2017
2017
2017
ANNUAL REPORT
ANNUAL REPORT
ANNUAL REPORT
TRANSFORMING
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TRANSFORMING
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11455 EL CAMINO RE AL, SUITE 200
11455 EL CAMINO RE AL, SUITE 200
SAN DIEGO, CA 92130
SAN DIEGO, CA 92130
PHONE: (858) 350-2600
PHONE: (858) 350-2600
FA X: (858) 350-2620
FA X: (858) 350-2620
(NYSE: A AT)
(NYSE: A AT)
W W W. AMERICANA SSE TSTRUST.COM
W W W. AMERICANA SSE TSTRUST.COM
FRONT COVER: PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
FRONT COVER: PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
INTO VALUE
AMERICAN ASSETS TRUST, INC. IS A FULL SERVICE,
VERTICALLY INTEGRATED AND SELF-ADMINISTERED
REAL ESTATE INVESTMENT TRUST, OR REIT,
HEADQUARTERED IN SAN DIEGO, CALIFORNIA.
WE HAVE OVER 50 YEARS OF EXPERIENCE IN
ACQUIRING, IMPROVING, DEVELOPING AND
MANAGING PREMIER RETAIL, OFFICE AND
RESIDENTIAL PROPERTIES THROUGHOUT THE
UNITED STATES IN SOME OF THE NATION’S MOST
DYNAMIC, HIGH-BARRIER-TO-ENTRY MARKETS
PRIMARILY IN SOUTHERN CALIFORNIA, NORTHERN
CALIFORNIA, OREGON, WASHINGTON AND HAWAII.
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
CORPORATE
INFORMATION
EXECUTIVE OFFICERS
Ernest Rady
Chairman, President and
Chief Executive Officer
Robert Barton
Executive Vice President
and Chief Financial Officer
Adam Wyll
Senior Vice President,
General Counsel and Secretary
Jerry Gammieri
Vice President, Construction
and Development
BOARD OF DIRECTORS
Ernest Rady
Larry Finger
Duane Nelles
Thomas Olinger
Dr. Robert Sullivan
CORPORATE OFFICE
11455 El Camino Real, Suite 200
San Diego, CA 92130
Phone: (858) 350-2600
Fax: (858) 350-2620
INDEPENDENT AUDITORS
Ernst & Young LLP
San Diego, CA
LEGAL COUNSEL
Latham & Watkins LLP
San Diego, CA
STOCK EXCHANGE LISTING
NYSE Symbol: AAT
REGISTRAR AND
TRANSFER AGENT
6201 15th Avenue
Brooklyn, NY 11219
Phone: (718) 921-8200
www.astfinancial.com
WEBSITE
For additional information on the
Company, visit our website at
www.AmericanAssetsTrust.com
American Stock Transfer & Trust Company, LLC
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
TORREY POINT // SAN DIEGO, CA
TORREY POINT // SAN DIEGO, CA
TORREY POINT // SAN DIEGO, CA
02 A M E R I C A N A S S E T S T R U S T // 20 17 A N N UA L R E P O R T
DEAR FELLOW
STOCKHOLDERS
2017 marked the beginning of a transforma-
tion for American Assets Trust, Inc., as we
embarked on a multi-year journey to trans-
form vision for our portfolio into incremental
value to our stockholders. Highlights of 2017
include the completion of the development
and redevelopment of several of our assets
into attractive, modern, amenitized, high-
class properties as well as the acquisition of
three additional properties that are comple-
mentary to our existing portfolio.
Our best-in-class portfolio has been generat-
ing exceptional growth in both net asset value
(NAV) and funds from operations (FFO) since
our initial public offering in 2011. However, we
believe that continued transformation is
required to create even more growth in the
years to come as we evolve our portfolio to
maintain our position with or ahead of the
marketplace.
We primarily measure our success by the cre-
ation of long-term NAV for our stockholders.
We are proud of our continued success, even
in 2017, a year that we designated as the com-
mencement of our transformation. We believe
that our growth in 2017 is a testament to the
discerning composition of our diversified
portfolio and to our top-notch, full-service
management of our assets. We own and oper-
ate a well-diversified portfolio comprised of
some of the most premier retail, office, multi-
family and mixed-use properties located in
dynamic, high-barrier-to-entry coastal West
Coast markets where the demographics,
tenant demand and local economies are strong,
including Southern California, Nor thern
California, Oregon, Washington and Hawaii.
Our proper ties have been meticulously
selected, managed, maintained and improved
by our team of very knowledgeable and quali-
fied individuals within the commercial real
estate industry. In doing so, we have devel-
oped a set of strategic guidelines that we
believe safeguards and preserves our contin-
ued success notwithstanding the inevitable
cycles of the real estate industry that we are
all aware of:
· Asset Class Diversity—We believe that own-
ership of a combination of office, retail,
multi family and mixed-use properties, as
opposed to focusing on a single-asset class,
provides for superior positioning opportuni-
ties during times when certain asset classes
are performing better than others.
· Location and Demographics—We believe
that ownership of properties located in geo-
graphic regions with moderate climates that
attract residents, workers and visitors with
higher household income and education lev-
els yield the best returns and are more
resistant to economic downturns.
· Technology—We expect that bringing cutting-
edge technology into our properties and in
our business operations attracts higher-
credit tenants and creates material opera-
tional cost savings.
· Environmental Sustainability—In operating
and developing our properties, we use
proven conservation methods to reduce car-
bon emissions, minimize our environmental
impact and preserve natural resources for
future generations to come. Our goal is to
implement standardized sustainability proc-
esses and policies, and provide guidelines to
all our stakeholders with a commitment to
the ongoing green-for ward movement.
Throughout our portfolio, we have imple-
mented the latest advances in technologies
aimed toward sustainability, including: solar
power harvesting and generation, bike hubs,
a complex self-contained on-site waste
water recycling machine, mobile retail solu-
tions for shoppers, electric car charging
stations, electronic tenant communication
portals, LED lighting retrofits, recycling
programs and much more.
In addition to implementing environmentally
conscious programs and changes, members
of our various regional teams have part-
nered with local utility providers and sus-
tainability organizations and committees to
introduce energy and water conservation
programs to our partners in the commercial
real estate community. Using the knowledge
we have gained through the many years in
operating and developing our properties,
we’ve adopted systems and processes that
are commercially viable and sustainable for
years to follow. We hope that in sharing our
sustainability knowledge, our communities
and neighbors will adopt changes that have
an overall positive impact on the environment.
· Social Responsibility—We firmly believe that
our success is directly related to the suc-
cess and health of the communities in which
our properties are located. Through part-
nerships with non-profit organizations,
charitable and financial contributions,
in-kind donations and volunteer efforts, we
strive to make a positive impact on the
individuals and businesses within our
communities. Partnering with the local
chapters of national non-profit organiza-
tions, we have contributed to the develop-
ment of community growth, support, and
philanthropy at our commercial office,
multi-family housing and retail shopping
centers. Our shopping centers provide family-
friendly venues for the local community to
organize events that support charitable
awareness. In addition to national organiza-
tions, we work with local communities and
neighboring schools to help those closest
to home.
We believe continuing to abide by these prin-
ciples in the operation of our organization will
ensure our sustainable and prudent growth
for years to come.
As shown below, we have grown our NAV from
approximately $22.00 per share at our initial
public offering in 2011 to approximately
$50.00 per share at the end of 2017, which
reflects a compounded annual growth rate of
approximately 12.2%.
NET ASSET VALUE
(NAV) PER SHARE
(JANUARY 13, 2011 (IPO)–DECEMBER 31, 2017)
12/31/17 // $50.75
12/31/16 // $50.00
12/31/15 // $45.00
12/31/14 // $40.75
12/31/13 // $34.00
12/31/12 // $29.50
12/31/11 // $24.25
1/13/11 // $22.78
The NAV estimates contained herein have been prepared in good faith by
American Assets Trust, Inc. (the “Company”) based on both manage-
ment’s knowledge of its core markets and published pricing data. All
such information presented herein is unaudited. In some cases, valuations
use assumptions that may be complex and susceptible to significant
uncertainty, and may ultimately prove incorrect. Actual NAV may be
materially different from the Company’s internal estimates and therefore
all of such data should only be taken as the Company’s indicative values
for information only. No reliance should be placed on any estimated val-
uation without the investor or analyst’s own independent determination.
Furthermore, the actual value of the Company’s assets as indicated in
the Company’s stock price, may be materially different from the NAV set
forth above. Such estimates and valuation are particularly susceptible to
inaccuracies during periods of market volatility or uncertainty, and addi-
tional information may become available subsequently which materially
alters assumptions or other inputs to the estimates. In the event that an
estimated valuation subsequently proves to be incorrect, no adjustment
to a previously provided estimated valuation is expected to be made and
the Company disclaims any obligation to update same.
A M E R I C A N A S S E T S T R U S T // 20 17 A N N UA L R E P O R T 03
A M E R I C A N A S S E T S T R U S T // 20 17 A N N UA L R E P O R T 03
THE LANDMARK AT ONE MARKET // SAN FRANCISCO, CA
3.2M
2.7M
SQ. FT.
OF RETAIL
SQ. FT.
OF OFFICE
DEL MONTE SHOPPING CENTER // MONTEREY, CA
Of course, we recognize that the real estate
industry is subject to frequent cycles and
therefore it was our expectation that 2017
would be a year that we commenced our
transformation by dedicating a significant
portion of our resources toward development,
redevelopment and repositioning efforts for
several of our assets.
DEVELOPMENT,
REDEVELOPMENT AND
REPOSITIONING ACTIVIT Y
Listed below is a summary of development,
redevelopment and repositioning activity
during 2017:
· Torrey Reserve, San Diego, California—In
2017, we completed our redevelopment of
our Torrey Plaza office building into an
upscale, vibrant work place with contempo-
rary design and modern amenities, includ-
ing a state-of-the-art café, fitness facilities
and open work spaces. We expect that the
majority of the approximate 98,000 square
feet of vacant office space at Torrey Reserve
will be leased by the end of 2018.
· Torrey Point, San Diego, California—In 2017,
we completed our development of Torrey
Point, consisting of two state-of-the-art
Class A office buildings consisting of
approximately 90,000 square feet in the
aggregate, with unobstructed panoramic
views of Torrey Pines State Beach, Torrey
Pines State Natural Reserve and the Pacific
Ocean. Leasing progress has been steady to
date and our expectation is to have leased the
majority of these buildings by the end of 2018.
· Lomas Palisades, San Diego, California—In
2017, we completed our redevelopment of 21
units (out of 548 total) at Loma Palisades,
that we refer to as Loma 21. We took each of
these 21 units down to the studs and rebuilt
them with modern amenities and current
style. All 21 units have views overlooking
Mission Bay in San Diego. Leasing began
in earnest in early 2018 and progress has
been steady.
· Waikele Center, Waipahu, Oahu, Hawaii—We
are actively repositioning Waikele Center,
which is located on 43 acres of fee simple
property located on one-half mile of frontage
to the H1 freeway. The repositioning includes
replacing the space previously vacated by
Sports Authority and the space to be vacated
by Kmart in June 2018. We are exploring
exciting alternatives for these spaces and
are in lease negotiations for much of the
space as we go to press. This repositioning
is expected to be complete in 2021.
· Oregon Square, Lloyd District Portfolio,
Portland, Oregon—Oregon Square consists
of four city blocks located adjacent to Hassalo
on Eighth, our 657-unit stabilized multifamily
project that we developed and opened to the
public in 2015. In 2017, we received entitle-
ments to build four separate multifamily
buildings with ground-floor retail in two
separate phases. We continue to monitor and
evaluate the economic feasibility of this proj-
ect, taking into account current construc tion
costs and market rental activities. How ever,
we are currently reviewing plans to poten-
tially redevelop one of the existing Oregon
Square buildings, consisting of approx i-
mately 33,000 square feet, into creative
office space, which we would expect to be
complete in 2019, pending market conditions.
