American Assets Trust, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. American Assets Trust, Inc. is a REIT and the sole general partner of American Assets Trust, L.P.; the Operating Partnership owns and operates the portfolio and holds the debt. At quarter-end, the company owned approximately 73.2% of the Operating Partnership.
Business context and portfolio
The company owns, operates, acquires and develops retail, office, multifamily and mixed-use properties in California, Oregon, Washington, Hawaii and Texas. Its portfolio comprised 26 operating properties at September 30, 2017, versus 24 a year earlier, plus land and projects classified as held for development or construction in progress.
- Acquisitions included Pacific Ridge Apartments, a 533-unit San Diego community, for approximately $232 million; Gateway Marketplace, a 128,000-square-foot shopping center, for approximately $42 million; and a Del Monte Center building for approximately $5.3 million.
- Torrey Point construction was completed during Q3, adding approximately 88,000 square feet of office space.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $82.3 million | $76.0 million | $233.2 million | $218.5 million |
| Operating income | $26.5 million | $25.5 million | $69.9 million | $72.8 million |
| Net income | $12.5 million | $11.9 million | $30.4 million | $33.2 million |
| Net income attributable to AAT stockholders | $9.1 million | $8.5 million | $22.0 million | $23.7 million |
| Diluted EPS | $0.19 | $0.19 | $0.47 | $0.52 |
| Property operating income (NOI) | $52.6 million | $48.0 million | $148.4 million | $139.4 million |
Q3 revenue rose 8%, while property operating income increased 10%; stockholder-attributable income rose 7%. For the nine-month period, revenue increased 7% and property operating income increased 6%, but net income declined 9% and diluted EPS fell from $0.52 to $0.47. Higher depreciation and amortization—up 19% for the nine months, largely reflecting acquisitions and completed development—was a principal pressure on reported earnings. Interest expense increased 2% over the nine months.
Nine-month same-store property operating income increased 2% overall. Office and multifamily same-store operating income increased 6% and 5%, respectively; retail rose 1%, while mixed-use declined 7%. Portfolio occupancy at September 30 was 97.0% for retail, 89.9% for office, 91.3% for multifamily and 93.7% for the retail portion of mixed-use.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $125.8 million, versus $102.7 million in 2016. Investing cash outflow was $318.3 million, mainly reflecting acquisitions; financing provided $242.0 million. Cash and cash equivalents ended the period at $94.2 million, compared with $44.8 million at December 31, 2016. Restricted cash was an additional $10.1 million.
- Debt carrying value was approximately $1.325 billion: $279.9 million secured notes and $1.045 billion unsecured notes. The company itself holds no debt; debt is held by the Operating Partnership. There was no balance outstanding on the $250 million revolving line at quarter-end. The $100 million Term Loan A remained outstanding.
- Unsecured notes increased through issuance of $250 million Series D notes at 4.29%, $100 million Series E notes at 4.24%, and $100 million Series F notes at 3.78%. The company also repaid secured mortgages, including the Waikiki Beach Walk retail and Solana Beach Corporate Centre III-IV loans. Management reported covenant compliance.
- Dividends declared were $0.26 per share for Q3 and $0.78 per share for the nine months, compared with $0.25 and $0.75, respectively, in 2016. Management stated that working capital was adequate for the company’s dividend obligations for the next 12 months, while noting that continued capital availability is not assured.
Outlook, commentary and risks
- No quantified earnings or FFO guidance was provided. Management said it remained cautiously optimistic about leasing trends and expected leasing volume for the rest of 2017 to be in line with historical averages, with overall positive rental-income increases; it cautioned that rent outcomes are not assured.
- Management intends to pursue acquisitions and development selectively, subject to market conditions and required risk-adjusted returns. It estimated total investment of approximately $56 million for Torrey Point, of which approximately $38 million had been incurred by September 30; remaining costs were expected as the property is leased.
- Q3 comparable retail leases showed a 1.2% average cash rent decrease and 8.4% GAAP increase. Comparable office leases showed average cash and GAAP rent increases of 10.3% and 14.5%, respectively. These lease statistics do not assure future rent collection or occupancy.
- Key exposures include economic and leasing conditions, tenant defaults or non-renewals, interest rates, financing availability, acquisition and development execution, real estate taxes, and geographic and sector concentration. Thirteen consolidated properties were in Southern California; retail and office tenants contributed 32.7% and 33.9% of nine-month revenue, respectively.
- The filing reported no material legal proceedings and no material changes to previously disclosed risk factors. Environmental groundwater remediation at Del Monte Center remains ongoing; management believes seller-funded escrow is sufficient, but additional costs could arise. Certain property interests remain subject to tax-protection agreements through January 19, 2018. Hotel franchise termination exposure could be as high as $7.5 million under specified conditions.
Important facts for investors to verify
- Whether acquisition-related revenue and NOI gains persist, and how Pacific Ridge Apartments and Gateway Marketplace perform after integration.
- Leasing, occupancy and rent trends, particularly the mixed-use segment’s weaker Q3 hotel revenue per available room and nine-month operating income decline.
- Debt maturities, variable-rate exposure, covenant headroom and refinancing needs; reported debt balances and interest-rate hedges should be reviewed alongside the debt notes.
- Torrey Point leasing progress and remaining development costs, as well as the timing and returns of future development or acquisition plans.
- Cash available for dividends and capital spending, considering the REIT distribution requirement, capital needs and reliance on continued access to debt or equity markets.