American Assets Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. American Assets Trust is a REIT operating through its consolidated Operating Partnership. At quarter-end, the portfolio comprised 28 properties across office, retail, multifamily and mixed-use, including a 369-room hotel.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $84.4 million | $98.4 million | $263.2 million | $267.8 million |
| Net income | $6.5 million | $16.5 million | $31.8 million | $43.7 million |
| Net income attributable to AAT stockholders | $5.0 million | $12.9 million | $24.8 million | $32.9 million |
| Basic and diluted EPS | $0.08 | $0.22 | $0.41 | $0.63 |
| Property operating income (NOI) | $53.7 million | $63.4 million | $173.0 million | $171.9 million |
| Operating cash flow | Not separately reported | Not separately reported | $109.1 million | $122.1 million |
Q3 revenue fell 14% and net income fell 61% year over year. Nine-month revenue declined 2%, while NOI increased 1%; net income declined 27%. Nine-month FFO attributable to common stock and units was $112.4 million, or $1.48 per diluted share/unit; the filing provides no comparative 2019 FFO in the presented reconciliation.
- Cash and liquidity: Cash and cash equivalents were $155.3 million at September 30, 2020, versus $99.3 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $156.6 million. The company stated it had adequate working capital for its dividend funding obligations over the next 12 months.
- Debt: Operating Partnership debt was held outside the parent company. Balance-sheet debt, net of issuance costs, totaled approximately $1.41 billion: $110.9 million secured notes, $1.197 billion unsecured notes and $99.0 million on the unsecured line of credit. The $350 million revolving facility had $100 million drawn at quarter-end. The company reported compliance with debt covenants.
- Cash flows and investment: Nine-month investing cash use was $53.6 million, principally capital expenditures and leasing commissions; financing cash use was $8.5 million. Operating cash flow was down $13.0 million year over year, primarily due to weaker hotel revenue and lower retail rent collections. No real estate acquisition occurred in 2020 through September; the prior-year period included the La Jolla Commons acquisition.
- Distributions: The Q3 dividend was $0.25 per share, compared with $0.28 in Q3 2019. Dividends declared per share for the first nine months were $0.75, versus $0.84 in 2019.
Material changes and operating drivers
- COVID-19 pressure was most pronounced in retail and the Waikiki hotel/mixed-use property. Q3 retail rental revenue declined 22%; mixed-use rental revenue declined 63%. Retail same-store NOI fell 21.9% for the first nine months, while office same-store NOI rose 20.8%.
- For Q3, hotel occupancy fell to 65.9% from 92.9% and revenue per available room to $138 from $332. For the first nine months, occupancy was 52.8% versus 92.1%, and revenue per available room was $138 versus $301.
- Management reported collecting approximately 98% of Q3 office rent, 73% of retail rent and 94% of multifamily rent due. COVID-related rent modifications covered approximately 2% of rent originally contracted for the quarter. The provision for doubtful accounts was approximately $10.0 million at September 30, versus $1.7 million at year-end 2019.
- Office segment results benefited from La Jolla Commons and higher rents at several properties. Nine-month total office rental revenue rose 35%, partly reflecting the prior-year acquisition. Retail and multifamily occupancy and rental performance weakened; the filing cites tenant credit deterioration, rent concessions and reduced occupancy.
- Interest expense was broadly flat for the nine months at $40.1 million. Depreciation and amortization rose 16% to $80.9 million, partly due to La Jolla Commons and tenant improvements.
Outlook, risks and contingencies
- Management gave no specific earnings or FFO guidance. It expected leasing volume for the remainder of 2020 to be below historical averages, with overall rental income decreasing due to COVID-19. It also expected reduced Waikiki hotel revenue and property income through the remainder of 2020 and into Q1 2021.
- Management said the pandemic’s future effects could not be estimated with certainty. Risks include tenant nonpayment or bankruptcy, rent concessions, reduced retail and office demand, hotel weakness, property-value declines, construction delays and higher costs, and constrained access to debt or equity capital. Development, redevelopment and acquisition plans may be delayed or limited if conditions worsen.
- After quarter-end, the Operating Partnership extended the $100 million Term Loan A maturity to January 9, 2022. It also settled the August 2020 $200 million treasury lock on October 1, 2020 with no gain or loss; its unrealized loss had been recorded in Q3 other expense.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It disclosed ongoing groundwater remediation at Del Monte Center, funded by a seller-funded escrow that management believes is sufficient, and a potential Embassy Suites franchise termination payment of up to $6.1 million if specified obligations are not met.
Investor verification points
- Track rent collections, receivable reserves, tenant concessions and retail tenant credit quality, especially as COVID-related restrictions and conditions evolve.
- Monitor Waikiki hotel occupancy and revenue per available room, and whether management’s stated weakness through Q1 2021 persists.
- Review debt maturities, revolver availability, covenant headroom and refinancing needs, including the post-quarter Term Loan A extension.
- Assess the sustainability of the $0.25 quarterly dividend against operating cash flow, capital needs and debt service.
- Separate acquisition-related office growth from underlying same-store performance; also assess planned development and redevelopment spending and leasing outcomes.