ACQUISITION ACTIVIT Y
In 2017, we acquired three properties that we
believe are complementary to our portfolio:
· Pacific Ridge Apartments, a 533-unit luxury
apartment community located in San Diego,
California, for $232 million. Pacific Ridge
Apartments is perched atop a bluff offering
unobstructed panoramic views of the Pacific
Ocean with an unparalleled amenities pack-
age and designed with a large focus on envi-
ronmental sustainability. Its central location
in San Diego provides residents with conve-
nient access to the light rail systems,
extending residents’ reach to downtown, the
San Diego International Airport, the San
Diego Zoo, sporting venues, numerous malls
and retail centers, three universities, culi-
nary destinations and the freeway and public
transportation.
· Gateway Marketplace, an approximately
128,000 square foot dual grocery-anchored
shopping center located in Chula Vista,
California, for approximately $42 million.
This property was developed in 2016 and is
strategically located at the heart of Chula
Vista’s retail core on a highly trafficked
intersection, across the street from (and
synergistic to) our Southbay Marketplace
and easily accessible to San Diego’s major
highways, I-5 and I-805.
· Former Mervyn’s Building at Del Monte
Center located in Monterey, California for
approximately $5.25 million. When we
acquired Del Monte Center in 2004, we
assumed the ground lessor interest for this
0 4 A M E R I C A N A S S E T S T R U S T // 20 17 A N N UA L R E P O R T
building and we owned the underlying fee
interest; however, we had limited control
over the retail tenancy of the building. When
the building was placed up for auction in
2017, we believed it was imperative to take
full ownership so that we could control the
tenant mix within Del Monte Center. This
building currently has in-place leases with
Forever 21 and Gold’s Gym.
PORTFOLIO SUMMARY
As of December 31, 2017, our operating portfo-
lio was comprised of 26 retail, office, multi-
family and mixed-use properties with an
aggregate of approximately 6.0 million rent-
able square feet of retail and office space
(including mixed-use retail space), 2,112 resi-
dential units (including 122 RV spaces) and a
369-room hotel. Additionally, as of December
31, 2017, we owned land at four of our properties
that we classified as held-for-development
and construction-in-progress.
RETAIL We finished the year 96.8% leased in
our retail portfolio. Retail same store GAAP
NOI growth was 0.6% for 2017 in comparison
to 2016.
OFFICE We finished the year 88.4% leased in
our office portfolio. Office same store GAAP
NOI growth was 2.2% for 2017 in comparison
to 2016.
MULTIFAMILY We finished the year 91.8%
leased in our multifamily portfolio. Our multi-
family same store GAAP NOI growth was 3.6%
in 2017 in comparison to 2016.
MIXED-USE Our mixed-use same store GAAP
NOI decreased 5.2% in 2017 in comparison
to 2016.
PORTFOLIO Overall our portfolio same store
GAAP NOI increased 0.5% in 2017 in compari-
son to 2016.
FINANCING ACTIVIT Y
We continue to strengthen our balance sheet
to successfully position ourselves for the
future as we have been refinancing our
maturing mortgages with unsecured debt
generally issued at lower interest rates:
· On March 1, 2017, we entered into a Note
Purchase Agreement that provided for the
private placement of $250 million of ten-year
senior unsecured Series D Notes at a 3.87%
fixed interest rate, net of the settlement of
forward interest rate swaps.
· On May 23, 2017, we entered into a Note
Purchase Agreement that provided for the
private placement of $100 million of twelve-
year senior unsecured Series E Notes at a
4.18% fixed interest rate, net of the settle-
ment of treasury lock contracts.
· On July 19, 2017, we entered into a Note
Purchase Agreement that provided for the
private placement of $100 million of seven-
year senior unsecured Series F Notes at a
3.85% fixed interest rate, net of the settle-
ment of treasury lock contracts.
· In 2017, we repaid in full, without penalty or
premium, the $130 million mortgage that
matured on Waikiki Beach Walk—Retail
(expiring 5.39% interest rate) and the $35
million mortgage that matured on Solana
Beach Corporate Centre III/IV (expiring
6.39% interest rate).
In addition, in 2017, we maintained our invest-
ment grade credit ratings from all three
major U.S. credit rating agencies, consisting
of a BBB rating from Fitch Ratings, a Baa3
rating from Moody’s Investors Service and a
BBB-rating from Standard and Poor’s
Financial Services. All three credit ratings
have a stable outlook.
FINANCIAL RESULTS
For the year ended December 31, 2017, we
generated funds from operations, or FFO, for
holders of common stock of $123.2 million, or
$1.92 per diluted share, compared to $116.8
million, or $1.85 per diluted share, for the
year ended December 31, 2016. Financial
highlights for the year ended December 31,
2017, compared to the year ended December
31, 2016, include:
· Total Revenues grew 6.7% to $315.0 million.
· Earnings Before Interest Taxes Depreciation
and Amortization (EBITDA) grew 4.5% to
$176.9 million.
· FFO per diluted share grew 3.8% to $1.92.
· We increased our quarterly dividend by 3.8%.
· Portfolio Weighted Average Fixed Interest
Rate decreased from 4.4% to 4.1%.
· Weighted Aver age Term
increased from 4.4 years to 5.8 years.
to Maturit y
We are fortunate to have a cohesive, seasoned
executive team with an average industry ten-
ure of almost 30 years that has been working
together, on average, for over 10 years. Each
executive team member has significant expe-
rience and capabilities across the real estate
sector in various assets classes. Additionally,
sitting on our Board of Directors are some of
the REIT industry’s most experienced and
knowledgeable individuals, bringing invalu-
able insight and wisdom to our executive
team, as needed.
We have almost 200 dedicated, diligent and
honorable employees across 5 states. The
quality of our team has not gone unrecog-
nized: In 2017, we were named to Forbes’® List
of America’s 50 Most Trustworthy Financial
Companies for the third consecutive year. The
integrity of our workforce reflects the values
and “tone at the top” of our founder, Chairman,
CEO and President, Ernest Rady, who was
awarded the 2017 Lifetime Achievement
Award by the San Diego Business Journal at
its “Most Admired CEO” ceremony, in recog-
nition of his extraordinary business and phil-
anthropic contributions in San Diego. We are
so proud of each of these awards.
We take great pride in what we do and are
honored to have all of you as stockholders. On
behalf of all of us, we thank you for your confi-
dence in allowing us to manage your company.
We look forward to your continued support
and our shared success as we transform our
vision into value for you and our company.
Sincerely,
ERNEST RADY
Chairman, President and
Chief Executive Officer
ROBERT BARTON
Executive Vice President and
Chief Financial Officer
ADAM WYLL
Senior Vice President,
General Counsel and Secretary
JERRY GAMMIERI
Vice President, Construction and Development
CHRIS SULLIVAN
Vice President, Retail Properties
WADE LANGE
Vice President, Regional Manager, Portland
VALERIE GANNAWAY
Vice President, Real Estate Operations
STEVE CENTER
Vice President, Office Properties
A M E R I C A N A S S E T S T R U S T // 20 17 A N N UA L R E P O R T 05
TX
PREMIER
MARKETS
PROPERTIES MAP
Our focus is in some of the nation’s most
dynamic, high-barrier-to-entry markets
primarily in Southern California, Northern
California, Oregon, Washington and
Hawaii. Today, you will find American
Assets Trust, Inc. properties in some
of the nation’s premier markets—all
characterized by exceptional locations
with high barriers to entry, strong
demographics and robust tourism.
WA SHINGTON
1 PROPERT Y
OREGON
4 PROPERTIES
CALIFORNIA
17 PROPERTIES
HAWAII
TE X A S
3 PROPERTIES
1 PROPERT Y
RETAIL—12
MULTI-FAMILY—6
OFFICE—7
MIXED-USE—1
WA
OR
CA
HI
FFO PER SHARE1
RENTAL INCOME2
($ IN MILLIONS)
REAL ESTATE ASSETS2
(AT COST, $ IN MILLIONS)
$1.92
$1.85
$1.76
$299
$279
$262
$243
$246
$225
$1.62
$1.54
$1.35
$2,614
$2,246 $2,301
$2,137
$1,939
$1,995
2012
2013
2014
2015
2016
2017
2012
2013
2014
2015
2016
2017
2012
2013
2014
2015
2016
2017
(1) Represents FFO as Adjusted which excludes one time charges for early extinguishment of debt, loan transfer and consent fees and gains from disposition of assets. FFO as Adjusted may not be comparable to other REITs.
A reconciliation of FFO to net income can be found in our Annual Report on Form 10-K.
(2) As reported in our Annual Report on Form 10-K, includes the results of discontinued operations.
0 6 A M E R I C A N A S S E T S T R U S T // 20 17 A N N UA L R E P O R T
HASSALO ON EIGHTH, PORTLAND, OR
HASSALO ON EIGHTH AWARDS
· 2016 USGBC LEED for Homes Platinum Certified
· 2016 Project of the Year, Commercial Real Estate Awards, Portland Business Journal
· 2016 1st Place Private Buildings—Top Projects Awards, DJC Oregon
· 2016 Green Home Builder of the Year, Earth Advantage
· 2016 Builders Award, Alice Award from The Street Trust
· 2016 Best Residential/Hospitality Project, Best Regional Projects, ENR Northwest
· 2017 Sustainable Development of the Year, CAB-NAIOP-SIOR
· 2017 USGBC LEED for Homes Project of the Year
· 2017 Engineering Excellence Grand Award, ACEC Oregon
· 2017 Catalyst Award, Natural Organic Recycling Machine, Lloyd EcoDistrict
· 2017 Property of the Year, Multifamily Northwest Ace Awards
657
LEED-CERTIFIED APARTMENTS
593,000
SQ FT OF HOUSING
50,000
SQ FT OF EXCITING
RESTAURANT & RETAIL SPACE
272,000
SQ FT OF OFFICE SPACE
1,000
BIKE PARKING SPACES
HASSALO ON EIGHTH, PORTLAND, OR
HASSALO ON EIGHTH, PORTLAND, OR
HASSALO ON EIGHTH // PORTLAND, OR
2017 AMERICAN ASSETS TRUST
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
or
AMERICAN ASSETS TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
Commission file number: 001-35030
AMERICAN ASSETS TRUST, L.P.
(Exact Name of Registrant as Specified in its Charter)
Maryland (American Assets Trust, Inc.)
Maryland (American Assets Trust, L.P.)
(State or other jurisdiction of incorporation or organization)
27-3338708 (American Assets Trust, Inc.)
27-3338894 (American Assets Trust, L.P.)
(IRS Employer Identification No.)
11455 El Camino Real, Suite 200, San Diego, California
(Address of Principal Executive Offices)
92130
(Zip Code)
(858) 350-2600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant
American Assets Trust, Inc.
American Assets Trust, L.P.
Title of Each Class
Common Stock, $.01 par value per share
None
Name Of Each Exchange On Which Registered
New York Stock Exchange
None
Securities registered pursuant to Section 12(g) of the Act:
American Assets Trust, Inc.
American Assets Trust, L.P.
None
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
American Assets Trust, Inc.
American Assets Trust, L.P.
Yes
Yes
No
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
American Assets Trust, Inc.
American Assets Trust, L.P.
Yes
Yes
No
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
American Assets Trust, Inc.
American Assets Trust, L.P.
Yes
Yes
No
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).
American Assets Trust, Inc.
American Assets Trust, L.P.
