American Assets Trust, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. American Assets Trust is a REIT operating through American Assets Trust, L.P.; the Operating Partnership holds substantially all assets and debt. At quarter-end, the company owned or controlled 24 operating properties across retail, office, multifamily and mixed-use segments, plus land and construction projects.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $73.8 million | $70.7 million; up 4% |
| Property operating income (NOI) | $46.4 million | $45.6 million; up 2% |
| Operating income | $23.3 million | $23.6 million; down 1% |
| Net income | $10.3 million | $10.7 million; down 4% |
| Net income attributable to AAT stockholders | $7.4 million | $7.7 million; down 3% |
| Diluted EPS | $0.16 | $0.17 |
| FFO attributable to common stock and units | $28.2 million; $0.44 per diluted share/unit | $28.1 million; $0.45 per diluted share/unit |
| Cash from operating activities | $47.8 million | $34.3 million |
| Cash and cash equivalents | $190.1 million at March 31 | $44.8 million at December 31, 2016 |
| Dividends declared per share | $0.26 | $0.25 |
Rental income rose 4% to $70.0 million. Property expenses increased 9% to $27.4 million, including higher real estate taxes and rental costs. Same-store NOI declined 1%; office same-store NOI rose approximately 5.3%, while retail same-store NOI declined 3%. The mixed-use segment’s NOI fell 13%, primarily due to hotel bad debt expense and higher room costs.
Operating cash flow included a $10.4 million cash receipt from settlement of forward-starting interest-rate swaps. Investing activities used $13.3 million, including a $5.0 million deposit on a property acquisition. Financing activities provided $110.7 million, reflecting $250 million of Series D notes and $30.1 million net proceeds from issuing 700,000 shares through the ATM program, partly offset by debt repayments and distributions.
At March 31, total debt carrying value was approximately $1.16 billion: $315.7 million secured and $844.8 million unsecured. The Operating Partnership issued $250 million of 4.29% Series D notes due March 2027. It had no revolver borrowings against the $250 million revolving facility and was in compliance with its debt covenants. American Assets Trust, Inc. itself has no indebtedness. The quarterly dividend was $0.26 per share/unit.
Material changes and notable items
- Revenue growth was led by multifamily, including improved occupancy at Hassalo on Eighth, and office rent growth. Multifamily total-portfolio rental revenue increased 24%; same-store multifamily revenue increased 3%.
- Property operating income rose 35% in multifamily and 3% in office, but declined 13% in mixed-use and 1% in retail. Overall same-store property operating income fell 1%.
- Interest expense increased 3% to $13.3 million, principally following the March 2017 Series D issuance. Waikiki Beach Walk Retail’s $130.3 million mortgage was repaid March 1; a $35.3 million secured loan was repaid April 3, just after quarter-end.
- Cash from operations was higher than the prior-year quarter partly because of the swap settlement; it should not be read as a comparable increase in recurring operating cash generation.
- Q1 occupancy/leased rates were 96.9% retail, 89.3% office, 93.4% multifamily and 94.1% for the retail portion of mixed-use. These figures include certain leases not yet commenced.
Outlook, risks and contingencies
- No specific earnings or FFO guidance was provided. Management expected 2017 leasing volume to be in line with historical averages and anticipated overall positive rental income growth, while cautioning that lease results and rent increases are not assured.
- Torrey Point development was expected to add approximately 88,000 square feet of office space, with completion in Q2 2017 and stabilization expected in 2018. Estimated project cost was $56 million, with approximately $34 million incurred by March 31; management estimated a 7%–8% stabilized yield.
- On April 28, 2017, the company acquired the 533-unit Pacific Ridge Apartments in San Diego for approximately $232 million, excluding closing costs and prorations, funded with cash and credit-facility borrowings. A prospective $100 million treasury lock related to an anticipated debt offering was entered into April 25; management cautioned the offering might not close.
- Management said available operating cash, cash reserves and credit-facility capacity were expected to meet short-term requirements, but access to future debt and equity financing is not assured. Potential responses to deteriorating markets include delaying development, limiting acquisitions, reducing expenditures or reevaluating the dividend.
- Key risks include tenant defaults or nonrenewals, adverse real estate and economic conditions, interest-rate and financing risk, development and acquisition execution, and geographic and industry concentration. Eleven properties were in Southern California; retail and office tenants generated 33.6% and 35.2% of revenue, respectively.
- A hotel travel agent’s bankruptcy increased bad debt expense. Del Monte Center groundwater remediation continues; the company believes seller-funded escrow is sufficient, but additional costs could arise. The Embassy Suites franchise agreement could result in a termination payment of up to $7.4 million if triggered. Tax-protection agreements apply to certain properties through January 19, 2018. Management did not expect ongoing legal matters to materially affect financial position or operating trends.
- Management reported effective disclosure controls and procedures and no material change to internal control over financial reporting. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- How much of the reported operating cash-flow increase reflects the one-time $10.4 million swap settlement rather than recurring operations.
- The post-quarter impact of the $232 million Pacific Ridge acquisition on debt, liquidity, interest expense and leverage.
- Repayment of the $35.3 million secured loan on April 3 and the schedule and refinancing plan for remaining debt maturities.
- Leasing, occupancy and same-store NOI trends, especially retail and mixed-use performance, and whether signed leases commence and tenants pay as expected.
- Torrey Point’s remaining funding needs, completion timing, leasing and stabilization assumptions, and the stated projected yield.
- Potential hotel bad-debt exposure, remediation costs, and any contingent payments under the franchise or tax-protection agreements.