American Assets Trust, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. American Assets Trust is a REIT whose operations are conducted through American Assets Trust, L.P.; the company owned 73.2% of the Operating Partnership at quarter-end. Unless noted, amounts are in millions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $77.1 | $71.8 | $150.9 | $142.6 |
| Operating income | $20.0 | $23.7 | $43.4 | $47.3 |
| Net income | $7.6 | $10.7 | $17.9 | $21.4 |
| Net income attributable to AAT stockholders | $5.5 | $7.6 | $12.9 | $15.3 |
| Diluted EPS | $0.12 | $0.17 | $0.28 | $0.34 |
| Property operating income (NOI) | $49.4 | $45.8 | $95.8 | $91.5 |
| Interest expense | $12.7 | $13.2 | $26.0 | $26.1 |
| FFO attributable to common stock and units | $31.7 | Not shown | $59.9 | Not shown |
Revenue rose 7% in Q2 and 6% for the first half, while net income attributable to stockholders fell 27% and 15%, respectively. Higher depreciation and amortization—up 37% in Q2 and 20% year to date—was the main reported drag; operating expenses also increased, including real estate taxes. Reported FFO was $0.49 per diluted share/unit for Q2 and $0.94 for the first half; the filing excerpt does not provide comparative 2016 FFO.
Same-store property operating income increased about 2% in Q2 and was approximately flat for the first half. At June 30, reported leased rates were 96.8% for retail, 88.7% for office, 92.6% for multifamily and 95.7% for the retail portion of mixed-use properties. Dividends declared were $0.26 per common share in Q2, versus $0.25 a year earlier.
Cash flow, debt and liquidity
- Six-month operating cash flow was $83.9, compared with $63.5 in 2016. Investing cash outflow was $256.6, chiefly reflecting the Pacific Ridge acquisition; financing cash inflow was $159.3. Cash and cash equivalents ended the period at $31.4, with a further $9.2 of restricted cash.
- At June 30, secured notes had $280.6 of principal and unsecured notes and term loans had $950.0 of principal; reported net carrying amounts were $280.2 and $944.8, respectively. The revolver had no balance. The unsecured credit facility provides a $250.0 revolver, subject to its terms.
- Debt financing included $250.0 of 4.29% Series D notes due 2027 and $100.0 of 4.24% Series E notes due 2029. Secured debt declined from $445.2 net at year-end 2016 as property loans were repaid; unsecured debt increased from $596.4 net, principally due to the new note issuances. The Operating Partnership reported compliance with debt covenants.
- Management said it had adequate working capital for the company’s dividend funding needs over the next 12 months, but noted that future access to debt and equity capital is not assured. The REIT’s distribution requirement limits reliance on retained earnings.
Material developments, outlook and risks
- On April 28, the company acquired Pacific Ridge Apartments, a 533-unit San Diego community, for approximately $232.0. It contributed about $2.9 of revenue from acquisition through June 30; disclosed property expenses were $6.9, resulting in a reported operating loss of $4.0 for that period. The filing also provides pro forma results, which are informational and not a forecast.
- After quarter-end, the company acquired Gateway Marketplace for approximately $42.0 and issued $100.0 of 3.78% Series F notes due 2024.
- Torrey Point construction was expected to add approximately 88,000 square feet of office space and finish in Q3 2017, with stabilization expected in 2018. Estimated project cost was $56.0, of which approximately $37.0 had been incurred. Management estimated a stabilized yield of 7%–8%, based on initial estimates. Future phases of Lloyd District development remain subject to market conditions and expected returns.
- Management reported cautious optimism about leasing and expected second-half 2017 leasing volume to be in line with historical averages, with overall positive rental-income increases; it provided no formal earnings or FFO guidance. Q2 comparable retail leases had an average cash rent decrease of 12.8% despite a 5.2% GAAP increase; comparable office leases showed increases of 32.5% cash and 47.4% GAAP. Lease commencements and rent collections remain uncertain.
- Risks include lower occupancy at several property categories versus the prior year, retail tenant exposure (including the Sports Authority bankruptcy’s effect at Waikele Center), hotel bad debt tied to a travel-agency bankruptcy, rising property taxes, interest-rate and refinancing exposure, and concentration in Southern California. The company also disclosed continuing groundwater remediation at Del Monte Center, with potential overrun exposure if escrow funds prove insufficient; it believes current escrow is adequate. It reported no material legal proceeding and no material changes to its previously disclosed risk factors.
Most important facts for investors to verify
- Whether Pacific Ridge’s post-acquisition operating results and expenses normalize, and how the July Gateway Marketplace acquisition performs.
- Whether same-store results and occupancy improve, particularly in retail and office, and whether retail cash rent roll-down persists.
- Funding needs and returns for Torrey Point and other development plans, alongside the effect of the new debt and future maturities on interest costs.
- Cash available for dividends after capital spending, debt service and distributions to noncontrolling Operating Partnership unitholders.
- Progress and remaining financial exposure for Del Monte Center remediation, and any material changes in tenant credit, litigation or covenant compliance.