Yes
Yes
No
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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,” “smaller reporting company” and
"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
American Assets Trust, Inc.
Large Accelerated Filer
Non-Accelerated Filer
Emerging Growth Company
(Do not check if a smaller reporting company)
Smaller reporting company
Accelerated Filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act.
American Assets Trust, L.P.
Large Accelerated Filer
Non-Accelerated Filer
Emerging Growth Company
(Do not check if a smaller reporting company)
Smaller reporting company
Accelerated Filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
American Assets Trust, Inc.
American Assets Trust, L.P.
Yes
Yes
No
No
The aggregate market value of American Assets Trust, Inc.'s common shares held by non-affiliates of the Registrant,
based upon the closing sales price of the Registrant's common shares on June 30, 2017 was $1,607.6 million.
The number of American Assets Trust, Inc.’s common shares outstanding on February 16, 2018 was 47,204,588.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of American Assets Trust, Inc.'s Proxy Statement with respect to its 2018 Annual Meeting of Stockholders to be filed
not later than 120 days after the end of its fiscal year are incorporated by reference into Part III hereof.
EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2017 of American Assets Trust,
Inc., a Maryland corporation, and American Assets Trust, L.P., a Maryland limited partnership, of which American Assets Trust,
Inc. is the parent company and sole general partner. Unless otherwise indicated or unless the context requires otherwise, all
references in this report to “we,” “us,” “our” or “the company” refer to American Assets Trust, Inc. together with its
consolidated subsidiaries, including American Assets Trust, L.P. Unless otherwise indicated or unless the context requires
otherwise, all references in this report to “our Operating Partnership” or “the Operating Partnership” refer to American Assets
Trust, L.P. together with its consolidated subsidiaries.
American Assets Trust, Inc. operates as a real estate investment trust, or REIT, and is the sole general partner of the
Operating Partnership. As of December 31, 2017, American Assets Trust, Inc. owned an approximate 73.2% partnership
interest in the Operating Partnership. The remaining 26.8% partnership interests are owned by non-affiliated investors and
certain of our directors and executive officers. As the sole general partner of the Operating Partnership, American Assets Trust,
Inc. has full, exclusive and complete authority and control over the Operating Partnership’s day-to-day management and
business, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can
cause changes in its line of business, capital structure and distribution policies.
The company believes that combining the annual reports on Form 10-K of American Assets Trust, Inc. and the Operating
Partnership into a single report will result in the following benefits:
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better reflects how management and the analyst community view the business as a single operating unit;
enhance investors' understanding of American Assets Trust, Inc. and the Operating Partnership by enabling them to
view the business as a whole and in the same manner as management;
greater efficiency for American Assets Trust, Inc. and the Operating Partnership and resulting savings in time, effort
and expense; and
greater efficiency for investors by reducing duplicative disclosure by providing a single document for their review.
Management operates American Assets Trust, Inc. and the Operating Partnership as one enterprise. The management of
American Assets Trust, Inc. and the Operating Partnership are the same.
There are a few differences between American Assets Trust, Inc. and the Operating Partnership, which are reflected in the
disclosures in this report. We believe it is important to understand the differences between American Assets Trust, Inc. and the
Operating Partnership in the context of how American Assets Trust, Inc. and the Operating Partnership operate as an
interrelated consolidated company. American Assets Trust, Inc. is a REIT, whose only material asset is its ownership of
partnership interests of the Operating Partnership. As a result, American Assets Trust, Inc. does not conduct business itself,
other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and
guaranteeing certain debt of the Operating Partnership. American Assets Trust, Inc. itself does not hold any indebtedness. The
Operating Partnership holds substantially all the assets of the company, directly or indirectly holds the ownership interests in
the company’s real estate ventures, conducts the operations of the business and is structured as a partnership with no publicly-
traded equity. Except for net proceeds from public equity issuances by American Assets Trust, Inc., which are generally
contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital
required by the company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or
indirect incurrence of indebtedness or through the issuance of operating partnership units.
Noncontrolling interests and stockholders’ equity and partners’ capital are the main areas of difference between the
consolidated financial statements of American Assets Trust, Inc. and those of American Assets Trust, L.P. The partnership
interests in the Operating Partnership that are not owned by American Assets Trust, Inc. are accounted for as partners’ capital in
the Operating Partnership’s financial statements and as noncontrolling interests in American Assets Trust, Inc.’s financial
statements. To help investors understand the significant differences between the company and the Operating Partnership, this
report presents the following separate sections for each of American Assets Trust, Inc. and the Operating Partnership:
•
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consolidated financial statements;
the following notes to the consolidated financial statements:
Debt;
Equity/Partners' Capital; and
Earnings Per Share/Unit;
• Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities; and
• Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of
Operations.
This report also includes separate Item 9A. Controls and Procedures sections and separate Exhibit 31 and 32
certifications for each of American Assets Trust, Inc. and the Operating Partnership in order to establish that the Chief
Executive Officer and the Chief Financial Officer of American Assets Trust, Inc. have made the requisite certifications and
American Assets Trust, Inc. and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities
Exchange Act of 1934 and 18 U.S.C. §1350.
AMERICAN ASSETS TRUST, INC. AND AMERICAN ASSETS TRUST, L.P.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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Forward Looking Statements.
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, 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,”
“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:
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adverse economic or real estate developments in our markets;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants;
difficulties in identifying properties to acquire and completing acquisitions;
difficulties in completing dispositions;
our failure to successfully operate acquired properties and operations;
our inability to develop or redevelop our properties due to market conditions;
fluctuations in interest rates and increased operating costs;
risks related to joint venture arrangements;
our failure to obtain necessary outside financing;
on-going litigation;
general economic conditions;
financial market fluctuations;
risks that affect the general retail, office, multifamily and mixed-use environment;
the competitive environment in which we operate;
decreased rental rates or increased vacancy rates;
conflicts of interests with our officers or directors;
lack or insufficient amounts of insurance;
environmental uncertainties and risks related to adverse weather conditions and natural disasters;
other factors affecting the real estate industry generally;
limitations imposed on our business and our ability to satisfy complex rules in order for American Assets
Trust, Inc. to continue to qualify as a real estate investment trust, or 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,
or new information, data or methods, future events or other changes. For a further discussion of these and other factors that
could impact our future results, performance or transactions, see the section entitled “Item 1A. Risk Factors.”
1
ITEM 1.
General
BUSINESS
PART I
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, Oregon, Washington, Texas and Hawaii. As of December 31, 2017, our
portfolio is comprised of twelve retail shopping centers; seven office properties; a mixed-use property consisting of a 369-room
all-suite hotel and a retail shopping center; and six multifamily properties. Additionally, as of December 31, 2017, we owned
land at four of our properties that we classified as held for development and 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 that was 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 such interest on January 19, 2011. After the completion of our initial public
offering and the related acquisitions, 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 73.2% of our
Operating Partnership as of December 31, 2017. Accordingly, we consolidate the assets, liabilities and results of operations of
our Operating Partnership.
Our Competitive Strengths
We believe the following competitive strengths distinguish us from other owners and operators of commercial real estate
and will enable us to take advantage of new acquisition and development opportunities, as well as growth opportunities within
our portfolio:
•
Irreplaceable Portfolio of High Quality Retail, Office and Multifamily Properties. We have acquired and
developed a high quality portfolio of retail, office and multifamily properties located in affluent
neighborhoods and sought-after business centers in Southern California, Northern California, Portland,
Oregon, Bellevue, Washington, San Antonio, Texas and Oahu, Hawaii. Many of our properties are located in
in-fill locations where developable land is scarce or where we believe current zoning, environmental and
entitlement regulations significantly restrict new development. We believe that the location of many of our
properties will provide us an advantage in terms of generating higher internal revenue growth on a relative
basis.
• Experienced and Committed Senior Management Team with Strong Sponsorship. The members of our
senior management team have significant experience in all aspects of the commercial real estate industry.
• Properties Located in High-Barrier-to-Entry Markets with Strong Real Estate Fundamentals. Our core
markets currently include Southern California, Northern California, Oregon, Washington and Hawaii, which
we believe have attractive long-term real estate fundamentals driven by favorable supply and demand
characteristics.
• Extensive Market Knowledge and Long-Standing Relationships Facilitate Access to a Pipeline of
Acquisition and Leasing Opportunities. We believe that our in-depth market knowledge and extensive
network of long-standing relationships in the real estate industry provide us access to an ongoing pipeline of
attractive acquisition and investment opportunities in and near our core markets, while also facilitating our
leasing efforts and providing us with opportunities to increase occupancy rates at our properties.
Internal Growth Prospects through Development, Redevelopment and Repositioning. The development and
redevelopment potential at several of our properties presents compelling growth prospects and our expertise
enhances our ability to capitalize on these opportunities.
•
• Broad Real Estate Expertise with Retail, Office and Multifamily Focus. Our senior management team has
strong experience and capabilities across the real estate sector with significant expertise in the retail, office
and multifamily asset classes, which provides for flexibility in pursuing attractive acquisition, development
and repositioning opportunities. Ernest Rady, our Chairman, President and Chief Executive Officer, and
Robert Barton, our Chief Financial Officer, each have over 30 years of commercial real estate experience,
and the other members of senior management each have over 20 years of commercial real estate experience.
2
Business and Growth Strategies
Our primary business objectives are to increase operating cash flows, generate long-term growth and maximize
stockholder value. Specifically, we pursue the following strategies to achieve these objectives:
• Capitalizing on Acquisition Opportunities in High-Barrier-to-Entry Markets. We intend to pursue growth
through the strategic acquisition of attractively priced, high quality properties that are well located in their
submarkets, focusing on markets that generally are characterized by strong supply and demand
characteristics, including high barriers to entry and diverse industry bases, that appeal to institutional
investors.
• Repositioning/Redevelopment and Development of Office, Retail and Multifamily Properties. Our strategy
is to selectively reposition and redevelop several of our existing or newly-acquired properties, and we will
also selectively pursue ground-up development of undeveloped land where we believe we can generate
attractive risk-adjusted returns.
• Disciplined Capital Recycling Strategy. Our strategy is to pursue an efficient asset allocation strategy that
maximizes the value of our investments by selectively disposing of properties whose returns appear to have
been maximized and redeploying capital into acquisition, repositioning, redevelopment and development
opportunities with higher return prospects, in each case in a manner that is consistent with our qualification as
a REIT.
• Proactive Asset and Property Management. We actively manage our properties, employ targeted leasing
strategies, leverage our existing tenant relationships and focus on reducing operating expenses to increase
occupancy rates at our properties, attract high quality tenants and increase property cash flows, thereby
enhancing the value of our properties.
Employees
At December 31, 2017, we had 194 employees. None of our employees are represented by a collective bargaining unit.
We believe that our relationship with our employees is good.
Tax Status
We have elected to be taxed as a REIT and believe we are organized and operate in a manner that has allowed us to
qualify and will allow us to remain qualified as a REIT for federal income tax purposes commencing with our taxable year
ended December 31, 2011. To maintain REIT status, we must meet a number of organizational and operational requirements,
including a requirement that we annually distribute at least 90% of our net taxable income to our stockholders (excluding any
net capital gains).
