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AAT > SEC Filings for AAT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for AMERICAN ASSETS TRUST, INC.

Form 10-Q for AMERICAN ASSETS TRUST, INC.


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in
Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

adverse economic or real estate developments in our markets;

our failure to generate sufficient cash flows to service our outstanding indebtedness;

defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants;

difficulties in identifying properties to acquire and completing acquisitions;

our failure to successfully operate acquired properties and operations;

our inability to develop or redevelop our properties due to market conditions;

fluctuations in interest rates and increased operating costs;

risks related to joint venture arrangements;

our failure to obtain necessary outside financing;

on-going litigation;

general economic conditions;

financial market fluctuations;

risks that affect the general retail, office, multifamily and mixed-use environment;

the competitive environment in which we operate;

decreased rental rates or increased vacancy rates;

conflicts of interests with our officers or directors;

lack or insufficient amounts of insurance;

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

other factors affecting the real estate industry generally;

limitations imposed on our business and our ability to satisfy complex rules in order for us to continue to qualify as a REIT for U.S. federal income tax purposes; and

changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes. For a further discussion of these and other factors, see the section entitled "Item 1A. Risk Factors" contained herein, in our annual report on Form 10-K for the year ended December 31, 2011 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.


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Overview

References to "we," "our," "us" and "our company" refer to American Assets Trust, Inc., a Maryland corporation, together with our consolidated subsidiaries, including American Assets Trust, L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this report as our Operating Partnership.

We are a full service, vertically integrated and self-administered real estate investment trust, or REIT, that owns, operates, acquires and develops high quality retail, office, multifamily and mixed-use properties in attractive, high-barrier-to-entry markets in Southern California, Northern California, Texas, Oregon, Washington and Hawaii. As of September 30, 2012, our portfolio is comprised of ten retail shopping centers; eight office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and four multifamily properties. Additionally, as of September 30, 2012, we owned land at five of our properties that we classified as held for development and/or construction in progress. Our core markets include San Diego, the San Francisco Bay Area, Portland, Oregon, Bellevue, Washington and Oahu, Hawaii. We are a Maryland corporation formed on July 16, 2010 to acquire the entities owning various controlling and noncontrolling interests in real estate assets owned and/or managed by Ernest S. Rady or his affiliates, including the Ernest Rady Trust U/D/T March 13, 1983, or the Rady Trust, and did not have any operating activity until the consummation of our initial public offering and the related acquisition of our Predecessor (as defined below) on January 19, 2011. After the completion of our initial public offering and the Formation Transactions (as defined below) on January 19, 2011, our operations have been carried on through our Operating Partnership. Our Company, as the sole general partner of our Operating Partnership, has control of our Operating Partnership and owned 67.8% of our Operating Partnership as of September 30, 2012. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership.

Our "Predecessor" is not a legal entity but rather a combination of entities whose assets included entities owned and/or controlled by Ernest S. Rady and his affiliates, including the Rady Trust, which in turn owned (1) controlling interests in entities owning 17 properties and the property management business of American Assets, Inc. and (2) noncontrolling interests in entities owning four properties (the assets described at (1) and (2) are the "Acquired Assets," and do not include our Predecessor's noncontrolling 25% ownership interest in Novato FF Venture, LLC, the entity that owns the Fireman's Fund Headquarters in Novato, California). The "Formation Transactions" included the acquisition by our Operating Partnership of the (a) Acquired Assets, (b) the entities that own Waikiki Beach Walk (a mixed-used property consisting of a retail portion and a hotel portion), or the Waikiki Beach Walk entities, and (c) the entities that own Solana Beach Towne Centre and Solana Beach Corporate Centre, or the Solana Beach Centre entities (including our Predecessor's ownership interest in these entities).

As noted above, since our initial public offering and the Formation Transactions occurred on January 19, 2011, the results of operations and financial condition for the entities acquired by us in connection with our initial public offering and related Formation Transactions are not included in certain historical financial statements. Our results of operations for the nine months ended September 30, 2011 reflect the results of operation and financial condition for our Predecessor together with the entities we acquired at the time of our initial public offering, namely, the Waikiki Beach Walk entities and the Solana Beach Centre entities, as well as entities acquired subsequent to our initial public offering. The results of operations for each of the acquisitions are included in our consolidated statements of income only from the date of acquisition.

