American Assets Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial amounts below are in millions unless otherwise noted. The company is a REIT operating through American Assets Trust, L.P. At quarter-end it owned or controlled 24 operating properties across retail, office, multifamily and mixed-use, plus development land. The company owned 71.8% of the Operating Partnership; substantially all operations and debt reside there.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $76.0 | $71.3 | $218.5 | $204.1 |
| Operating income | $25.5 | $23.5 | $72.8 | $70.3 |
| Net income | $11.9 | $19.0 | $33.2 | $42.7 |
| Net income attributable to AAT stockholders | $8.5 | $13.6 | $23.7 | $30.3 |
| Basic and diluted EPS | $0.19 | $0.30 | $0.52 | $0.69 |
| Property operating income / NOI | $48.0 | $45.6 | $139.4 | $132.6 |
| FFO per diluted share/unit | $0.47 | Not provided in the reported reconciliation | $1.37 | Not provided in the reported reconciliation |
Q3 property operating income was 63.2% of revenue, compared with 64.0% a year earlier. The filing defines NOI as a non-GAAP measure and cautions that it excludes significant costs, including interest, depreciation, capital expenditures and leasing costs.
Cash, debt and distributions
- Cash and cash equivalents were $62.0 at September 30, 2016, up from $39.9 at December 31, 2015; restricted cash was $10.2.
- Nine-month operating cash flow was $102.7, investing cash outflow $47.2, and financing cash outflow $33.5. Capital expenditures were $45.6 in the cash-flow statement.
- Debt carrying value was approximately $1,063.9: $467.9 secured notes and $596.0 unsecured notes. There was no balance on the $250 million revolving credit line. The Operating Partnership also had $250 million in term loans, whose rates were hedged at approximately 3.14%–3.15%.
- During the first nine months, the company repaid $113.5 of secured notes and drew $150 million in new term loans. The secured South Bay Marketplace loan of $23 million was repaid on October 10, 2016, after quarter-end.
- The company reported compliance with applicable debt covenants. The interest-rate swaps had a $13.1 fair-value liability at quarter-end; nine-month changes in swap value included an $11.4 loss recorded in other comprehensive income.
- Dividends declared were $0.25 per share each quarter, or $0.75 for the nine months, compared with $0.6975 for the prior-year period. AAT reported 45,640,980 common shares outstanding on November 4, 2016.
Changes versus the prior comparable period
- Q3 revenue rose 7% and property operating income rose 5%; nine-month revenue rose 7% and property operating income rose 5%.
- Net income attributable to AAT stockholders fell 38% in Q3 and 22% for the nine months. The principal comparison item was the $7.1 gain on the 2015 sale of Rancho Carmel Plaza, absent in 2016. Higher depreciation and interest expense also weighed on 2016 results.
- Growth was supported by completed Hassalo on Eighth multifamily development and higher mixed-use hotel revenue per available room. Same-store NOI increased 2% in Q3 and 3% for the nine months.
- General and administrative expense decreased 29% in Q3 and 17% for the nine months, partly reflecting lower stock compensation and the prior-year CEO transition costs. Property expenses increased faster than revenue in both periods.
- Operating cash flow rose to $102.7 from $90.0 for the nine months, while investing cash outflow declined to $47.2 from $119.1, largely reflecting completion of prior development work.
Outlook, commentary and risks
- Management reported improved tenant interest and remained cautiously optimistic, but said there was no assurance that trends would continue. It expected the remaining-2016 leasing volume to be in line with historical averages and to produce overall positive rental-income increases; this is commentary, not formal financial guidance.
- Q3 leasing included 24 retail leases covering 103,348 square feet, with comparable-space rents up 13.3% cash basis, and 15 office leases covering 47,637 square feet, with comparable-space rents up 9.6% cash basis. Signed leases may not all commence or produce full contractual rent.
- Torrey Point development was planned to add approximately 88,000 square feet of office space. Estimated cost was $53 million, with $27 million incurred by September 30; completion was expected in 2017, stabilization in 2018, and estimated stabilized yield of 7.5%–8.6%. These are estimates subject to market and execution risks.
- Occupancy/percentage leased at quarter-end was 97.0% retail, 89.9% office, 91.7% multifamily and 98.8% for the retail portion of mixed-use. Retail, office and mixed-use were lower than a year earlier.
- Risk factors include geographic concentration (11 properties in Southern California), exposure to retail and office tenants, tenant defaults or nonrenewals, interest rates, financing access and development execution. Retail and office tenants accounted for 34% and 35% of nine-month revenue, respectively. Bad-debt expense increased amid Sports Authority’s bankruptcy and K-Mart’s announced closure at Waikele Center.
- Management said it believed cash flow and available credit were adequate for near-term needs and that the company had adequate working capital for dividend funding over the next 12 months, while noting that financing availability was not assured. As a REIT, it generally must distribute at least 90% of REIT taxable income.
- The filing reported no material legal proceedings expected to adversely affect the company. Del Monte Center groundwater remediation continues; management considered seller-funded escrow sufficient for remaining work, but additional costs could arise. A hotel franchise termination payment could be as high as $7.2 million under specified circumstances.
- The filing identifies uncertainty related to the United Kingdom’s referendum to leave the EU as a potential risk to global markets and the company. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether leasing and occupancy trends hold, particularly office occupancy and the impact of K-Mart and Sports Authority-related tenant exposure.
- Debt maturities, covenant headroom, interest-rate swap exposure and the availability of the undrawn revolver and capital markets.
- Torrey Point’s remaining cost, delivery schedule, leasing progress and whether the estimated stabilized yield is achievable.
- Dividend funding against operating cash flow after capital expenditures, debt service and distributions to noncontrolling unitholders.
- Any additional costs or liability developments involving Del Monte remediation, hotel franchise requirements or other contingencies.