Insurance
We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of
the properties in our portfolio under a blanket insurance policy, in addition to other coverages, such as trademark and pollution
coverage, that may be appropriate for certain of our properties. We believe the policy specifications and insured limits are
appropriate and adequate for our properties given the relative risk of loss, the cost of the coverage and industry practice;
however, our insurance coverage may not be sufficient to fully cover our losses. We do not carry insurance for certain losses,
including, but not limited to, losses caused by riots or war. Some of our policies, like those covering losses due to terrorism and
earthquakes, are insured subject to limitations involving large deductibles or co-payments and policy limits that may not be
sufficient to cover losses, for such events. In addition, all but one of our properties are subject to an increased risk of
earthquakes. While we carry earthquake insurance on all of our properties, the amount of our earthquake insurance coverage
may not be sufficient to fully cover losses from earthquakes. We may reduce or discontinue earthquake, terrorism or other
insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our
judgment, the value of the coverage discounted for the risk of loss. Also, if destroyed, we may not be able to rebuild certain of
our properties due to current zoning and land use regulations. As a result, we may be required to incur significant costs in the
event of adverse weather conditions and natural disasters. In addition, our title insurance policies may not insure for the current
aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage if the market value of our
portfolio increases. If we or one or more of our tenants experiences a loss that is uninsured or that exceeds policy limits, we
could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In
addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness,
even if these properties were irreparably damaged. Furthermore, we may not be able to obtain adequate insurance coverage at
reasonable costs in the future as the costs associated with property and casualty renewals may be higher than anticipated.
3
Regulation
Our properties are subject to various covenants, laws, ordinances and regulations, including laws such as the Americans
with Disabilities Act of 1990, or ADA, and the Fair Housing Amendment Act of 1988, or FHAA, that impose further
restrictions on our properties and operations. Under the ADA and the FHAA, all public accommodations must meet federal
requirements related to access and use by disabled persons. Some of our properties may currently be in non-compliance with
the ADA or the FHAA. If one or more of the properties in our portfolio is not in compliance with the ADA, the FHAA or any
other regulatory requirements, we may be required to incur additional costs to bring the property into compliance and we might
incur governmental fines or the award of damages to private litigants. In addition, we do not know whether existing
requirements will change or whether future requirements will require us to make significant unanticipated expenditures.
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or
operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic
substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate, clean
up such contamination and liability for harm to natural resource. Such laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and
several. These liabilities could be substantial and the cost of any required remediation, removal, fines or other costs could
exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to
remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal or
property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the
properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for
damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties,
environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and
these restrictions may require substantial expenditures.
Some of our properties have been or may be impacted by contamination arising from current or prior uses of the property,
or adjacent properties, for commercial or industrial purposes. Such contamination may arise from spills of petroleum or
hazardous substances or releases from tanks used to store such materials. For example, Del Monte Center is currently
undergoing remediation of dry cleaning solvent contamination from a former onsite dry cleaner. The environmental issue is
currently in the final stages of remediation which entails the long term ground monitoring by the appropriate regulatory agency
over the next five to seven years. The prior owner of Del Monte Center entered into a fixed fee environmental services
agreement in 1997 pursuant to which the remediation will be completed for approximately $3.5 million, with the remediation
costs paid for through an escrow funded by the prior owner. We expect that the funds in this escrow account will cover all
remaining costs and expenses of the environmental remediation. However, if the Regional Water Quality Control Board -
Central Coast Region were to require further work costing more than the remaining escrowed funds, we could be required to
pay such overage although we may have a claim for such costs against the prior owner or our environmental remediation
consultant. In addition to the foregoing, we possess Phase I Environmental Site Assessments for certain of the properties in our
portfolio. However, the assessments are limited in scope (e.g., they do not generally include soil sampling, subsurface
investigations or hazardous materials survey) and may have failed to identify all environmental conditions or concerns.
Furthermore, we do not have Phase I Environmental Site Assessment reports for all of the properties in our portfolio and, as
such, may not be aware of all potential or existing environmental contamination liabilities at the properties in our portfolio. As
a result, we could potentially incur material liability for these issues, which could adversely impact our financial condition,
results of operations, cash flow and the per share trading price of our common stock.
As the owner of the buildings on our properties, we could face liability for the presence of hazardous materials (e.g.,
asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in our buildings. Environmental laws govern the
presence, maintenance, and removal of hazardous materials in buildings, and if we do not comply with such laws, we could
face fines for such noncompliance. Also, we could be liable to third parties (e.g., occupants of the buildings) for damages
related to exposure to hazardous materials or adverse conditions in our buildings, and we could incur material expenses with
respect to abatement or remediation of hazardous materials or other adverse conditions in our buildings. In addition, some of
our tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our properties,
which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or our tenants
to liability resulting from these activities.
Competition
We compete with a number of developers, owners and operators of retail, office, multifamily and mixed-use real estate,
many of which own properties similar to ours in the same markets in which our properties are located and some of which have
greater financial resources than we do. In operating and managing our portfolio, we compete for tenants based on a number of
factors, including location, rental rates, security, flexibility and expertise to design space to meet prospective tenants' needs and
4
the manner in which the property is operated, maintained and marketed. As leases at our properties expire, we may encounter
significant competition to renew or re-let space in light of the large number of competing properties within the markets in
which we operate. As a result, we may be required to provide rent concessions or abatements, incur charges for tenant
improvements and other inducements, including early termination rights or below market renewal options, or we may not be
able to timely lease vacant space. In that case, our financial condition, results of operations, cash flow, per share trading price of
our common stock and ability to satisfy our debt service obligations and to pay dividends may be adversely affected.
We also face competition when pursuing acquisition and disposition opportunities. Our competitors may be able to pay
higher property acquisition prices, may have private access to opportunities not available to us and otherwise be in a better
position to acquire a property. Competition may also have the effect of reducing the number of suitable acquisition
opportunities available to us, increasing the price required to consummate an acquisition opportunity and generally reducing the
demand for retail, office, mixed-use and multifamily space in our markets. Likewise, competition with sellers of similar
properties to locate suitable purchasers may result in us receiving lower proceeds from a sale or in us not being able to dispose
of a property at a time of our choosing due to the lack of an acceptable return.
Segments
We operate in four business segments: retail, office, multifamily and mixed-use. Information related to our business
segments for 2017, 2016 and 2015 is set forth in Note 17 to our consolidated financial statements in Item 8 of this Report.
Tenants Accounting for over 10% of Revenues
None of our tenants accounted for more than 10% of total revenues in any of the years ended December 31, 2017, 2016
or 2015. salesforce.com at The Landmark at One Market accounted for approximately 15.5%, 15.0% and 15.7% of total office
segment revenues for the years ended December 31, 2017, 2016 and 2015, respectively.
Foreign Operations
We do not engage in any foreign operations or derive any revenue from foreign sources.
Available Information
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports with the Securities and Exchange Commission, or the SEC. You may obtain copies of these
documents by visiting the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at
1-800-SEC-0330 or by accessing the SEC’s website at www.sec.gov. In addition, as soon as reasonably practicable after such
materials are furnished to the SEC, we make copies of these documents available to the public free of charge through our
website at www.americanassetstrust.com, or by contacting our Secretary at our principal office, which is located at 11455 El
Camino Real, Suite 200, San Diego, California 92130. Our telephone number is (858) 350-2600. The information contained on
our website is not a part of this report and is not incorporated herein by reference.
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Policies and Procedures for Complaints
Regarding Accounting, Internal Accounting Controls, Fraud or Auditing Matters and the charters of our audit committee,
compensation committee and nominating and corporate governance committee are all available in the Corporate Governance
section of the Investor Relations section of our website.
ITEM 1A.
RISK FACTORS
The following section includes the most significant factors that may adversely affect our business and operations. The
risk factors describe risks that may affect these statements but are not all-inclusive, particularly with respect to possible future
events. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to
time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our
business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. This discussion of risk factors includes many forward-looking statements. For
cautions about relying on forward-looking statements, please refer to the section entitled “Forward Looking Statements” at the
beginning of this Report immediately prior to Item 1.
Risks Related to Our Business and Operations
5
Our portfolio of properties is dependent upon regional and local economic conditions and is geographically concentrated in
California, Oregon, Washington, Texas and Hawaii, which may cause us to be more susceptible to adverse developments in
those markets than if we owned a more geographically diverse portfolio.
Our properties are located in California, Oregon, Washington, Texas and Hawaii, and substantially all of our properties
are concentrated in California, Oregon, Washington and Hawaii, which exposes us to greater economic risks than if we owned a
more geographically diverse portfolio. As a result, we are particularly susceptible to adverse economic or other conditions in
these markets (such as periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns,
relocations of businesses, increases in real estate and other taxes and the cost of complying with governmental regulations or
increased regulation), as well as to natural disasters that occur in these markets (such as earthquakes, wildfires and other
events). If there is a downturn in the economy in these markets, our operations and our revenue and cash available for
distribution, including cash available to pay distributions to American Assets Trust, Inc.'s stockholders or American Assets
Trust, L.P.'s unitholders, could be materially adversely affected. We cannot assure you that these markets will grow or that
underlying real estate fundamentals will be favorable to owners and operators of retail, office, mixed-use or multifamily
properties. Our operations may also be affected if competing properties are built in any of these markets. Moreover, submarkets
within any of our core markets may be dependent upon a limited number of industries. In addition, the State of California is
regarded as more litigious, highly regulated and taxed than many other states, all of which may reduce demand for retail, office,
mixed-use or multifamily space in California. Any adverse economic or real estate developments in the California, Oregon,
Washington or Hawaii markets, or any decrease in demand for retail, office, multifamily or mixed-use space resulting from the
regulatory environment, business climate or energy or fiscal problems, could adversely impact our financial condition, results
of operations, cash flow, our ability to satisfy our debt service obligations and our ability to pay distributions to American
Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders.
We have a substantial amount of indebtedness, which may expose us to the risk of default under our debt obligations.
At December 31, 2017, we had total debt outstanding of $1,329.9 million, excluding debt issuance costs, a substantial
portion of which contains non-recourse carve-out guarantees and environmental indemnities from us and our Operating
Partnership, and we may incur significant additional debt to finance future acquisition and development activities. At
December 31, 2017, we also had an amended and restated credit facility with a capacity of $350 million, consisting of a
revolving line of credit of $250 million and an unsecured term loan of $100 million. On January 9, 2018, we entered into a
second amended and restated credit facility with a capacity of $450 million, consisting of a revolving line of credit of $350
million and an unsecured term loan of $100 million. Payments of principal and interest on borrowings may leave us with
insufficient cash resources to operate our properties or to pay the dividends currently contemplated or necessary to maintain our
REIT qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse
consequences, including the following:
our cash flow may be insufficient to meet our required principal and interest payments;
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• we may be unable to borrow additional funds as needed or on favorable terms, which could, among other
things, adversely affect our ability to meet operational needs;
• we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable
than the terms of our original indebtedness;
• we may be forced to dispose of one or more of our properties, possibly on unfavorable terms or in violation
of certain covenants to which we may be subject;
• we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our
debt obligations; and
our default under any loan with cross default provisions could result in a default on other indebtedness.
•
If any one of these events were to occur, our financial condition, results of operations, cash flow and per share trading
price of our common stock could be adversely affected. Furthermore, foreclosures could create taxable income without
accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the
Internal Revenue Code of 1986, or the Code.
We depend on significant tenants in our office properties, and a bankruptcy, insolvency or inability to pay rent of any of
these tenants may adversely affect the income produced by our office properties and could have an adverse effect on our
financial condition, results of operations, cash flow and the per share trading price of our common stock.
As of December 31, 2017, the three largest tenants in our office portfolio - salesforce.com, Inc., Autodesk, Inc. and
Veterans Benefits Administration - represented approximately 27.4% of the total annualized base rent in our office portfolio.
salesforce.com, Inc. is a provider of customer and collaboration relationship management services to various businesses and
industries worldwide. Autodesk, Inc. is an American multinational corporation that focuses on 3-D design software for use in
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the architecture, engineering, construction, manufacturing, media and entertainment industries. The Veterans Benefits
Administration is a division of the U.S. Department of Veterans Affairs and is responsible for administering financial and other
forms of assistance to veterans and their dependents. The inability of a significant tenant to pay rent or the bankruptcy or
insolvency of a significant tenant may adversely affect the income produced by our office properties. If a tenant becomes
bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency.
