Business context and reporting period
American Assets Trust, Inc. is a REIT whose operations are conducted through American Assets Trust, L.P. The company owned or controlled 30 retail, office, multifamily and mixed-use properties as of September 30, 2021, across markets including California, Oregon, Washington, Texas and Hawaii. This summary covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
- Third quarter: Total revenue was $98.3, up 16%; operating income was $27.7, up 36%; net income was $12.9, versus $6.5; and net income attributable to AAT stockholders was $10.0, versus $5.0. Diluted EPS was $0.17, versus $0.08.
- Nine months: Total revenue was $274.1, up 4%; operating income was $74.2, versus $72.2; net income was $26.1, down 18%; and net income attributable to AAT stockholders was $20.2, down 18%. Diluted EPS was $0.34, versus $0.41.
- Property operating income (NOI): $65.2 in the quarter, up 21%, and $180.6 for nine months, up 4%. Same-store NOI increased 10% in the quarter and 1% for nine months.
- Cash flow: Nine-month operating cash flow was $129.6, compared with $109.1. Investing used $263.3, including $204.5 for property acquisitions and $56.8 of capital expenditures. Financing provided $168.3. Cash, cash equivalents and restricted cash ended at $173.6.
- Debt and liquidity: September 30 debt on the balance sheet was $1,648.7 net of discounts and issuance costs, including $111.0 of secured notes and $1,537.8 of unsecured notes; no revolving credit was outstanding. The $350 revolving line was available, subject to facility terms. The Operating Partnership reported covenant compliance. AAT, Inc. itself has no indebtedness; debt is held by the Operating Partnership.
- Distributions: Dividends declared were $0.30 per share in the quarter and $0.86 for nine months, compared with $0.25 and $0.75, respectively, in 2020.
Material changes versus prior periods
- Quarterly revenue growth reflected improved retail rent collections and recovery in the Waikiki hotel, as well as the July and September acquisitions of Eastgate Office Park and Corporate Campus East III. The acquisitions added approximately 441,000 square feet of office space for approximately $209 million combined.
- Quarterly retail property operating income benefited from approximately $4.6 million of rent from tenants returned to contractual or cash-basis recognition and a $1.6 million real estate tax refund at Alamo Quarry Market. Mixed-use results improved with hotel occupancy and revenue per available room recovering.
- Nine-month net income fell despite higher revenue and NOI, principally reflecting $4.3 million of debt extinguishment expense, higher interest expense and higher depreciation and amortization. The debt charge related to the January 2021 early repayment of $150 million of Series A notes and a make-whole payment.
- In January 2021, the Operating Partnership issued $500 million of 3.375% senior unsecured notes due February 2031. Proceeds were used primarily to repay the Series A notes and revolving borrowings, fund development and for general purposes. Net unsecured notes increased versus year-end while the revolver balance was repaid.
- Leasing and occupancy remained uneven: at quarter-end, office and retail leased rates were 90.2% and 91.7%, versus 93.8% and 95.0% a year earlier; multifamily was 97.1%, versus 87.5%. Same-store nine-month NOI rose 3.1% in retail and 0.7% in office, while multifamily NOI declined 1%.
Outlook, commentary and risks
- Management provided qualitative outlook, not a numerical earnings or FFO forecast. It intends to pursue acquisitions, development and redevelopment selectively, subject to market conditions and required returns; identified future opportunities include La Jolla Commons, Lloyd Portfolio and One Beach Street.
- Management expected leasing volume through the remainder of 2021 to be below historical averages, with overall rental income potentially declining. Third-quarter comparable retail renewals had a 3.6% cash rent decrease, while comparable office renewals had a 2.7% cash rent increase.
- COVID-19 remained a significant uncertainty. For third-quarter rent due, management reported collections of approximately 99% for office, 94% for retail and 93% for multifamily; it collected 96% of deferred repayments due in the quarter. Concessions and deferrals could continue to affect operating cash flow.
- Key risks include tenant defaults or nonrenewals, occupancy and rent pressure, economic and market conditions, interest rates, development and acquisition execution, financing availability, concentration in Southern California and retail/office tenants, and the continuing effects of COVID-19.
- Other contingencies include ongoing groundwater remediation at Del Monte Center, expected to be funded by seller escrow, and a potential hotel franchise termination payment of up to $4.3 million if the agreement is terminated under specified circumstances. Management did not expect pending legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether rent collections, concessions and tenant credit quality remain stable, especially in retail, and whether reported receivables and deferred rent convert to cash.
- Acquisition performance and integration, including occupancy, leasing costs and contribution from Eastgate Office Park and Corporate Campus East III.
- Near-term debt maturities and refinancing plans, including the January 2022 Term Loan A maturity and November 2022 secured-note maturity, as well as interest-rate exposure and covenant headroom.
- Cash requirements for development, redevelopment, capital expenditures and dividends, and the sustainability of distributions relative to operating cash flow.
- How much reported improvement reflects recurring operations versus acquisitions, prior-period rent-recognition changes, the tax refund and hotel recovery.