American Assets Trust, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. American Assets Trust is a REIT whose real estate operations and debt are held through its Operating Partnership; the company owned approximately 78.8% of the partnership at quarter-end. Its 31-property portfolio spans office, retail, multifamily and mixed-use assets in California, Washington, Oregon, Texas and Hawaii.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total property revenue | $104.2 million | $91.8 million | $205.6 million | $175.8 million |
| Property operating income (NOI) | $67.0 million | $61.0 million | $132.9 million | $115.4 million |
| Net income | $13.6 million | $11.5 million | $27.1 million | $13.2 million |
| Net income attributable to AAT stockholders | $10.6 million | $8.9 million | $21.1 million | $10.2 million |
| Diluted EPS | $0.18 | $0.15 | $0.35 | $0.17 |
- Q2 revenue rose 13% and NOI 10% year over year; for the first half, revenue rose 17% and NOI 15%. Higher rental income and property costs both contributed, with rental expenses growing faster than revenue.
- Six-month diluted FFO was $88.3 million, or $1.16 per diluted share/unit; Q2 FFO was $44.5 million, or $0.58 per diluted share/unit. FFO is a non-GAAP measure and is not a substitute for cash flow or GAAP earnings.
- Rental income gains reflected acquired office properties, improved multifamily occupancy and rents, retail rent recovery, and stronger Waikiki hotel performance as travel restrictions eased. Same-store NOI increased 10% for the first half, including 11.3% growth in retail; same-store office NOI increased 0.4%.
- Occupancy indicators improved year over year: office leased 91.0% versus 90.3%, retail 92.5% versus 91.1%, multifamily 92.0% versus 87.8%, and mixed-use retail 94.9% versus 89.2%.
- Q2 dividends declared were $0.32 per share; first-half dividends were $0.64 per share, versus $0.56 in the prior-year half.
Cash flow, balance sheet and debt
- At June 30, total assets were $3.01 billion, total liabilities $1.81 billion, and equity $1.20 billion. Cash and cash equivalents were $60.8 million, down from $139.5 million at year-end 2021.
- First-half operating cash flow was $86.1 million, up from $76.7 million. Investing used $112.5 million, including the Bel-Spring 520 acquisition and property spending; financing used $52.4 million. Dividends and distributions paid were $49.1 million.
- Debt consisted of $111 million in secured notes and $1.55 billion principal of unsecured notes and term loans (reported net debt carrying values totaled about $1.65 billion). The $400 million revolving facility had no balance outstanding at June 30; the company reported covenant compliance.
- Near-term maturities include a $111 million secured mortgage due November 2022 and $150 million of Term Loans B and C due March 2023. On July 25, 2022, the company entered a rate lock at 5.08% for a prospective City Center Bellevue mortgage of up to $75 million, intended to refinance the expiring mortgage; closing was expected in Q3 or Q4, subject to conditions.
- The company reported $1.41 billion of fixed-rate debt and $250 million of variable-rate debt; swaps effectively fix the rate on the term loans. It estimated a 1% rate increase would have no material annual interest expense impact on the reported variable debt.
Changes, outlook and risks
- Bel-Spring 520, a 93,000-square-foot Bellevue office campus, was acquired in March for approximately $45.5 million before closing costs and prorations, using cash on hand. Its contribution through June 30 was $0.95 million of revenue and $0.01 million of operating income.
- Management intends to pursue development and redevelopment opportunities, including future phases of La Jolla Commons and Lloyd Portfolio and work at Waikele Center and One Beach Street, subject to market conditions and acceptable risk-adjusted returns. It also continues to review acquisitions; no quantified earnings or FFO guidance is provided in the supplied filing text.
- Management described liquidity as strong and said available cash, operating cash flow and the revolving facility were expected to meet near-term needs. It also cautioned that access to debt and equity financing is not assured and that deteriorating markets could prompt delayed projects, fewer acquisitions, spending reductions or dividend-policy reassessment.
- Key exposures include tenant defaults or non-renewals, economic and interest-rate changes, COVID-19 effects, higher operating costs, and development, refinancing and capital-market risks. Office and retail tenants generated 48.7% and 23.9% of first-half revenue, respectively; 15 properties were in Southern California. COVID-related tenant concessions in Q2 were described as immaterial.
- The company reported no material legal proceedings and no material change to the risk factors in its 2021 Form 10-K. It disclosed ongoing groundwater remediation at Del Monte Center, funded by a seller-funded escrow it believes is sufficient; excess costs could still arise. A hotel franchise termination payment could be as high as $4.8 million under specified circumstances.
Investor facts to verify
- Progress and final terms of the planned City Center Bellevue mortgage refinancing, and repayment or refinancing plans for the 2022 and 2023 maturities.
- Whether reported occupancy and leasing spreads convert into commenced leases, collections and sustainable same-store NOI, particularly in office and retail.
- Development and redevelopment budgets, timing, leasing, and expected returns, especially for La Jolla Commons III, Lloyd Portfolio and One Beach Street.
- Cash needs for capital expenditures, tenant improvements and leasing commissions, and the sustainability of the $0.32 quarterly dividend relative to recurring cash generation.
- Exposure to tenant credit deterioration, ongoing COVID-related effects, regional and sector concentration, environmental remediation costs, and hotel franchise obligations.