Edgar Filing: American Assets Trust, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

AMERICAN ASSETS TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)

Commission file number: 001-35030

AMERICAN ASSETS TRUST, L.P.

(Exact Name of Registrant as Specified in its Charter)

Commission file number: 333-202342-01



	Maryland (American Assets Trust, Inc.)	27-3338708 (American Assets Trust, Inc.)
	Maryland (American Assets Trust, L.P.)	27-3338894 (American Assets Trust, L.P.)
	(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

	11455 El Camino Real, Suite 200, San Diego, California (Address of Principal Executive Offices)	92130 (Zip Code)
		92130 (Zip Code)

(858) 350-2600

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

American Assets Trust, Inc. x Yes o No

American Assets Trust, L.P. x Yes o No

(American Assets Trust, L.P. became subject to filing requirements under Section 13 of the Securities Exchange Act of 1934, as amended, upon effectiveness of its Registration Statement on Form S-3 on February 6, 2015 and has filed all required reports subsequent to that date.)

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

American Assets Trust, Inc. x Yes o No

American Assets Trust, L.P. x Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

American Assets Trust, Inc.



Large Accelerated Filer	x		Accelerated Filer	o
Non-Accelerated Filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o
Emerging growth company	o

American Assets Trust, L.P.



Large Accelerated Filer	o		Accelerated Filer	o
Non-Accelerated Filer	x	(Do not check if a smaller reporting company)	Smaller reporting company	o
Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

American Assets Trust, Inc. o Yes x No

American Assets Trust, L.P. o Yes x No

American Assets Trust, Inc. had 47,222,121 shares of common stock, par value $0.01 per share, outstanding as of August 3, 2018.

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2018 of American Assets Trust, Inc., a Maryland corporation, and American Assets Trust, L.P., a Maryland limited partnership, of which American Assets Trust, Inc. is the parent company and sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our” or “the company” refer to American Assets Trust, Inc. together with its consolidated subsidiaries, including American Assets Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “our Operating Partnership” or “the Operating Partnership” refer to American Assets Trust, L.P. together with its consolidated subsidiaries.

American Assets Trust, Inc. operates as a real estate investment trust, or REIT, and is the sole general partner of the Operating Partnership. As of June 30, 2018, American Assets Trust, Inc. owned an approximate 73.2% partnership interest in the Operating Partnership. The remaining 26.8% partnership interests are owned by non-affiliated investors and certain of our directors and executive officers. As the sole general partner of the Operating Partnership, American Assets Trust, Inc. has full, exclusive and complete authority and control over the Operating Partnership’s day-to-day management and business, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies.

The company believes that combining the quarterly reports on Form 10-Q of American Assets Trust, Inc. and the Operating Partnership into a single report will result in the following benefits:


•	better reflects how management and the analyst community view the business as a single operating unit;


•	enhance investors' understanding of American Assets Trust, Inc. and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;


•	greater efficiency for American Assets Trust, Inc. and the Operating Partnership and resulting savings in time, effort and expense; and


•	greater efficiency for investors by reducing duplicative disclosure by providing a single document for their review.

Management operates American Assets Trust, Inc. and the Operating Partnership as one enterprise. The management of American Assets Trust, Inc. and the Operating Partnership are the same.

There are a few differences between American Assets Trust, Inc. and the Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between American Assets Trust, Inc. and the Operating Partnership in the context of how American Assets Trust, Inc. and the Operating Partnership operate as an interrelated consolidated company. American Assets Trust, Inc. is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, American Assets Trust, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain debt of the Operating Partnership. American Assets Trust, Inc. itself does not hold any indebtedness. The Operating Partnership holds substantially all the assets of the company, directly or indirectly holds the ownership interests in the company’s real estate ventures, conducts the operations of the business and is structured as a partnership with no publicly-traded equity. Except for net proceeds from public equity issuances by American Assets Trust, Inc., which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of operating partnership units.

Noncontrolling interests and stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of American Assets Trust, Inc. and those of American Assets Trust, L.P. The partnership interests in the Operating Partnership that are not owned by American Assets Trust, Inc. are accounted for as partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in American Assets Trust, Inc.’s financial statements. To help investors understand the significant differences between the company and the Operating Partnership, this report presents the following separate sections for each of American Assets Trust, Inc. and the Operating Partnership:


•	consolidated financial statements;


•	the following notes to the consolidated financial statements:


◦	Debt;


◦	Equity/Partners' Capital; and


◦	Earnings Per Share/Unit; and


•	Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations.

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This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of American Assets Trust, Inc. and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of American Assets Trust, Inc. have made the requisite certifications and American Assets Trust, Inc. and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

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AMERICAN ASSETS TRUST, INC. AND AMERICAN ASSETS TRUST, L.P.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018



PART 1. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Financial Statements of American Assets Trust, Inc.:
		Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	1
		Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2018 and 2017	2
		Consolidated Statement of Equity for the six months ended June 30, 2018	3
		Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2018 and 2017	4
	Consolidated Financial Statements of American Assets Trust, L.P.:
		Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	5
		Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2018 and 2017	6
		Consolidated Statement of Partners' Capital (unaudited) for the six months ended June 30, 2018	7
		Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2018 and 2017	8
	Notes to Consolidated Financial Statements (unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		45
Item 4.	Controls and Procedures		46
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		47
Item 1A.	Risk Factors		47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.	Defaults Upon Senior Securities		47
Item 4.	Mine Safety Disclosures		47
Item 5.	Other Information		47
Item 6.	Exhibits		48
SIGNATURES			49

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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American Assets Trust, Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Data)



	June 30,			December 31,
	2018			2017
	(unaudited)
ASSETS
Real estate, at cost
Operating real estate	$	2,543,142		$	2,536,474
Construction in progress	76,502			68,272
Held for development	9,392			9,392
	2,629,036			2,614,138
Accumulated depreciation	(595,042		)	(537,431		)
Net real estate	2,033,994			2,076,707
Cash and cash equivalents	51,326			82,610
Restricted cash	9,385			9,344
Accounts receivable, net	7,118			9,869
Deferred rent receivables, net	39,283			38,973
Other assets, net	44,934			42,361
TOTAL ASSETS	$	2,186,040		$	2,259,864
LIABILITIES AND EQUITY
LIABILITIES:
Secured notes payable, net	$	205,155		$	279,550
Unsecured notes payable, net	1,045,406			1,045,470
Unsecured line of credit, net	20,133			—
Accounts payable and accrued expenses	39,666			38,069
Security deposits payable	8,712			6,570
Other liabilities and deferred credits, net	49,333			46,061
Total liabilities	1,368,405			1,415,720
Commitments and contingencies (Note 11)
EQUITY:
American Assets Trust, Inc. stockholders’ equity
Common stock, $0.01 par value, 490,000,000 shares authorized, 47,223,809 and 47,204,588 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively	473			473
Additional paid-in capital	919,598			919,066
Accumulated dividends in excess of net income	(120,008		)	(97,280		)
Accumulated other comprehensive income	13,734			11,451
Total American Assets Trust, Inc. stockholders’ equity	813,797			833,710
Noncontrolling interests	3,838			10,434
Total equity	817,635			844,144
TOTAL LIABILITIES AND EQUITY	$	2,186,040		$	2,259,864

