American Assets Trust, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. The REIT owns retail, office, multifamily and mixed-use properties, primarily in California, Oregon and Hawaii. Comparisons are affected by acquisitions and the company’s January 2011 IPO and formation transactions; 2011 results do not include all properties for the full quarter.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $57.0 million | $46.9 million |
| Property operating income (NOI) | $36.4 million | $30.7 million |
| Operating income | $17.3 million | $15.4 million |
| Net income | $2.9 million | $13.6 million |
| Net income (loss) attributable to company stockholders | $1.9 million | $(0.7) million |
| FFO attributable to common stock and units | $18.0 million; $0.31 per diluted share/unit | $9.8 million; $0.21 per diluted share/unit |
| Cash from operating activities | $18.5 million | $15.3 million |
Revenue rose 22%, mainly reflecting acquired properties, including One Beach Street, acquired in January 2012, and the fuller-period contribution of properties acquired in 2011. Total property expenses increased 28%; NOI rose 18%. On a same-store basis, rental revenue declined 2% and property operating income declined 4%. Reported net income fell from 2011, which included a $46.4 million acquisition gain, partly offset by $25.9 million in debt-extinguishment costs and $9.0 million in loan transfer and consent fees. These items make reported net income comparisons unusually affected by one-time transaction accounting. Diluted EPS was $0.05 versus a loss of $0.02; share and unit counts differ between periods.
Hotel occupancy at Waikiki Beach Walk was 92.2%, compared with 87.6% a year earlier. At March 31, portfolio occupancy was 94.8% for retail, 94.7% for office and 88.4% for multifamily; mixed-use retail was 98.8%. These are leased percentages, including certain leases not yet commenced.
Cash, debt and liquidity
- Cash and cash equivalents were $100.7 million at March 31, down from $112.7 million at year-end; marketable securities were $26.3 million. Operating cash flow was $18.5 million, investing cash outflow $37.9 million and financing cash inflow $7.3 million. Cash declined $12.1 million during the quarter.
- Secured debt principal was $980.1 million (balance-sheet carrying value $964.9 million, net of unamortized fair-value adjustments). Debt was fixed-rate, with stated rates ranging from 3.94% to 7.22%; maturities extend through 2020. The company reported compliance with loan covenants.
- The revolving credit facility was undrawn. Maximum allowable borrowing at quarter-end was $212.9 million, subject to borrowing-base limits; the facility maturity was extended to January 2016, with a one-year extension option. The filing reports $58.7 million of annual debt service for April 2012–March 2013.
- Q1 capital expenditures were $6.0 million in cash-flow reporting; segment disclosure including leasing commissions reported $6.5 million. Dividends declared and paid were $0.21 per share/unit, or $12.1 million in total.
Changes, outlook and risks
- One Beach Street, a 97,000-square-foot San Francisco office property, was acquired for approximately $36.5 million, funded with cash on hand. A $21.9 million, seven-year fixed-rate mortgage at 3.94% was secured by the property.
- Management said two of three former Borders spaces had been re-leased by April 16, expecting the spaces to be re-leased at higher aggregate rents. Office same-store results were pressured by free-rent terms for Salesforce.com space and a vacancy following a lease expiration; replacement tenants were expected to take possession in Q2 2012.
- No formal earnings or operating guidance is provided in the supplied filing text. Management expects short-term needs to be met with operating cash flow, cash reserves and, if needed, the credit facility; longer-term needs may be funded through operations, debt or equity. A shelf registration permits up to approximately $500 million of additional securities, but no issuance is assured.
- Key risks include debt service and refinancing needs, tenant defaults or vacancies, interest-rate and property-market changes, and geographic and retail-sector concentration. Twelve properties were in Southern California; retail tenants represented 38% of Q1 revenue. The Del Monte Center groundwater remediation is expected to conclude within two years and is funded by seller escrow, though cost overruns could fall to the company. Hotel franchise termination could trigger a payment of up to $5.4 million based on performance through quarter-end. Tax-protection agreements could create payments if certain properties are disposed of in taxable transactions before January 2018.
- A jury returned a defense verdict for Executive Chairman Ernest Rady and the Rady Trust in March 2012, and remaining claims were dismissed or settled; the company was not a party and reported no financial obligation. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth reflects acquisitions versus same-store performance, especially the 4% same-store NOI decline and higher property taxes.
- Debt maturities, refinancing terms and available borrowing capacity, including the 2014–2015 maturities and restrictions on the credit facility.
- Whether the Borders and office vacancies were filled on the expected terms, and whether hotel occupancy and performance persisted.
- Cash needs for capital projects and hotel brand-improvement requirements, and sufficiency of the Del Monte remediation escrow.
- The sustainability of the $0.21 quarterly dividend relative to operating cash flow, FFO and debt obligations; FFO is a non-GAAP measure, not cash available for distribution.