American Assets Trust, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The company is a vertically integrated REIT owning retail, office, multifamily and mixed-use properties. At quarter-end it held 23 operating properties and land at five properties; the portfolio included about 5.8 million rentable square feet of retail and office space, 922 residential units and a 369-room hotel.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $62.8 million | $56.3 million | $177.7 million | $154.3 million |
| Operating income | $19.1 million | $15.2 million | $53.7 million | $44.1 million |
| Net income | $4.3 million | $4.6 million | $9.8 million | $18.7 million |
| Net income attributable to company stockholders | $2.8 million | $3.1 million | $6.4 million | $2.6 million |
| Basic and diluted EPS | $0.08 | $0.08 | $0.17 | $0.07 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $55.4 million | $51.8 million |
Q3 property operating income (the company’s reported segment profit/NOI measure) was $39.5 million, up 14%; it was about 62.9% of revenue, versus about 61.7% in Q3 2011. Nine-month property operating income was $111.8 million, up 16%, or about 62.9% of revenue versus 62.7%. These are non-GAAP measures and exclude corporate, financing and depreciation costs.
At September 30, total assets were $1.861 billion, net real estate $1.698 billion, and total liabilities $1.206 billion. Secured notes payable were $964.1 million on the balance sheet; the principal balance before unamortized fair-value adjustments was $977.8 million. The credit facility had $141.0 million drawn and $219.4 million maximum allowable borrowing capacity. Cash and cash equivalents were $34.9 million, down from $112.7 million at December 31, 2011. The filing reports no covenant defaults; the company was in compliance with its debt and credit-facility covenants.
Nine-month investing cash outflow was $255.0 million, including $253.1 million for real estate acquisitions and $25.8 million of capital expenditures, partly offset by marketable-security proceeds. Financing cash inflow was $121.8 million. Dividends declared were $0.21 per common share per quarter, or $0.63 for the nine months.
Changes versus comparable periods
- Q3 revenue rose 12%; same-store rental revenue rose 7% and same-store property operating income rose 7%. Nine-month revenue rose 15%, while same-store rental revenue rose 3% and same-store property operating income rose 2%.
- Growth included acquisitions, particularly One Beach Street and City Center Bellevue, as well as improved retail leasing and stronger Waikiki hotel performance. Retail and office occupancy at September 30 was 96.9% and 94.0%, respectively; multifamily was 96.2% and mixed-use retail was 97.4%.
- Nine-month net income declined 48%, although income attributable to company stockholders increased to $6.4 million from $2.6 million. The comparison is affected by 2011 items: a $46.4 million acquisition gain and $34.9 million of debt extinguishment and loan-transfer fees, as well as discontinued operations and predecessor ownership allocations.
- Secured notes and the credit-facility draw increased, while cash fell substantially. Nine-month capital expenditures were higher than in 2011, reflecting property improvements and development activity.
Outlook, commentary and risks
- No specific earnings, FFO or same-store guidance was provided. Management said it expects to meet short-term liquidity needs through operating cash, reserves and, if needed, credit-facility borrowings; longer-term needs may be funded with operating cash, debt and equity. These financing sources are not assured.
- Management cited adverse market and economic conditions, tenant defaults or nonrenewals, vacancies or rent declines, acquisition and development execution, interest-rate and operating-cost changes, financing access, competition, litigation, environmental matters, and maintaining REIT qualification as risks.
- The portfolio is geographically concentrated: 12 consolidated properties were in Southern California. Retail tenants generated 38.2% of nine-month revenue; no tenant exceeded 10% of rental revenue.
- Debt is predominantly fixed-rate. The company had $977.8 million of fixed-rate debt outstanding; a hypothetical 1 percentage-point rate increase would reduce its estimated fair value by about $30 million. The $141 million credit-facility balance was variable-rate debt.
- Notable maturities include approximately $91.7 million at Alamo Quarry Market and $27.5 million at 160 King Street in 2014, and $140.7 million at Waikele Center in 2014. The filing lists total annual debt service of $58.8 million for the year ending September 30, 2013.
- After quarter-end, the company obtained a $111 million, ten-year, interest-only mortgage on City Center Bellevue at 3.98%. It also agreed to sell 160 King Street, expected in Q4 2012, to reallocate capital and support a reverse tax-deferred exchange related to the Bellevue acquisition. A proposed $21 million Geary Marketplace acquisition was expected to close in early 2013, subject to customary conditions.
- Del Monte Center has ongoing groundwater remediation, funded through a seller-funded escrow that management believes is sufficient; additional costs could fall to the company. Certain Embassy Suites franchise termination circumstances could trigger a payment of up to $5.6 million. Tax-protection agreements may require indemnification if specified properties are disposed of in taxable transactions before January 2018.
- Management stated that it did not believe current legal proceedings would have a material adverse effect. Disclosure controls were assessed as effective, and no material change to internal control over financial reporting was identified.
Important facts for investors to verify
- Whether the acquired offices deliver the expected ongoing contribution and whether same-store growth persists; separate acquisition effects from underlying portfolio performance.
- Liquidity after acquisition spending: cash balance, remaining borrowing availability, credit-facility borrowing-base limits and upcoming debt maturities or refinancing requirements.
- Progress and final economics of the 160 King Street sale and the proposed Geary Marketplace purchase, including completion timing and any effects on earnings or financing.
- Capital expenditure and development commitments, supplemental property-tax costs, and the sufficiency of remediation escrow funds at Del Monte Center.
- Dividend sustainability in light of cash flows, debt service, required capital investment and credit-facility distribution limits; the filing does not establish a forward dividend or earnings outlook.