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In Thousands, Except Shares and Per Share Data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
REVENUE:
Rental income	$	76,892		$	72,925		$	153,093		$	142,965
Other property income	8,131			4,181			12,662			7,933
Total revenue	85,023			77,106			165,755			150,898
EXPENSES:
Rental expenses	20,882			19,841			41,302			39,700
Real estate taxes	8,628			7,904			17,174			15,440
General and administrative	5,396			5,131			10,963			10,213
Depreciation and amortization	32,868			24,182			66,147			42,168
Total operating expenses	67,774			57,058			135,586			107,521
OPERATING INCOME	17,249			20,048			30,169			43,377
Interest expense	(12,688		)	(12,652		)	(26,508		)	(25,983		)
Other (expense) income, net	(148		)	192			61			502
NET INCOME	4,413			7,588			3,722			17,896
Net income attributable to restricted shares	(216		)	(61		)	(144		)	(121		)
Net income attributable to unitholders in the Operating Partnership	(1,125		)	(2,008		)	(959		)	(4,869		)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS	$	3,072		$	5,519		$	2,619		$	12,906

EARNINGS PER COMMON SHARE
Earnings per common share, basic	$	0.07		$	0.12		$	0.06		$	0.28
Weighted average shares of common stock outstanding - basic	46,939,449			46,871,377			46,937,645			46,524,510

Earnings per common share, diluted	$	0.07		$	0.12		$	0.06		$	0.28
Weighted average shares of common stock outstanding - diluted	64,132,520			64,089,081			64,131,665			64,075,919

DIVIDENDS DECLARED PER COMMON SHARE	$	0.27		$	0.26		$	0.54		$	0.52

COMPREHENSIVE INCOME
Net income	$	4,413		$	7,588		$	3,722		$	17,896
Other comprehensive income (loss) - unrealized income (loss) on swap derivative during the period	875			(518		)	3,736			(1,514		)
Reclassification of amortization of forward-starting swap included in interest expense	(319		)	(330		)	(639		)	(475		)
Comprehensive income	4,969			6,740			6,819			15,907
Comprehensive income attributable to non-controlling interest	(1,271		)	(1,700		)	(1,773		)	(4,184		)
Comprehensive income attributable to American Assets Trust, Inc.	$	3,698		$	5,040		$	5,046		$	11,723

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, Inc.

Consolidated Statement of Equity

(Unaudited)

(In Thousands, Except Share Data)



	American Assets Trust, Inc. Stockholders’ Equity													Noncontrolling Interests - Unitholders in the Operating Partnership			Total
	Common Shares				Additional Paid-in Capital			Accumulated Dividends in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)
	Shares		Amount		Additional Paid-in Capital			Accumulated Dividends in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2017	47,204,588		$	473	$	919,066		$	(97,280	)	$	11,451		$	10,434		$	844,144
Net income	—		—		—			2,763			—			959			3,722
Issuance of restricted stock	5,320		—		—			—			—			—			—
Forfeiture of restricted stock	(3,312	)	—		—			—			—			—			—
Conversion of operating partnership units	17,372		—		(916		)	—			—			916			—
Dividends declared and paid	—		—		—			(25,491		)	—			(9,285		)	(34,776		)
Stock-based compensation	—		—		1,454			—			—			—			1,454
Shares withheld for employee taxes	(159	)	—		(6		)	—			—			—			(6		)
Other comprehensive income - change in value of interest rate swaps	—		—		—			—			2,750			986			3,736
Reclassification of amortization of forward-starting swap included in interest expense	—		—		—			—			(467		)	(172		)	(639		)
Balance at June 30, 2018	47,223,809		$	473	$	919,598		$	(120,008	)	$	13,734		$	3,838		$	817,635

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)



	Six Months Ended June 30,
	2018			2017
OPERATING ACTIVITIES
Net income	$	3,722		$	17,896
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles	2,096			(1,397		)
Depreciation and amortization	66,147			42,168
Amortization of debt issuance costs and debt fair value adjustments	806			2,180
Stock-based compensation expense	1,454			1,278
Settlement of derivative instruments	—			10,667
Other noncash interest expense	(639		)	(475		)
Other, net	1,495			482
Changes in operating assets and liabilities
Change in accounts receivable	2,220			2,674
Change in other assets	755			468
Change in accounts payable and accrued expenses	1,749			5,869
Change in security deposits payable	2,142			665
Change in other liabilities and deferred credits	370			496
Net cash provided by operating activities	82,317			82,971
INVESTING ACTIVITIES
Acquisition of real estate	—			(232,061		)
Capital expenditures	(20,353		)	(19,883		)
Leasing commissions	(3,057		)	(2,094		)
Deposit on property acquisition	—			(1,000		)
Net cash used in investing activities	(23,410		)	(255,038		)
FINANCING ACTIVITIES
Repayment of secured notes payable	(74,476		)	(166,439		)
Proceeds from unsecured line of credit	35,000			130,000
Repayment of unsecured line of credit	(13,000		)	(150,000		)
Proceeds from unsecured notes payable	—			350,000
Debt issuance costs	(2,656		)	(2,281		)
Proceeds from issuance of common stock, net	(236		)	30,075
Dividends paid to common stock and unitholders	(34,776		)	(33,448		)
Shares withheld for employee taxes	(6		)	—
Net cash (used in) provided by financing activities	(90,150		)	157,907
Net decrease in cash and cash equivalents	(31,243		)	(14,160		)
Cash, cash equivalents and restricted cash, beginning of period	91,954			54,751
Cash, cash equivalents and restricted cash, end of period	$	60,711		$	40,591

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:



	Six Months Ended June 30,
	2018		2017
Cash and cash equivalents	$	51,326	$	31,380
Restricted cash	9,385		9,211
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows	$	60,711	$	40,591

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, L.P.

