American Assets Trust, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. American Assets Trust is a vertically integrated REIT owning 23 retail, office, multifamily and mixed-use properties across several U.S. markets. Amounts below are in millions except per-share data.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $62.2 | $62.9 | $126.1 | $125.1 |
| Operating income | $17.7 | $19.4 | $38.1 | $39.3 |
| Net income | $5.4 | $4.6 | $12.0 | $9.4 |
| Net income attributable to company stockholders | $3.7 | $3.1 | $8.3 | $6.3 |
| Basic and diluted EPS | $0.09 | $0.08 | $0.20 | $0.16 |
| FFO attributable to common stock and units | $23.5 | Not presented | $46.5 | Not presented |
| FFO per diluted share/unit | $0.39 | Not presented | $0.78 | Not presented |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $50.3 | $45.7 |
Property operating income (NOI, a non-GAAP measure) was $40.6 million in Q2 and $81.9 million in the first half, essentially flat against comparable 2013 periods. NOI margin was approximately 65.2% for Q2 (64.8% in 2013) and 64.9% for the first half (65.4% in 2013). Operating margin declined to approximately 28.5% in Q2 from 30.8%, and to 30.2% for the first half from 31.4%.
At June 30, cash and cash equivalents were $78.9 million; total assets were $1.892 billion and total liabilities $1.155 billion. Debt comprised $952.8 million of secured notes and a $100 million term loan; no revolving credit balance was outstanding. Gross debt was approximately $1.053 billion. Dividends declared were $0.22 per share for Q2 and $0.44 for the first half.
Changes versus prior comparable periods
- Q2 revenue fell 1% and operating income fell $1.7 million, while net income attributable to stockholders rose 21%. For the first half, revenue increased 1%, net income attributable to stockholders rose 32%, and operating income declined $1.2 million.
- Interest expense decreased 9% in Q2 and 8% year to date, mainly reflecting repayment of the Alamo Quarry Market mortgage and more capitalized interest. Depreciation and amortization rose 7% in Q2, partly due to accelerated depreciation during a hotel room refresh.
- Hotel occupancy declined to 71.3% in Q2 from 87.6%, and to 80.7% for the first half from 88.6%, as one tower underwent a room refresh. Multifamily performance improved: first-half average occupancy was 96.7% versus 94.5%, with higher average rent per unit.
- Cash flow from operations increased $4.7 million year over year, while investing cash outflow rose to $63.9 million from $22.1 million, mainly due to development and redevelopment spending. Financing provided $43.4 million, including $100 million of term-loan proceeds and $69.9 million net ATM share proceeds.
Outlook, risks and unusual items
- Management provided no formal earnings or FFO guidance. It expected leasing volume through the rest of 2014 to be in line with historical averages and to produce overall positive rental-income increases, while cautioning that lease outcomes and tenant performance are uncertain.
- Development plans include Lloyd District (approximately $192 million projected cost; $72 million incurred; completion expected 2015 and stabilization 2017), Torrey Reserve (approximately $34 million projected cost; $24 million incurred; completion expected fall 2014 and stabilization 2015), and Sorrento Pointe (approximately $46 million projected cost; $7 million incurred; completion expected 2016 and stabilization 2017). Plans remain subject to market conditions and returns.
- The amended credit facility provides $250 million of revolving capacity and a $100 million term loan. A swap is intended to fix the term-loan rate at approximately 3.08%; the swap had a $1.6 million liability and contributed $1.6 million of unrealized loss in the first half. The company reported compliance with debt covenants.
- Near-term refinancing needs include a $140.7 million Waikele Center loan maturing November 1, 2014, followed by significant maturities in 2015. Management expects to use operations, cash, debt and/or equity to meet liquidity and investment needs, but says access to financing cannot be assured.
- Q2 other income included a $0.745 million net termination fee from a canceled acquisition. The first-half ATM program issued 2.11 million shares for $69.9 million net proceeds; $53.3 million of capacity remained at June 30.
- Risks include office occupancy weakness (88.5% leased versus 92.9% a year earlier), hotel performance, development costs and execution, interest rates, tenant defaults and regional/sector concentration. Retail and office tenants generated 36.9% and 35.9% of first-half revenue, respectively; 12 properties were in Southern California.
- Contingencies include approximately $6.6 million accrued for California transfer taxes, possible additional costs for Del Monte Center environmental remediation if escrow funds prove insufficient, and a potential Embassy Suites franchise termination payment of up to $6.4 million. Management did not expect current legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Whether the Waikele Center maturity was refinanced, repaid or otherwise addressed after the reporting date, and how the 2015 maturities will be funded.
- Actual spending, completion timing, leasing and stabilization progress for Lloyd District, Torrey Reserve and Sorrento Pointe.
- Whether office occupancy and hotel occupancy recover, and whether signed leases commence and deliver the stated rents.
- How much of operating cash flow remains available after capital spending and dividends, and whether further ATM equity issuance or borrowing is needed.
- Final exposure for the accrued transfer taxes, environmental remediation and hotel franchise obligations.