Business context and reporting period
American Assets Trust, Inc. (a REIT) and its operating partnership filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company owned or controlled 31 office, retail, multifamily and mixed-use properties in California, Washington, Oregon, Texas and Hawaii. The portfolio included about 7.2 million rentable square feet, 2,110 residential units and a 369-room hotel. The Inc. owned approximately 78.8% of the operating partnership; the partnership holds the debt and conducts the property business.
Financial and operating highlights
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $107.8 million | $101.5 million; up 6% |
| Operating income | $29.7 million | $28.3 million |
| Net income | $20.7 million | $13.5 million; up 53% |
| Net income attributable to AAT stockholders | $16.1 million; $0.27 per diluted share | $10.5 million; $0.18 per diluted share |
| Property operating income (NOI) | $68.6 million | $65.9 million; up 4% |
| Cash from operating activities | $52.0 million | $39.1 million |
| Cash used in investing activities | $25.7 million | $77.3 million |
| Cash and cash equivalents at period-end | $87.3 million | $49.6 million at December 31, 2022 |
| Debt at carrying value | $1.688 billion; no revolver balance | $1.648 billion at December 31, 2022 |
| Dividend declared per share | $0.33 | $0.32 |
Property operating income was about 63.7% of revenue, compared with about 65.0% a year earlier. These percentages are calculated from reported figures; NOI is a non-GAAP measure. FFO attributable to common stock and units was $50.4 million, or $0.66 per diluted share/unit. The declared dividend was $0.33 per share.
Changes versus the prior comparable period
- Revenue growth reflected the Bel-Spring 520 acquisition, higher multifamily rents and stronger hotel occupancy and room rates, as travel restrictions eased. Same-store revenue rose 5%.
- Property operating income increased 4% overall. Multifamily and mixed-use segment profit each rose 16%, retail rose 5%, while same-store office NOI declined 1.1%.
- Operating expenses increased 10%, including 14% growth in rental expenses; general and administrative expenses rose 26%. Net interest expense increased 7% to $15.7 million.
- Net income included an approximately $6.3 million settlement received in January related to building systems at Hassalo on Eighth. This unusual item materially contributed to the year-over-year earnings increase.
- Operating cash flow increased, while investing cash outflow declined largely because Q1 2022 included the Bel-Spring 520 acquisition and higher development spending.
Liquidity, debt and outlook
The operating partnership reported $87.3 million of cash and no amounts drawn on its $400 million revolving credit line at March 31, 2023. Management said liquidity was adequate for near-term needs and expected to fund them with operating cash flow, cash reserves and, if needed, credit-facility borrowings. The filing does not provide formal earnings or FFO guidance.
In January, the company amended and restated its term loan agreement, increasing fully drawn term borrowings from $150 million to $225 million and extending Term Loans B and C to January 2025, with a conditional one-year extension option. The term loans are floating-rate debt, but swaps were intended to fix rates at approximately 5.47% in the first year and 5.57% in the second, subject to leverage-based adjustments. The company reported compliance with applicable debt covenants. Approximately $1.4 billion of debt was fixed-rate; the $325 million term loans were effectively fixed through swaps.
Management plans to pursue development, redevelopment and acquisitions selectively, subject to market conditions and risk-adjusted returns. Identified opportunities include future phases at La Jolla Commons and the Lloyd Portfolio, and redevelopments at Waikele Center and One Beach Street. The filing notes that projects may be delayed or not proceed; deterioration in markets could also prompt reduced acquisitions or spending and a reassessment of the dividend policy.
Risks, contingencies and other notable items
- Portfolio exposure is concentrated geographically: 15 properties are in Southern California. Office tenants generated 47.3% and retail tenants 23.8% of Q1 revenue.
- Occupancy/leasing measures showed office leased at 88.1% versus 91.5% a year earlier, retail at 93.8% versus 92.2%, multifamily at 91.8% versus 94.8%, and mixed-use retail at 95.0% versus 94.3%.
- Management cited risks from tenant defaults, vacancies, economic and real estate market conditions, interest rates, operating costs, financing access, development execution, and REIT qualification.
- Del Monte Center has ongoing groundwater remediation; the seller-funded escrow is believed sufficient, but additional costs could fall to the company. A hotel franchise termination payment could reach $6.6 million in certain circumstances.
- The company reported no material legal proceeding expected to materially affect its business and no material change to the risk factors in its 2022 Form 10-K. Disclosure controls were deemed effective; no material internal-control changes were identified.
Important facts for investors to verify
- Whether recurring earnings and cash generation support the dividend after excluding the $6.3 million Hassalo settlement.
- Office leasing, occupancy and same-store NOI trends, and whether higher operating costs continue to pressure office profitability.
- Debt maturities, borrowing costs and covenant headroom, including the terms and effectiveness of interest-rate swaps and availability of the undrawn revolver.
- Progress, costs and expected returns for development and redevelopment projects, including the $18.3 million of construction-in-progress costs payable or accrued at quarter-end.
- Potential obligations related to Del Monte remediation and the Waikiki hotel franchise and management agreements.