Consolidated Balance Sheets

(In Thousands, Except Unit Data)



	June 30,			December 31,
	2018			2017
	(unaudited)
ASSETS
Real estate, at cost
Operating real estate	$	2,543,142		$	2,536,474
Construction in progress	76,502			68,272
Held for development	9,392			9,392
	2,629,036			2,614,138
Accumulated depreciation	(595,042		)	(537,431		)
Net real estate	2,033,994			2,076,707
Cash and cash equivalents	51,326			82,610
Restricted cash	9,385			9,344
Accounts receivable, net	7,118			9,869
Deferred rent receivables, net	39,283			38,973
Other assets, net	44,934			42,361
TOTAL ASSETS	$	2,186,040		$	2,259,864
LIABILITIES AND CAPITAL
LIABILITIES:
Secured notes payable, net	$	205,155		$	279,550
Unsecured notes payable, net	1,045,406			1,045,470
Unsecured line of credit, net	20,133			—
Accounts payable and accrued expenses	39,666			38,069
Security deposits payable	8,712			6,570
Other liabilities and deferred credits	49,333			46,061
Total liabilities	1,368,405			1,415,720
Commitments and contingencies (Note 11)
CAPITAL:
Limited partners' capital, 17,177,608 and 17,194,980 units issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	(1,275		)	6,135
General partner's capital, 47,223,809 and 47,204,588 units issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	800,063			822,259
Accumulated other comprehensive income	18,847			15,750
Total capital	817,635			844,144
TOTAL LIABILITIES AND CAPITAL	$	2,186,040		$	2,259,864

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, L.P.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In Thousands, Except Shares and Per Unit Data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
REVENUE:
Rental income	$	76,892		$	72,925		$	153,093		$	142,965
Other property income	8,131			4,181			12,662			7,933
Total revenue	85,023			77,106			165,755			150,898
EXPENSES:
Rental expenses	20,882			19,841			41,302			39,700
Real estate taxes	8,628			7,904			17,174			15,440
General and administrative	5,396			5,131			10,963			10,213
Depreciation and amortization	32,868			24,182			66,147			42,168
Total operating expenses	67,774			57,058			135,586			107,521
OPERATING INCOME	17,249			20,048			30,169			43,377
Interest expense	(12,688		)	(12,652		)	(26,508		)	(25,983		)
Other (expense) income, net	(148		)	192			61			502
NET INCOME	4,413			7,588			3,722			17,896
Net income attributable to restricted shares	(216		)	(61		)	(144		)	(121		)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, L.P.	$	4,197		$	7,527		$	3,578		$	17,775

EARNINGS PER UNIT - BASIC
Earnings per unit, basic	$	0.07		$	0.12		$	0.06		$	0.28
Weighted average units outstanding - basic	64,132,520			64,089,081			64,131,665			64,075,919

EARNINGS PER UNIT - DILUTED
Earnings per unit, diluted	$	0.07		$	0.12		$	0.06		$	0.28
Weighted average units outstanding - diluted	64,132,520			64,089,081			64,131,665			64,075,919

DISTRIBUTIONS PER UNIT	$	0.27		$	0.26		$	0.54		$	0.52

COMPREHENSIVE INCOME
Net income	$	4,413		$	7,588		$	3,722		$	17,896
Other comprehensive income (loss) - unrealized income (loss) on swap derivative during the period	875			(518		)	3,736			(1,514		)
Reclassification of amortization of forward-starting swap included in interest expense	(319		)	(330		)	(639		)	(475		)
Comprehensive income	4,969			6,740			6,819			15,907
Comprehensive income attributable to Limited Partners	(1,271		)	(1,700		)	(1,773		)	(4,184		)
Comprehensive income attributable to General Partner	$	3,698		$	5,040		$	5,046		$	11,723

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, L.P.

Consolidated Statement of Partners' Capital

(Unaudited)

(In Thousands, Except Unit Data)



	Limited Partners' Capital ⁽¹⁾					General Partner's Capital ⁽²⁾					Accumulated Other Comprehensive Income (Loss)			Total Capital
	Units		Amount			Units		Amount			Accumulated Other Comprehensive Income (Loss)			Total Capital
Balance at December 31, 2017	17,194,980		$	6,135		47,204,588		$	822,259		$	15,750		$	844,144
Net income	—		959			—		2,763			—			3,722
Conversion of operating partnership units	(17,372	)	916			17,372		(916		)	—			—
Issuance of restricted units	—		—			5,320		—			—			—
Forfeiture of restricted units	—		—			(3,312	)	—			—			—
Distributions	—		(9,285		)	—		(25,491		)	—			(34,776		)
Stock-based compensation	—		—			—		1,454			—			1,454
Units withheld for employee taxes	—		—			(159	)	(6		)	—			(6		)
Other comprehensive income - change in value of interest rate swap	—		—			—		—			3,736			3,736
Reclassification of amortization of forward-starting swap included in interest expense	—		—			—		—			(639		)	(639		)
Balance at June 30, 2018	17,177,608		$	(1,275	)	47,223,809		$	800,063		$	18,847		$	817,635

(1) Consists of limited partnership interests held by third parties.

(2) Consists of general partnership interests held by American Assets Trust, Inc.

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, L.P.

Consolidated Statements of Cash Flows

(Unaudited, In Thousands)



	Six Months Ended June 30,
	2018			2017
OPERATING ACTIVITIES
Net income	$	3,722		$	17,896
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles	2,096			(1,397		)
Depreciation and amortization	66,147			42,168
Amortization of debt issuance costs and debt fair value adjustments	806			2,180
Stock-based compensation expense	1,454			1,278
Settlement of derivative instruments	—			10,667
Other noncash interest expense	(639		)	(475		)
Other, net	1,495			482
Changes in operating assets and liabilities
Change in accounts receivable	2,220			2,674
Change in other assets	755			468
Change in accounts payable and accrued expenses	1,749			5,869
Change in security deposits payable	2,142			665
Change in other liabilities and deferred credits	370			496
Net cash provided by operating activities	82,317			82,971
INVESTING ACTIVITIES
Acquisition of real estate	—			(232,061		)
Capital expenditures	(20,353		)	(19,883		)
Leasing commissions	(3,057		)	(2,094		)
Deposit on property acquisition	—			(1,000		)
Net cash used in investing activities	(23,410		)	(255,038		)
FINANCING ACTIVITIES
Repayment of secured notes payable	(74,476		)	(166,439		)
Proceeds from unsecured line of credit	35,000			130,000
Repayment of unsecured line of credit	(13,000		)	(150,000		)
Proceeds from unsecured notes payable	—			350,000
Debt issuance costs	(2,656		)	(2,281		)
Contributions from American Assets Trust, Inc.	(236		)	30,075
Distributions	(34,776		)	(33,448		)
Shares withheld for employee taxes	(6		)	—
Net cash (used in) provided by financing activities	(90,150		)	157,907
Net decrease in cash and cash equivalents	(31,243		)	(14,160		)
Cash, cash equivalents and restricted cash, beginning of period	91,954			54,751
Cash, cash equivalents and restricted cash, end of period	$	60,711		$	40,591



	Six Months Ended June 30,
	2018		2017
Cash and cash equivalents	$	51,326	$	31,380
Restricted cash	9,385		9,211
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows	$	60,711	$	40,591

The accompanying notes are an integral part of these consolidated financial statements.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Organization

American Assets Trust, Inc. (which may be referred to in these financial statements as the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed on July 16, 2010 that did not have any operating activity until the consummation of our initial public offering on January 19, 2011. The Company is the sole general partner of American Assets Trust, L.P., a Maryland limited partnership formed on July 16, 2010 (the “Operating Partnership”). The Company’s operations are carried on through our Operating Partnership and its subsidiaries, including our taxable real estate investment trust ("REIT") subsidiary ("TRS"). Since the formation of our Operating Partnership, the Company has controlled our Operating Partnership as its general partner and has consolidated its assets, liabilities and results of operations.

