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AAT > SEC Filings for AAT > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for AMERICAN ASSETS TRUST, INC.


2-Aug-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;

difficulties in completing dispositions

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,


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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.
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 June 30, 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 June 30, 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 68.9% of our Operating Partnership as of June 30, 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 $6.1 million and $2.6 million for the three months ended June 30, 2013 and 2012, respectively. We capitalized external and internal costs related to both development and redevelopment activities combined of $13.6 million and $5.2 million for the six months ended June 30, 2013 and 2012, respectively

We capitalized external and internal costs related to other property improvements combined of $4.3 million and $7.0 million, for the three months ended June 30, 2013 and 2012, respectively. We capitalized external and internal costs related to other property improvements combined of $6.2 million and $10.1 million, for the six months ended June 30, 2013 and 2012, respectively.

We capitalized internal costs for salaries and related benefits for development and redevelopment activities and other property improvements of $0.03 million and $0.02 million for the three months ended June 30, 2013 and 2012, respectively. We capitalized internal costs for salaries and related benefits for development and redevelopment activities and other property improvements of $0.06 million and $0.02 million for the six months ended June 30, 2013 and 2012, respectively.
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


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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 development and redevelopment activities combined of $0.5 million and $0.2 million for the three months ended June 30, 2013 and 2012, respectively. We capitalized interest costs related to both development and redevelopment activities combined of $0.8 million and $0.2 million for the six months ended June 30, 2013 and 2012, respectively.
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 June 30, 2013 to the three months ended June 30, 2012
The following summarizes our consolidated results of operations for the three months ended June 30, 2013 compared to our consolidated results of operations for the three months ended June 30, 2012. As of June 30, 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 June 30, 2013, we owned land at five of our properties that we classified as held for development and/or construction in progress. As of June 30, 2012, our operating portfolio was comprised of 21 properties with an aggregate of approximately 5.3 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. The following table sets forth selected data from our unaudited consolidated statements of income for the three months ended June 30, 2013 and 2012 (dollars in thousands):

                                                   Three Months Ended
                                                        June 30,
                                                   2013          2012        Change         %
Revenues
Rental income                                  $   59,705     $  53,740     $ 5,965         11  %
Other property income                               3,209         2,391         818         34
Total property revenues                            62,914        56,131       6,783         12
Expenses
Rental expenses                                    16,686        15,506       1,180          8
Real estate taxes                                   5,476         5,743        (267 )       (5 )
Total property expenses                            22,162        21,249         913          4
Total property income                              40,752        34,882       5,870         17
General and administrative                         (4,426 )      (3,911 )      (515 )       13
Depreciation and amortization                     (16,953 )     (14,329 )    (2,624 )       18
Interest expense                                  (14,744 )     (14,028 )      (716 )        5
Other income (expense), net                           (65 )        (217 )       152        (70 )
Total other, net                                  (36,188 )     (32,485 )    (3,703 )       11
Income from continuing operations                   4,564         2,397       2,167         90
Discontinued operations
Results from discontinued operations                    -           227        (227 )     (100 )
Net income                                          4,564         2,624       1,940         74
Net income attributable to restricted shares         (133 )        (131 )        (2 )        2
Net income attributable to unitholders in the
Operating Partnership                              (1,354 )        (804 )      (550 )       68
Net income attributable to American Assets
Trust, Inc. stockholders                       $    3,077     $   1,689     $ 1,388         82  %


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Revenue
Total property revenues. Total property revenue consists of rental revenue and
other property income. Total property revenue increased $6.8 million, or 12%, to
$62.9 million for the three months ended June 30, 2013 compared to $56.1 million
for the three months ended June 30, 2012. The percentage leased was as follows
for each segment as of June 30, 2013 and 2012:
                Percentage Leased  (1)
                       June 30,
                  2013          2012
Retail          96.6 %       96.2 %
Office          92.9 %       94.7 %  (2)
Multifamily     97.7 %       97.7 %
Mixed-Use (3)   93.8 %       93.9 %

(1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of June 30, 2013 or June 30, 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 was 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 $6.0 million, or 11%, to $59.7 million for the three months ended June 30, 2013 compared to $53.7 million for the three months ended June 30, 2012. Rental revenue by segment was as follows (dollars in thousands):

