Form 10-Q
Table of Contents

 

 

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 September 30, 2012

or

 

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

For the transition period from         to         

Commission file number: 001-35030

 

 

AMERICAN ASSETS TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   27-3338708
(State of Organization)  

(IRS Employer

Identification No.)

11455 El Camino Real, Suite 200,

San Diego, California

  92130
(Address of Principal Executive Offices)   (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.     x  Yes    ¨  No

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).     x  Yes    ¨  No

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

 

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of Registrant’s common shares outstanding on November 9, 2012 was 39,627,212.

 

 

 


Table of Contents

AMERICAN ASSETS TRUST, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

 

PART 1. FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011      3   
   Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2012 and 2011      4   
   Consolidated Statement of Equity (unaudited) for the nine months ended September 30, 2012      5   
   Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011      6   
   Notes to Consolidated Financial Statements (unaudited)      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      45   

Item 4.

   Controls and Procedures      45   
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      47   

SIGNATURES

     49   

 

2


Table of Contents

American Assets Trust, Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Data)

 

     September 30,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Real estate, at cost

    

Operating real estate

   $ 1,917,089      $ 1,659,106   

Construction in progress

     34,369        3,495   

Held for development

     14,877        24,675   
  

 

 

   

 

 

 
     1,966,335        1,687,276   

Accumulated depreciation

     (267,840     (234,595
  

 

 

   

 

 

 

Net real estate

     1,698,495        1,452,681   

Cash and cash equivalents

     34,917        112,723   

Restricted cash

     10,251        9,216   

Marketable securities

     —          28,235   

Accounts receivable, net

     6,076        6,847   

Deferred rent receivable, net

     29,392        23,294   

Other assets, net

     81,806        76,285   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,860,937      $ 1,709,281   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

LIABILITIES:

    

Secured notes payable

   $ 964,068      $ 943,479   

Line of credit

     141,000        —     

Accounts payable and accrued expenses

     33,950        25,476   

Security deposits payable

     5,482        4,790   

Other liabilities and deferred credits

     61,140        55,808   
  

 

 

   

 

 

 

Total liabilities

     1,205,640        1,029,553   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

EQUITY:

    

American Assets Trust, Inc. stockholders’ equity

    

Common stock, $0.01 par value, 490,000,000 shares authorized, 39,316,461 and 39,283,796 shares outstanding at September 30, 2012 and December 31, 2011, respectively

     393        393   

Additional paid-in capital

     656,425        653,645   

Accumulated dividends in excess of net income

     (46,004     (28,007
  

 

 

   

 

 

 

Total American Assets Trust, Inc. stockholders’ equity

     610,814        626,031   

Noncontrolling interests

     44,483        53,697   
  

 

 

   

 

 

 

Total equity

     655,297        679,728   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 1,860,937      $ 1,709,281   
  

 

 

   

 

 

 

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

 

3


Table of Contents

American Assets Trust, Inc.

Consolidated Statements of Income

(Unaudited)

(In Thousands, Except Shares and Per Share Data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

REVENUE:

        

Rental income

   $ 59,915      $ 53,278      $ 169,199      $ 146,860   

Other property income

     2,921        3,015        8,484        7,416   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     62,836        56,293        177,683        154,276   

EXPENSES:

        

Rental expenses

     17,024        16,187        48,219        42,720   

Real estate taxes

     6,301        5,390        17,689        14,800   

General and administrative

     3,959        3,733        11,716        10,786   

Depreciation and amortization

     16,432        15,827        46,356        41,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     43,716        41,137        123,980        110,222   

OPERATING INCOME

     19,120        15,156        53,703        44,054   

Interest expense

     (14,690     (14,738     (43,522     (41,791

Early extinguishment of debt

     —          —          —          (25,867

Loan transfer and consent fees

     —          —          —          (9,019

Gain on acquisition

     —          —          —          46,371   

Other income (expense), net

     68        (108     (188     (179
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS

     4,498        310        9,993        13,569   

DISCONTINUED OPERATIONS

        

(Loss) income from discontinued operations

     (213     327        (213     1,119   

Gain on sale of real estate property

     —          3,981        —          3,981   
  

 

 

   

 

 

   

 

 

   

 

 

 

Results from discontinued operations

     (213     4,308        (213     5,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

     4,285        4,618        9,780        18,669   

Net income attributable to restricted shares

     (133     (132     (396     (350

Net loss attributable to Predecessor’s noncontrolling interests in consolidated real estate entities

     —          —          —          2,458   

Net income attributable to Predecessor’s controlled owners’ equity

     —          —          —          (16,995

Net income attributable to unitholders in the Operating Partnership

     (1,335     (1,434     (3,022     (1,209
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS

   $ 2,817      $ 3,052      $ 6,362      $ 2,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE, BASIC

        

Continuing operations

   $ 0.08      $ —        $ 0.17      $ (0.03

Discontinued operations

     —          0.08        —          0.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income attributable to common stockholders per share

   $ 0.08      $ 0.08      $ 0.17      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding - basic

     38,673,617        38,655,084        38,663,352        36,106,397   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

EARNINGS PER COMMON SHARE, DILUTED

        

Continuing operations

   $ 0.08      $ —        $ 0.17      $ (0.03

Discontinued operations

     —          0.08        —          0.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income attributable to common stockholders per share

   $ 0.08      $ 0.08      $ 0.17      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding - diluted

     57,054,425        57,051,173        57,054,425        53,265,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.21      $ 0.21      $ 0.63      $ 0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

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
     
     Shares     Amount            

Balance at December 31, 2011

     39,283,796      $ 393       $ 653,645       $ (28,007   $ 53,697      $ 679,728   

Net income

     —          —           —           6,758        3,022        9,780   

Conversion of operating partnership units

     24,903        —           652         —          (652     —     

Issuance of restricted stock

     10,015        —           —           —          —          —     

Forfeiture of restricted stock

     (2,253     —           —           —          —          —     

Dividends declared and paid

     —          —           —           (24,755     (11,584     (36,339

Stock-based compensation

     —          —           2,128         —          —          2,128   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

     39,316,461      $ 393       $ 656,425       $ (46,004   $ 44,483      $ 655,297   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

American Assets Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)

 

     Nine Months Ended
September 30,
 
     2012     2011  

OPERATING ACTIVITIES

    

Net income

   $ 9,780      $ 18,669   

Results from discontinued operations

     213        (5,100
  

 

 

   

 

 

 

Income from continuing operations

     9,993        13,569   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

    

Deferred rent revenue and amortization of lease intangibles

     (5,521     (1,639

Depreciation and amortization

     46,356        41,916   

Amortization of debt issuance costs and debt fair value adjustments

     2,964        2,924   

Early extinguishment of debt

     —          25,867   

Loan transfer and consent fees

     —          9,019   

Gain on acquisition of controlling interests

     —          (46,371

Stock-based compensation expense

     2,128        1,902   

Other, net

     998        1,774   

Changes in operating assets and liabilities

    

Change in restricted cash

     (2,100     (848

Change in accounts receivable

     445        (3,262

Change in other assets

     (1,409     (590

Change in accounts payable and accrued expenses

     2,848        5,689   

Change in security deposits and other liabilities

     (1,095     125   
  

 

 

   

 

 

 

Net cash provided by operating activities of continuing operations

     55,607        50,075   

Net cash (used in) provided by operating activities of discontinued operations

     (213     1,748   
  

 

 

   

 

 

 

Net cash provided by operating activities

     55,394        51,823   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Acquisition of real estate, net of cash acquired

     (253,090     (227,309

Capital expenditures

     (25,779     (5,871

Change in restricted cash

     1,066        (1,653

Cash acquired from acquisition of controlling interests in real estate joint ventures

     —          15,222   

Leasing commissions

     (2,727     (1,772

Purchase of marketable securities

     —          (33,103

Maturity of marketable securities

     4,384        3,502   

Deposit on property acquisition

     (2,000     —     

Sale of marketable securities

     23,191        —     
  

 