We are a full service, vertically integrated, and self-administered REIT with approximately 193 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.

As of June 30, 2018, we owned or had a controlling interest in 26 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of June 30, 2018, we owned land at four of our properties that we classify as held for development and/or construction in progress. A summary of the properties owned by us is as follows:



Retail
Carmel Country Plaza	Gateway Marketplace	Alamo Quarry Market
Carmel Mountain Plaza	Del Monte Center	Hassalo on Eighth - Retail
South Bay Marketplace	Geary Marketplace
Lomas Santa Fe Plaza	The Shops at Kalakaua
Solana Beach Towne Centre	Waikele Center

Office
Torrey Reserve Campus	Lloyd District Portfolio
Solana Beach Corporate Centre	City Center Bellevue
The Landmark at One Market
One Beach Street
First & Main

Multifamily
Loma Palisades	Hassalo on Eighth - Residential
Imperial Beach Gardens
Mariner's Point
Santa Fe Park RV Resort
Pacific Ridge Apartments

Mixed-Use
Waikiki Beach Walk Retail and Embassy Suites™ Hotel

Held for Development and/or Construction in Progress
Solana Beach Corporate Centre – Land
Solana Beach – Highway 101 – Land
Torrey Point – Construction in Progress
Lloyd District Portfolio – Construction in Progress

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

Basis of Presentation

Our consolidated financial statements include the accounts of the Company, our Operating Partnership and our subsidiaries. The equity interests of other investors in our Operating Partnership are reflected as noncontrolling interests.

All significant intercompany transactions and balances are eliminated in consolidation.

The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (“GAAP”) for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and notes therein included in the Company's and Operating Partnership's annual report on Form 10-K for the year ended December 31, 2017.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using our best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.

Any reference to the number of properties, number of units, square footage, employee numbers or percentages of beneficial ownership of our shares are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Consolidated Statements of Cash Flows—Supplemental Disclosures

The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):



	Six Months Ended June 30,
	2018			2017
Supplemental cash flow information
Total interest costs incurred	$	27,419		$	26,730
Interest capitalized	$	911		$	747
Interest expense	$	26,508		$	25,983
Cash paid for interest, net of amounts capitalized	$	26,926		$	21,984
Cash paid for income taxes	$	337		$	296
Supplemental schedule of noncash investing and financing activities
Accounts payable and accrued liabilities for construction in progress	$	(1,192	)	$	2,113
Accrued leasing commissions	$	1,040		$	498
Reduction to capital for prepaid offering costs	$	236		$	69

Significant Accounting Policies

We describe our significant accounting policies in Note 1 to the consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. Except for the adoption of the accounting standards during the first quarter of 2018 as discussed below, there have been no changes to our significant accounting policies during the six months ended June 30, 2018.

Segment Information

Segment information is prepared on the same basis that our chief operating decision maker reviews information for operational decision-making purposes. We operate in four business segments: the acquisition, redevelopment, ownership and management of retail real estate, office real estate, multifamily real estate and mixed-use real estate. The products for our retail segment primarily include rental of retail space and other tenant services, including tenant reimbursements, parking and storage

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

space rental. The products for our office segment primarily include rental of office space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our multifamily segment include rental of apartments and other tenant services. The products of our mixed-use segment include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental and operation of a 369-room all-suite hotel.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-2, Leases. This pronouncement is expected to result in the recognition of a right-to-use asset and related liability to account for future obligations under ground lease agreements for which we are the lessee. In addition, this pronouncement will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. As of June 30, 2018, the remaining contractual payments under lease agreements for which we are the lessee aggregated approximately $36.7 million.

As a lessor, under current accounting standards, we recognize rental revenue from our operating leases on a straight-line basis over the respective lease terms. We commence recognition of rental revenue at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property. Under current accounting standards, tenant recoveries related to payments of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses are considered lease components. We recognize these tenant recoveries as revenue when services are rendered in an amount equal to the related operating expenses incurred that are recoverable under the terms of the applicable lease.

Under this pronouncement, each lease agreement will be evaluated to identify the lease components and nonlease components at lease inception. The total consideration in the lease agreement will be allocated to the lease and nonlease components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis). In March 2018, the FASB approved an amendment to the lease ASU that would allow lessors to elect, as a practical expedient, not to allocate the total consideration to lease and nonlease components based on their relative standalone selling prices. This practical expedient will allow lessors to elect a combined single lease component presentation if (i) the timing and pattern of the revenue recognition of the combined single lease component is the same, and (ii) the related lease component and, the combined single lease component would be classified as an operating lease.

The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We plan to adopt the provisions of ASU No. 2016-2 effective January 1, 2019 using the modified retrospective approach. We continue to evaluate the impact this pronouncement will have on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods beginning after December 15, 2017. We adopted the provisions of the ASU effective January 1, 2018 using the modified retrospective approach. As discussed above, leases are specifically excluded from this and will be governed by the applicable lease codification.

We evaluated the revenue recognition for all contracts within this scope under existing accounting standards and under the new revenue recognition ASU and confirmed that there were no differences in the amounts recognized or the pattern of recognition. This evaluation included revenues from the hotel portion of our mixed-use property, parking income and excise taxes charged to customers. Therefore, the adoption of this ASU did not result in an adjustment to our retained earnings on January 1, 2018.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

NOTE 2. ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES

The following summarizes our acquired lease intangibles and leasing costs, which are included in other assets and other liabilities and deferred credits, as of June 30, 2018 and December 31, 2017 (in thousands):



	June 30, 2018			December 31, 2017
In-place leases	$	44,500		$	54,206
Accumulated amortization	(37,269		)	(45,835		)
Above market leases	15,525			21,262
Accumulated amortization	(14,733		)	(20,084		)
Acquired lease intangible assets, net	$	8,023		$	9,549
Below market leases	$	67,348		$	67,423
Accumulated accretion	(38,991		)	(37,241		)
Acquired lease intangible liabilities, net	$	28,357		$	30,182

NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy for inputs used in measuring fair value is as follows:


1.	Level 1 Inputs—quoted prices in active markets for identical assets or liabilities


2.	Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities


3.	Level 3 Inputs—unobservable inputs

Except as disclosed below, the carrying amounts of our financial instruments approximate their fair value. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

We measure the fair value of our deferred compensation liability, which is included in other liabilities and deferred credits on the consolidated balance sheet, on a recurring basis using Level 2 inputs. We measure the fair value of this liability based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.