Acquisitions and Dispositions

On January 24, 2012, we acquired One Beach Street, consisting of approximately 97,000 rentable square feet in a 3-story fully renovated historic office building located along the Embarcadero in San Francisco's North Waterfront District. The purchase price was approximately $36.5 million, excluding closing costs of approximately $0.02 million.

On August 21, 2012, we acquired City Center Bellevue, a 27-story LEED-EB Gold certified office tower, consisting of approximately 497,000 square feet, located in Bellevue, Washington. The purchase price was approximately $228.8 million, excluding closing costs of approximately $0.1 million. Additionally, we received credits to our purchase price of approximately $6.9 million that primarily relate to outstanding tenant improvement obligations and rent abatements.

On August 28, 2012, we entered into an agreement to acquire Geary Marketplace, a newly constructed, approximately 35,000 square foot, 100% leased, grocery-anchored shopping center in Walnut Creek, California. The purchase price is approximately $21.0 million. The acquisition is expected to close early in the first quarter of 2013, subject to customary closing conditions. We can offer no assurances that this acquisition will close on the terms described herein, or at all.

On October 23, 2012, we entered into an agreement to sell 160 King Street located in San Francisco, California. The decision to sell 160 King Street was a result of our desire to reallocate capital within our existing and future portfolio. The sale is expected to be completed during the fourth quarter of 2012 in connection with the reverse tax deferred exchange structured for the acquisition of City Center Bellevue pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections.


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Critical Accounting Policies

We identified certain critical accounting policies that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2011. We have not made any material changes to these policies during the periods covered by this report.

Capitalized Costs

Certain external and internal costs directly related to the development and redevelopment of real estate, including pre-construction costs, real estate taxes, insurance, construction costs and salaries and related costs of personnel directly involved, are capitalized. We capitalize costs under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. We consider a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but not later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with any remaining portion under construction.

We capitalized external and internal costs related to both development and redevelopment activities combined of $1.8 million and $0.5 million for the three months ended September 30, 2012 and 2011, respectively. We capitalized external and internal costs related to both development and redevelopment activities combined of $5.4 million and $0.6 million, for the nine months ended September 30, 2012 and 2011, respectively.

We capitalized external and internal costs related to other property improvements of $11.8 million and none, respectively, for the three months ended September 30, 2012 and $2.9 million and none, respectively, for the three months ended September 30, 2011. We capitalized external and internal costs related to other property improvements of $21.2 million and none, respectively, for the nine months ended September 30, 2012 and $5.2 million and none, respectively, for the nine months ended September 30, 2011.

The amount of capitalized internal costs for salaries and related benefits for development and redevelopment activities and other property improvements were $0.1 million for both the three and nine months ended September 30, 2012. For the year ended December 31, 2011, we did not allocate salaries or related personnel costs to any assets and there was no payroll that was capitalized or deferred because we had no projects under active development, redevelopment, or construction other than ongoing tenant improvements. Additionally, the amount of time devoted by internal personnel to pre-construction activities in 2011 was immaterial.

Results of Operations

For our discussion of results of operations, we have provided information on a total portfolio and same-store basis. Information provided on a same-store basis includes the results of properties that we owned and operated for the entirety of both periods being compared, except for properties held for development and properties classified as discontinued operations, which are excluded for both periods.

Comparison of the three months ended September 30, 2012 to the three months ended September 30, 2011

The following summarizes our consolidated results of operations for the three months ended September 30, 2012 compared to our consolidated results of operations for the three months ended September 30, 2011. As of September 30, 2012, our operating portfolio was comprised of 23 retail, office, multifamily and mixed-use properties with an aggregate of approximately 5.8 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, 922 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of September 30, 2012, we owned land at five of our properties that we classified as held for development and/or construction in progress. As of September 30, 2011, our operating portfolio was comprised of 21 properties with an aggregate of approximately 5.2 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, and 922 residential units (including 122 RV spaces) and a 369-room hotel; we also owned land at five of our properties that we classified as held for development.