 

   

 

 

 

Net cash used in investing activities of continuing operations

     (254,955     (250,984

Net cash provided by investing activities of discontinued operations

     —          30,078   
  

 

 

   

 

 

 

Net cash used in investing activities

     (254,955     (220,906
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Issuance of secured notes payable

     21,900        84,500   

Repayment of secured notes payable

     (3,512     (263,106

Defeasance costs on repayment of secured notes payable

     —          (24,345

Proceeds from unsecured line of credit

     164,000        —     

Repayment of unsecured line of credit

     (23,000     —     

Loan transfer and consent fees paid

     —          (8,350

Repayment of unsecured notes payable

     —          (38,013

Repayment of notes payable to affiliates

     —          (19,279

Debt issuance costs

     (932     (2,961

Proceeds from issuance of common stock, net

     —          596,541   

Proceeds from private placement of common units

     —          5,410   

Dividends paid to common stock and unitholders

     (36,340     (34,010

Deferred offering costs

     (361     —     

Payments to nonaccredited investors

     —          (6,075

Distributions to Predecessor’s controlling and noncontrolling interests

     —          (39,960
  

 

 

   

 

 

 

Net cash provided by financing activities

     121,755        250,352   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (77,806     81,269   

Cash and cash equivalents, beginning of period

     112,723        41,953   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 34,917      $ 123,222   
  

 

 

   

 

 

 

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

 

6


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements

September 30, 2012

(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 (the “Offering”) and the related acquisition of certain assets of our Predecessor (as defined below) 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 REIT subsidiary. 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.

In connection with the Offering, on January 19, 2011 the following transactions were completed:

 

   

We issued a total of 31,625,000 shares of our common stock at $20.50 per share.

 

   

We acquired, through a series of merger and contribution transactions (the “Formation Transactions,” as more fully described below), certain assets of our Predecessor and certain other entities. In exchange for such assets, the prior investors in such assets that were accredited investors were issued a total of 7,030,084 shares of our common stock and 18,145,039 common units of limited partnership interests in our Operating Partnership (“common units”), with an aggregate value of approximately $516.1 million, and non-accredited prior investors were paid a total of approximately $6.1 million in cash from the net proceeds of the Offering.

 

   

We entered into a $250.0 million revolving credit facility (the “credit facility”) with an accordion feature to increase availability to $400.0 million under specified circumstances.

 

   

We repaid $342.0 million of indebtedness (including $24.3 million of defeasance costs) and paid $10.8 million, net of $0.7 million prepaid by our Predecessor, for loan transfer and consent fees and credit facility origination fees from the net proceeds of the Offering.

The net proceeds from the Offering were approximately $594.6 million, net of $1.9 million of offering costs prepaid by our Predecessor, including the underwriters’ overallotment option which was exercised in full (after deducting the underwriting discount and commissions and expenses of the Offering and Formation Transactions). We contributed the net proceeds of the Offering to our Operating Partnership in exchange for common units.

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 Ernest Rady Trust U/D/T March 13, 1983 (the “Rady Trust”), which in turn owned (1) controlling interests in entities owning 17 properties and the property management business of American Assets, Inc. (“AAI”) (the “controlled entities”), and (2) noncontrolling interests in entities owning four properties (the “noncontrolled entities”) (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-use property consisting of a retail portion and a hotel portion) (the “Waikiki Beach Walk entities”) and (c) the entities that own Solana Beach Towne Centre and Solana Beach Corporate Centre (the “Solana Beach Centre entities”) (including our Predecessor’s ownership interest in these entities).

The Formation Transactions enabled us to (1) consolidate the ownership of our property portfolio under our Operating Partnership, (2) succeed to the property management business of AAI, (3) facilitate the Offering, and (4) qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2011. As a result of the Formation Transactions, we are a vertically integrated and self-administered REIT with approximately 130 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.

We determined that our Predecessor was the acquirer for accounting purposes, and therefore the contribution or acquisition by merger of interests in the controlled entities was considered a transaction between entities under common control since our Executive Chairman, Ernest S. Rady or his affiliates, including the Rady Trust, owned the controlling interest in each of the entities comprising our Predecessor, which, in turn, owned a controlling interest in each of the controlled entities. As a result, the acquisition of interests in each of the controlled entities was recorded at our historical cost. The contribution or

 

7


Table of Contents

acquisition by merger of interests in certain of the noncontrolled entities, which include the Waikiki Beach Walk entities and the Solana Beach Centre entities (including our Predecessor’s ownership interest in these noncontrolled entities), was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of such contribution or acquisition.

Since these transactions occurred on January 19, 2011, the financial condition and results of operations for the entities acquired by us in connection with the 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 financial condition and results of operation for our Predecessor together with the entities we acquired at the time of the Offering, namely, the Waikiki Beach Walk entities and the Solana Beach Centre entities, as well as entities acquired subsequent to the Offering. We have included the results of operations for the acquired entities in our consolidated statements of operations from the date of acquisition.

As of September 30, 2012, we owned or had a controlling interest in 23 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of September 30, 2012, we owned land at five 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

Carmel Mountain Plaza

South Bay Marketplace

Rancho Carmel Plaza

Lomas Santa Fe Plaza

Solana Beach Towne Centre

Del Monte Center

The Shops at Kalakaua

Waikele Center

Alamo Quarry Market

Office

Torrey Reserve Campus

Solana Beach Corporate Centre

160 King Street

The Landmark at One Market

One Beach Street

First & Main

Lloyd District Portfolio

City Center Bellevue

Multifamily

Loma Palisades

Imperial Beach Gardens

Mariner’s Point

Santa Fe Park RV Resort

Mixed-Use

Waikiki Beach Walk Retail and Embassy SuitesTM Hotel

Held for Development and Construction in Progress

Solana Beach Corporate Centre – Land

Solana Beach – Highway 101 – Land

Sorrento Pointe – Land

Torrey Reserve – Land

Lloyd District Portfolio – Land

 

 

8


Table of Contents

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.

In August 2011, we sold Valencia Corporate Center. We have reclassified our financial statements for all periods prior to the sale to reflect Valencia Corporate Center as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

The accompanying consolidated financial statements of the Company 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.

The preparation of financial statements in conformity with GAAP requires management 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 management’s 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 and square footage are unaudited and outside the scope of our independent registered public accounting firm’s audit 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):

 

     Nine Months Ended September 30,  
     2012      2011  

Supplemental cash flow information

     

Total interest costs incurred

   $ 43,983       $ 41,791   
  

 

 

    

 

 

 

Interest capitalized

   $ 461       $ —     
  

 

 

    

 

 

 

Interest expense

   $ 43,522       $ 41,791   
  

 

 

    

 

 

 

Cash paid for interest, net of amounts capitalized

   $ 40,527       $ 39,158   
  

 

 

    

 

 

 

Cash paid for income taxes

   $ 1,210       $ 55   
  

 

 

    

 

 

 

Supplemental schedule of noncash investing and financing activities

     

Accounts payable and accrued liabilities for construction in progress

   $ 5,635       $ 1,525   
  

 

 

    

 

 

 

Assumption of debt upon acquisition

   $ —         $ 268,008   
  

 

 

    

 

 

 

Assumption of notes to affiliates upon acquisition

   $ —         $ 14,824   
  

 

 

    

 

 

 

Acquisition of working capital deficit, net of cash

   $ —         $ (4,175
  

 

 

    

 

 

 

Distribution of investment in joint venture not acquired

   $ —         $ 11,480   
  

 

 

    

 

 

 

Issuance of common shares and units for acquisition of properties

   $ —         $ 33,854   
  

 

 

    

 

 

 

Notes receivable from affiliate settled in common units

   $ —         $ 21,797   
  

 

 

    

 

 

 

Notes payable to affiliates settled in common units

   $ —         $ 828   
  

 

 

    

 

 

 

Reduction to capital for prepaid Offering costs

   $ —         $ 1,974   
  

 

 

    

 

 

 

Transfer taxes accrued at time of Offering

   $ —         $ 6,556   
  

 

 

    

 

 

 

 

 

9


Table of Contents

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, 2011. There have been no changes to our significant accounting policies during the nine months ended September 30, 2012.