In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease with us. Any claim against such
tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed
under the lease. If any of these tenants were to experience a downturn in its business or a weakening of its financial condition
resulting in its failure to make timely rental payments or causing it to default under its lease, we may experience delays in
enforcing our rights as landlord and may incur substantial costs in protecting our investment. Any such event could have an
adverse effect on our financial condition, results of operations, cash flow and the per share trading price of our common stock.
Our retail shopping center properties depend on anchor stores or major tenants to attract shoppers and could be adversely
affected by the loss of, or a store closure by, one or more of these tenants.
Our retail shopping center properties typically are anchored by large, nationally recognized tenants. At any time, our
tenants may experience a downturn in their business that may significantly weaken their financial condition. As a result, our
tenants, including our anchor and other major tenants, may fail to comply with their contractual obligations to us, seek
concessions in order to continue operations or declare bankruptcy, any of which could result in the termination of such tenants'
leases and the loss of rental income attributable to the terminated leases. In addition, certain of our tenants may cease
operations while continuing to pay rent, which could decrease customer traffic, thereby decreasing sales for our other tenants at
the applicable retail property. In addition to these potential effects of a business downturn, mergers or consolidations among
large retail establishments could result in the closure of existing stores or duplicate or geographically overlapping store
locations, which could include stores at our retail properties.
Loss of, or a store closure by, an anchor or major tenant could significantly reduce our occupancy level or the rent we
receive from our retail properties, and we may not have the right to re-lease vacated space or we may be unable to re-lease
vacated space at attractive rents or at all. Moreover, in the event of default by a major tenant or anchor store, we may
experience delays and costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements
with those parties. The occurrence of any of the situations described above, particularly if it involves an anchor tenant with
leases in multiple locations, could seriously harm our performance and could adversely affect the value of the applicable retail
property.
For example, Sears Holdings Corporation, the parent company of Sears Roebuck and Co. and Kmart Corporation, which
leases retail space for a Kmart store at one of our properties with an aggregate of 119,590 leased square feet for an aggregate
annualized base rent of $4.9 million as of December 31, 2017 ceased operations in its leased premises at Waikele Center.
Although Kmart remains fully liable for all of its lease obligations until the lease's scheduled expiration on June 30, 2018, it is
unlikely that it will renew its lease with us and it may ultimately file for bankruptcy protection. In the event that Kmart does not
renew its lease with us, there can be no assurances that we will be able to re-lease such premises at market rents, or at all,
which may materially adversely affect our financial condition, results of operations, cash flow, cash available for distribution
and our ability to satisfy our debt service obligations. As of December 31, 2017, Kmart remains current on its rental
obligations under the terms of its lease, however, the loss of Kmart as a tenant at our property could (1) decrease customer
traffic for our other tenants at the property, thereby decreasing sales for such tenants and (2) make it more difficult for us to
secure tenant lease renewals or new tenants for the property.
As of December 31, 2017, our largest anchor tenants were Kmart, Lowe's and Nordstrom Rack, which together
represented approximately 14.8% of our total annualized base rent of our retail portfolio in the aggregate, and 6.2%, 5.8% and
2.8%, respectively, of the annualized base rent generated by our retail properties.
Many of the leases at our retail properties contain “co-tenancy” or “go-dark” provisions, which, if triggered, may allow
tenants to pay reduced rent, cease operations or terminate their leases, any of which could adversely affect our performance
or the value of the applicable retail property.
Many of the leases at our retail properties contain “co-tenancy” provisions that condition a tenant's obligation to remain
open, the amount of rent payable by the tenant or the tenant's obligation to continue occupancy on certain conditions, including:
(1) the presence of a certain anchor tenant or tenants; (2) the continued operation of an anchor tenant's store; and (3) minimum
occupancy levels at the applicable retail property. If a co-tenancy provision is triggered by a failure of any of these or other
applicable conditions, a tenant could have the right to cease operations, to terminate its lease early or to a reduction of its rent.
In periods of prolonged economic decline, there is a higher than normal risk that co-tenancy provisions will be triggered as
there is a higher risk of tenants closing stores or terminating leases during these periods. In addition to these co-tenancy
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provisions, certain of the leases at our retail properties contain “go-dark” provisions that allow the tenant to cease operations
while continuing to pay rent. This could result in decreased customer traffic at the applicable retail property, thereby decreasing
sales for our other tenants at that property, which may result in our other tenants being unable to pay their minimum rents or
expense recovery charges. These provisions also may result in lower rental revenue generated under the applicable leases. To
the extent co-tenancy or go-dark provisions in our retail leases result in lower revenue or tenant sales or tenants' rights to
terminate their leases early or to a reduction of their rent, our performance or the value of the applicable retail property could be
adversely affected.
We may be unable to renew leases, lease vacant space or re-let space as leases expire, thereby increasing or prolonging
vacancies, which could adversely affect our financial condition, results of operations, cash flow and per share trading price
of our common stock.
As of December 31, 2017, leases representing 11.8% of the square footage and 15.3% of the annualized base rent of the
properties in our office, retail and retail portion of our mixed-use portfolios will expire in 2018, and an additional 6.9% of the
square footage of the properties in our office, retail and retail portion of our mixed-use portfolios was available. We cannot
assure you that leases will be renewed or that our properties will be re-let at rental rates equal to or above the current average
rental rates or that substantial rent abatements, tenant improvements, early termination rights or below market renewal options
will not be offered to attract new tenants or retain existing tenants. In addition, our ability to lease our multifamily properties at
favorable rates, or at all, is dependent upon the overall level of spending in the economy, which is adversely affected by, among
other things, job losses and unemployment levels, recession, personal debt levels, the downturn in the housing market, stock
market volatility and uncertainty about the future. If the rental rates for our properties decrease, our existing tenants do not
renew their leases or we do not re-let a significant portion of our available space and space for which leases will expire, our
financial condition, results of operations, cash flow and per share trading price of our common stock could be adversely
affected.
We may be unable to identify and complete acquisitions of properties that meet our criteria, which may impede our growth.
Our business strategy involves the acquisition of retail, office, multifamily and mixed-use properties. These activities
require us to identify suitable acquisition candidates or investment opportunities that meet our criteria and are compatible with
our growth strategies. We continue to evaluate the market of available properties and may attempt to acquire properties when
strategic opportunities exist. However, we may be unable to acquire properties identified as potential acquisition opportunities.
Our ability to acquire properties on favorable terms, or at all, may be exposed to the following significant risks:
• we may incur significant costs and divert management attention in connection with evaluating and
negotiating potential acquisitions, including ones that we are subsequently unable to complete;
•
even if we enter into agreements for the acquisition of properties, these agreements are subject to conditions
to closing, which we may be unable to satisfy; and
• we may be unable to finance the acquisition on favorable terms or at all.
If we are unable to finance property acquisitions or acquire properties on favorable terms, or at all, our financial
condition, results of operations, cash flow and per share trading price of our common stock could be adversely affected. In
addition, failure to identify or complete acquisitions of suitable properties could slow our growth.
We face significant competition for acquisitions of real properties, which may reduce the number of acquisition
opportunities available to us and increase the costs of these acquisitions.
The current market for acquisitions continues to be extremely competitive. This competition may increase the demand for
the types of properties in which we typically invest and, therefore, reduce the number of suitable acquisition opportunities
available to us and increase the prices paid for such acquisition properties. We also face significant competition for attractive
acquisition opportunities from an indeterminate number of investors, including publicly traded and privately held REITs,
private equity investors and institutional investment funds, some of which have greater financial resources than we do, a greater
ability to borrow funds to acquire properties and the ability to accept more risk than we can prudently manage, including risks
with respect to the geographic proximity of investments and the payment of higher acquisition prices. This competition will
increase if investments in real estate become more attractive relative to other forms of investment. Competition for investments
may reduce the number of suitable investment opportunities available to us and may have the effect of increasing prices paid
for such acquisition properties and/or reducing the rents we can charge and, as a result, adversely affecting our operating
results.
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Our future acquisitions may not yield the returns we expect, and we may otherwise be unable to operate these properties to
meet our financial expectations, which could adversely affect our financial condition, results of operations, cash flow and
per share trading price of our common stock.
Our future acquisitions and our ability to successfully operate the properties we acquire in such acquisitions may be
exposed to the following significant risks:
•
even if we are able to acquire a desired property, competition from other potential acquirers may significantly
increase the purchase price;
• we may acquire properties that are not accretive to our results upon acquisition, and we may not successfully
manage and lease those properties to meet our expectations;
our cash flow may be insufficient to meet our required principal and interest payments;
•
• we may spend more than budgeted amounts to make necessary improvements or renovations to acquired
properties;
• we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios
of properties, into our existing operations, and as a result our results of operations and financial condition
could be adversely affected;
• market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
• we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with
respect to unknown liabilities, such as liabilities for clean-up of undisclosed environmental contamination,
claims by tenants, vendors or other persons dealing with the former owners of the properties, liabilities
incurred in the ordinary course of business and claims for indemnification by general partners, directors,
officers and others indemnified by the former owners of the properties.
If we cannot operate acquired properties to meet our financial expectations, our financial condition, results of operations,
cash flow and per share trading price of our common stock could be adversely affected.
We may not be able to control our operating costs or our expenses may remain constant or increase, even if our revenues do
not increase, causing our results of operations to be adversely affected.
Factors that may adversely affect our ability to control operating costs include the need to pay for insurance and other
operating costs, including real estate taxes, which could increase over time, the need periodically to repair, renovate and re-
lease space, the cost of compliance with governmental regulation, including zoning and tax laws, the potential for liability
under applicable laws, interest rate levels and the availability of financing. If our operating costs increase as a result of any of
the foregoing factors, our results of operations may be adversely affected.
The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors
and competition cause a reduction in income from the property. As a result, if revenues decline, we may not be able to reduce
our expenses accordingly. Costs associated with real estate investments, such as real estate taxes, insurance, loan payments and
maintenance, generally will not be reduced even if a property is not fully occupied or other circumstances cause our revenues to
decrease. If we are unable to decrease operating costs when demand for our properties decreases and our revenues decline, our
financial condition, results of operations and our ability to make distributions to American Assets Trust, Inc.'s stockholders or
American Assets Trust, L.P.'s unitholders may be adversely affected.
Our ability to grow will be limited if we cannot obtain additional capital.
If economic conditions and conditions in the capital markets are not favorable at the time we need to raise capital, we
may need to obtain capital on less favorable terms than our current debt financings. Equity capital could include our common
shares or preferred shares. We cannot guarantee that additional financing, refinancing or other capital will be available in the
amounts we desire or on favorable terms. Our access to debt or equity capital depends on a number of factors, including the
market's perception of our growth potential, our ability to pay dividends, and our current and potential future earnings.
Depending on the outcome of these factors as well as the impact of the economic environment, we could experience delay or
difficulty in implementing our growth strategy, including the development and redevelopment of our assets, on satisfactory
terms, or be unable to implement this strategy.
High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can
make.
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If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place
mortgage debt on properties, we may be unable to refinance the properties when the loans become due, or to refinance on
favorable terms. If interest rates are higher when we refinance our properties, our income could be reduced. If any of these
events occur, our cash flow could be reduced. This, in turn, could reduce cash available for distribution to our stockholders and
may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on
indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property
securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely
affect the overall value of our portfolio of properties. Moreover, repayment of mortgage and other secured debt obligations
could limit the funds that are available to repay our unsecured debt obligations. For tax purposes, a foreclosure on any of our
properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to
the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage
exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash
proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
Some of our financing arrangements involve balloon payment obligations, which may adversely affect our ability to make
distributions.
