American Assets Trust, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2014. The company is a vertically integrated REIT with 23 retail, office, multifamily and mixed-use operating properties, plus land and projects under development, across California, Oregon, Washington, Texas and Hawaii.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $67.3 million, up 3% year over year | $193.5 million, up 2% |
| Net income | $9.1 million, versus $6.3 million | $21.1 million, versus $15.7 million |
| Net income attributable to company stockholders | $6.4 million, versus $4.2 million | $14.7 million, versus $10.5 million |
| Diluted earnings per share | $0.15, versus $0.11 | $0.35, versus $0.27 |
| Dividends declared per common share | $0.22, versus $0.21 | $0.66, versus $0.63 |
| Net operating income (NOI; non-GAAP) | $44.1 million, up 5% | $126.0 million, up 2% |
| Funds from operations attributable to common stock and units (FFO; non-GAAP) | $25.4 million; $0.42 per diluted share/unit | $71.9 million; $1.20 per diluted share/unit |
Cash flow and liquidity. For the nine months, operating cash flow was $81.4 million, investing cash outflow was $99.0 million, and financing cash inflow was $63.7 million. Cash and cash equivalents were $95.1 million at September 30, 2014, versus $49.0 million at December 31, 2013. Capital expenditures were a significant use of cash, principally for development and redevelopment.
Debt. At September 30, secured notes had a carrying value of $953.2 million and the term loan was $100.0 million; no revolver balance was outstanding. The $100 million term loan was effectively fixed at approximately 3.08% by an interest-rate swap. The company reported compliance with its debt covenants. A $250 million revolving facility was available, subject to its terms and covenants.
Portfolio and operating indicators. At September 30, leased percentages were retail 98.7%, office 89.9%, multifamily 96.4%, and the retail portion of mixed-use 99.5%. Nine-month same-store NOI rose 1%; same-store office NOI declined 0.8%. Multifamily performance benefited from increased occupancy and rents, while hotel revenue was affected by lower occupancy during a room refresh.
Material changes versus the prior comparable period
- Nine-month stockholder net income increased 40%; lower interest expense, higher property income and a $745,000 net acquisition termination fee contributed to the improvement. The termination fee is unusual and should not be assumed recurring.
- Nine-month interest expense fell 9%, to $40.4 million, primarily following repayment of the Alamo Quarry Market mortgage in 2013 and increased capitalized interest.
- Nine-month total property revenue increased 2%, while property expenses rose 2%. General and administrative expense rose 10%, mainly due to employee-related costs.
- Common shares issued increased to 43.6 million from 40.5 million at year-end 2013, including ATM sales and a 400,000-share private placement to ICW, an entity majority-owned and controlled by the board’s Executive Chairman.
- Development and redevelopment spending increased substantially: cash capital expenditures were $94.9 million for the nine months, versus $33.5 million a year earlier.
Outlook, risks and contingencies
- Projects: Lloyd District redevelopment was expected to cost approximately $192 million, with $101 million incurred; completion was expected in 2015 and stabilization in 2017, at an estimated stabilized yield of 6.25%–7.25%. Torrey Reserve redevelopment was expected to cost $34 million, with $28 million incurred, and stabilization in 2015 at an estimated yield of 8.6%. Sorrento Pointe development was expected to cost $46 million, with $7 million incurred; completion was expected in 2016 and stabilization in 2017. These are estimates dependent on market and execution conditions.
- Leasing commentary: Management reported positive leasing trends but cautioned that signed leases may not commence or produce all contractual rent. It expected remaining-2014 leasing volume to be in line with historical averages, without assurance of continued rent increases.
- Subsequent financing: After quarter-end, the company agreed to issue $350 million of senior guaranteed notes in three series. The $150 million Series A notes were issued October 31, 2014 at 4.04%; the $100 million Series B and $100 million Series C were expected to issue in 2015 at 4.45% and 4.50%, respectively, subject to customary conditions. Proceeds included refinancing the $140.7 million Waikele Center mortgage, repaid October 31, 2014. The remaining note issuances were prospective as of the filing.
- Risks and contingencies: Risks include tenant defaults or nonrenewals, vacancies and rent pressure, development costs and delays, interest rates and financing access, geographic and retail/office concentration, REIT qualification, and newly identified cybersecurity risks. Del Monte Center groundwater remediation continues; the company believes seller-funded escrow is adequate, but additional costs could arise. Embassy Suites franchise termination payments could be as high as $6.5 million under specified circumstances. Management said it did not expect pending legal matters to have a material adverse effect; outcomes remain uncertain.
Key facts investors should verify
- Whether the subsequent $200 million of Series B and C notes closed as planned, and the resulting debt costs, maturities and covenant headroom.
- Development budgets, remaining funding needs, completion schedules and eventual occupancy and yields for Lloyd District, Torrey Reserve and Sorrento Pointe.
- Office leasing and occupancy trends, particularly at First & Main, and the effects of the expired Foodland lease and hotel room refresh.
- How much of earnings growth reflects recurring property operations versus lease termination fees, tax refunds and other timing-related items.
- Future capital requirements, dividend coverage and any changes to liquidity, covenant compliance, litigation or environmental remediation exposure.
The filing provides no quantified forward earnings or FFO guidance.