Segment Information

Segment information is prepared on the same basis that our management 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 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.

Reclassifications

Certain items in the consolidated financial statements for prior periods have been reclassified to conform to current classifications.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amended ASC Topic 820, Fair Value Measurement. ASU 2011-04 clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 is effective for annual and interim reporting periods beginning on or after December 15, 2011. The new guidance is to be adopted prospectively and early adoption is not permitted. The adoption of ASU 2011-04 did not have a significant impact on our financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amended ASC Topic 220, Comprehensive Income. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in equity and requires that all non owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 requires retrospective application and has been effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of ASU 2011-05 did not have significant impact on our disclosures of comprehensive income, since we do not have other comprehensive income.

NOTE 2. REAL ESTATE

Acquisitions

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. The identified intangible assets and liabilities are being amortized over a weighted average life of 7.0 years.

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. The identified intangible assets and liabilities are being amortized over a weighted average life of 5.8 years.

 

10


Table of Contents

The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by management. Using information available at the time the acquisition closed, we allocated the total consideration to tangible assets and liabilities and identified intangible assets and liabilities. We may adjust the purchase price allocation after obtaining more information about asset valuations and liabilities assumed. The allocation of the purchase price for each of One Beach Street and City Center Bellevue is as follows (in thousands):

 

     One Beach Street      City Center
Bellevue
     Total  

Land

   $ 15,332       $ 25,135       $ 40,467   

Building

     16,764         185,653         202,417   

Land improvements

     30         154         184   

Tenant improvements

     1,223         5,191         6,414   
  

 

 

    

 

 

    

 

 

 

Total real estate

     33,349         216,133         249,482   

Lease intangibles

     4,141         11,870         16,011   

Prepaid expenses and other assets

     1         2,596         2,597   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 37,491       $ 230,599       $ 268,090   
  

 

 

    

 

 

    

 

 

 

Accounts payable and accrued expenses

   $ 94       $ 456       $ 550   

Security deposits payable

     75         740         815   

Lease intangibles

     1,382         8,733         10,115   

Other liabilities and deferred credits

     22         497         519   
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1,573       $ 10,426       $ 11,999   
  

 

 

    

 

 

    

 

 

 

We have included the results of operations for One Beach Street and City Center Bellevue in our consolidated statements of income from the date of acquisition. For the period of acquisition through September 30, 2012, One Beach Street contributed $2.9 million to total revenue, $0.7 million to operating expenses, $2.2 million to operating income and $0.6 million to net income. For the period of acquisition through September 30, 2012, City Center Bellevue contributed $2.2 million to total revenue, $0.4 million to operating expenses, $1.8 million to operating income and $0.1 million to net income.

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.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of One Beach Street and City Center Bellevue with the historical results of operations of the Company, as though the entities were acquired on January 1, 2011. The pro forma financial information for the nine months ended September 30, 2011 also includes the pro forma results of operations of the Waikiki Beach Walk entities, Solana Beach Centre entities, First & Main, Lloyd District Portfolio and Solana Beach-Highway 101, each of which were acquired at various times during 2011. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2011. The pro forma financial information includes adjustments to depreciation expense for acquired property and equipment, adjustments to amortization charges for acquired intangible assets and liabilities, adjustments to straight-line rent revenue and the removal of the gain on acquisition of the controlling interests of the Solana Beach Centre entities and Waikiki Beach Walk entities for the nine months ended September 30, 2011.

 

11


Table of Contents

The following table summarizes the unaudited pro forma financial information (in thousands):

 

     Nine Months Ended September 30, 2012      Nine Months Ended September 30, 2011  
     As Reported      Pro Forma      As Reported      Pro Forma  

Total revenue

   $ 177,683       $ 186,776       $ 154,276       $ 179,780   

Total operating expenses

     123,980         134,068         110,222         133,590   

Operating income

     53,703         52,708         44,054         46,190   

Net income (loss)

   $ 9,993       $ 9,126       $ 13,569       $ (31,199 )(1) 

 

(1) The net loss for the nine months ended September 30, 2011 includes one-time expenses for the early extinguishment of debt and loan transfer and consent fees but excludes the gain on acquisition of the controlling interests in the Solana Beach Centre entities and the Waikiki Beach Walk entities.

Dispositions

On August 30, 2011, we sold Valencia Corporate Center and determined that the property was a discontinued operation in the third quarter of 2011. During the third quarter of 2012, we received a supplemental tax billing related to Valencia Corporate Center for approximately $0.3 million, which we recorded against related reserves. The net tax billing of approximately $0.2 million is recorded in discontinued operations.

NOTE 3. 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 September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012     December 31, 2011  

In-place leases

   $ 72,853      $ 59,812   

Accumulated amortization

     (36,806     (30,924

Above market leases

     32,910        42,428   

Accumulated amortization

     (20,114     (25,657
  

 

 

   

 

 

 

Acquired lease intangible assets, net

   $ 48,843      $ 45,659   
  

 

 

   

 

 

 

Below market leases

   $ 80,263      $ 70,332   

Accumulated accretion

     (25,470     (21,715
  

 

 

   

 

 

 

Acquired lease intangible liabilities, net

   $ 54,793      $ 48,617   
  

 

 

   

 

 

 

We recorded in-place leases of $11.7 million, above market leases of $0.1 million, and below market leases of $8.7 million related to our acquisition of City Center Bellevue during the third quarter of 2012. The identified intangible assets and liabilities for City Center Bellevue are being amortized over a weighted average life of 5.8 years.

NOTE 4. MARKETABLE SECURITIES

Our portfolio of marketable securities was comprised of debt securities that were classified as trading securities. Our marketable securities consisted of investments in mortgage-backed securities issued by the Government National Mortgage Association (“GNMA securities”). We reported our trading securities at fair value, using prices provided by independent market participants that were based on observable inputs using market-based valuation techniques (Level 2 of the fair value hierarchy-see Note 5). On August 20, 2012, we sold all of our outstanding GNMA securities with a realized loss of $0.7 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2011, gains and losses resulting from the mark-to-market of these securities were recognized as unrealized gains or losses in income. Unrealized (losses) and gains in our statement of income for the nine months ended September 30, 2011 were insignificant and included in other income (expense).

NOTE 5. 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

 

12


Table of Contents
  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. Financial assets and liabilities whose fair values we measure on a recurring basis using Level 2 inputs consist of GNMA securities and our deferred compensation liability. We measure the fair values of these assets and liability based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.

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.

The fair value of our secured notes payable is sensitive to fluctuations in interest rates. Discounted cash flow analysis (Level 2) is generally used to estimate the fair value of our secured notes payable, using rates ranging from 3.0% to 8.5%.

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. A summary of the carrying amount and fair value of our financial instruments, all of which are based on Level 2 inputs, is as follows (in thousands):

 

     September 30, 2012      December 31, 2011  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Marketable securities

   $ —         $ —         $ 28,235       $ 28,235   

Secured notes payable

     964,068         1,003,699         943,479         974,273   

Credit facility

     141,000         141,000         —           —     

Deferred compensation liability

     604         604         520         520   

NOTE 6. OTHER ASSETS

Other assets consist of the following (in thousands):

 

     September 30, 2012      December 31, 2011  

Leasing commissions, net of accumulated amortization of $17,107 and $14,722, respectively

   $ 19,906       $ 18,207   

Acquired above market leases, net

     12,796         16,771   

Acquired in-place leases, net

     36,047         28,888   

Lease incentives, net of accumulated amortization of $2,128 and $1,850, respectively

     1,573         1,850   

Other intangible assets, net of accumulated amortization of $4,208 and $3,885, respectively

     973         987   

Debt issuance costs, net of accumulated amortization of $2,476 and $2,509, respectively

     3,561         3,392   

Purchase deposit

     2,000         3,000   

Prepaid expenses, deposits, and other

     4,950         3,190   
  

 

 

    

 

 

 

Total other assets

   $ 81,806       $ 76,285   
  

 

 

    

 

 

 

Lease incentives are amortized over the term of the related lease and included as a reduction of rental income in the statement of income. The purchase deposit at December 31, 2011 relates to the acquisition of One Beach Street in San Francisco, California, which was completed on January 24, 2012 (Note 2). The purchase deposit at September 30, 2012 relates to the pending acquisition of Geary Marketplace in Walnut Creek, California (Note 2).