The fair value of the interest rate swap agreements are based on the estimated amounts we would receive or pay to terminate the contract at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in accumulated other comprehensive income and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.

We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2018 we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivative. As a result, we have determined that our derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

A summary of our financial liabilities that are measured at fair value on a recurring basis, by level within the fair value hierarchy is as follows (in thousands):



	June 30, 2018								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Deferred compensation liability	$	—	$	1,287	$	—	$	1,287	$	—	$	1,156	$	—	$	1,156
Interest rate swap asset	$	—	$	8,818	$	—	$	8,818	$	—	$	5,091	$	—	$	5,091
Interest rate swap liability	$	—	$	—	$	—	$	—	$	—	$	10	$	—	$	10

The fair value of our secured notes payable and unsecured senior guaranteed notes are sensitive to fluctuations in interest rates. Discounted cash flow analysis using observable market interest rates (Level 2) is generally used to estimate the fair value of our secured notes payable, using rates ranging from 3.9% to 5.0%.

Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The carrying values of our revolving line of credit and term loan set forth below are deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts. A summary of the carrying amount and fair value of our secured financial instruments, all of which are based on Level 2 inputs, is as follows (in thousands):



	June 30, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Secured notes payable, net	$	205,155	$	208,889	$	279,550	$	286,156
Unsecured term loans, net	$	248,541	$	250,000	$	248,839	$	250,000
Unsecured senior guaranteed notes, net	$	796,865	$	781,818	$	796,631	$	802,699
Unsecured line of credit, net	$	20,133	$	22,000	$	—	$	—

NOTE 4. DERIVATIVE AND HEDGING ACTIVITIES

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The following is a summary of the terms of our outstanding interest rate swaps as of June 30, 2018 (dollars in thousands):



Swap Counterparty	Notional Amount		Effective Date	Maturity Date	Fair Value
Bank of America, N.A.	$	100,000	1/9/2014	1/9/2019	$	236
U.S. Bank N.A.	$	100,000	3/1/2016	3/1/2023	$	5,693
Wells Fargo Bank, N.A.	$	50,000	5/2/2016	3/1/2023	$	2,889

The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in accumulated other comprehensive income and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings for as long as hedged cash flows remain probable.

The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, counter party credit risk and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

NOTE 5. OTHER ASSETS

Other assets consist of the following (in thousands):



	June 30, 2018		December 31, 2017
Leasing commissions, net of accumulated amortization of $29,348 and $28,318, respectively	$	21,620	$	20,633
Interest rate swap asset	8,818		5,091
Acquired above market leases, net	792		1,178
Acquired in-place leases, net	7,231		8,371
Lease incentives, net of accumulated amortization of $208 and $136, respectively	1,057		916
Other intangible assets, net of accumulated amortization of $1,100 and $1,115, respectively	202		227
Prepaid expenses and other	5,214		5,945
Total other assets	$	44,934	$	42,361

NOTE 6. OTHER LIABILITIES AND DEFERRED CREDITS

Other liabilities and deferred credits consist of the following (in thousands):



	June 30, 2018		December 31, 2017
Acquired below market leases, net	$	28,357	$	30,182
Prepaid rent and deferred revenue	9,545		8,429
Interest rate swap liability	—		10
Deferred rent expense and lease intangible	2,017		1,670
Deferred compensation	1,287		1,156
Deferred tax liability	117		123
Straight-line rent liability	7,940		4,428
Other liabilities	70		63
Total other liabilities and deferred credits, net	$	49,333	$	46,061

Straight-line rent liability relates to leases which have rental payments that decrease over time or one-time upfront payments for which the rental revenue is deferred and recognized on a straight-line basis.

NOTE 7. DEBT

Debt of American Assets Trust, Inc.

American Assets Trust, Inc. does not hold any indebtedness. All debt is held directly or indirectly by the Operating Partnership; however, American Assets Trust, Inc. has guaranteed the Operating Partnership's obligations under the (i) amended and restated credit facility, (ii) term loans and (iii) senior guaranteed notes. Additionally, American Assets Trust, Inc. has provided carve-out guarantees on certain property-level mortgage debt.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

Debt of American Assets Trust, L.P.

Secured notes payable

The following is a summary of our total secured notes payable outstanding as of June 30, 2018 and December 31, 2017 (in thousands):



	Principal Balance as of						Stated Interest Rate		Stated Maturity Date
Description of Debt	June 30, 2018			December 31, 2017			as of June 30, 2018		Stated Maturity Date
Loma Palisades ⁽¹⁾⁽²⁾	—			73,744			6.09	%	July 1, 2018
One Beach Street ⁽¹⁾	21,900			21,900			3.94	%	April 1, 2019
Torrey Reserve—North Court ⁽³⁾	19,825			20,023			7.22	%	June 1, 2019
Torrey Reserve—VCI, VCII, VCIII ⁽³⁾	6,700			6,764			6.36	%	June 1, 2020
Solana Beach Corporate Centre I-II ⁽³⁾	10,613			10,721			5.91	%	June 1, 2020
Solana Beach Towne Centre ⁽³⁾	35,375			35,737			5.91	%	June 1, 2020
City Center Bellevue ⁽¹⁾	111,000			111,000			3.98	%	November 1, 2022
	205,413			279,889
Debt issuance costs, net of accumulated amortization of $828 and $1,191, respectively	(258		)	(339		)
Total Secured Notes Payable Outstanding	$	205,155		$	279,550


(1)	Interest only.


(2)	Loan repaid in full, without premium or penalty, on March 30, 2018.


(3)	Principal payments based on a 30-year amortization schedule.