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The following table sets forth selected data from our consolidated statements of income for the three months ended September 30, 2012 and 2011 (dollars in thousands):

                                                 Three Months Ended
                                                    September 30,
                                                2012            2011           Change           %
Revenues
Rental income                                 $  59,915       $  53,278          6,637            12
Other property income                             2,921           3,015            (94 )          (3 )

Total property revenues                          62,836          56,293          6,543            12
Expenses
Rental expenses                                  17,024          16,187            837             5
Real estate taxes                                 6,301           5,390            911            17

Total property expenses                          23,325          21,577          1,748             8

Total property income                            39,511          34,716          4,795            14

General and administrative                       (3,959 )        (3,733 )         (226 )           6
Depreciation and amortization                   (16,432 )       (15,827 )         (605 )           4
Interest expense                                (14,690 )       (14,738 )           48            -
Other income (expense), net                          68            (108 )          176          (163 )

Total other, net                                (35,013 )       (34,406 )         (607 )           2

Income from continuing operations                 4,498             310          4,188         1,351
Discontinued operations
Results from discontinued operations               (213 )         4,308         (4,521 )        (105 )

Net income                                        4,285           4,618           (333 )          (7 )
Net income attributable to restricted
shares                                             (133 )          (132 )           (1 )           1
Net income attributable to unitholders in
the Operating Partnership                        (1,335 )        (1,434 )           99            (7 )

Net income attributable to American Assets
Trust, Inc. stockholders                      $   2,817       $   3,052       $   (235 )          (8 )%

Revenue

Total property revenues. Total property revenue consists of rental revenue and
other property income. Total property revenue increased $6.5 million, or 12%, to
$62.8 million for the three months ended September 30, 2012 compared to $56.3
million for the three months ended September 30, 2011. The percentage leased was
as follows for each segment as of September 30, 2012 and 2011:



                                       Percentage Leased  (1)
                                            September 30,
                                       2012               2011
                    Retail                96.9 %             92.6 %
                    Office                94.0 %             94.1 %
                    Multifamily           96.2 %             94.4 %
                    Mixed-Use (2)         97.4 %             99.2 %

(1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of September 30, 2012 or September 30, 2011, as applicable.

(2) Includes the retail portion of the mixed-use property only.

The increase in total property revenue is attributable primarily to the factors discussed below.

Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased $6.6 million, or 12%, to $59.9 million for the three months ended September 30, 2012 compared to $53.3 million for the three months ended September 30, 2011. Rental revenue by segment was as follows (dollars in thousands):


Table of Contents
                            Total Portfolio                               Same-Store Portfolio(1)
                Three Months Ended                                Three Months Ended
                   September 30,                                     September 30,
                 2012          2011       Change       %           2012          2011       Change       %
Retail        $   23,312     $ 21,136     $ 2,176       10 %    $   23,302     $ 21,133     $ 2,169       10 %
Office            20,709       17,282       3,427       20          17,540       17,226         314        2
Multifamily        3,635        3,504         131        4           3,635        3,504         131        4
Mixed-Use         12,259       11,356         903        8          12,259       11,356         903        8

              $   59,915     $ 53,278     $ 6,637       12 %    $   56,736     $ 53,219     $ 3,517        7 %

(1) For this table and tables following, the same-store portfolio excludes: Lloyd District Portfolio acquired on July 1, 2011; One Beach Street acquired on January 24, 2012; City Center Bellevue acquired on August 21, 2012; and land held for development.

On a same-store basis, retail rental revenue increased $2.2 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. This increase was primarily due to the increase in the average percentage leased and additional cost reimbursements. Additionally, the Nordstrom Rack leases at Carmel Mountain Plaza and Alamo Quarry Market during the third quarter of 2012 contributed an increase of approximately $0.8 million from the prior year. Also during the third quarter of 2012, the remaining Borders space at Del Monte Center was re-leased at an increased cash basis rent of 29.2% per square foot. As of September 30, 2012, we have released all of our three former Borders spaces at an increased cash basis rent of 25.7% per square foot in the aggregate.

The increase in office rental revenue was primarily caused by the acquisition of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had rental revenue of $1.1 million and $2.0 million, respectively, for the three months ended September 30, 2012. The remaining increase was primarily due to additional cost reimbursements.

