American Assets Trust, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unless indicated otherwise, financial amounts are in millions. The filing combines American Assets Trust, Inc. and its Operating Partnership; the Operating Partnership holds the debt and conducts substantially all operations. The company owned approximately 71.6% of the Partnership.
Business context
The REIT owned or controlled 23 retail, office, multifamily and mixed-use operating properties in California, Oregon, Washington, Texas and Hawaii, plus land and properties under development. Its mixed-use portfolio includes a 369-room hotel.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $71.3 | $67.3 | $204.1 | $193.5 |
| Property operating income (NOI) | $45.6 | $44.1 | $132.6 | $126.0 |
| Operating income | $23.5 | $23.0 | $70.3 | $61.1 |
| Net income | $19.0 | $9.1 | $42.7 | $21.1 |
| Net income attributable to AAT stockholders | $13.6 | $6.4 | $30.3 | $14.7 |
| Diluted EPS | $0.30 | $0.15 | $0.69 | $0.35 |
| FFO per diluted share/unit | $0.44 | Not provided | $1.31 | Not provided |
- Q3 revenue rose 6% year over year; property operating income rose 4%. For the first nine months, revenue and property operating income each rose 5%. Office and mixed-use operating performance improved, supported by higher leasing, rents and hotel occupancy.
- Net income included a $7.1 million gain on the August sale of Rancho Carmel Plaza. The $12.3 million net sale proceeds remained in escrow as restricted cash and the sale was structured to accommodate a possible tax-deferred exchange.
- Interest expense declined 16% in Q3 and 15% for the nine-month period, primarily reflecting repayment of several property mortgages and increased capitalized interest. G&A increased 36% in Q3, primarily due to a $2.5 million charge related to the former CEO’s resignation.
- At September 30, assets were $2.00 billion, total liabilities $1.16 billion and equity $832.5 million. Cash and cash equivalents were $40.2 million; restricted cash was $25.2 million.
- Debt carrying amounts were $579.4 million secured notes, $450.0 million unsecured notes and $25.0 million drawn on the unsecured revolver. The revolver facility was $250 million, implying $225 million undrawn, subject to its terms. The $100 million term loan is effectively fixed at approximately 3.08% by a swap. The Partnership reported compliance with debt covenants.
- Operating cash flow was $90.0 million, versus $81.4 million in the prior-year period. Investing cash outflow was $119.1 million, including $115.2 million of capital expenditures; financing cash inflow was $9.9 million. Cash declined $19.2 million during the period.
- Declared dividends were $0.2325 per share per quarter, or $0.6975 for the nine months. Total dividends and Partnership distributions paid were $43.6 million.
Material changes and management outlook
- During the first nine months, secured notes fell from $812.8 million to $579.4 million, while unsecured notes increased from $250 million to $450 million, including $200 million of Series B and C notes issued in 2015. The company also raised equity through its ATM program.
- Lloyd District redevelopment was expected to add 657 multifamily units and approximately 47,000 square feet of retail space. Estimated cost was $202 million, with $191 million incurred by September 30; completion was expected in 2015, stabilization in 2017, and estimated stabilized yield of 5.75%–6.25%.
- Torrey Point development was expected to add approximately 88,000 square feet of office space. Estimated cost was $50 million, with $10 million incurred; completion was expected in 2017, stabilization in 2018, and estimated yield of 8.25%–9.25%. These are estimates and projects depend on market conditions.
- Management reported positive leasing trends and was cautiously optimistic, but said future rental increases were not assured. For Q3 comparable-space leases, average rent increases were 23.0% cash for retail and 6.4% cash for office; signed leases may take time to commence and tenants may not take possession or pay as contracted.
- No formal earnings guidance is provided in the supplied filing text. Management said it may defer development, limit acquisitions, reduce expenses or reassess dividends if market conditions deteriorate.
Risks, contingencies and unusual items
- Key risks include tenant defaults or non-renewals, leasing and occupancy pressure, real estate market weakness, interest rates, financing availability, development execution, and REIT qualification requirements. Twelve properties were in Southern California; retail and office tenants represented 36.0% and 35.6% of nine-month revenue, respectively.
- Environmental remediation at Del Monte Center is ongoing, with long-term monitoring expected for five to seven years. Management believes the seller-funded escrow is sufficient, but additional costs could arise.
- Hotel franchise termination could trigger a payment of up to $6.7 million based on operating performance through September 30, 2015. The filing also describes lease obligations, hotel management agreements and tax-protection agreements that could create payments in specified circumstances.
- The former CEO’s resignation resulted in the $2.5 million Q3 business-transition charge. Management reported no material legal proceeding and no material change to previously disclosed risk factors.
- Disclosure controls were deemed effective at period-end; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported earnings increase came from the one-time $7.1 million property-sale gain, and what were comparable recurring operating results?
- Whether Lloyd District and Torrey Point remain on budget and schedule, and whether their projected yields and stabilization dates are achievable.
- Debt maturities, covenant headroom, refinancing plans and available revolver capacity, particularly given development spending and the REIT’s distribution requirements.
- Whether leasing, occupancy and hotel performance improvements continue, and how higher property expenses and taxes affect property-level margins.
- The expected timing and tax treatment of the Rancho Carmel Plaza escrow proceeds, and any material developments in environmental, franchise or tax-protection contingencies.