Certain loans require us to comply with various financial covenants. As of June 30, 2018, the Operating Partnership was in compliance with these financial covenants.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

Unsecured notes payable

The following is a summary of the Operating Partnership's total unsecured notes payable outstanding as of June 30, 2018 and December 31, 2017 (in thousands):



Description of Debt	Principal Balance as of						Stated Interest Rate			Stated Maturity Date
Description of Debt	June 30, 2018			December 31, 2017			as of June 30, 2018			Stated Maturity Date
Term Loan A	$	100,000		$	100,000		Variable		⁽¹⁾	January 9, 2019
Senior Guaranteed Notes, Series A	150,000			150,000			4.04	%	⁽²⁾	October 31, 2021
Term Loan B	100,000			100,000			Variable		⁽³⁾	March 1, 2023
Term Loan C	50,000			50,000			Variable		⁽⁴⁾	March 1, 2023
Senior Guaranteed Notes, Series F	100,000			100,000			3.78	%	⁽⁵⁾	July 19, 2024
Senior Guaranteed Notes, Series B	100,000			100,000			4.45	%		February 2, 2025
Senior Guaranteed Notes, Series C	100,000			100,000			4.50	%		April 1, 2025
Senior Guaranteed Notes, Series D	250,000			250,000			4.29	%	⁽⁶⁾	March 1, 2027
Senior Guaranteed Notes, Series E	100,000			100,000			4.24	%	⁽⁷⁾	May 23, 2029
	1,050,000			1,050,000
Debt issuance costs, net of accumulated amortization of $6,387 and $5,866, respectively	(4,594		)	(4,530		)
Total Unsecured Notes Payable	$	1,045,406		$	1,045,470


(1)	The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan A at approximately 3.08% through its maturity date and extension options, subject to adjustments based on our consolidated leverage ratio.


(2)	The Operating Partnership entered into a one-month forward-starting seven-year swap contract on August 19, 2014, which was settled on September 19, 2014 at a gain of approximately $1.6 million. The forward-starting seven-year swap contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.88% per annum.

(3)

The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan B at approximately 3.15% through its maturity date, subject to adjustments based on our consolidated leverage ratio. Effective March 1, 2018, the effective interest rate associated with Term Loan B is approximately 2.75%, subject to adjustments based on our consolidated leverage ratio.

(4)

The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan C at approximately 3.14% through its maturity date, subject to adjustments based on our consolidated leverage ratio. Effective March 1, 2018, the effective interest rate associated with Term Loan C is approximately 2.74%, subject to adjustments based on our consolidated leverage ratio.


(5)	The Operating Partnership entered into a treasury lock contract on May 31, 2017, which was settled on June 23, 2017 at a loss of approximately $0.5 million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.85% per annum.


(6)	The Operating Partnership entered into forward-starting interest rate swap contracts on March 29, 2016 and April 7, 2016, which were settled on January 18, 2017 at a gain of approximately $10.4 million. The forward-starting interest swap rate contracts were deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.87% per annum.


(7)	The Operating Partnership entered into a treasury lock contract on April 25, 2017, which was settled on May 11, 2017 at a gain of approximately $0.7 million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 4.18% per annum.

Certain loans require us to comply with various financial covenants. As of June 30, 2018, the Operating Partnership was in compliance with these financial covenants.

On January 9, 2018, we entered into the Third Amendment to the Term Loan Agreement (as so amended, the "Term Loan Agreement"), which maintains the seven-year $150 million unsecured term loan (referred to herein as Term Loan B and Term Loan C) to the Operating Partnership that matures on March 1, 2023 (the “$150mm Term Loan”). Effective as of March 1, 2018, borrowings under the Term Loan Agreement with respect to the $150mm Term Loan bear interest at floating rates equal to, at the Operating Partnership’s option, either (1) LIBOR, plus a spread which ranges from 1.20% to 1.70% based on the Operating Partnership’s consolidated leverage ratio, or (2) a base rate equal to the highest of (a) 0%, (b) the prime rate, (c) the federal funds rate plus 50 bps or (d) the Eurodollar rate plus 100 bps, in each case plus a spread which ranges from 0.70% to 1.35% based on the Operating Partnership’s consolidated leverage ratio. Additionally, the Operating Partnership may elect for borrowings to bear interest based on a ratings-based pricing grid as per the Operating Partnership’s then-applicable investment grade debt ratings under the terms set forth in the Term Loan Agreement.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

Second Amended and Restated Credit Facility

On January 9, 2018, we entered into a second amended and restated credit agreement (the "Second Amended and Restated Credit Facility"). The Second Amended and Restated Credit Facility provides for aggregate, unsecured borrowing of $450 million, consisting of a revolving line of credit of $350 million (the "Revolver Loan") and a term loan of $100 million (the "Term Loan A"). The Second Amended and Restated Credit Facility has an accordion feature that may allow us to increase the availability thereunder up to an additional $350 million, subject to meeting specified requirements and obtaining additional commitments from lenders. At June 30, 2018, there was $22 million outstanding under the Revolver Loan with approximately $1.9 million of debt issuance costs, net.

Borrowings under the Second Amended and Restated Credit Agreement initially bear interest at floating rates equal to, at our option, either (1) LIBOR, plus a spread which ranges from (a) 1.05% to 1.50% (with respect to the Revolver Loan) and (b) 1.30% to 1.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio, or (2) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 50 bps or (c) LIBOR plus 100 bps, plus a spread which ranges from (i) 0.10% to 0.50% (with respect to the Revolver Loan) and (ii) 0.30% to 0.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio. For the six months ended June 30, 2018, the weighted average interest rate on the Revolver Loan was 3.01%.

The Revolver Loan initially matures on January 9, 2022, subject to our option to extend the Revolver Loan up to two times, with each such extension for a six-month period. The Term Loan A matures on January 9, 2019 with no further extension options. The foregoing extension options are exercisable by us subject to the satisfaction of certain conditions.

Additionally, the Second Amended and Restated Credit Facility includes a number of customary financial covenants, including:


•	A maximum leverage ratio (defined as total indebtedness net of certain cash and cash equivalents to total asset value) of 60%,


•	A maximum secured leverage ratio (defined as total secured debt to secured total asset value) of 40%,


•	A minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.50x,


•	A minimum unsecured interest coverage ratio of 1.75x,


•	A maximum unsecured leverage ratio of 60%, and


•	Recourse indebtedness at any time cannot exceed 15% of total asset value.

The Second Amended and Restated Credit Facility provides that our annual distributions may not exceed the greater of (1) 95% of our funds from operation ("FFO") or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution, we may be precluded from making distributions other than those necessary to qualify and maintain our status as a REIT.

As of June 30, 2018, the Operating Partnership was in compliance with the financial covenants in the Second Amended and Restated Credit Facility.

NOTE 8. PARTNERS' CAPITAL OF AMERICAN ASSETS TRUST, L.P.

Noncontrolling interests in our Operating Partnership are interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of 17,177,608 common units (the “noncontrolling common units”), and represented approximately 26.8% of the ownership interests in our Operating Partnership at June 30, 2018. Common units and shares of our common stock have essentially the same economic characteristics in that common units and shares of our common stock share equally in the total net income or loss distributions of our Operating Partnership. Investors who own common units have the right to cause our Operating Partnership to redeem any or all of their common units for cash equal to the then-current market value of one share of our common stock, or, at our election, shares of our common stock on a one-for-one basis.