 

13


Table of Contents

NOTE 7. OTHER LIABILITIES AND DEFERRED CREDITS

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

 

     September 30, 2012      December 31, 2011  

Acquired below market leases, net

   $ 54,793       $ 48,617   

Prepaid rent and deferred revenue

     4,538         5,008   

Deferred rent expense and lease intangible

     1,042         1,122   

Deferred compensation

     604         520   

Straight-line rent liability

     124         433   

Other liabilities

     39         108   
  

 

 

    

 

 

 

Total other liabilities and deferred credits

   $ 61,140       $ 55,808   
  

 

 

    

 

 

 

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.

 

 

14


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

NOTE 8. DEBT

The following is a summary of our total secured notes payable outstanding as of September 30, 2012 and December 31, 2011 (in thousands):

 

    Principal Balance as of     Stated Interest
Rate as of
September 30, 2012
    Stated Maturity Date  

Description of Debt

  September 30, 2012     December 31, 2011      

Alamo Quarry Market (1)(2)

  $ 94,482      $ 96,027        5.67     January 8, 2014   

160 King Street (3)

    30,214        31,412        5.68     May 1, 2014   

Waikele Center (4)

    140,700        140,700        5.15     November 1, 2014   

The Shops at Kalakaua (4)

    19,000        19,000        5.45     May 1, 2015   

The Landmark at One Market (2)(4)

    133,000        133,000        5.61     July 5, 2015   

Del Monte Center (4)

    82,300        82,300        4.93     July 8, 2015   

First & Main (4)

    84,500        84,500        3.97     July 1, 2016   

Imperial Beach Gardens (4)

    20,000        20,000        6.16     September 1, 2016   

Mariner’s Point (4)

    7,700        7,700        6.09     September 1, 2016   

South Bay Marketplace (4)

    23,000        23,000        5.48     February 10, 2017   

Waikiki Beach Walk—Retail (4)

    130,310        130,310        5.39     July 1, 2017   

Solana Beach Corporate Centre III-IV (5)

    37,302        37,330        6.39     August 1, 2017   

Loma Palisades (4)

    73,744        73,744        6.09     July 1, 2018   

One Beach Street (4)

    21,900        —          3.94     April 1, 2019   

Torrey Reserve—North Court (1)

    21,727        21,921        7.22     June 1, 2019   

Torrey Reserve—VCI, VCII, VCIII (1)

    7,316        7,380        6.36     June 1, 2020   

Solana Beach Corporate Centre I-II (1)

    11,676        11,788        5.91     June 1, 2020   

Solana Beach Towne Centre (1)

    38,922        39,293        5.91     June 1, 2020   
 

 

 

   

 

 

     
    977,793        959,405       
 

 

 

   

 

 

     

Unamortized fair value adjustment

    (13,725     (15,926    
 

 

 

   

 

 

     

Total Secured Notes Payable Outstanding

  $ 964,068      $ 943,479       
 

 

 

   

 

 

     

 

(1) Principal payments based on a 30-year amortization schedule.
(2) Maturity Date is the earlier of the loan maturity date under the loan agreement, or the “Anticipated Repayment Date” as specifically defined in the loan agreement, which is the date after which substantial economic penalties apply if the loan has not been paid off.
(3) Principal payments based on a 20-year amortization schedule.
(4) Interest only.
(5) Loan was interest only through August 2012. Beginning in September 2012, principal payments are based on a 30-year amortization schedule.

On March 29, 2012, we entered into a seven-year non-recourse mortgage loan with PNC Bank, National Association with an original principal amount of $21.9 million. The loan is secured by a first-priority deed of trust on One Beach Street and an assignment of all leases, rents and security deposits relating to One Beach Street. The loan has a maturity date of April 1, 2019, bears interest at a fixed rate per annum of 3.94% and is interest only.

Certain loans require us to comply with various financial covenants. As of September 30, 2012, we were in compliance with all loan covenants.

Credit Facility

On January 19, 2011, in connection with the Offering, we entered into a credit facility pursuant to which a group of lenders provided commitments for a revolving credit facility allowing borrowings of up to $250.0 million. At September 30, 2012, our maximum allowable borrowing amount was $219.4 million, of which $141.0 million was outstanding. The credit facility has an accordion feature that may allow us to increase the availability thereunder up to a maximum of $400.0 million,

 

15


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

subject to meeting specified requirements and obtaining additional commitments from lenders. The credit facility bears interest at the rate of either the applicable LIBOR or a base rate, in each case plus a margin that will vary depending on our leverage ratio. For the three and nine months ended September 30, 2012, we incurred approximately $0.3 million of interest expense on amounts drawn on our credit facility. The amount available for us to borrow under the credit facility is subject to the net operating income of our properties that form the borrowing base of the facility and a minimum implied debt yield of such properties.

On March 7, 2011, the credit facility was amended to allow us or our Operating Partnership to purchase GNMA securities with maturities of up to 30 years. On January 10, 2012, the credit facility was amended a second time to (1) extend the maturity date to January 10, 2016 (with a one-year extension option), (2) decrease the applicable interest rates and (3) modify certain financial covenants contained therein. On September 7, 2012, the credit facility was amended a third time to allow the Company’s consolidated total secured indebtedness to be up to 55% of our secured total asset value for the period commencing upon the date that a material acquisition (generally, greater than $100 million) is consummated through and including the last day of the third fiscal quarter that follows such date.

The credit facility includes a number of customary financial covenants, including:

 

   

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

 

   

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

 

   

a maximum secured leverage ratio (defined as total secured indebtedness to secured total asset value) of up to 55% in certain circumstances,

 

   

a minimum tangible net worth equal to at least 75% of our tangible net worth at January 19, 2011, plus 85% of the net proceeds of any additional equity issuances (other than additional equity issuances in connection with any dividend reinvestment program), and

 

   

a $35.0 million limit on the maximum principal amount of recourse indebtedness we may have outstanding at any time, other than under the credit facility.

The credit facility provides that our annual distributions may not exceed the greater of (1) 95.0% of our funds from operations 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.

We and certain of our subsidiaries guarantee the obligations under the credit facility, and certain of our subsidiaries pledged specified equity interests in our subsidiaries as collateral for our obligations under the credit facility.

As of September 30, 2012, we were in compliance with all credit facility covenants.

NOTE 9. EQUITY

Noncontrolling Interests

Noncontrolling interests in our Operating Partnership are interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of 18,371,186 common units (the “noncontrolling common units”), and represented approximately 32% of the ownership interests in our Operating Partnership at September 30, 2012. 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 nine months ended September 30, 2012, approximately 24,903 common units were converted into shares of our common stock at an average price per share of $26.21.

