American Assets Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. American Assets Trust is a vertically integrated REIT operating 23 retail, office, multifamily and mixed-use properties, with development land in several U.S. markets.
Financial performance and position
| Metric | Q1 2014 | Comparable period / change |
|---|---|---|
| Total revenue | $64.0 million | Up 3% from $62.2 million |
| Net income | $6.7 million | Up 37% from $4.9 million |
| Net income attributable to common stockholders | $4.6 million; $0.11 per basic and diluted share | Up 42% from $3.2 million; $0.08 per share |
| Property operating income (NOI) | $41.3 million | Up 1% from $41.1 million; approximately 64.6% of revenue |
| FFO attributable to common stock and units | $22.9 million; $0.39 per diluted share/unit | Up from $21.8 million; $0.38 per diluted share/unit |
| Cash from operations | $28.0 million | Up from $25.7 million |
| Cash and cash equivalents | $79.5 million | $49.0 million at Dec. 31, 2013 |
| Total liabilities | $1.156 billion | $1.146 billion at Dec. 31, 2013 |
| Dividends declared | $0.22 per common share | $0.21 in Q1 2013 |
Rental and other property expenses rose 7% to $22.6 million, chiefly reflecting a 26% increase in real estate taxes. Interest expense fell 7% to $13.6 million. Cash used in investing was $31.6 million, mainly for redevelopment construction, versus $9.7 million in Q1 2013. Financing provided $34.1 million, including the term loan and ATM share issuance.
Material changes and capital structure
- Under a January 2014 amended credit facility, the company drew the full $100 million term loan, repaid its $93 million prior line balance, and obtained a $250 million unsecured revolver with no balance outstanding at quarter-end. The facility includes an accordion feature for up to $250 million of additional commitments, subject to conditions.
- A swap is intended to fix the term loan rate at approximately 3.08% through January 2019. Its quarter-end fair-value liability was $0.7 million; the resulting unrealized loss was recorded in other comprehensive loss, not earnings.
- Secured notes had $961.9 million principal outstanding (balance-sheet carrying amount $952.5 million after fair-value adjustments). Total debt including the term loan was approximately $1.062 billion at principal value. The company reported covenant compliance.
- Q1 ATM sales issued 1.44 million shares at a weighted average $33.06, generating $47.4 million gross proceeds; $76.6 million of program capacity remained at March 31.
Outlook, commentary and risks
- Management described leasing conditions as improving and remained cautiously optimistic, but offered no numerical earnings or FFO guidance. It expected 2014 leasing volume to be in line with historical averages, with overall positive rental-income increases, while cautioning that lease commencements and tenant performance are uncertain.
- Retail comparable leases signed in the quarter showed average rent increases of 9.8% on a cash basis and 20.9% straight-line. Comparable office lease increases averaged 11.1% cash and 13.8% straight-line; signed leases may not commence or produce all contracted rent.
- Lloyd District redevelopment is projected to cost approximately $192 million, with $53 million incurred; completion is expected in 2015 and stabilization in 2017. Torrey Reserve redevelopment is projected at $34 million, with $21 million incurred; completion is expected in fall 2014 and stabilization in 2015. Management expected to invest a further approximately $13 million at Torrey Reserve during 2014.
- Same-store property operating income declined 1%; same-store office NOI declined approximately 4.1%, associated with lower occupancy and higher taxes. Office occupancy was 89.5%, down from 93.8% a year earlier; retail, multifamily and mixed-use leasing metrics were higher year over year.
- Near-term refinancing is a key item to monitor: $140.7 million secured debt matures in November 2014, followed by substantial maturities in 2015. The company cited dependence on operating cash flow and access to debt and equity markets to fund maturities, capital projects and acquisitions.
- Other disclosed exposures include concentration in Southern California, retail and office tenant demand, interest-rate and financing conditions, development execution, litigation, and environmental remediation at Del Monte Center. Management said remediation escrow funds were expected to be sufficient, but additional costs could arise. A possible Embassy Suites franchise termination payment could be as high as $6.5 million if specified conditions are triggered. The company had accrued approximately $6.6 million for California transfer taxes and said taxing-authority agreement was not assured.
Key facts for investors to verify
- Refinancing plans and terms for the November 2014 Waikele Center maturity and 2015 secured maturities.
- Progress, remaining funding needs, completion timing and stabilization assumptions for Lloyd District and Torrey Reserve.
- Whether office occupancy and same-store office performance recover, and whether the reported lease spreads translate into collected rent.
- Cash availability and capital allocation, including future ATM issuance, dividends and development spending.
- Developments in transfer-tax assessments, Del Monte environmental monitoring, litigation and hotel franchise obligations.