Some of our financing arrangements require us to make a lump-sum or “balloon” payment at maturity. Our ability to
make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability
to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on
terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a
refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition,
payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we
are required to pay to maintain our qualification as a REIT.
Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations,
cash flow and per share trading price of our common stock.
The REIT rules impose certain restrictions on our ability to utilize hedges, swaps and other types of derivatives to hedge
our liabilities. Subject to these restrictions, we may enter into hedging transactions to protect us from the effects of interest rate
fluctuations on floating rate debt. Our hedging transactions may include entering into interest rate cap agreements or interest
rate swap agreements. As described under Note 8. "Derivative and Hedging Activities," to the accompanying consolidated
financial statements, we have entered into several interest rate swap agreements that are intended to reduce the interest rate
variability exposure with respect to certain of our indebtedness. These agreements involve risks, such as the risk that such
arrangements would not be effective in reducing our exposure to interest rate changes or that a court could rule that such an
agreement is not legally enforceable. In addition, interest rate hedging can be expensive, particularly during periods of rising
and volatile interest rates. Hedging could reduce the overall returns on our investments. Failure to hedge effectively against
interest rate changes could materially adversely affect our financial condition, results of operations, cash flow and per share
trading price of our common stock. In addition, while such agreements would be intended to lessen the impact of rising interest
rates on us, they could also expose us to the risk that the other parties to the agreements would not perform, we could incur
significant costs associated with the settlement of the agreements or that the underlying transactions could fail to qualify as
highly-effective cash flow hedges under Financial Accounting Standards Board, or FASB, Accounting Standards Codification,
or ASC, Topic 815, Derivative and Hedging.
Our second amended and restated credit facility, note purchase agreements and amended term loan agreement restrict our
ability to engage in some business activities, including our ability to incur additional indebtedness, make capital
expenditures and make certain investments, which could adversely affect our financial condition, results of operations, cash
flow and per share trading price of our common stock.
Our second amended and restated credit facility, note purchase agreements and amended term loan agreement contain
customary negative covenants and other financial and operating covenants that, among other things:
•
•
•
restrict our ability to incur additional indebtedness;
restrict our ability to incur additional liens;
restrict our ability to make certain investments (including certain capital expenditures);
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•
•
•
•
restrict our ability to merge with another company;
restrict our ability to sell or dispose of assets;
restrict our ability to make distributions to American Assets Trust, Inc.'s stockholders or American Assets
Trust, L.P.'s unitholders; and
require us to satisfy minimum financial coverage ratios, minimum tangible net worth requirements and/or
maximum leverage ratios.
These limitations restrict our ability to engage in some business activities, which could adversely affect our financial
condition, results of operations, cash flow and per share trading price of our common stock. In addition, our credit facility
contains specific cross-default provisions with respect to specified other indebtedness, giving the lenders and/or note
purchasers the right to declare a default if we are in default under other loans in some circumstances.
The effective subordination of our unsecured indebtedness may reduce amounts available for payment on our unsecured
indebtedness.
Our second amended and restated credit facility, the notes issued under our note purchase agreements and our amended
term loan agreement represent unsecured indebtedness. The holders of our secured debt may foreclose on the assets securing
such debt, reducing the cash flow from the foreclosed property available for payment of unsecured debt. The holders of any of
our secured debt also would have priority over unsecured creditors in the event of a bankruptcy, liquidation or similar
proceeding.
If we invest in mortgage receivables, including originating mortgages, such investment would be subject to several risks, any
of which could decrease the value of such investments and result in a significant loss to us.
From time to time, we may invest in mortgage receivables, including originating mortgages. In general, investments in
mortgages are subject to several risks, including:
•
•
•
•
borrowers may fail to make debt service payments or pay the principal when due, which may make it
necessary for us to foreclose our mortgages or engage in costly negotiations;
the value of the mortgaged property may be less than the principal amount of the mortgage note securing the
property;
interest rates payable on the mortgages may be lower than our cost for the funds to acquire these mortgages;
and
the mortgages may be or become subordinated to mechanics' or materialmen's liens or property tax liens, in
which case we would need to make payments to maintain the current status of a prior lien or discharge it in its
entirety to protect such mortgage investment.
If any of these risks were to be realized, the total amount we would recover from our mortgage receivables may be less
than our total investment, resulting in a loss and our mortgage receivables may be materially and adversely affected.
Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on
our financial condition, results of operations, cash flow and per share trading price of our common stock.
Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate
industry as a whole, including dislocations in the credit markets. These conditions, or similar conditions existing in the future,
may adversely affect our financial condition, results of operations, cash flow and per share trading price of our common stock
as a result of the following potential consequences, among others:
•
•
•
•
decreased demand for retail, office, multifamily and mixed-use space, which would cause market rental rates
and property values to be negatively impacted;
reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt
financing secured by our properties and may reduce the availability of unsecured loans;
our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited,
which could reduce our ability to pursue acquisition and development opportunities and refinance existing
debt, reduce our returns from our acquisition and development activities and increase our future interest
expense; and
one or more lenders under our second amended and restated credit facility could refuse to fund their
financing commitment to us or could fail and we may not be able to replace the financing commitment of any
such lenders on favorable terms, or at all.
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We are subject to risks that affect the general retail environment, such as weakness in the economy, the level of consumer
spending, the adverse financial condition of large retailing companies and competition from discount and internet retailers,
any of which could adversely affect market rents for retail space and the willingness or ability of retailers to lease space in
our shopping centers.
A portion of our properties are in the retail real estate market. This means that we are subject to factors that affect the
retail sector generally, as well as the market for retail space. The retail environment and the market for retail space have
previously been, and could again be, adversely affected by weakness in the national, regional and local economies, the level of
consumer spending and consumer confidence, the adverse financial condition of some large retailing companies, the ongoing
consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing competition from
discount retailers, outlet malls, internet retailers and other online businesses. Increases in consumer spending via the internet
may significantly affect our retail tenants' ability to generate sales in their stores and could affect the way future tenants lease
space. In addition, some of our retail tenants face competition from the expanding market for digital content and hardware.
New and enhanced technologies, including new digital technologies and new web services technologies, may increase
competition for certain of our retail tenants. While we devote considerable effort and resources to analyze and respond to
tenant trends, preferences and consumer spending patterns, we cannot predict with certainty what future tenants will want, what
future retail spaces will look like and how much revenue will be generated at traditional “brick and mortar” locations. If we are
unable to anticipate and respond promptly to trends in the market, our occupancy levels and rental amounts may decline.
Any of the foregoing factors could adversely affect the financial condition of our retail tenants and the willingness of
retailers to lease space in our shopping centers. In turn, these conditions could negatively affect market rents for retail space
and could materially and adversely affect our financial condition, results of operations, cash flow, the trading price of our
common shares and our ability to satisfy our debt service obligations and to pay distributions to American Assets Trust, Inc.'s
stockholders or American Assets Trust, L.P.'s unitholders.
We face significant competition in the leasing market, which may decrease or prevent increases of the occupancy and rental
rates of our properties.
We compete with numerous developers, owners and operators of real estate, many of which own properties similar to
ours in the same submarkets in which our properties are located. If our competitors offer space at rental rates below current
market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be
pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant
improvements, early termination rights or below market renewal options in order to retain tenants when our tenants' leases
expire. As a result, our financial condition, results of operations, cash flow and per share trading price of our common stock
could be adversely affected.
We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in
order to retain and attract tenants, causing our financial condition, results of operations, cash flow and per share trading
price of our common stock to be adversely affected.
We may be required, upon expiration of leases at our properties, to make rent or other concessions to tenants,
accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our
tenants. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire
and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are
unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in
non-renewals by tenants upon expiration of their leases, which could cause an adverse effect to our financial condition, results
of operations, cash flow and per share trading price of our common stock.
The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience
lease roll down from time to time, which could negatively impact our ability to generate cash flow growth.
As a result of various factors, including competitive pricing pressure in our submarkets, adverse conditions in the
California, Oregon, Washington, Texas and Hawaii real estate markets and the desirability of our properties compared to other
properties in our submarkets, we may be unable to realize the asking rents across the properties in our portfolio. In addition, the
degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from property to
property and among different leased spaces within a single property. If we are unable to obtain rental rates that are on average
comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted.
In addition, depending on asking rental rates at any given time as compared to expiring leases in our portfolio, from time to
time rental rates for expiring leases may be higher than starting rental rates for new leases.
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We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in
stockholder dilution and limit our ability to sell or refinance such assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in
exchange for partnership interests in our Operating Partnership, which may result in stockholder dilution through the issuance
of Operating Partnership units that may be exchanged for shares of our common stock. This acquisition structure may have the
effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired
properties, and may require that we agree to protect the contributors' ability to defer recognition of taxable gain through
restrictions on our ability to dispose of, or refinance the debt on, the acquired properties. Similarly, we may be required to incur
or maintain debt we would otherwise not incur so we can allocate the debt to the contributors to maintain their tax bases. These
restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
We are subject to the business, financial and operating risks inherent to the hospitality industry, including competition for
guests with other hospitality properties and general and local economic conditions that may affect demand for travel in
general, any of which could adversely affect the revenues generated by our hospitality properties.
Because we own the Waikiki Beach Walk-Embassy Suites™ in Hawaii and the Santa Fe Park RV Resort in California, we
are susceptible to risks associated with the hospitality industry, including:
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•
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competition for guests with other hospitality properties, some of which may have greater marketing and
financial resources than the managers of our hospitality properties;
increases in operating costs from inflation, labor costs (including the impact of unionization), workers'
compensation and healthcare related costs, utility costs, insurance and other factors that the managers of our
hospitality properties may not be able to offset through higher rates;
the fluctuating and seasonal demands of business travelers and tourism, which seasonality may cause
quarterly fluctuations in our revenues;
general and local economic conditions that may affect demand for travel in general;
periodic oversupply resulting from excessive new development;
unforeseen events beyond our control, such as terrorist attacks, travel-related health concerns, including
pandemics and epidemics, imposition of taxes or surcharges by regulatory authorities, travel-related accidents
and unusual weather patterns, including natural disasters such as earthquakes or wildfires; and
•
decreased reimbursement revenue from the licensor for traveler reward programs.
If our hospitality properties do not generate sufficient revenues, our financial position, results of operations, cash flow,
per share trading price of our common stock and ability to satisfy our debt service obligations and to pay distributions to
American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders may be adversely affected.
We must rely on third-party management companies to operate the Waikiki Beach Walk-Embassy Suites™ in order to
maintain our qualification as a REIT under the Code, and, as a result, we will have less control than if we were operating
the hotel directly.
In order to assist us in maintaining our qualification as a REIT, we have leased the Waikiki Beach Walk-Embassy
Suites™ to WBW Hotel Lessee, LLC, our taxable REIT subsidiary, or TRS, lessee, and engaged a third-party management
company to operate our hotel. While we have some input into operating decisions for the hotel leased by our TRS lessee and
operated under a management agreement, we have less control than if we managed the hotel ourselves. Even if we believe that
our hotel is not being operated efficiently, we may not have sufficient rights under the management agreement to enable us to
force the management company to change its method of operation. We cannot assure you that the management company will
successfully manage our hotel. A failure by the management company to successfully manage the hotel could lead to an
increase in our operating expenses or a decrease in our revenue, or both, which could adversely impact our financial condition,
results of operations, cash flow, our ability to satisfy our debt service obligations and our ability to pay distributions to
American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders
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If our relationship with the franchisor of the Waikiki Beach Walk-Embassy Suites™ was to deteriorate or terminate, it could
have a material adverse effect on our business, financial condition, results of operations and our ability to make
distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders.