 

 

16


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

Dividends

The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units during the nine months ended September 30, 2012:

 

Period    Amount  per
Share/Unit
     Period Covered    Dividend Paid Date

First Quarter 2012

   $ 0.21       January 1, 2012 to March 31, 2012    March 30, 2012

Second Quarter 2012

   $ 0.21       April 1, 2012 to June 30, 2012    June 29, 2012

Third Quarter 2012

   $ 0.21       July 1, 2012 to September 30, 2012    September 28, 2012

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 loss on extinguishment of debt, revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

Stock-Based Compensation

Concurrently with the closing of the Offering, we made grants of restricted shares of our common stock to certain executive officers pursuant to the terms of their employment agreements. These awards were made pursuant to our 2011 Equity Incentive Award Plan (the “2011 Plan”) and are subject to either timing-based vesting or performance-based vesting. Those awards subject to time-based vesting will vest, subject to the recipient’s continued employment, in two substantially equal installments on each of the third and fourth anniversaries of the date of grant. The vesting of those restricted stock awards subject to performance-based vesting is based on the achievement of absolute and relative total shareholder return hurdles over a three-year performance period, commencing on January 19, 2011. Following the completion of the three-year performance period, our compensation committee will determine the number of shares to which the executive officer is entitled based on our performance relative to the performance hurdles set forth in the restricted stock award agreement he entered into in connection with his initial award grant. These shares will then vest in two substantially equal installments, with the first installment vesting on the third anniversary of the date of grant and the second installment vesting on the fourth anniversary of the date of grant, subject to the executive officer’s continued employment on those dates.

We granted each of our non-employee directors restricted shares of our common stock pursuant to the 2011 Plan, either concurrently with the closing of the Offering or at the time the director was formally appointed to our board of directors (the “Board”). Additionally, on July 10, 2012, we granted a total of 8,015 restricted shares of our common stock to members of our Board. These awards of restricted stock will vest ratably as to one-third of the shares granted on each of the first three anniversaries of the date of grant, subject to the director’s continued service on our Board pursuant to our independent director compensation policy.

On March 16, 2011, we granted a total of 123,950 restricted shares of our common stock to certain other employees, and on January 19, 2012, we granted an additional 2,000 restricted shares of our common stock to employees, all pursuant to the 2011 Plan. These shares are subject to performance-based vesting, with substantially the same terms described above.

For the performance-based stock awards, the fair value of the awards was estimated using a Monte Carlo Simulation model. Our stock price, along with the stock prices of a group of peer REITs, is assumed to follow the Multivariate Geometric Brownian Motion Process. Multivariate Geometric Brownian Motion is a common assumption when modeling in financial markets, as it allows the modeled quantity (in this case, the stock price) to vary randomly from its current value and take any value greater than zero. The volatilities of the returns on the stock price of the Company and the group of REITs were estimated based on a three year look-back period. The expected growth rate of the stock prices over the “derived service period” of the employee is determined with consideration of the risk free rate as of the grant date. For the restricted stock grants that are time-vesting, we estimate the stock compensation expense based on the fair value of the stock at the grant date.

 

 

17


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

The following table summarizes the activity of restricted stock awards during the nine months ended September 30, 2012:

 

     Units     Weighted
Average Grant
Date  Fair Value
 

Nonvested at January 1, 2012

     628,712      $ 15.43   

Granted

     10,015        22.50   

Vested

     (3,252     20.49   

Forfeited

     (2,253     12.52   
  

 

 

   

Nonvested at September 30, 2012

     633,222      $ 15.64   
  

 

 

   

We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $2.1 million and $1.9 million in noncash compensation expense for the nine months ended September 30, 2012 and 2011, respectively, which is included in general and administrative expense on the consolidated statements of income. Unrecognized compensation expense was $5.1 million at September 30, 2012.

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. For the three and nine months ended September 30, 2012, we had a weighted average of approximately 632,438 and 628,240 unvested shares outstanding, respectively, which are considered participating securities. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares.

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 and nine months ended September 30, 2012, 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.

 

 

18


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

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

 

     Three Months Ended
September 30,
   

Nine Months Ended

September 30,

 
     2012     2011     2012     2011  

NUMERATOR

        

Income from continuing operations

   $ 4,498      $ 310      $ 9,993      $ 13,569   

Less: Net income attributable to restricted shares

     (133     (132     (396     (350

Plus: Loss from continuing operations attributable to Predecessor’s noncontrolling interests in consolidated real estate entities

     —          —          —          2,454   

Less: Income from continuing operations attributable to Predecessor’s controlled owners’ equity

     —          —          —          (17,009

Less: (Income) loss from continuing operations attributable to unitholders in the Operating Partnership

     (1,403     (57     (3,090     427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to American Assets Trust, Inc. common stockholders—basic

     2,962        121        6,507        (909

Plus: Results from discontinued operations attributable to American Assets Trust, Inc. common stockholders

     (145     2,931        (145     3,482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders—basic

   $ 2,817      $ 3,052      $ 6,362      $ 2,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to American Assets Trust, Inc. common stockholders—basic

   $ 2,962      $ 121      $ 6,507      $ (909

Plus: Income (loss) from continuing operations attributable to unitholders in the Operating Partnership

     1,403        57        3,090        (427
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to common stockholders—diluted

     4,365        178        9,597        (1,336

Plus: Results from discontinued operations attributable to American Assets Trust, Inc. common stockholders

     (145     2,931        (145     3,482   

Plus: Results from discontinued operations attributable to unitholders in the Operating Partnership

     (68     1,377        (68     1,636   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders—diluted

   $ 4,152      $ 4,486      $ 9,384      $ 3,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

DENOMINATOR

        

Weighted average common shares outstanding—basic

     38,673,617        38,655,084        38,663,352        36,106,397   

Effect of dilutive securities—conversion of Operating Partnership units

     18,380,808        18,396,089        18,391,073        17,159,251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

     57,054,425        57,051,173        57,054,425        53,265,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS (LOSS) PER COMMON SHARE-BASIC

        

Continuing operations

   $ 0.08      $ —        $ 0.17      $ (0.03

Discontinued operations

     —          0.08        —          0.10   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 0.08      $ 0.08      $ 0.17      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS (LOSS) PER COMMON SHARE-DILUTED

        

Continuing operations

   $ 0.08      $ —        $ 0.17      $ (0.03

Discontinued operations

     —          0.08        —          0.10   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 0.08      $ 0.08      $ 0.17      $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

19


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

NOTE 10. 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.

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, as lessee, a building adjacent to The Landmark under an operating lease effective through June 30, 2016, which we have the option to extend until 2026 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, which we have the option to extend at fair rental value in the event the sublessor extends its lease for the space with the master landlord. The lease payments under the lease will increase by approximately 3.4% annually through 2017 and, thereafter, will be equal to fair rental value, as defined in the lease, through lease expiration.

Current minimum annual payments under the leases are as follows, as of September 30, 2012 (in thousands):

 

Year Ending December 31,

  

2012 (three months ending December 31, 2012)

   $ 616   

2013

     2,502   

2014

     2,569   

2015

     2,636   

2016

     1,709   

Thereafter

     3,701 (1) 
  

 

 

 

Total

   $ 13,733   
  

 

 

 

 

(1) Lease payments on the Waikiki Beach Walk lease will be equal to fair rental value from March 2017 through the end of the lease term. In the table, we have shown the lease payments for this period based on the stated rate for the month of February 2017 of $61,690.

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

 

20


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

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.

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 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 $5.6 million based on operating performance through September 30, 2012.

We have a property management agreement with Langley Investment Properties, Inc. (“Langley”) pursuant to which Langley manages and operates Lloyd District Portfolio, and we pay Langley a monthly management fee of 3.5% of “gross receipts,” as defined in the property management agreement, as well as leasing commissions and construction oversight fees in certain situations. The property management agreement has an initial term that expires on June 30, 2013, with three one-year renewal options, exercisable by us in our sole discretion. The property management agreement may not be terminated by us or by Langley without cause during the initial term, except by mutual consent of both parties.

Our Del Monte Center property has ongoing environmental remediation related to ground water contamination. The environmental issue existed at purchase and remediation is expected to conclude within the next two years. The work performed is financed through an escrow account funded by the seller upon purchase of the property. 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.