The increase in mixed-use rental revenue was due to increased tourist travel to Hawaii leading to higher hotel revenue, with average occupancy for the three months ended September 30, 2012 of 89.7% compared to 88.8% for the three months ended September 30, 2011 and revenue per available room of $263 and $242 for the three months ended September 30, 2012 and September 30, 2011, respectively.

Other property income. Other property income decreased $(0.1) million, or 3%, to $2.9 million for the three months ended September 30, 2012, compared to $3.0 million for the three months ended September 30, 2011. Other property income by segment was as follows (dollars in thousands):

                             Total Portfolio                                    Same-Store Portfolio
                Three Months Ended                                   Three Months Ended
                   September 30,                                        September 30,
                 2012          2011       Change         %            2012          2011        Change        %
Retail        $      382      $   358     $    24          7 %     $      382      $   358     $     24         7 %
Office               948        1,053        (105 )      (10 )            858          830           28         3
Multifamily          271          299         (28 )       (9 )            271          299          (28 )      (9 )
Mixed-Use          1,320        1,305          15          1            1,320        1,305           15         1

              $    2,921      $ 3,015     $   (94 )       (3 )%    $    2,831      $ 2,792     $     39         1 %

The decrease in office other property income of $0.1 million was primarily caused by the decrease in parking income during the third quarter of 2012, of approximately $0.3 million in connection with the development activity at Lloyd District Portfolio, offset by $0.2 million related to the acquisition of City Center Bellevue on August 21, 2012.

The decrease in multifamily other property income is due to a decrease in utility recoveries from residents, which is consistent with the decrease in utility expense at the properties.

Property Expenses

Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $1.7 million , or 8%, to $23.3 million for the three months ended September 30, 2012, compared to $21.6 million for the three months ended September 30, 2011. This increase in total property expenses is attributable primarily to the factors discussed below.


Table of Contents

Rental Expenses. Rental expenses increased $0.8 million, or 5%, to $17.0 million for the three months ended September 30, 2012, compared to $16.2 million for the three months ended September 30, 2011. Rental expense by segment was as follows (dollars in thousands):

                                                   Total Portfolio                                 Same-Store Portfolio
                                      Three Months Ended                                 Three Months Ended
                                         September 30,                                      September 30,
                                       2012          2011        Change       %           2012          2011        Change       %
Retail                              $    3,717     $  3,541     $    176        5 %    $    3,706     $  3,541     $    165       5 %
Office                                   4,562        4,071          491       12           4,209        4,008          201       5
Multifamily                              1,065        1,026           39        4           1,065        1,026           39       4
Mixed-Use                                7,680        7,549          131        2           7,680        7,549          131       2

                                    $   17,024     $ 16,187     $    837        5 %    $   16,660     $ 16,124     $    536       3 %

The increase in retail rental expenses was due to higher rental expenses for the three months ended September 30, 2012, primarily due to the increase in percentage leased and higher premiums on our insurance policies.

The increase in office rental expenses was primarily caused by the acquisition of City Center Bellevue on August 21, 2012, which had rental expenses of $0.3 million for the three months ended September 30, 2012 and higher premiums on our insurance policies.

Real Estate Taxes. Real estate tax expense increased $0.9 million, or 17%, to $6.3 million for the three months ended September 30, 2012 compared to $5.4 million for the three months ended September 30, 2011. Real estate tax expense by segment was as follows (dollars in thousands):

                              Total Portfolio                                    Same-Store Portfolio
                Three Months Ended                                   Three Months Ended
                   September 30,                                        September 30,
                 2012          2011       Change         %            2012          2011       Change          %
Retail        $    3,111      $ 2,440     $   671          28 %    $    3,087      $ 2,438     $   649           27 %
Office             2,245        2,138         107           5           1,945        2,076        (131 )         (6 )
Multifamily          493          361         132          37             493          361         132           37
Mixed-Use            452          451           1          -              452          451           1           -

              $    6,301      $ 5,390     $   911          17 %    $    5,977      $ 5,326     $   651           12 %

Real estate taxes increased $0.4 million during the three months ended September 30, 2012, primarily due to the receipt of 2011 supplemental tax bills from the California taxing authority for Southern California properties during the third quarter of 2012. Approximately $0.3 million of the additional tax expense is recoverable from our commercial tenants. The remaining $0.1 million . . .

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