American Assets Trust, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. American Assets Trust is a REIT operating through its consolidated Operating Partnership. It owned or controlled 23 properties across retail, office, multifamily and mixed-use sectors, plus development land. The portfolio included approximately 5.8 million square feet of retail and office space, 1,579 residential units and a 369-room hotel. The company owned 71.7% of the Operating Partnership.
Financial highlights
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Total revenue | $70.7 million | $66.0 million; up 7% |
| Property operating income (NOI) | $45.6 million | $43.4 million; up 5% |
| Net income | $10.7 million | $11.4 million; down 6% |
| Net income attributable to AAT stockholders | $7.7 million; $0.17 per diluted share | $8.0 million; $0.18 per diluted share |
| FFO attributable to common stock and units | $28.1 million; $0.45 per diluted share/unit | $26.4 million; $0.43 per diluted share/unit |
| Operating cash flow | $34.3 million | $32.5 million |
| Cash and cash equivalents at quarter-end | $44.0 million | $39.9 million at Dec. 31, 2015 |
| Dividends declared per common share | $0.25 | $0.2325 |
Revenue growth reflected stronger office and multifamily rental income, including contributions from Hassalo on Eighth, which became available for occupancy in 2015. Property expenses rose 11% to $25.1 million, faster than revenue; depreciation and amortization increased 16% to $17.5 million and interest expense rose 10% to $12.9 million. These increases contributed to lower GAAP net income. FFO and NOI are non-GAAP measures and should not be treated as substitutes for net income or cash flow.
Same-store NOI increased 5% to $40.7 million. Segment NOI changes were retail +3%, office +5%, multifamily +10% and mixed-use +9%. Reported leased percentages were 98.6% for retail, 91.3% for office, 79.4% for multifamily and 97.8% for the retail portion of mixed-use. Multifamily occupancy was down from 96.4% a year earlier, with the comparison affected by the addition of Hassalo on Eighth units.
Debt, liquidity and cash flow
- At March 31, the Operating Partnership reported $494.9 million of secured notes, $545.9 million of unsecured notes and $20.0 million outstanding on its unsecured revolver. Total reported debt was approximately $1.06 billion, compared with approximately $1.06 billion at year-end; debt mix changed during the quarter.
- The company itself reported no indebtedness; debt is held by the Operating Partnership. A new $100 million seven-year term loan closed March 1, 2026? No—March 1, 2016, and matures March 1, 2023. The $100 million loan is swapped to an approximately 3.15% rate, subject to leverage-based adjustments. The Operating Partnership repaid the First & Main secured loan and extended Term Loan A maturity to January 2017.
- The revolving facility provides a $250 million revolver; $20 million was drawn at quarter-end. The reported cash balance was $44.0 million, in addition to $9.3 million of restricted cash. Management said available operating cash flow and borrowing capacity were adequate for expected near-term needs and dividend funding over the next 12 months.
- Operating activities provided $34.3 million; investing activities used $17.9 million, including $17.1 million of capital expenditures; financing activities used $12.3 million. Dividends and distributions paid totaled $15.8 million.
- Interest-rate swaps had a $5.7 million fair-value liability at quarter-end. Fixed-rate debt was approximately $849 million; variable-rate debt was $220 million, with swaps used to manage exposure.
Outlook, commentary and risks
- Management described leasing conditions as improving but remained cautiously optimistic and gave no assurance that trends would persist. It expected leasing volume for the remainder of 2016 to be in line with historical averages and to produce overall positive rental-income growth.
- Torrey Point development is planned to add approximately 88,000 square feet of office space. Estimated project cost is $53 million, of which approximately $17 million had been incurred; completion is expected in 2017, stabilization in 2018, and estimated stabilized yield is 7.5%–8.6%. These are estimates subject to market and execution risks.
- The company was pursuing a prospective additional $50 million seven-year term loan and a prospective ten-year debt offering; neither financing was assured. It entered forward-starting swaps to hedge anticipated financing, including a $150 million notional swap for prospective debt expected by March 31, 2017.
- Risks include real-estate and economic weakness, tenant defaults or non-renewals, vacancies and rent declines, financing availability and interest-rate movements, development and redevelopment execution, and REIT qualification requirements. Eleven properties were in Southern California; retail and office tenants represented 34.5% and 35.8% of quarterly revenue, respectively.
- Contingencies include continuing 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 $6.9 million if specified conditions are breached. Management did not expect current legal matters to have a material adverse effect. No material risk-factor changes were reported.
- Disclosure controls were concluded effective, with no reported material changes to internal control over financial reporting. The filing reported adoption of accounting updates with no material impact from the consolidation guidance; debt issuance costs were reclassified as deductions from related debt.
Important facts for investors to verify
- Reconcile the quarter’s debt refinancing, near-term maturities, revolver availability and covenant headroom; confirm the expected $50 million loan and longer-term debt offering are completed on acceptable terms.
- Track occupancy and lease commencement, particularly the multifamily portfolio, and assess whether rent growth and same-store NOI gains continue after operating-cost increases.
- Monitor Torrey Point budget, schedule, leasing and stabilization assumptions, and the company’s remaining development and capital spending needs.
- Review dividend coverage against recurring cash flow, debt service, capital expenditures and the REIT distribution requirement; remember that FFO is not cash available for dividends.
- Assess swap valuation and interest-rate exposure, Southern California and sector concentration, and the status of environmental remediation and hotel franchise obligations.