In connection with the Formation Transactions, we entered into tax protection agreements with certain limited partners of our Operating Partnership. These agreements provide that if we dispose of any interest with respect to Carmel Country Plaza, Carmel Mountain Plaza, Del Monte Center, Loma Palisades, Lomas Santa Fe Plaza, Waikele Center or the ICW Plaza portion of Torrey Reserve Campus, in a taxable transaction during the period from the closing of the Offering through January 19, 2018, we will indemnify such limited partners for their tax liabilities attributable to their share of the built-in gain that existed with respect to such property interest as of the time of the Offering and tax liabilities incurred as a result of the reimbursement payment. Subject to certain exceptions and limitations, the indemnification rights will terminate for any such protected partner that sells, exchanges or otherwise disposes of more than 50% of his or her common units. We have no present intention to sell or otherwise dispose of the properties or interest therein in taxable transactions during the restriction period. If we were to trigger the tax protection provisions under these agreements, we would be required to pay damages in the amount of the taxes owed by these limited partners (plus additional damages in the amount of the taxes incurred as a result of such payment).

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. Twelve 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. Further, tenants in the retail industry accounted for 38.2% of total revenues for the nine months ended September 30, 2012. 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. For the nine months ended September 30, 2012 and 2011, no tenant accounted for more than 10% of our total rental revenue.

 

 

21


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

NOTE 11. 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 September 30, 2012, 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 for the years/period ending December 31 (in thousands):

 

Year Ending December 31,

  

2012 (three months ending December 31, 2012)

   $ 44,292   

2013

     151,623   

2014

     131,893   

2015

     118,281   

2016

     100,553   

Thereafter

     222,193   
  

 

 

 

Total

   $ 768,835   
  

 

 

 

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 12. COMPONENTS OF RENTAL INCOME AND EXPENSE

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Minimum rents

           

Retail

   $ 17,019       $ 15,847       $ 49,866       $ 48,062   

Office

     19,644         16,423         54,870         41,324   

Multifamily

     3,633         3,501         10,160         9,789   

Mixed-use

     2,114         2,239         6,649         6,275   

Cost reimbursement

     7,565         6,406         21,041         18,963   

Percentage rent

     533         455         1,259         1,090   

Hotel revenue

     9,017         8,010         24,142         20,274   

Other

     390         397         1,212         1,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental income

   $ 59,915       $ 53,278       $ 169,199       $ 146,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

Minimum rents include $2.2 million and $1.9 million for the three months ended September 30, 2012 and 2011, respectively, and $6.2 million and $3.3 million for the nine months ended September 30, 2012 and 2011, 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 immaterial for the three months ended September 30, 2012 and $(0.9) million for the three months ended September 30, 2011, respectively, and $(0.7) million and $(1.6) million for the nine months ended September 30, 2012 and 2011, respectively.

 

 

22


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Rental operating

   $ 6,516       $ 6,031       $ 18,477       $ 15,747   

Hotel operating

     5,458         5,168         15,570         13,819   

Repairs and maintenance

     2,747         2,497         7,319         6,073   

Marketing

     263         402         833         1,261   

Rent

     510         555         1,751         2,154   

Hawaii excise tax

     996         1,028         2,753         2,516   

Management fees

     534         506         1,516         1,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental expenses

   $ 17,024       $ 16,187       $ 48,219       $ 42,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 13. OTHER INCOME (EXPENSE)

The principal components of other income (expense), net are as follows (in thousands):

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
     2012     2011     2012     2011  

Income tax expense

   $ 5      $ (309   $ (388   $ (690

Loss from real estate joint ventures

     —          —          —          (188

Acquisition related expenses

     (114     (187     (129     (431

Fee income from real estate joint ventures

     —          —          —          44   

Interest and investment income

     177        388        329        1,086   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ 68      $ (108   $ (188   $ (179
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 14. RELATED PARTY TRANSACTIONS

Prior to the Offering and Formation Transactions, we acted as the manager for certain unconsolidated real estate joint ventures and earned fees for these services (excluding Waikiki Beach Walk). Each unconsolidated joint venture (excluding Waikiki Beach Walk) had a master management agreement with additional agreements covering property management, construction management, acquisition, disposition and leasing and asset management. Certain unconsolidated joint ventures also reimbursed us for monthly maintenance and facilities management services provided to the properties owned by the unconsolidated joint ventures. Subsequent to the Formation Transactions, we no longer earn fees from unconsolidated joint ventures. Fees earned by us from the unconsolidated joint ventures prior to the Formation Transactions are as follows (in thousands):

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Property management fees

   $ —         $ —         $ —         $ 38   

Maintenance reimbursements

     —           —           —           6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fee income from real estate joint ventures

   $ —         $ —         $ —         $ 44   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

Certain affiliated entities made loans to affiliates in order to attain a higher return on excess cash balances, and these loans were classified as notes receivable from affiliates. The notes bore interest at LIBOR and were to be repaid upon demand. The notes receivable were settled as part of the Formation Transactions.

We received unsecured loans on January 15, 2008, from certain of the entities that own Del Monte Center for $12.0 million, the proceeds of which were used to fund construction at the property. The notes bore interest at 10.0% and required monthly principal and interest payments until maturity on March 1, 2013. The notes were repaid using proceeds from the Offering or were settled as part of the Formation Transactions.

At ICW Plaza, we lease space to Insurance Company of the West, which is under the indirect control of Ernest Rady, our Executive Chairman of the Board. Rental revenue recognized on the leases of $1.6 million and $1.7 million for the nine months ended September 30, 2012 and 2011, respectively, is included in rental income. Additionally, we leased space to Insurance Company of the West at Valencia Corporate Center until the sale of Valencia Corporate Center on August 30, 2011, and rental revenue recognized on these leases of $1.2 million for the nine months ended September 30, 2011, is included in discontinued operations.

The Waikiki Beach Walk entities have a 47.7% investment in WBW CHP LLC, an entity that was formed to, among other things, construct a chilled water plant to provide air conditioning to the property and other adjacent facilities. The operating expenses of WBW CHP LLC are recovered through reimbursements from its members, and reimbursements to WBW CHP LLC of $0.8 million and $0.7 million were made for the nine months ended September 30, 2012 and 2011, respectively, and are included in rental expenses on the statement of income.

NOTE 15. SEGMENT REPORTING

Segment information is prepared on the same basis that our management 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 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.

We evaluate the performance of our segments based on segment profit, which is defined as property revenue less property expenses. We do not use asset information as a measure to assess performance and make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses, interest expense, depreciation and amortization expense and other income and expense are not included in segment profit as our internal reporting addresses these items on a corporate level.

Segment profit is not a measure of operating income or cash flows from operating activities as measured by GAAP, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate segment profit in the same manner. We consider segment profit to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of our properties.

 

24


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

The following table represents operating activity within our reportable segments (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Total Retail

        

Property revenue

   $ 23,694      $ 21,494      $ 67,837      $ 64,923   

Property expense

     (6,828     (5,981     (18,648     (17,433
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     16,866        15,513        49,189        47,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Office

        

Property revenue

     21,657        18,335        60,838        45,767   

Property expense

     (6,807     (6,209     (19,458     (15,029
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     14,850        12,126        41,380        30,738   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Multifamily

        

Property revenue

     3,906        3,803        10,957        10,588   

Property expense

     (1,558     (1,387     (4,437     (3,974
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     2,348        2,416        6,520        6,614   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Mixed-Use

        

Property revenue

     13,579        12,661        38,051        32,998   

Property expense

     (8,132     (8,000     (23,365     (21,084
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     5,447        4,661        14,686        11,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segments’ profit

   $ 39,511      $ 34,716      $ 111,775      $ 96,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

The following table is a reconciliation of segment profit to net income attributable to stockholders (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Total segments’ profit

