American Assets Trust, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2016; comparisons are with Q2 and the six months ended June 30, 2015. American Assets Trust is a REIT operating through its consolidated Operating Partnership, in which it held a 71.7% interest. The portfolio comprised 24 retail, office, multifamily and mixed-use properties, plus land under development or construction, in California, Oregon, Washington, Texas and Hawaii.
Financial performance and liquidity
- Q2 revenue: $71.8 million, up 8%; rental income was $68.2 million, up 7%.
- Q2 earnings: Net income was $10.7 million, down 13%; net income attributable to company stockholders was $7.6 million, down 13%. Basic and diluted EPS were $0.17, versus $0.20.
- First-half results: Revenue was $142.6 million, up 7%; net income was $21.4 million, down 10%; stockholder-attributable income was $15.3 million, down 9%. EPS was $0.34, versus $0.38.
- Property performance and margins: Property operating income (NOI) was $45.8 million in Q2, up 5%, and $91.5 million for the first half, up 5%. NOI margin was approximately 63.8% in Q2 (65.3% in 2015) and 64.2% for the first half (65.5% in 2015). GAAP operating margin was approximately 33.0% in Q2 and 33.2% for the first half, compared with 35.2% in each 2015 period.
- FFO: FFO attributable to common stock and units was $28.3 million in Q2 and $56.5 million for the first half; diluted FFO per share/unit was $0.45 and $0.89, respectively. The filing’s FFO table does not show prior-period comparisons.
- Cash flow: First-half operating cash flow was $63.5 million, versus $57.7 million. Investing used $32.9 million, versus $93.9 million; financing used $26.7 million, versus $11.8 million provided. Cash and equivalents ended June at $43.9 million; restricted cash was $9.5 million.
- Debt and liquidity: June 30 debt carrying value was approximately $1.063 billion: $467.5 million secured and $595.8 million unsecured; no balance was outstanding on the $250 million revolving line. Total liabilities were $1.166 billion and total assets $1.972 billion. The company itself holds no debt; debt is held by the Operating Partnership. The company reported covenant compliance and stated liquidity sources were adequate for near-term needs.
- Distributions: Q2 dividend was $0.25 per share/unit, versus $0.2325; first-half distributions were $0.50, versus $0.465.
Material changes versus the prior period
- Revenue growth reflected higher rents and reimbursements, improved hotel revenue, and the addition of Hassalo on Eighth multifamily units completed in 2015. Same-store NOI increased 3% in Q2 and 4% for the first half.
- Operating expenses rose faster than revenue: first-half property expenses increased 11%. Depreciation and amortization rose 16% and interest expense rose 14%, partly because completed Hassalo on Eighth buildings moved out of development and interest capitalization ceased.
- Secured debt declined following repayment of First & Main and two multifamily loans. Unsecured debt increased after $150 million of new term loans were drawn in March and May 2016; those loans mature in 2023 and are swapped to fixed rates of approximately 3.15% and 3.14%.
- Unrealized swap losses materially reduced comprehensive income: the six-month loss on swap valuation was $13.9 million, and the swap liability rose to $15.6 million from $1.7 million at year-end.
Outlook, risks and contingencies
- Management gave no quantified company-wide earnings or FFO guidance. It expected second-half 2016 leasing volume to be in line with historical averages and anticipated overall positive rental-income growth, while cautioning that signed leases may not commence as planned or be fully collected.
- Torrey Point development is planned to add approximately 88,000 square feet of office space, with completion expected in 2017 and stabilization in 2018. Estimated cost is $53 million, of which approximately $22 million had been incurred by June 30; management estimated stabilized yield of 7.5%–8.6%.
- Occupancy/leased rates were lower year over year in every segment shown: retail 98.2%, office 90.4%, multifamily 92.5% and mixed-use retail 98.3%. Retail bad-debt expense increased in connection with Sports Authority’s bankruptcy.
- Risks include tenant defaults or nonrenewals, interest rates, financing availability, development execution, real-estate and market conditions, and geographic and sector concentration. Eleven consolidated properties were in Southern California; retail and office tenants accounted for 34.6% and 35.5% of first-half revenue, respectively. The filing also cited uncertainty following the UK referendum as a potential risk to global markets.
- Contingencies include ongoing groundwater remediation at Del Monte Center, funded by a seller-funded escrow believed sufficient for remaining work; potential Embassy Suites franchise termination payments of up to $7.1 million; and tax-protection obligations if specified properties are sold in taxable transactions during the protected period. Management did not expect current legal proceedings to materially affect the company.
Important facts for investors to verify
- Whether Hassalo on Eighth’s lease-up and the planned Torrey Point development meet expected timing, cost and return assumptions.
- Whether occupancy, same-store NOI and rent growth offset rising property expenses, depreciation and interest costs.
- Debt maturities, variable-rate exposure, swap valuation and covenant headroom; the filing reports compliance but does not provide a clear consolidated leverage ratio here.
- Exposure to Sports Authority-related tenant losses and the concentration of properties and revenue by geography and sector.
- The sustainability of distributions relative to operating cash flow, capital needs and future financing access.