American Assets Trust, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2020. American Assets Trust is a REIT operating 28 retail, office, multifamily and mixed-use properties across six states. The portfolio includes a 369-room hotel in Hawaii. The filing presents consolidated results for the company and its operating partnership; amounts below are in U.S. dollars and millions unless noted.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $82.1 | $84.1 | $178.9 | $169.4 |
| Operating income | $23.0 | $24.5 | $51.8 | $53.3 |
| Net income | $9.8 | $11.9 | $25.3 | $27.2 |
| Net income attributable to AAT stockholders | $7.7 | $8.9 | $19.7 | $20.0 |
| Basic and diluted EPS | $0.13 | $0.18 | $0.33 | $0.41 |
| Operating cash flow | Not provided separately | Not provided separately | $69.1 | $70.2 |
Property operating income, a company-defined measure, was $56.2 million in Q2, up 6%, and $119.3 million for the first half, up 10%. Operating margin was approximately 28.0% in Q2 versus 29.1% a year earlier; first-half margin was approximately 29.0% versus 31.5%. Interest expense was $13.3 million in Q2 and $26.8 million for the first half.
At June 30, cash and cash equivalents were $146.1 million, with $4.0 million of restricted cash. Debt carrying amounts totaled approximately $1.406 billion: $110.9 million secured notes, $1.196 billion unsecured notes and $98.9 million drawn on the unsecured credit line. The $350 million revolver had $100 million outstanding. Total liabilities were $1.570 billion. The company reported compliance with its debt covenants.
Dividends declared were $0.20 per share for Q2 and $0.50 per share for the first half, compared with $0.28 and $0.56 in the comparable 2019 periods. FFO was $0.48 per diluted share/unit for Q2 and $1.04 for the first half; the supplied filing text does not provide comparable 2019 FFO figures in this reconciliation.
Material changes versus prior comparable periods
- Q2 revenue declined 2% and net income declined 18%; first-half revenue increased 6%, while net income decreased 7%.
- Office results benefited from the 2019 acquisition of La Jolla Commons and higher rents at existing properties. Same-store office NOI increased 30.2% for the first half.
- Retail same-store NOI declined 17.3% for the first half, reflecting pandemic-related tenant credit concerns and weaker performance; a prior-year lease termination fee also affected comparison.
- Mixed-use revenue and NOI fell sharply as COVID-19 disrupted Hawaii tourism. Hotel occupancy was 17.0% and revenue per available room was $34 in Q2, versus 91.6% and $282 in Q2 2019.
- Multifamily occupancy weakened: average occupancy was 88.5% in Q2 versus 92.8% a year earlier. Office and retail leased rates at quarter-end were 94.4% and 94.7%, respectively; multifamily was 85.1%.
- First-half operating cash flow was nearly unchanged, but the company recorded a $3.8 million provision for uncollectible rental income versus $0.5 million in 2019. Cash flow from investing improved substantially because the prior-year period included the La Jolla Commons acquisition.
- Debt increased overall with a $100 million revolver draw, partly offset by repayment of $51.0 million of secured mortgages in March. The company had no common-stock sales under its ATM program in the first half.
Outlook, risks and unusual items
- Management said COVID-19’s future financial impact could not be estimated reliably and identified it as a major risk. Second-quarter rent collections to date were approximately 98% for office, 58% for retail and 95% for multifamily. Lease modifications, including rent deferrals and other concessions, covered approximately 5% of rent originally contracted for Q2.
- Management expected leasing volume to remain below historical averages through the rest of 2020, with potential overall decreases in rental income. It expected Hawaii hotel weakness to reduce mixed-use revenue and income at least through the remainder of 2020.
- Management described liquidity as strong and said available cash, operating cash flow and credit-facility borrowings were expected to support near-term needs. It also noted that projects or acquisitions could be delayed, expenditures reduced, or dividend policy reconsidered if conditions deteriorated. No numerical earnings or FFO guidance was provided.
- Nearer-term maturities include a $100 million term loan due January 2021, $150 million of notes due October 2021, and a $111 million property mortgage due November 2022. The filing says the company has extension options on certain facilities.
- Unusual or judgment-sensitive items include increased doubtful-account reserves, COVID-related rent concessions, a $2.3 million property-tax refund at Alamo Quarry Market, and a large reduction in hotel activity. Derivative swap liabilities were $7.0 million at quarter-end. The company reported no material legal proceedings; ongoing groundwater remediation at Del Monte Center is funded by seller escrow, which management believes is sufficient.
- The company disclosed a potential hotel franchise termination payment of up to $6.7 million if specified conditions are triggered. It also disclosed geographic and tenant-industry concentration, including 14 properties in Southern California and substantial revenue exposure to office and retail tenants.
Important facts for investors to verify
- Subsequent rent collections, deferrals, tenant defaults and the adequacy of the increased doubtful-account allowance.
- Hotel occupancy, room revenue and the timing of recovery in Hawaii, alongside retail and multifamily occupancy trends.
- Liquidity, revolver availability, covenant headroom and refinancing or extension plans for 2021–2022 maturities.
- The sustainability of the reduced dividend relative to cash flow, required REIT distributions and capital spending needs.
- Whether planned development and redevelopment projects proceed, and how much capital they require.