   $ 39,511      $ 34,716      $ 111,775      $ 96,756   

General and administrative

     (3,959     (3,733     (11,716     (10,786

Depreciation and amortization

     (16,432     (15,827     (46,356     (41,916

Interest expense

     (14,690     (14,738     (43,522     (41,791

Early extinguishment of debt

     —          —          —          (25,867

Loan transfer and consent fees

     —          —          —          (9,019

Gain on acquisition

     —          —          —          46,371   

Other income (expense), net

     68        (108     (188     (179
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     4,498        310        9,993        13,569   

Discontinued operations

        

Results from discontinued operations

     (213     4,308        (213     5,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4,285        4,618        9,780        18,669   

Net income attributable to restricted shares

     (133     (132     (396     (350

Net loss attributable to Predecessor’s noncontrolling interests in consolidated real estate entities

     —          —          —          2,458   

Net income attributable to Predecessor’s controlled owners’ equity

     —          —          —          (16,995

Net income attributable to unitholders in the Operating Partnership

     (1,335     (1,434     (3,022     (1,209
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American Assets Trust, Inc. stockholders

   $ 2,817      $ 3,052      $ 6,362      $ 2,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows net real estate and secured note payable balances for each of the segments (in thousands):

 

     September 30, 2012      December 31, 2011  

Net Real Estate

     

Retail

   $ 652,766       $ 655,450   

Office

     804,811         551,955   

Multifamily

     36,587         37,187   

Mixed-Use

     204,331         208,089   
  

 

 

    

 

 

 
   $ 1,698,495       $ 1,452,681   
  

 

 

    

 

 

 

Secured Notes Payable (1)

     

Retail

   $ 398,404       $ 400,320   

Office

     347,635         327,331   

Multifamily

     101,444         101,444   

Mixed-Use

     130,310         130,310   
  

 

 

    

 

 

 
   $ 977,793       $ 959,405   
  

 

 

    

 

 

 

 

(1) Excludes unamortized fair market value adjustments of $(13.7) million and $(15.9) million as of September 30, 2012 and December 31, 2011, respectively.

 

26


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

Capital expenditures for each segment for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Capital Expenditures (1)

           

Retail

   $ 4,292       $ 1,574       $ 11,734       $ 2,521   

Office

     10,381         1,638         15,737         3,850   

Multifamily

     259         335         782         472   

Mixed-Use

     108         670         253         800   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,040       $ 4,217       $ 28,506       $ 7,643   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Capital expenditures represent cash paid for capital expenditures during the period and include leasing commissions paid.

 

27


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2012

(Unaudited)

 

NOTE 16. SUBSEQUENT EVENTS

On October 10, 2012, we entered into a ten-year non-recourse mortgage loan with PNC Bank, National Association with an original principal amount of $111.0 million. The loan is secured by a first-priority deed of trust on City Center Bellevue and an assignment of all leases, rents and security deposits relating to City Center Bellevue. The loan has a maturity date of November 1, 2022, bears interest at a fixed rate per annum of 3.98% and is interest only.

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 Internal Revenue Code of 1986, as amended (the “Code”), and applicable state revenue and taxation code sections.

 

28


Table of Contents

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.

 

29


Table of Contents

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.

 

30


Table of Contents

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.

 

31


Table of Contents

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):

 

32


Table of Contents
     Total Portfolio     Same-Store Portfolio(1)  
     Three Months Ended
September 30,
                  Three Months Ended
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
September 30,
                 Three Months Ended
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.

 

33


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
September 30,
     Change      %     Three Months Ended
September 30,
     Change      %  
     2012      2011           2012      2011        

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
September 30,
     Change      %     Three Months Ended
September 30,
     Change     %  
     2012      2011           2012      2011       

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 is related to our multifamily portfolio, which will not be reimbursed.

Retail real estate taxes increased $0.7 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase was primarily caused by higher real estate tax assessments due to receipt of supplemental tax bills received during the second and third quarters of 2012. The remaining increase is due to additional real estate tax accruals of approximately $0.2 million for Solana Beach Towne Center based on supplemental tax bills from the California taxing authority received during the third quarter, which was billed to the tenants during the third quarter.

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 taxes of $0.1 million for the three months ended September 30, 2012. On a same store basis, office real estate taxes decreased due to a decrease in real estate taxes at First & Main based on estimates made during the third quarter of 2011.

The increase in multifamily real estate taxes was primarily due to additional real estate tax accruals for Imperial Beach Gardens, Mariner’s Point and Santa Fe Park RV Resort, based on supplemental tax bills from the California taxing authority received during the third quarter, which will not be reimbursed.

Property Operating Income

Property operating income increased $4.8 million, or 14%, to $39.5 million for the three months ended September 30, 2012, compared to $34.7 million for the three months ended September 30, 2011. Property operating income by segment was as follows (dollars in thousands):

 

34


Table of Contents
     Total Portfolio     Same-Store Portfolio  
     Three Months Ended
September 30,
     Change     %     Three Months Ended
September 30,
     Change     %  
     2012      2011          2012      2011       

Retail

   $ 16,866       $ 15,513       $ 1,353        9   $ 16,891       $ 15,512       $ 1,379        9

Office

     14,850         12,126         2,724        22        12,244         11,972         272        2   

Multifamily

     2,348         2,416         (68     (3     2,348         2,416         (68     (3

Mixed-Use

     5,447         4,661         786        17        5,447         4,661         786        17   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 39,511       $ 34,716       $ 4,795        14   $ 36,930       $ 34,561       $ 2,369        7
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

On a same-store basis, the retail property operating income increased $1.4 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, primarily due to an increase in the percentage leased for the retail properties, which include our Nordstrom Rack leases at Carmel Mountain Plaza and Alamo Quarry Market, and additional cost reimbursements.

The increase in office property operating income was primarily caused by the acquisition of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had property operating income of $0.8 million and $1.8 million, respectively, for the three months ended September 30, 2012.

The decrease in multifamily property operating income was primarily due to additional real estate tax accruals based on receipt of supplemental tax bills from the California taxing authority received during the second and third quarters.

Mixed-use property operating income increased due to increased tourist travel to Hawaii leading to higher hotel operating income as a result of higher average occupancy for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Other

Depreciation and amortization. Depreciation and amortization expense increased $0.6 million, or 4%, to $16.4 million for the three months ended September 30, 2012, compared to $15.8 million for the three months ended September 30, 2011. This increase was primarily due to depreciation and amortization attributable to the acquired properties.

Other income (expense), net. Other income, net decreased $0.2 million, or 163%, to net other income of $0.1 million for the three months ended September 30, 2012, compared to net other expenses $0.1 million for the three months ended September 30, 2011, primarily due to a realized loss from our marketable securities. Other income (expense), net is comprised of interest and investment income, acquisition related expenses and income tax expense related to our taxable REIT subsidiary, which operates the hotel portion of our mixed-use property.

Discontinued Operations. Discontinued operations relates to Valencia Corporate Center, which was sold on August 30, 2011.

Comparison of the Nine Months Ended September 30, 2012 to the Nine Months Ended September 30, 2011

The following table summarizes our consolidated results of operations for the nine months ended September 30, 2012 compared to our consolidated results of operations for the nine 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.

 

35


Table of Contents

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

 

     Nine Months Ended
September 30,
    Change     %  
     2012     2011      

Revenues

        

Rental income

   $ 169,199      $ 146,860      $ 22,339        15

Other property income

     8,484        7,416        1,068        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property revenues

     177,683        154,276        23,407        15   

Expenses

        

Rental expenses

     48,219        42,720        5,499        13   

Real estate taxes

     17,689        14,800        2,889        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property expenses

     65,908        57,520        8,388        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property income

     111,775        96,756        15,019        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative

     (11,716     (10,786     (930     9   

Depreciation and amortization

     (46,356     (41,916     (4,440     11   

Interest expense

     (43,522     (41,791     (1,731     4   

Early extinguishment of debt

     —          (25,867     25,867        (100

Loan transfer and consent fees

     —          (9,019     9,019        (100

Gain on acquisition

     —          46,371        (46,371     (100

Other income (expense), net

     (188     (179     (9     5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other, net

     (101,782     (83,187     (18,595     22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     9,993        13,569        (3,576     (26

Discontinued operations

        

Results from discontinued operations

     (213     5,100        (5,313     (104
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     9,780        18,669        (8,889     (48

Net income attributable to restricted shares

     (396     (350     (46     13   

Net loss attributable to Predecessor’s noncontrolling interests in consolidated real estate entities

     —          2,458        (2,458     (100

Net loss attributable to Predecessor’s controlled owners’ equity

     —          (16,995     16,995        (100

Net income attributable to unitholders in the Operating Partnership

     (3,022     (1,209     (1,813     150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American Assets Trust, Inc. stockholders

   $ 6,362      $ 2,573      $ 3,789        147
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased $23.4 million, or 15%, to $177.7 million for the nine months ended September 30, 2012 compared to $154.3 million for the nine 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.

