growth is attributable to acquisitions, and whether same-store leasing, occupancy and property operating income stabilize.
- The quality and sustainability of earnings, given the acquisition gain, debt-extinguishment charges, consent fees and discontinued-operation sale gain.
- Debt maturities, refinancing plans, borrowing-base availability and continued compliance with credit-facility covenants.
- Actual cash needs for hotel operations, tenant improvements, capital spending and prospective development, and the effect on dividends.
- Progress on Del Monte Center remediation, the ongoing litigation, and the company’s ability to meet REIT qualification requirements.