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AAT > SEC Filings for AAT > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for AMERICAN ASSETS TRUST, INC.


3-May-2013

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 and, in our annual report on Form 10-K for the year ended December 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 March 31, 2013, our portfolio is comprised of eleven retail shopping centers; seven 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 March 31, 2013, 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 on January 19, 2011. Our Company, as the sole general partner of our Operating Partnership, has control of our Operating Partnership and owned 68.4% of our Operating Partnership as of March 31, 2013. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership.

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, 2012. 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 $6.6 million and $1.9 million for the three months ended March 31, 2013 and 2012, respectively.

We capitalized external and internal costs related to other property improvements of $3.7 million and none, respectively, for the three months ended March 31, 2013 and $4.1 million and none, respectively, for the three months ended March 31, 2012.

The amount of capitalized internal costs for salaries and related benefits for development and redevelopment activities and other property improvements was $0.1 million for the three months ended March 31, 2013. For the quarter ended March 31, 2012, 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.

Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet placed in service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use as noted above. We make judgments as to the time period over which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not subtracted in calculating net income. If the time period for capitalizing interest is extended, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period. We capitalized interest costs related to both


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development and redevelopment activities combined of $0.4 million and none for the three months ended March 31, 2013 and 2012, respectively. For the quarter ended March 31, 2012, our primary capital expenditures related to tenant improvements and capital improvements at our existing operating properties which are currently leased to tenants, and we do not capitalize interest to those properties that are currently in use. We had no properties under active construction or placed into service during the quarter ended March 31, 2012.

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 March 31, 2013 to the three months ended March 31, 2012

The following summarizes our consolidated results of operations for the three months ended March 31, 2013 compared to our consolidated results of operations for the three months ended March 31, 2012. As of March 31, 2013, 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 March 31, 2013, we owned land at five of our properties that we classified as held for development and/or construction in progress. As of March 31, 2012, 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 March 31, 2013 and 2012 (dollars in thousands):

                                                      Three Months Ended
                                                          March 31,
                                                     2013           2012          Change         %
Revenues
Rental income                                      $  59,222      $  53,008      $  6,214          12 %
Other property income                                  2,958          2,441           517          21

Total property revenues                               62,180         55,449         6,731          12
Expenses
Rental expenses                                       16,286         14,818         1,468          10
Real estate taxes                                      4,800          5,241          (441 )        (8 )

Total property expenses                               21,086         20,059         1,027           5

Total property income                                 41,094         35,390         5,704          16

General and administrative                            (4,201 )       (3,725 )        (476 )        13
Depreciation and amortization                        (17,013 )      (14,854 )      (2,159 )        15
Interest expense                                     (14,736 )      (13,901 )        (835 )         6
Other income (expense), net                             (279 )         (146 )        (133 )        91

Total other, net                                     (36,229 )      (32,626 )      (3,603 )        11

Income from continuing operations                      4,865          2,764         2,101          76
Discontinued operations
Results from discontinued operations                      -             107          (107 )      (100 )

Net income                                             4,865          2,871         1,994          69
Net income attributable to restricted shares            (132 )         (132 )          -           -
Net income attributable to unitholders in the
Operating Partnership                                 (1,495 )         (883 )        (612 )        69

Net income attributable to American Assets
Trust, Inc. stockholders                           $   3,238      $   1,856      $  1,382          74 %

Revenue

Total property revenues. Total property revenue consists of rental revenue and
other property income. Total property revenue increased $6.7 million, or 12%, to
$62.2 million for the three months ended March 31, 2013 compared to $55.4
million for the three months ended March 31, 2012. The percentage leased was as
follows for each segment as of March 31, 2013 and 2012:



                                     Percentage Leased  (1)
                                            March 31,
                                     2013               2012
                  Retail                96.1 %             94.8 %
                  Office                93.8 %             94.5 % (2)
                  Multifamily           94.3 %             88.4 %
                  Mixed-Use (3)         95.5 %             98.8 %

(1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of March 31, 2013 or March 31, 2012, as applicable.

(2) Excludes 160 King Street, which was sold on December 4, 2012.