We cannot assure you that disputes between us and the franchisor of the Waikiki Beach Walk- Embassy Suites™ will not
arise. If our relationship with the franchisor were to deteriorate as a result of disputes regarding the franchise agreement under
which our hotel operates or for other reasons, the franchisor could, under certain circumstances, terminate our current license
with them or decline to provide licenses for hotels that we may acquire in the future. If any of the foregoing were to occur, it
could have a material adverse effect on our business, financial condition, results of operations and our ability to make
distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders.
Our franchisor, Embassy Suites™, could cause us to expend additional funds on upgraded operating standards, which may
adversely affect our results of operations and reduce cash available for distribution to stockholders.
Under the terms of our franchise license agreement, our hotel operator must comply with operating standards and terms
and conditions imposed by the franchisor of the hotel brand, Embassy Suites™. Failure by us, our TRS lessees or any hotel
management company that we engage to maintain these standards or other terms and conditions could result in the franchise
license being canceled or the franchisor requiring us to undertake a costly property improvement program. 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 we expect could be as high as approximately $7.5 million based on
operating performance through December 31, 2017. In addition, our franchisor may impose upgraded or new brand standards,
such as substantially upgrading the bedding, enhancing the complimentary breakfast or increasing the value of guest awards
under its “frequent guest” program, which can add substantial expense for the hotel. Furthermore, under certain circumstances,
the franchisor may require us to make certain capital improvements to maintain the hotel in accordance with system standards,
the cost of which can be substantial and may adversely affect our results of operations and reduce cash available for distribution
to our stockholders.
Embassy Suites™, our franchisor, has a right of first offer with respect to the Waikiki Beach Walk-Embassy Suites™, which
may limit our ability to obtain the highest price possible for the hotel.
Pursuant to the terms of our franchise agreement for the Waikiki Beach Walk-Embassy Suites™, the franchisor has a
right of first offer to purchase the hotel if we propose to sell all or a portion of the hotel or any interest therein. In the event that
we choose to dispose of the hotel, we would be required to notify the franchisor, prior to offering the hotel to any other
potential buyer, of the price and conditions on which we would be willing to sell the hotel, and the franchisor would have the
right, within 30 days of receiving such notice, to make an offer to purchase the hotel. If the franchisor makes an offer to
purchase that is equal to or greater than the price and on substantially the same terms set forth in our notice, then we will be
obligated to sell the hotel to the franchisor at that price and on those terms. If the franchisor makes an offer to purchase for less
than the price stated in our notice or on less favorable terms, then we may reject the franchisor's offer. The existence of this
right of first offer could adversely impact our ability to obtain the highest possible price for the hotel as, during the term of the
franchise agreement, we would not be able to offer the hotel to potential purchasers through a competitive bid process or in a
similar manner designed to maximize the value obtained for the property without first offering to sell this property to the
franchisor.
Our real estate development activities are subject to risks particular to development, such as unanticipated expenses, delays
and other contingencies, any of which could adversely affect our financial condition, results of operations, cash flow and
the per share trading price of our common stock.
We may engage in development and redevelopment activities with respect to certain of our properties. To the extent that
we do so, we will be subject to the following risks associated with such development and redevelopment activities:
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unsuccessful development or redevelopment opportunities could result in direct expenses to us;
construction or redevelopment costs of a project may exceed original estimates, possibly making the project
less profitable than originally estimated, or unprofitable;
time required to complete the construction or redevelopment of a project or to lease up the completed project
may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;
contractor and subcontractor disputes, strikes, labor disputes or supply disruptions;
failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all;
delays with respect to obtaining or the inability to obtain necessary zoning, occupancy, land use and other
governmental permits, and changes in zoning and land use laws;
occupancy rates and rents of a completed project may not be sufficient to make the project profitable;
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our ability to dispose of properties developed or redeveloped with the intent to sell could be impacted by the
ability of prospective buyers to obtain financing given the current state of the credit markets; and
the availability and pricing of financing to fund our development activities on favorable terms or at all.
These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent
completion of development or redevelopment activities once undertaken, any of which could have an adverse effect on our
financial condition, results of operations, cash flow and the per share trading price of our common stock.
Our success depends on key personnel whose continued service is not guaranteed, and the loss of one or more of our key
personnel could adversely affect our ability to manage our business and to implement our growth strategies, or could create
a negative perception in the capital markets.
Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key
personnel, particularly Messrs. Rady and Barton, who have extensive market knowledge and relationships and exercise
substantial influence over our operational, financing, acquisition and disposition activity. Among the reasons that these
individuals are important to our success is that each has a national or regional industry reputation that attracts business and
investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we
lose their services, our relationships with such personnel could diminish.
Our Board has implemented an emergency succession plan in case of the sudden or unanticipated resignation,
termination, death or temporary or permanent disability of Mr. Rady, or otherwise in case Mr. Rady is unable to perform his
duties as Chairman, President and Chief Executive Officer. This plan is reviewed at least annually by our Board with input
from our Nominating and Governance Committee and currently includes Dr. Robert Sullivan (Board member), Mr. Larry
Finger (Board member), Mr. Barton and Adam Wyll, our SVP and General Counsel, as potential interim candidates for the roles
of Chairman, President and/or Chief Executive Officer and/or as emergency interim executive committee members.
Many of our other senior executives also have extensive experience and strong reputations in the real estate industry,
which aid us in identifying opportunities, having opportunities brought to us and negotiating with tenants and build-to-suit
prospects. The loss of services of one or more members of our senior management team, or our inability to attract and retain
highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our
relationships with lenders, business partners, existing and prospective tenants and industry participants, which could adversely
affect our financial condition, results of operations, cash flow and per share trading price of our common stock.
Mr. Rady is involved in outside businesses, which may interfere with his ability to devote time and attention to our business
and affairs.
We rely on our senior management team, including Mr. Rady, for the day-to-day operations of our business. Our
employment agreement with Mr. Rady requires him to devote a substantial portion of his business time and attention to our
business. Mr. Rady continues to serve as chairman of the board of directors and president of American Assets, Inc. and
chairman of the board of directors of Insurance Company of the West. As such, Mr. Rady has certain ongoing duties to
American Assets, Inc., Insurance Company of the West and other business ventures that could require a portion of his time and
attention. Although we expect that Mr. Rady will continue to devote a majority of his business time and attention to us, we
cannot accurately predict the amount of time and attention that will be required of Mr. Rady to perform such ongoing duties. To
the extent that Mr. Rady is required to dedicate time and attention to American Assets, Inc. and/or Insurance Company of the
West, his ability to devote a majority of his business time and attention to our business and affairs may be limited and could
adversely affect our operations.
We may be subject to on-going or future litigation and otherwise in the ordinary course of business, which could have a
material adverse effect on our financial condition, results of operations, cash flow and per share trading price of our
common stock.
We may be subject to on-going litigation at our properties and otherwise in the ordinary course of business. Some of
these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or
cannot be, insured against. We generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate
outcomes of currently asserted claims or of those that may arise in the future. Resolution of these types of matters against us
may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and
settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having an adverse effect on our
financial condition, results of operations, cash flow and per share trading price of our common stock. Certain litigation or the
resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely
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impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact
our ability to attract officers and directors.
Potential losses from earthquakes in California, Oregon, Washington and Hawaii may not be fully covered by insurance.
Many of the properties we currently own are located in California, Oregon, Washington and Hawaii, which are areas
especially subject to earthquakes. While we carry earthquake insurance on all of our properties, the amount of our earthquake
insurance coverage may not be sufficient to fully cover losses from earthquakes and will be subject to limitations involving
large deductibles or co-payments. In addition, we may reduce or discontinue earthquake insurance on some or all of our
properties in the future if the cost of premiums for any such policies exceeds, in our judgment, the value of the coverage
discounted for the risk of loss. As a result, in the event of an earthquake, we may be required to incur significant costs, and, to
the extent that a loss exceeds policy limits, we could lose the capital invested in the damaged properties as well as the
anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness,
we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.
We may not be able to rebuild our existing properties to their existing specifications if we experience a substantial or
comprehensive loss of such properties.
In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to
rebuild such property to its existing specifications. Further, reconstruction or improvement of such a property would likely
require significant upgrades to meet zoning and building code requirements. Environmental and legal restrictions could also
restrict the rebuilding of our properties. For example, if we experienced a substantial or comprehensive loss of Torrey Reserve
Campus in San Diego, California, reconstruction could be delayed or prevented by the California Coastal Commission, which
regulates land use in the California coastal zone.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-
venturers' financial condition and disputes between us and our co-venturers.
We may co-invest in the future with other third parties through partnerships, joint ventures or other entities, acquiring
non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other
entity. Consequently, with respect to any such arrangement we may enter into in the future, we would not be in a position to
exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in
partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not
involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required
capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent
with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives, and they may
have competing interests in our markets that could create conflict of interest issues. Such investments may also have the
potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control
over the partnership or joint venture. In addition, a sale or transfer by us to a third party of our interests in the joint venture may
be subject to consent rights or rights of first refusal, in favor of our joint venture partners, which would in each case restrict our
ability to dispose of our interest in the joint venture. Where we are a limited partner or non-managing member in any
partnership or limited liability company, if such entity takes or expects to take actions that could jeopardize our status as a
REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. Disputes between us and partners or
co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors
from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers might
result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain
circumstances be liable for the actions of our third-party partners or co-venturers. Our joint ventures may be subject to debt
and, in the current volatile credit market, the refinancing of such debt may require equity capital calls.
Increased competition and increased affordability of residential homes could limit our ability to retain our residents, lease
apartment homes or increase or maintain rents at our multifamily apartment communities.
Our multifamily apartment communities compete with numerous housing alternatives in attracting residents, including
other multifamily apartment communities and single-family rental homes, as well as owner occupied single and multifamily
homes. Competitive housing in a particular area and an increase in the affordability of owner occupied single and multifamily
homes due to, among other things, housing prices, oversupply, mortgage interest rates and tax incentives and government
programs to promote home ownership, could adversely affect our ability to retain residents, lease apartment homes and increase
or maintain rents.
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Our growth depends on external sources of capital that are outside of our control and may not be available to us on
commercially reasonable terms or at all, which could limit our ability, among other things, to meet our capital and operating
needs or make the cash distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s
unitholders necessary to maintain our qualification as a REIT.
In order to maintain our qualification as a REIT, we are required under the Code, among other things, to distribute
annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding
any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less
than 100% of our REIT taxable income, including any net capital gains. Because of these distribution requirements, we may not
be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we
intend to rely on third-party sources to fund our capital needs. We may not be able to obtain such financing on favorable terms
or at all and any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources
of capital depends, in part, on:
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general market conditions;
the market's perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the market price per share of our common stock.
If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic
opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make
the cash distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders necessary to
maintain our qualification as a REIT.
We rely on information technology in our operations, and any breach, interruption or security failure of that technology
could have a negative impact on our business, operations and/or financial condition.
Information security risks have generally increased in recent years due to the rise in new technologies and the increased
sophistication and activities of perpetrators of cyber-attacks. We face risks associated with security breaches, whether through
cyber-attacks or cyber-intrusions over the internet, malware, computer viruses, attachments to e-mails and/or employees or
third-parties with access to our systems.
Our information technology, or IT, networks and related systems, are essential to the operation of our business and our
ability to perform day-to-day operations, and, in some cases, may be critical to the operations of certain of our tenants.
