American Assets Trust, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. American Assets Trust is a REIT operating through American Assets Trust, L.P. The portfolio comprised 28 properties across office, retail, multifamily and mixed-use, plus land under development or construction.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $84.0 million | $96.7 million | Down 13% |
| Property operating income (NOI) | $54.4 million | $63.1 million | Down 14% |
| Operating income | $20.1 million | $28.8 million | Down 30% |
| Net income | $1.7 million | $15.5 million | Down 89% |
| Net income attributable to AAT stockholders | $1.3 million | $12.1 million | Down 90% |
| Diluted earnings per share | $0.02 | $0.20 | |
| FFO attributable to common stock and units | $29.1 million; $0.38 per diluted share/unit | Not provided in this filing’s FFO table | |
| Cash from operating activities | $42.5 million | $45.4 million | Down $2.9 million |
| Cash and cash equivalents at period end | $380.4 million | $137.3 million at Dec. 31, 2020 | |
| Dividends declared per common share | $0.28 | $0.30 |
Rental income fell 12% to $81.1 million; other property income fell 39% to $2.9 million. Rental expenses declined 19%, while real estate taxes rose 3%. Interest expense increased 4% to $14.0 million. Q1 net income included a $4.3 million debt-extinguishment charge related to the early repayment of notes.
Debt, liquidity and capital
- At March 31, 2021, the Operating Partnership reported $110.9 million of secured notes and $1.537 billion of unsecured notes, net of discounts and issuance costs; no revolver borrowings were outstanding. American Assets Trust, Inc. itself holds no debt.
- In January, the Operating Partnership issued $500 million of 3.375% senior unsecured notes due February 2031. Proceeds primarily refinanced $150 million of Series A notes and repaid $100 million drawn on the revolving credit line; proceeds also supported La Jolla Commons III development and general purposes.
- Cash and cash equivalents were $380.4 million; the $350 million revolving line was undrawn. Management said liquidity was adequate for near-term needs and expected operations, cash reserves and available credit to fund short-term requirements.
- Operating cash flow was $42.5 million. Investing activities used $12.2 million, including capital expenditures and leasing commissions. Financing activities provided $212.8 million, chiefly reflecting the new notes issuance, partly offset by debt repayments and $21.5 million of dividends and distributions.
- The Operating Partnership reported compliance with its financial covenants. The filing states there were no off-balance-sheet arrangements.
Material changes and operating trends
- Office was comparatively resilient: total office rental revenue increased 3%, and office segment profit rose to $33.1 million from $32.7 million.
- Retail segment profit declined 23% to $14.3 million. Management cited tenants moved to alternate-rent or cash-basis accounting, lower expense recoveries and rent concessions. Retail same-store NOI fell 25.5%.
- Multifamily segment profit fell 3% to $7.1 million; average occupancy declined to 89.3% from 92.6%, with weakness at Hassalo on Eighth in Portland.
- Mixed-use segment reported a $0.1 million loss versus $4.6 million profit. Hotel occupancy fell to 47.5% from 75.4%, and revenue per available room to $99 from $242, reflecting pandemic-related tourism declines. The hotel and retail components also faced weaker collections and revenue.
- Same-store office NOI increased 1.4%; same-store retail NOI decreased 25.5%. Portfolio leased rates at March 31 were 91.4% office, 90.8% retail and 91.9% multifamily; mixed-use retail was 88.2% leased.
Outlook, risks and unusual items
- No specific earnings or FFO guidance was provided. Management expected leasing volume to remain below historical averages through the rest of 2021, with overall rental income decreases due to COVID-19. It expected Oahu hotel weakness to continue through at least the first half of 2021.
- Q1 rent collections were approximately 99% for office, 84% for retail and 95% for multifamily. COVID-related lease modifications represented about $1.2 million, or 2% of rent originally contracted for the quarter; the company collected about 88% of deferred repayments due during Q1.
- Management cited uncertainty around the pandemic, tenant financial health, reopening conditions and construction or permitting delays. It said it could defer development or redevelopment, limit acquisitions, reduce spending or reconsider dividends if conditions deteriorate.
- Key risks include tenant defaults or lease nonrenewals, concentrated exposure to Southern California and to office and retail tenants, interest-rate and financing conditions, and the ability to complete development projects. Retail and office tenants represented 25.9% and 52.9% of Q1 revenue, respectively.
- The company disclosed ordinary-course legal matters but did not expect them to have a material adverse effect. Del Monte Center has groundwater remediation expected to involve monitoring for five to seven years; seller-funded escrow is believed sufficient, though additional costs could arise. Potential termination liability under the hotel franchise agreement was stated as up to $4.9 million based on operating performance through March 31, 2021.
- Variable-rate debt was $250 million; management estimated a 1 percentage-point rate increase would raise annual interest expense by about $1.0 million. The $4.3 million debt-extinguishment charge was a notable nonrecurring Q1 item.
Important facts for investors to verify
- Whether retail and hotel rent collections, occupancy and tenant credit quality recover as pandemic-related conditions change.
- Progress on leasing, renewal rents and occupancy, particularly the disclosed expectation for below-historical leasing activity in 2021.
- Use of the January 2021 note proceeds, upcoming debt maturities and any changes in revolver availability or covenant headroom.
- Funding, timing, costs and leasing progress for La Jolla Commons III and other development or redevelopment projects.
- Future dividends in relation to cash flow, REIT distribution requirements and the credit facility’s distribution limitations.