During the six months ended June 30, 2018, 17,372 common units were converted into shares of our common stock.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

Earnings Per Unit of the Operating Partnership

Basic earnings per unit (“EPU”) of the Operating Partnership is computed by dividing income applicable to unitholders by the weighted average Operating Partnership units outstanding, as adjusted for the effect of participating securities. Operating Partnership units granted in equity-based payment transactions that have non-forfeitable dividend equivalent rights are considered participating securities prior to vesting. The impact of unvested Operating Partnership unit awards on EPU has been calculated using the two-class method whereby earnings are allocated to the unvested Operating Partnership unit awards based on distributions and the unvested Operating Partnership units’ participation rights in undistributed earnings.

The calculation of diluted EPU for the three months ended June 30, 2018 and 2017 does not include the weighted average of 266,260 and 232,047 unvested Operating Partnership units, respectively, as these equity securities are either considered contingently issuable or the effect of including these equity securities was anti-dilutive to income from continuing operations and net income attributable to the unitholders. The calculation of diluted EPU for the six months ended June 30, 2018 and 2017 does not include the weighted average of 267,367 and 232,073 unvested Operating Partnership units, respectively.

NOTE 9. EQUITY OF AMERICAN ASSETS TRUST, INC.

Stockholders' Equity

On May 27, 2015, we entered into an at-the-market ("ATM") equity program with five sales agents in which we may, from time to time, offer and sell shares of our common stock having an aggregate offering price of up to $250.0 million. On March 2, 2018, we amended certain of these equity programs, terminated one such program and entered into a new equity program with one new sales agent. The sales of shares of our common stock made through the ATM equity program, as amended, are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended. During the six months ended June 30, 2018, no shares of common stock were sold through the ATM equity program.

We intend to use the net proceeds from the ATM equity program to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving line of credit or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of June 30, 2018, we had the capacity to issue up to an additional $176.2 million in shares of our common stock under our ATM equity program. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program.

Dividends

The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units during the six months ended June 30, 2018:



Period	Amount per Share/Unit		Period Covered	Dividend Paid Date
First Quarter 2018	$	0.27	January 1, 2018 to March 31, 2018	March 29, 2018
Second Quarter 2018	$	0.27	April 1, 2018 to June 30, 2018	June 28, 2018

Taxability of Dividends

Earnings and profits, which determine the taxability of distributions to stockholders and holders of common units, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

Stock-Based Compensation

We follow the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer. The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.

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Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

The following table summarizes the activity of restricted stock awards during the six months ended June 30, 2018:



	Units		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2018	268,768		$29.89
Granted	5,320		$37.58
Vested	(6,719	)	$37.90
Forfeited	(3,312	)	$29.71
Nonvested at June 30, 2018	264,057		$29.85

We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $0.7 million and $0.6 million in noncash compensation expense for the three month periods ended June 30, 2018 and 2017, respectively, which is included in general and administrative expense on the consolidated statements of comprehensive income. We recognized $1.5 million and $1.3 million in noncash compensation expense for the six months ended June 30, 2018 and 2017, respectively. Unrecognized compensation expense was $2.7 million at June 30, 2018.

Earnings Per Share

We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating security is calculated according to dividends declared and participation rights in undistributed earnings. The weighted average unvested shares outstanding, which are considered participating securities, were 266,260 and 232,047 for the three months ended June 30, 2018 and 2017, respectively and 267,367 and 232,073 for the six months ended June 30, 2018 and 2017, respectively. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares as these unvested shares have nonforfeitable dividend equivalent rights.

Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method. For the three months ended June 30, 2018 and 2017, diluted shares exclude incentive restricted stock as these awards are considered contingently issuable. Additionally, the unvested restricted stock awards subject to time vesting are anti-dilutive for all periods presented, and accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

The computation of basic and diluted EPS is presented below (dollars in thousands, except share and per share amounts):



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
NUMERATOR
Net income from operations	$	4,413		$	7,588		$	3,722		$	17,896
Less: Net income attributable to restricted shares	(216		)	(61		)	(144		)	(121		)
Less: Income from operations attributable to unitholders in the Operating Partnership	(1,125		)	(2,008		)	(959		)	(4,869		)
Net income attributable to common stockholders—basic	$	3,072		$	5,519		$	2,619		$	12,906
Income from operations attributable to American Assets Trust, Inc. common stockholders—basic	$	3,072		$	5,519		$	2,619		$	12,906
Plus: Income from operations attributable to unitholders in the Operating Partnership	1,125			2,008			959			4,869
Net income attributable to common stockholders—diluted	$	4,197		$	7,527		$	3,578		$	17,775
DENOMINATOR
Weighted average common shares outstanding—basic	46,939,449			46,871,377			46,937,645			46,524,510
Effect of dilutive securities—conversion of Operating Partnership units	17,193,071			17,217,704			17,194,020			17,551,409
Weighted average common shares outstanding—diluted	64,132,520			64,089,081			64,131,665			64,075,919

Earnings per common share, basic	$	0.07		$	0.12		$	0.06		$	0.28
Earnings per common share, diluted	$	0.07		$	0.12		$	0.06		$	0.28

NOTE 10. INCOME TAXES

We elected to be taxed as a REIT and operate in a manner that allows us to qualify as a REIT for federal income tax purposes commencing with our initial taxable year. As a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. Taxable income from non-REIT activities managed through our TRS is subject to federal and state income taxes.

We lease our hotel property to a wholly owned TRS that is subject to federal and state income taxes. We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases. Additionally, we classify certain state taxes as income taxes for financial reporting purposes in accordance with ASC Topic 740, Income Taxes.

A deferred tax liability is included in our consolidated balance sheets of $0.1 million as of June 30, 2018 and December 31, 2017, respectively, in relation to real estate asset basis differences of property subject to state taxes based on income and certain prepaid expenses of our TRS.

Income tax expense is recorded in other (expense) income, net on our consolidated statements of comprehensive income. For the three and six months ended June 30, 2018, we recorded income tax expense of $0.2 million and $0.1 million, respectively. For the three and six months ended June 30, 2017, we recorded income tax benefit of $0.1 million and $0.2 million, respectively.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Legal

We are sometimes involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

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Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. We do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also, under our leases, tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us as owner of the properties due to certain matters relating to the operation of the properties by the tenant.

Commitments

At the Landmark at One Market, we lease (the "Annex Lease"), as lessee, a building adjacent to the Landmark at One Market under an operating lease effective through June 30, 2021, which we have the option to extend until 2031 by way of two five-year extension options.

At Waikiki Beach Walk, we sublease a portion of the building of which Quiksilver is currently in possession, under an operating lease effective through December 31, 2021.

Current minimum annual payments under the leases are as follows, as of June 30, 2018 (in thousands):



Year Ending December 31,
2018 (six months ending December 31, 2018)	$	1,655
2019	3,347
2020	3,422
2021	3,460		⁽¹⁾
2022	2,613
Thereafter	22,210
Total	$	36,707


(1)	Lease payments on the Annex Lease will be equal to fair rental value from July 2021 through the end of the extended lease term. In the table above, we have shown the option lease payments for this period based on the stated rate for the month of June 2021 of $217,744.