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

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


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Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased $6.2 million, or 12%, to $59.2 million for the three months ended March 31, 2013 compared to $53.0 million for the three months ended March 31, 2012. Rental revenue by segment was as follows (dollars in thousands):

                            Total Portfolio                                Same-Store Portfolio(1)
                Three Months Ended                                Three Months Ended
                     March 31,                                         March 31,
                 2013          2012       Change       %           2013          2012       Change        %
Retail        $   21,859     $ 21,384     $   475        2 %    $   21,390     $ 21,369     $    21        -  %
Office            21,419       17,270       4,149       24          16,007       16,421        (414 )      (3 )
Multifamily        3,585        3,278         307        9           3,585        3,278         307         9
Mixed-Use         12,359       11,076       1,283       12          12,359       11,076       1,283        12

              $   59,222     $ 53,008     $ 6,214       12 %    $   53,341     $ 52,144     $ 1,197         2 %

(1) For this table and tables following, the same-store portfolio excludes: One Beach Street acquired on January 24, 2012; City Center Bellevue acquired on August 21, 2012; Geary Marketplace acquired on December 19, 2012 and land held for development.

Retail rental revenue increased $0.5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This increase was due to the acquisition of Geary Marketplace on December 19, 2012, which had rental revenue of $0.5 million for the three months ended March 31, 2013.

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 additional rental revenue of $0.3 million and $4.3 million, respectively, for the three months ended March 31, 2013. Same-store office rental revenue decreased $0.4 million for the three months ended March 31, 2013 primarily due to a decrease in the percentage leased during the period, mainly at the Lloyd District Portfolio.

The increase in multifamily rental revenue was primarily due to an increase in the average percentage leased during the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

The increase in mixed-use rental revenue was due to higher revenue per available room of $266 for the three months ended March 31, 2013 compared to $228 for the three months ended March 31, 2012.

Other property income. Other property income increased $0.5 million, or 21%, to $3.0 million for the three months ended March 31, 2013, compared to $2.4 million for the three months ended March 31, 2012. Other property income by segment was as follows (dollars in thousands):

                             Total Portfolio                                    Same-Store Portfolio
                Three Months Ended                                   Three Months Ended
                     March 31,                                            March 31,
                 2013          2012        Change        %            2013          2012        Change        %
Retail        $      295      $   307     $    (12 )      (4 )%    $      295      $   306     $    (11 )      (4 )%
Office             1,003          617          386        63              370          352           18         5
Multifamily          290          264           26        10              290          264           26        10
Mixed-Use          1,370        1,253          117         9            1,370        1,253          117         9

              $    2,958      $ 2,441     $    517        21 %     $    2,325      $ 2,175     $    150         7 %

The increase in office other property income of $0.4 million was primarily caused by the acquisition of City Center Bellevue on August 21, 2012, which had other property income of $0.6 million for the three months ended March 31, 2013. This increase was offset by decreased parking income at the Lloyd District Portfolio in connection with capitalization of development activities that began during the second quarter of 2012.

The increase in multifamily other property income is due to an increase in the average percentage leased during the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

The increase in mixed-use other property income is due to an increase in parking income, principally due to an increase in the overnight hotel guest parking rate from $30/day to $35/day effective January 2013, and an increase in sales of food and beverages and other services provided to hotel guests during the three months ended March 31, 2013 compared to the three months ended March 31, 2012.


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Property Expenses

Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $1.0 million, or 5%, to $21.1 million for the three months ended March 31, 2013, compared to $20.1 million for the three months ended March 31, 2012. This increase in total property expenses is attributable primarily to the factors discussed below.