                               Total Portfolio                                     Same-Store Portfolio(1)
              Three Months Ended June 30,                             Three Months Ended June 30,
                  2013             2012        Change        %            2013             2012        Change        %
Retail      $       23,073     $   22,135     $   938         4 %   $       22,593     $   22,121     $   472         2  %
Office              21,442         17,516       3,926        22             17,066         17,459        (393 )      (2 )
Multifamily          3,688          3,254         434        13              3,688          3,254         434        13
Mixed-Use           11,502         10,835         667         6             11,502         10,835         667         6
            $       59,705     $   53,740     $ 5,965        11 %   $       54,849     $   53,669     $ 1,180         2  %

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

Retail rental revenue increased $0.9 million for the three months ended June 30, 2013 compared to the three months ended June 30, 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 June 30, 2013. Same-store retail rental revenue increased $0.5 million for the three months ended June 30, 2013 primarily related to the increase in percentage leased and additional cost reimbursements. These increases were partially offset by a decrease in occupancy at Lomas Santa Fe Plaza, mainly due to the expiration of the Ross Dress for Less lease on January 31, 2013.
Office rental revenue increased $3.9 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This increase was due to the acquisition of City Center Bellevue on August 21, 2012, which contributed additional rental revenue of $4.3 million for the three months ended June 30, 2013. Same-store office rental revenue decreased $0.4 million for the three months ended June 30, 2013 primarily due to a decrease in the percentage leased during the period, mainly at Torrey Reserve Campus and One Beach Street. The increase in multifamily rental revenue was primarily due to an increase in average occupancy of 95.4% during the three months ended June 30, 2013 compared to 92.2% during the three months ended June 30, 2012. Additionally, there was an increase in average monthly base rent of $1,398 per leased unit during the three months ended June 30, 2013 compared to $1,328 per leased unit during the three months ended June 30, 2012.
The increase in mixed-use rental revenue was due to higher revenue per available room of $244 for the three months ended June 30, 2013 compared to $222 for the three months ended June 30, 2012.


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Other property income. Other property income increased $0.8 million, or 34%, to $3.2 million for the three months ended June 30, 2013, compared to $2.4 million for the three months ended June 30, 2012. Other property income by segment was as follows (dollars in thousands):

                                Total Portfolio                                         Same-Store Portfolio
              Three Months Ended June 30,                               Three Months Ended June 30,
                  2013              2012         Change        %            2013              2012         Change        %
Retail      $           424     $      317     $    107        34 %   $           424     $      316     $    108        34  %
Office                1,070            511          559       109                 388            393           (5 )      (1 )
Multifamily             286            255           31        12                 286            255           31        12
Mixed-Use             1,429          1,308          121         9               1,429          1,308          121         9
            $         3,209     $    2,391     $    818        34 %   $         2,527     $    2,272     $    255        11  %

Retail other property income increased $0.1 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 primarily due to an additional distribution of bankruptcy claim amounts from the liquidating trustee of our former Borders tenants received during the second quarter of 2013.
Office other property income increased $0.6 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This increase was due to the acquisition of City Center Bellevue on August 21, 2012, which had additional other property income of $0.7 million for the three months ended June 30, 2013. This increase was offset by capitalized incidental operations at Lloyd District Portfolio and Sorrento Pointe in connection with development activities.
The increase in mixed-use other property income was due to an increase in parking income, principally as a result of 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 June 30, 2013 compared to the three months ended June 30, 2012.
Property Expenses
Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $0.9 million, or 4%, to $22.2 million for the three months ended June 30, 2013, compared to $21.2 million for the three months ended June 30, 2012. This increase in total property expenses was attributable primarily to the factors discussed below. Rental Expenses. Rental expenses increased $1.2 million, or 8%, to $16.7 million for the three months ended June 30, 2013, compared to $15.5 million for the three months ended June 30, 2012. Rental expense by segment was as follows (dollars in thousands):