 

36


Table of Contents

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 $22.3 million, or 15%, to $169.2 million for the nine months ended September 30, 2012 compared to $146.9 million for the nine months ended September 30, 2011. Rental revenue by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio(1)  
     Nine Months Ended
September 30,
     Change      %     Nine Months Ended
September 30,
     Change      %  
     2012      2011           2012      2011        

Retail

   $ 66,831       $ 63,831       $ 3,000         5   $ 60,120       $ 58,347       $ 1,773         3

Office

     58,031         43,755         14,276         33        30,766         30,351         415         1   

Multifamily

     10,167         9,799         368         4        10,167         9,799         368         4   

Mixed-Use

     34,170         29,475         4,695         16        —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 169,199       $ 146,860       $ 22,339         15   $ 101,053       $ 98,497       $ 2,556         3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For this table and tables following, the same-store portfolio excludes: Solana Beach Towne Centre, Solana Beach Corporate Centre and the Waikiki Beach Walk entities acquired on January 19, 2011; First & Main acquired on March 11, 2011; 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 $1.8 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This increase was due to the increase in the average percentage leased and additional cost reimbursements, primarily related to supplemental tax billings received during 2012 for Carmel Mountain Plaza, Lomas Santa Fe Plaza, and Solana Beach Towne Centre. 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 additional rental revenue of $2.9 million and $2.0 million, respectively, for the nine months ended September 30, 2012. Additionally, Solana Beach Corporate Centre, First & Main and Lloyd District Portfolio contributed an additional $0.7 million, $2.7 million, and $5.6 million, respectively, in rental revenue during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to the acquisition of these properties during 2011.

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 nine months ended September 30, 2012 of 90.2% compared to 88.8% for the nine months ended September 30, 2011 and revenue per available room of $238 and $215 for the nine months ended September 30, 2012 and September 30, 2011, respectively.

Other property income. Other property income increased $1.1 million, or 14%, to $8.5 million for the nine months ended September 30, 2012, compared to $7.4 million for the nine months ended September 30, 2011. Other property income by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio  
     Nine Months Ended
September 30,
     Change     %     Nine Months Ended
September 30,
     Change     %  
     2012      2011          2012      2011       

Retail

   $ 1,006       $ 1,092       $ (86     (8 )%    $ 958       $ 1,091       $ (133     (12 )% 

Office

     2,807         2,012         795        40        1,367         1,482         (115     (8

Multifamily

     790         789         1        —          790         789         1        —     

Mixed-Use

     3,881         3,523         358        10        —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 8,484       $ 7,416       $ 1,068        14   $ 3,115       $ 3,362       $ (247     (7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Retail other property income decreased $0.1 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decrease was primarily due to a lease termination fee of $0.1 million paid by a tenant at Del Monte Center during the nine months ended September 30, 2011.

 

37


Table of Contents

The increase in office other property income was primarily caused by the acquisition of Lloyd District Portfolio on July 1, 2011, which had parking income of $0.9 million for the nine months ended September 30, 2012.

The increase in mixed-use other property income is attributed to the increase in average occupancy for the nine months ended September 30, 2012.

Property Expenses

Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $8.4 million, or 15%, to $65.9 million for the nine months ended September 30, 2012, compared to $57.5 million for the nine months ended September 30, 2011. This increase in total property expenses is attributable primarily to the factors discussed below.

Rental Expenses. Rental expenses increased $5.5 million, or 13%, to $48.2 million for the nine months ended September 30, 2012, compared to $42.7 million for the nine months ended September 30, 2011. Rental expense by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio  
     Nine Months Ended
September 30,
     Change     %     Nine Months Ended
September 30,
     Change     %  
     2012      2011          2012      2011       

Retail

   $ 10,164       $ 10,199       $ (35     —     $ 9,594       $ 9,538       $ 56        1

Office

     12,953         9,701         3,252        34        6,619         6,925         (306     (4

Multifamily

     3,089         3,001         88        3        3,089         3,001         88        3   

Mixed-Use

     22,013         19,819         2,194        11        —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 48,219       $ 42,720       $ 5,499        13   $ 19,302       $ 19,464       $ (162     (1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The increase in office rental expenses 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 expenses of $0.5 million and $0.3 million, respectively, for the nine months ended September 30, 2012. Additionally, Solana Beach Corporate Centre, First & Main and Lloyd District Portfolio contributed an additional $0.1 million, $0.3 million and $2.3 million, respectively, in rental expenses during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to the acquisition of these properties during 2011. Additionally, we incurred higher premiums on our insurance policies, which are offset by lower rent expense for rental of the Annex at The Landmark at One Market.

Real Estate Taxes. Real estate tax expense increased $2.9 million, or 20%, to $17.7 million for the nine months ended September 30, 2012 compared to $14.8 million for the nine months ended September 30, 2011. Real estate tax expense by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio  
     Nine Months Ended
September 30,
     Change      %     Nine Months Ended
September 30,
     Change      %  
     2012      2011           2012      2011        

Retail

   $ 8,484       $ 7,234       $ 1,250         17   $ 7,455       $ 6,750       $ 705         10

Office

     6,505         5,328         1,177         22        3,851         3,631         220         6   

Multifamily

     1,348         973         375         39        1,348         973         375         39   

Mixed-Use

     1,352         1,265         87         7        —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,689       $ 14,800       $ 2,889         20   $ 12,654       $ 11,354       $ 1,300         11
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Real estate taxes increased $1.0 million during the nine 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 second and third quarters of 2012. Approximately $0.7 million of the additional tax expense is recoverable from our commercial tenants. The remaining $0.3 million is related to our multifamily portfolio, which will not be reimbursed.

Retail real estate taxes increased $1.3 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase was primarily due to additional real estate tax accruals at Carmel Mountain Plaza, Lomas Santa Fe Plaza and Solana Beach Towne Centre based on supplemental tax bills from the California taxing authority received during 2012, which were billed to the tenants during the nine months ended September 30, 2012.

 

38


Table of Contents

The increase in office real estate taxes was primarily caused by the acquisition of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had real estate taxes of $0.2 million and $0.1 million, respectively, for the nine months ended September 30, 2012. Additionally, First & Main and Lloyd District Portfolio contributed an additional $0.1 million and $0.5 million, respectively, in real estate taxes during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to the acquisition of these properties during 2011. On a same-store basis, office real estate taxes increased $0.2 million due to additional tax accruals at Torrey Reserve Campus based on supplemental tax bills from the California taxing authority received during the second quarter, which are recoverable from the tenants.

The increase in multifamily real estate taxes was primarily due to additional real estate tax accruals for all multifamily properties based on supplemental tax bills from the California taxing authority received during the second and third quarters of 2012, which are not reimbursable.

Property Operating Income

Property operating income increased $15.0 million, or 16%, to $111.8 million for the nine months ended September 30, 2012, compared to $96.8 million for the nine months ended September 30, 2011. Property operating income by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio  
     Nine Months Ended
September 30,
     Change     %     Nine Months Ended
September 30,
     Change     %  
     2012      2011 &nb