Rental Expenses. Rental expenses increased $1.5 million, or 10%, to $16.3 million for the three months ended March 31, 2013, compared to $14.8 million for the three months ended March 31, 2012. Rental expense by segment was as follows (dollars in thousands):

                             Total Portfolio                                  Same-Store Portfolio
                Three Months Ended                                  Three Months Ended
                     March 31,                                           March 31,
                 2013          2012       Change        %            2013          2012       Change        %
Retail        $    3,087     $  3,149     $   (62 )      (2 )%    $    2,980     $  3,146     $  (166 )      (5 )%
Office             4,375        3,658         717        20            3,338        3,447        (109 )      (3 )
Multifamily        1,040          960          80         8            1,040          960          80         8
Mixed-Use          7,784        7,051         733        10            7,784        7,051         733        10

              $   16,286     $ 14,818     $ 1,468        10 %     $   15,142     $ 14,604     $   538         4 %

The decrease in retail rental expenses was primarily due to lower rent expenses in the retail portfolio for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, due to additional marketing expense and maintenance performed during the first quarter of 2012. This decrease was offset by additional rental expenses for Geary Marketplace acquired on December 19, 2012.

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 $0.8 million for the three months ended March 31, 2013. This increase was offset by decreases in rental expenses at the Lloyd District Portfolio related to a decrease in parking expenses in connection with development activities that began during the second quarter of 2012. Additionally, we incurred less payroll and management fee expenses at the Lloyd District Portfolio in connection with the mutual termination of our property management agreement with Langley on February 1, 2013.

The increase in multifamily rental expenses is due to an increase in the average percentage leased during the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

The increase in mixed-use rental expenses is due to an increase of various expenses during the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The hotel portion of our mixed-use property incurred higher room, food and beverage, and advertising expenses during the first quarter of 2013. The retail portion of our mixed-use property also incurred higher advertising expenses and completed a lawn restoration project during the first quarter of 2013.

Real Estate Taxes. Real estate taxes decreased $0.4 million, or 8%, to $4.8 million for the three months ended March 31, 2013 compared to $5.2 million for the three months ended March 31, 2012. Real estate tax expense by segment was as follows (dollars in thousands):

                             Total Portfolio                                    Same-Store Portfolio
                Three Months Ended                                   Three Months Ended
                     March 31,                                            March 31,
                 2013          2012       Change         %            2013          2012       Change         %
Retail        $    1,884      $ 2,577     $  (693 )      (27 )%    $    1,802      $ 2,551     $  (749 )      (29 )%
Office             2,061        1,860         201         11            1,737        1,738          (1 )       -
Multifamily          402          354          48         14              402          354          48         14
Mixed-Use            453          450           3          1              453          450           3          1

              $    4,800      $ 5,241     $  (441 )       (8 )%    $    4,394      $ 5,093     $  (699 )      (14 )%

Retail real estate taxes decreased $0.7 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily as a result of tax refunds at Lomas Santa Fe Plaza and Alamo Quarry Market that were offset by additional taxes incurred for Geary Marketplace, which was acquired on December 19, 2012.

The increase in office real estate taxes was primarily caused by the acquisition of City Center Bellevue on August 21, 2012, which had real estate tax expense of $0.2 million for the three months ended March 31, 2013.


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The increase in multifamily real estate taxes for the three months ended March 31, 2013 was primarily due to additional real estate tax accruals based on supplemental tax bills from the California taxing authority received during the second and third quarters of 2012.

Property Operating Income

Property operating income increased $5.7 million, or 16%, to $41.1 million for
the three months ended March 31, 2013, compared to $35.4 million for the three
months ended March 31, 2012. Property operating income by segment was as follows
(dollars in thousands):



                            Total Portfolio                                 Same-Store Portfolio
                Three Months Ended                                Three Months Ended
                     March 31,                                         March 31,
                 2013          2012       Change       %           2013          2012       Change        %
Retail        $   17,183     $ 15,965     $ 1,218        8 %    $   16,903     $ 15,978     $   925         6 %
Office            15,986       12,369       3,617       29          11,302       11,588        (286 )      (2 )
Multifamily        2,433        2,228         205        9           2,433        2,228         205         9
Mixed-Use          5,492        4,828         664       14           5,492        4,828         664        14

              $   41,094     $ 35,390     $ 5,704       16 %    $   36,130     $ 34,622     $ 1,508         4 %

Retail property operating income increased $1.2 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to the acquisition of Geary Marketplace on December 19, 2012 and an increase in the average percentage leased for the retail properties.

The increase in office property operating income was primarily caused by the . . .

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