                               Total Portfolio                                        Same-Store Portfolio
              Three Months Ended June 30,                              Three Months Ended June 30,
                  2013             2012        Change        %             2013             2012         Change        %
Retail      $        3,401     $    3,298     $   103         3  %   $        3,301     $    3,298     $      3         -  %
Office               4,621          3,862         759        20               3,842          3,791           51         1
Multifamily          1,014          1,064         (50 )      (5 )             1,014          1,064          (50 )      (5 )
Mixed-Use            7,650          7,282         368         5               7,650          7,282          368         5
            $       16,686     $   15,506     $ 1,180         8  %   $       15,807     $   15,435     $    372         2  %

The increase in retail rental expenses was primarily due to the acquisition of Geary Marketplace on December 19, 2012, which had rental expenses of $0.1 million for the three months ended June 30, 2013.
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 June 30, 2013.
The increase in mixed-use rental expenses was due to an increase in management fees and excise taxes at both the hotel and retail portions of Waikiki Beach Walk during the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Additionally, room, food and beverage and advertising expenses increased at the hotel portion of Waikiki Beach Walk during the second quarter of 2013.


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Real Estate Taxes. Real estate taxes decreased $0.3 million, or 5%, to $5.5 million for the three months ended June 30, 2013 compared to $5.7 million for the three months ended June 30, 2012. Real estate tax expense by segment was as follows (dollars in thousands):

                                Total Portfolio                                        Same-Store Portfolio
              Three Months Ended June 30,                               Three Months Ended June 30,
                  2013              2012        Change        %             2013              2012        Change        %
Retail      $         2,659     $    2,796     $  (137 )      (5 )%   $         2,570     $    2,773     $  (203 )      (7 )%
Office                1,963          1,996         (33 )      (2 )              1,682          1,926        (244 )     (13 )
Multifamily             402            501         (99 )     (20 )                402            501         (99 )     (20 )
Mixed-Use               452            450           2         -                  452            450           2         -
            $         5,476     $    5,743     $  (267 )      (5 )%   $         5,106     $    5,650     $  (544 )     (10 )%

Retail real estate taxes decreased for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, primarily as a result of lower property tax expense at Lomas Santa Fe Plaza and Alamo Quarry Market based on refunds received subsequent to June 30, 2012. This decrease was partially offset by additional taxes incurred at Geary Marketplace, which was acquired on December 19, 2012.
Office real estate taxes decreased for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, in connection with capitalization of development activities at Torrey Reserve Campus, Lloyd District Portfolio and Sorrento Pointe. This decrease was partially offset by the acquisition of City Center Bellevue on August 21, 2012, which had real estate tax expense of $0.3 million for the three months ended June 30, 2013. The decrease in multifamily real estate taxes for the three months ended June 30, 2013 was primarily due to the payment of additional real estate taxes for fiscal year 2011 during the second quarter of 2012 as a result of supplemental tax bills from the California taxing authority. Similar supplemental tax bills were not received during the three months ended June 30, 2013. Property Operating Income
Property operating income increased $5.9 million, or 17%, to $40.8 million for the three months ended June 30, 2013, compared to $34.9 million for the three months ended June 30, 2012. Property operating income by segment was as follows (dollars in thousands):

                               Total Portfolio                                       Same-Store Portfolio
              Three Months Ended June 30,                             Three Months Ended June 30,
                  2013             2012        Change        %            2013             2012        Change        %
Retail      $       17,437     $   16,358     $ 1,079         7 %   $       17,146     $   16,366     $   780         5  %
Office              15,928         12,169       3,759        31             11,930         12,135        (205 )      (2 )
Multifamily          2,558          1,944         614        32              2,558          1,944         614        32
Mixed-Use            4,829          4,411         418         9              4,829          4,411         418         9
            $       40,752     $   34,882     $ 5,870        17 %   $       36,463     $   34,856     $ 1,607         5  %

The increase in retail property operating income was primarily due to the acquisition of Geary Marketplace on December 19, 2012 and an increase in the average percentage leased and additional cost reimbursements for the retail properties for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.
The increase in office property operating income was primarily due to the acquisition of City Center Bellevue on August 21, 2012. The decrease in same-store office property operating income was primarily due to a decrease in percentage leased for the office properties for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. . . .

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