American Assets Trust, Inc. — Q1 2015 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014. American Assets Trust is a REIT operating through its consolidated Operating Partnership, in which it held a 70.9% interest. The company owned or controlled 23 retail, office, multifamily and mixed-use properties, plus land and projects under development.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $66.0 million | $64.0 million; up 3% |
| Operating income | $23.2 million | $20.4 million |
| Consolidated net income | $11.4 million | $6.7 million |
| Net income attributable to company stockholders | $8.0 million | $4.6 million |
| Diluted earnings per share | $0.18 | $0.11 |
| FFO per diluted share/unit | $0.43 | $0.39 |
| Cash from operating activities | $32.5 million | $28.0 million |
| Capital expenditures | $44.1 million cash outflow | $30.3 million |
| Cash and cash equivalents at quarter-end | $54.6 million | $59.4 million at Dec. 31, 2014 |
| Total debt carrying value | Approximately $1.082 billion | Approximately $1.063 billion at Dec. 31, 2014 |
| Dividend declared per common share | $0.2325 | $0.2200 |
Property operating income (the company’s NOI measure) was $43.4 million, up 5%; its share of total revenue was approximately 65.7%, versus 64.6% in Q1 2014. NOI and FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Changes and management commentary
- Revenue growth reflected higher rental income, up 4%, led by retail and office leasing and higher multifamily rents. Other property income declined 6%, partly because 2014 included office lease termination fees.
- Same-store property operating income increased 6%. Retail and office leased percentages were 98.5% and 92.7%, respectively, compared with 96.8% and 89.5% a year earlier.
- Interest expense fell 13% to $11.8 million, principally reflecting mortgage repayments and greater capitalized interest. Depreciation and amortization declined 8%; G&A rose 9% to $5.0 million, primarily from employee-related costs.
- Operating cash flow increased, while investing cash use rose with redevelopment and development spending. Financing cash flow was $7.9 million, down from $34.1 million, chiefly because of lower ATM equity proceeds. Cash declined by $4.7 million during the quarter.
- Secured debt fell by about $101 million, while unsecured notes increased by $100 million and $20 million was drawn on the revolving line. The $250 million revolver had $20 million outstanding at quarter-end. The $100 million term loan was effectively fixed at approximately 3.08% by a swap; the company reported compliance with debt covenants.
Outlook, projects and risks
- Management expected 2015 leasing volume to be in line with historical averages and anticipated positive rental-income growth, while cautioning that signed leases may not commence or produce all contracted rent.
- Lloyd District redevelopment, including approximately 47,000 square feet of retail and 657 multifamily units, was expected to complete in 2015. Estimated cost was $192 million, with $162 million incurred by March 31; stabilization was expected in 2017, at an estimated 6.25%–7.25% yield.
- Torrey Reserve’s approximately 81,500-square-foot office expansion was completed in Q1; total cost was approximately $34 million, with stabilization expected later in 2015 and an estimated 8.6% yield. Torrey Point’s planned 88,000-square-foot office project was expected to complete in 2016; estimated cost was $46 million, with $7 million incurred, and stabilization expected in 2017.
- After quarter-end, the company issued $100 million of Series C notes on April 2 and repaid the $133 million Landmark at One Market mortgage on April 6. These are subsequent events, not quarter-end debt balances.
- Key risks include tenant defaults, lease nonrenewals, vacancies and rent declines; real estate and financing market conditions; interest-rate and refinancing exposure; development cost, timing and leasing risks; and REIT qualification and capital-market access. Twelve properties were in Southern California, and retail and office tenants represented 36.4% and 35.7% of Q1 revenue. No tenant exceeded 10% of rental revenue.
- The filing reports ongoing groundwater remediation at Del Monte Center, funded from a seller-funded escrow believed sufficient; additional costs could arise if funds prove inadequate. Tax-protection agreements could require indemnity payments if certain properties are disposed of in taxable transactions before January 19, 2018. Management did not expect litigation, individually or in aggregate, to materially affect financial position or operating trends.
Most important facts for investors to verify
- Confirm the post-quarter debt refinancing and repayment effects on total debt, interest expense, maturities and liquidity.
- Track remaining project costs, completion schedules, lease-up and realized yields at Lloyd District, Torrey Reserve and Torrey Point.
- Assess whether occupancy and signed lease rent increases translate into commenced leases, collected rent and sustained same-store NOI growth.
- Review available revolver capacity, covenant headroom, debt maturities and the funding mix for development spending and dividends.
- Monitor the Del Monte Center remediation, tax-protection obligations and related-party transactions, including the March 2015 share sale to an entity controlled by the executive chairman.