We have management agreements with Outrigger Hotels & Resorts or an affiliate thereof (“Outrigger”) pursuant to which Outrigger manages each of the retail and hotel portions of the Waikiki Beach Walk property. Under the management agreement with Outrigger relating to the retail portion of Waikiki Beach Walk (the “retail management agreement”), we pay Outrigger a monthly management fee of 3.0% of net revenues from the retail portion of Waikiki Beach Walk. Pursuant to the terms of the retail management agreement, if the agreement is terminated in certain instances, including our election not to repair damage or destruction at the property, a condemnation or our failure to make required working capital infusions, we would be obligated to pay Outrigger a termination fee equal to the sum of the management fees paid for the two calendar months immediately preceding the termination date. The retail management agreement may not be terminated by us or by Outrigger without cause. Under our management agreement with Outrigger relating to the hotel portion of Waikiki Beach Walk (the “hotel management agreement”), we pay Outrigger a monthly management fee of 6.0% of the hotel's gross operating profit, as well as 3.0% of the hotel's gross revenues; provided that the aggregate management fee payable to Outrigger for any year shall not exceed 3.5% of the hotel's gross revenues for such fiscal year. Pursuant to the terms of the hotel management agreement, if the agreement is terminated in certain instances, including upon a transfer by us of the hotel or upon a default by us under the hotel management agreement, we would be required to pay a cancellation fee calculated by multiplying (1) the management fees for the previous 12 months by (2) (a) eight, if the agreement is terminated in the first 11 years of its term, or (b) four, three, two or one, if the agreement is terminated in the twelfth, thirteenth, fourteenth or fifteenth year, respectively, of its term. The hotel management agreement may not be terminated by us or by Outrigger without cause.

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Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

A wholly owned subsidiary of our Operating Partnership, WBW Hotel Lessee LLC, entered into a franchise license agreement with Embassy Suites Franchise LLC, the franchisor of the brand “Embassy Suites™,” to obtain the non-exclusive right to operate the hotel under the Embassy Suites^TM brand for 20 years. The franchise license agreement provides that WBW Hotel Lessee LLC must comply with certain management, operational, record keeping, accounting, reporting and marketing standards and procedures. In connection with this agreement, we are also subject to the terms of a product improvement plan pursuant to which we expect to undertake certain actions to ensure that our hotel's infrastructure is maintained in compliance with the franchisor's brand standards. In addition, we must pay to Embassy Suites Franchise LLC a monthly franchise royalty fee equal to 4.0% of the hotel's gross room revenue through December 2021 and 5.0% of the hotel's gross room revenue thereafter, as well as a monthly program fee equal to 4.0% of the hotel's gross room revenue. If the franchise license is terminated due to our failure to make required improvements or to otherwise comply with its terms, we may be liable to the franchisor for a termination payment, which could be as high as $7.6 million based on operating performance through June 30, 2018.

Our Del Monte Center property has ongoing environmental remediation related to ground water contamination. The environmental issue existed at purchase and remains in remediation. The final stages of the remediation will include routine, long term ground monitoring by the appropriate regulatory agency over the next five to seven years. The work performed is financed through an escrow account funded by the seller upon purchase of the Del Monte Center. We believe the funds in the escrow account are sufficient for the remaining work to be performed. However, if further work is required costing more than the remaining escrow funds, we could be required to pay such overage, although we may have a contractual claim for such costs against the prior owner or our environmental remediation consultant.

Concentrations of Credit Risk

Our properties are located in Southern California, Northern California, Hawaii, Oregon, Texas, and Washington. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate. Thirteen of our consolidated properties are located in Southern California, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. Tenants in the retail industry accounted for 31.7% of total revenues for the six months ended June 30, 2018. This makes us susceptible to demand for retail rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the retail industry. Furthermore, tenants in the office industry accounted for 34.9% of total revenues for the six months ended June 30, 2018. This makes us susceptible to demand for office rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the office industry. For the six months ended June 30, 2018 and 2017, no tenant accounted for more than 10% of our total rental revenue.

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Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

NOTE 12. OPERATING LEASES

Our leases with office, retail, mixed-use and residential tenants are classified as operating leases. Leases at our office and retail properties and the retail portion of our mixed-use property generally range from three to ten years (certain leases with anchor tenants may be longer), and in addition to minimum rents, usually provide for cost recoveries for the tenant’s share of certain operating costs and also may include percentage rents based on the tenant’s level of sales achieved. Leases on apartments generally range from 7 to 15 months, with a majority having 12-month lease terms. Rooms at the hotel portion of our mixed-use property are rented on a nightly basis.

As of June 30, 2018, minimum future rentals from noncancelable operating leases, before any reserve for uncollectible amounts and assuming no early lease terminations, at our office and retail properties and the retail portion of our mixed-use property are as follows (in thousands):



Year Ending December 31,
2018 (six months ending December 31, 2018)	$	84,572
2019	162,912
2020	145,082
2021	122,495
2022	103,261
Thereafter	278,047
Total	$	896,369

The above future minimum rentals exclude residential leases, which typically have a term of 12 months or less, and exclude the hotel, as rooms are rented on a nightly basis.

NOTE 13. COMPONENTS OF RENTAL INCOME AND EXPENSE

The principal components of rental income are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Minimum rents
Retail	$	19,548	$	18,544	$	39,202	$	37,078
Office	24,140		23,213		47,446		46,335
Multifamily	11,721		10,249		23,207		17,484
Mixed-use	2,740		2,581		5,565		5,142
Cost reimbursement	8,491		8,128		16,833		16,016
Percentage rent	355		456		791		911
Hotel revenue	9,530		9,345		19,313		19,210
Other	367		409		736		789
Total rental income	$	76,892	$	72,925	$	153,093	$	142,965

Minimum rents include $(2.8) million and $(0.5) million for the three months ended June 30, 2018 and 2017, respectively, and $(3.5) million and $(0.3) million for the six months ended June 30, 2018 and 2017, respectively, to recognize minimum rents on a straight-line basis. In addition, net amortization of above and below market leases included in minimum rents were $0.7 million and $0.9 million for the three months ended June 30, 2018 and 2017, respectively, and $1.4 million and $1.7 million for the six months ended June 30, 2018 and 2017, respectively.

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Notes to Consolidated Financial Statements—(Continued)

June 30, 2018

(Unaudited)

The principal components of rental expenses are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Rental operating	$	8,742	$	8,437	$	17,402	$	16,510
Hotel operating	5,995		5,746		12,027		12,297
Repairs and maintenance	3,389		2,984		6,390		5,515
Marketing	503		462		915		898
Rent	806		794		1,600