American Assets Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. American Assets Trust is a REIT whose operations are conducted through its consolidated Operating Partnership. The portfolio comprised 31 office, retail, multifamily and mixed-use properties, including a 369-room hotel.
Financial performance and liquidity
- Third-quarter revenue: $111.2 million, essentially unchanged from $111.0 million a year earlier. Property operating income (NOI) was $69.9 million, down 2% from $71.1 million.
- Third-quarter earnings: Net income was $15.1 million versus $16.4 million; net income attributable to AAT stockholders was $11.8 million versus $12.8 million. Diluted EPS was $0.20 versus $0.21. Net interest expense rose 13% to $16.3 million.
- Nine-month revenue and earnings: Revenue rose 4% to $328.7 million; NOI increased 2% to $208.4 million. Net income rose 18% to $51.2 million, and net income attributable to stockholders increased to $39.9 million from $33.9 million. Diluted EPS was $0.66 versus $0.56.
- Margins: The filing reports NOI of $69.9 million on third-quarter revenue of $111.2 million and $208.4 million on nine-month revenue of $328.7 million. NOI is a non-GAAP measure and excludes corporate costs, interest, depreciation and other items.
- Cash flow: Nine-month operating cash flow was $149.9 million, up from $140.9 million. Investing outflow was $70.2 million, compared with $139.6 million, principally reflecting no real estate acquisition in 2023 and lower capital spending. Financing outflow was $39.3 million. Cash ended at $90.0 million, versus $63.4 million at September 30, 2022.
- Debt and liquidity: At September 30, 2023, net carrying debt was approximately $1.689 billion: $74.6 million secured and $1.614 billion unsecured. The $400 million revolving facility was undrawn; cash was $90.0 million. The Operating Partnership was in compliance with debt covenants. Management stated it believed liquidity was adequate for near-term needs.
- Distributions and FFO: Quarterly dividend was $0.33 per share, up from $0.32; nine-month dividends were $0.99 per share. Nine-month FFO attributable to common stock and units was $140.2 million, or $1.84 per diluted share/unit. The supplied FFO table does not give a comparable 2022 figure.
Material changes versus the prior comparable period
- Third-quarter office property operating income declined, partly because 2022 included accelerated recognition of tenant-improvement overages; higher utilities, services, insurance and other costs also weighed on results. Retail property operating income increased, while multifamily was approximately flat and mixed-use improved.
- For the first nine months, retail, multifamily and mixed-use NOI rose 6%, 7% and 7%, respectively; office NOI fell 1%. Same-store office NOI decreased 1.4% and retail same-store NOI increased 5.8%.
- Nine-month rental expenses rose 10% to $86.1 million, including higher office, multifamily and hotel costs. General and administrative expense increased 15% to $26.5 million. Interest expense rose 11% to $48.4 million.
- Nine-month net income included $7.3 million of other income, versus $0.5 million of other expense in 2022. This included an approximately $6.3 million settlement payment received in January 2023 related to building systems at Hassalo on Eighth, as well as higher investment income.
Outlook, risks and contingencies
- The filing provides no quantified earnings or FFO guidance. Management described pursuing same-store growth, development and redevelopment, and selective acquisitions, subject to market conditions and acceptable risk-adjusted returns. Projects mentioned include future phases at La Jolla Commons and Lloyd Portfolio and work at Waikele Center and One Beach Street.
- Leasing activity included 87,081 square feet of office leases signed in Q3, with comparable office lease rates up 7.0% on a cash basis and 13.5% on a GAAP basis. Retail comparable renewal rates increased 8.2% on a cash and GAAP basis. Management cautioned that leases may not commence as expected and tenants may fail to pay contractual rent.
- Occupancy indicators were mixed at September 30: office 86.8% versus 90.7% a year earlier; retail 94.4% versus 92.2%; multifamily 89.5% versus 93.0%; mixed-use retail 95.1% versus 94.9%. Multifamily average occupancy for the nine-month period fell to 89.7% from 93.4%.
- Key risks include office and retail demand, tenant defaults or vacancies, higher operating costs and interest rates, access to financing, development execution, geographic concentration and REIT qualification requirements. Fifteen properties are in Southern California; office and retail tenants represented 47.2% and 23.6% of nine-month revenue, respectively.
- Debt refinancing is a notable consideration: $100 million of senior guaranteed notes mature in 2024, and $225 million of term loans plus $100 million of senior guaranteed notes mature in 2025, subject to disclosed extension rights for the term loans. The term loans were effectively fixed through swaps at approximately 5.47% for the first year and 5.57% for the second year, subject to leverage adjustments.
- Contingencies include ongoing groundwater remediation at Del Monte Center, expected to require monitoring for five to seven years; management believes the seller-funded escrow is sufficient but could face additional costs. A potential Embassy Suites franchise termination payment could be as high as $7.4 million if specified conditions occur. Management did not believe current legal matters would materially affect the company.
Important facts for investors to verify
- Office leasing, occupancy and tenant demand, given lower office occupancy and weaker office NOI.
- Debt maturities in 2024–2025, refinancing terms and availability of the undrawn revolver.
- How much reported nine-month earnings growth depended on the one-time Hassalo on Eighth settlement.
- Whether higher rents can continue to offset rising property, insurance, personnel and interest costs, particularly in multifamily and hospitality.
- Development and redevelopment spending, project timing, and the effect of capital needs on dividends and liquidity.