Additionally, we collect and hold personally identifiable information of our residents and prospective residents in
connection with our leasing activities at our multifamily locations. We also collect and hold personally identifiable information
of our employees in connection with their employment. In addition, we engage third-party service providers that may have
access to such personally identifiable information in connection with providing business services to us, whether through our
own IT networks and related systems, or through the third-party service providers’ IT networks and related systems.
There can be no assurance that our efforts to maintain the security and integrity of our (or our third-party service
providers') IT networks and related systems will be effective or that attempted security breaches or disruptions would not be
successful or damaging. A security breach or other significant disruption involving our (or our third-party service providers')
IT networks and related systems could materially and adversely impact our income, cash flow, results of operations, financial
condition, liquidity, the ability to service our debt obligations, the market price of our common stock, our ability to pay
dividends and/or other distributions to our shareholders. A security breach could additionally cause the disclosure or misuse of
confidential or proprietary information (including personal information of our residents and/or employees) and damage to our
reputation.
Risks Related to the Real Estate Industry
Our performance and value are subject to risks associated with real estate assets and the real estate industry, including local
oversupply, reduction in demand or adverse changes in financial conditions of buyers, sellers and tenants of properties,
which could decrease revenues or increase costs, which would adversely affect our financial condition, results of operations,
cash flow and the per share trading price of our common stock.
Our ability to make expected distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s
unitholders depends on our ability to generate revenues in excess of expenses, scheduled principal payments on debt and capital
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expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond
our control may decrease cash available for distribution and the value of our properties. These events include many of the risks
set forth above under “Risks Related to Our Business and Operations,” as well as the following:
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local oversupply or reduction in demand for retail, office, multifamily or mixed-use space;
adverse changes in financial conditions of buyers, sellers and tenants of properties;
vacancies or our inability to rent space on favorable terms, including possible market pressures to offer
tenants rent abatements, tenant improvements, early termination rights or below market renewal options, and
the need to periodically repair, renovate and re-let space;
increased operating costs, including insurance premiums, utilities, real estate taxes and state and local taxes;
a favorable interest rate environment that may result in a significant number of potential residents of our
multifamily apartment communities deciding to purchase homes instead of renting;
rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising
rents to offset increases in operating costs;
civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes and floods, which may
result in uninsured or underinsured losses;
decreases in the underlying value of our real estate;
changing submarket demographics; and
changing traffic patterns.
In addition, periods of economic downturn or recession, rising interest rates or declining demand for real estate, or the
public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of
defaults under existing leases, which would adversely affect our financial condition, results of operations, cash flow and per
share trading price of our common stock.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance
of our properties and harm our financial condition.
The real estate investments made, and to be made, by us are relatively difficult to sell quickly. As a result, our ability to
promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is
limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or
refinancing of the underlying property. We may be unable to realize our investment objectives by sale, other disposition or
refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In
particular, our ability to dispose of one or more properties within a specific time period is subject to weakness in or even the
lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes
in national or international economic conditions, such as the recent economic downturn, and changes in laws, regulations or
fiscal policies of jurisdictions in which the property is located.
In addition, the Code imposes restrictions on a REIT's ability to dispose of properties that are not applicable to other
types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for
investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of
properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to
economic or other conditions promptly or on favorable terms, which may adversely affect our financial condition, results of
operations, cash flow and per share trading price of our common stock.
Our property taxes could increase due to property tax rate changes or reassessment, which would adversely impact our cash
flows.
Even if we continue to qualify as a REIT for federal income tax purposes, we will be required to pay some state and local
taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties
are assessed or reassessed by taxing authorities. If the property taxes we pay increase, our cash flow would be adversely
impacted, and our ability to pay any expected dividends to our stockholders could be adversely affected.
As an owner of real estate, we could incur significant costs and liabilities related to environmental matters.
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or
operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic
substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate, clean
up such contamination and liability for harm to natural resources. Such laws often impose liability without regard to whether
the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and
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several. These liabilities could be substantial and the cost of any required remediation, removal, fines or other costs could
exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to
remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal or
property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the
properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for
damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties,
environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and
these restrictions may require substantial expenditures.
Some of our properties have been or may be impacted by contamination arising from current or prior uses of the property,
or adjacent properties, for commercial or industrial purposes. Such contamination may arise from spills of petroleum or
hazardous substances or releases from tanks used to store such materials. For example, Del Monte Center is currently
undergoing remediation of dry cleaning solvent contamination from a former onsite dry cleaner. The environmental issues is
currently in the final stages of remediation which entails the long term ground monitoring by the appropriate regulatory agency
over the next five to seven years. The prior owner of Del Monte Center entered into a fixed fee environmental services
agreement in 1997 pursuant to which the remediation will be completed for approximately $3.5 million, with the remediation
costs paid for through an escrow funded by the prior owner. We expect that the funds in this escrow account will cover all
remaining costs and expenses of the environmental remediation. However, if the Regional Water Quality Control Board -
Central Coast Region were to require further work costing more than the remaining escrowed funds, we could be required to
pay such overage although we may have a claim for such costs against the prior owner or our environmental remediation
consultant. In addition to the foregoing, we possess Phase I Environmental Site Assessments for certain of the properties in our
portfolio. However, the assessments are limited in scope (e.g., they do not generally include soil sampling, subsurface
investigations or hazardous materials survey) and may have failed to identify all environmental conditions or concerns.
Furthermore, we do not have Phase I Environmental Site Assessment reports for all of the properties in our portfolio and, as
such, may not be aware of all potential or existing environmental contamination liabilities at the properties in our portfolio. As
a result, we could potentially incur material liability for these issues, which could adversely impact our financial condition,
results of operations, cash flow and the per share trading price of our common stock.
As the owner of the buildings on our properties, we could face liability for the presence of hazardous materials (e.g.,
asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in our buildings. Environmental laws govern the
presence, maintenance, and removal of hazardous materials in buildings, and if we do not comply with such laws, we could
face fines for such noncompliance. Also, we could be liable to third parties (e.g., occupants of the buildings) for damages
related to exposure to hazardous materials or adverse conditions in our buildings, and we could incur material expenses with
respect to abatement or remediation of hazardous materials or other adverse conditions in our buildings. In addition, some of
our tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our properties,
which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or our tenants
to liability resulting from these activities. Environmental liabilities could affect a tenant's ability to make rental payments to us,
and changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated
expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which could in turn have
an adverse effect on us.
We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to
make distributions to you or that such costs or other remedial measures will not have an adverse effect on our financial
condition, results of operations, cash flow and per share trading price of our common stock. If we do incur material
environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any
affected properties.
Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for
adverse health effects and costs of remediation.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the
moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or
irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor
sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants
above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other
reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us
to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected
property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could
expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury is alleged to
have occurred.
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We may incur significant costs complying with various federal, state and local laws, regulations and covenants that are
applicable to our properties.
The properties in our portfolio are subject to various covenants and federal, state and local laws and regulatory
requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances,
zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may
require us to obtain approval from local officials or restrict our use of our properties and may require us to obtain approval from
local officials of community standards organizations at any time with respect to our properties, including prior to acquiring a
property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to
fire and safety, seismic or hazardous material abatement requirements. There can be no assurance that existing laws and
regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional
regulations will not be adopted that increase such delays or result in additional costs. Our growth strategy may be affected by
our ability to obtain permits, licenses and zoning relief. Our failure to obtain such permits, licenses and zoning relief or to
comply with applicable laws could have an adverse effect on our financial condition, results of operations, cash flow and per
share trading price of our common stock.
In addition, federal and state laws and regulations, including laws such as the ADA and the FHAA, impose further
restrictions on our properties and operations. Under the ADA and the FHAA, all public accommodations must meet federal
requirements related to access and use by disabled persons. Some of our properties may currently be in non-compliance with
the ADA or the FHAA. If one or more of the properties in our portfolio is not in compliance with the ADA, the FHAA or any
other regulatory requirements, we may be required to incur additional costs to bring the property into compliance and we might
incur governmental fines or the award of damages to private litigants. In addition, we do not know whether existing
requirements will change or whether future requirements will require us to make significant unanticipated expenditures that
will adversely impact our financial condition, results of operations, cash flow and per share trading price of our common stock.
Risks Related to Our Organizational Structure
Ernest S. Rady and his affiliates, directly or indirectly, own a substantial beneficial interest in our company on a fully
diluted basis and have the ability to exercise significant influence on our company and our Operating Partnership,
including the approval of significant corporate transactions.
As of December 31, 2017, Mr. Rady and his affiliates owned approximately 12.2% of our outstanding common stock and
23.1% of our outstanding common units, which together represent an approximate 35.2% beneficial interest in our company on
a fully diluted basis. Consequently, Mr. Rady may be able to significantly influence the outcome of matters submitted for
stockholder action, including the approval of significant corporate transactions, including business combinations,
consolidations and mergers. In addition, we may not, without prior limited partner approval, directly or indirectly transfer all or
any portion of our interest in the Operating Partnership before the later of the death of Mr. Rady and the death of his wife, in
connection with a merger, consolidation or other combination of our assets with another entity, a sale of all or substantially all
of our assets, a reclassification, recapitalization or change in any outstanding shares of our stock or other outstanding equity
interests or an issuance of shares of our stock, in any case that requires approval by our common stockholders. As a result, Mr.
Rady has substantial influence on us and could exercise his influence in a manner that conflicts with the interests of other
stockholders.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of
holders of units in our Operating Partnership, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on
the one hand, and our Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to our
company under Maryland law in connection with their management of our company. At the same time, we, as the general
partner of our Operating Partnership, have fiduciary duties and obligations to our Operating Partnership and its limited partners
under Maryland law and the partnership agreement of our Operating Partnership in connection with the management of our
Operating Partnership. Our fiduciary duties and obligations as the general partner of our Operating Partnership may come into
conflict with the duties of our directors and officers to our company.
Under Maryland law, a general partner of a Maryland limited partnership has fiduciary duties of loyalty and care to the
partnership and its partners and must discharge its duties and exercise its rights as general partner under the partnership
agreement or Maryland law consistently with the obligation of good faith and fair dealing. The partnership agreement provides
that, in the event of a conflict between the interests of our Operating Partnership or any partner, on the one hand, and the
separate interests of our company or our stockholders, on the other hand, we, in our capacity as the general partner of our
Operating Partnership, are under no obligation not to give priority to the separate interests of our company or our stockholders,
and that any action or failure to act on our part or on the part of our directors that gives priority to the separate interests of our
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company or our stockholders that does not result in a violation of the contract rights of the limited partners of the Operating
Partnership under its partnership agreement does not violate the duty of loyalty that we, in our capacity as the general partner of
our Operating Partnership, owe to the Operating Partnership and its partners.
Additionally, the partnership agreement provides that we will not be liable to the Operating Partnership or any partner for
monetary damages for losses sustained, liabilities incurred or benefits not derived by the Operating Partnership or any limited
partner, except for liability for our intentional harm or gross negligence. Our Operating Partnership must indemnify us, our
directors and officers, officers of our Operating Partnership and our designees from and against any and all claims that relate to
the operations of our Operating Partnership, unless (1) an act or omission of the person was material to the matter giving rise to
the action and either was committed in bad faith or was the result of active and deliberate dishonesty, (2) the person actually
received an improper personal benefit in violation or breach of the partnership agreement or (3) in the case of a criminal
proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. Our Operating
Partnership must also pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of
the person's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking
to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for
indemnification. Our Operating Partnership will not indemnify or advance funds to any person with respect to any action
initiated by the person seeking indemnification without our approval (except for any proceeding brought to enforce such
person's right to indemnification under the partnership agreement) or if the person is found to be liable to our Operating
Partnership on any portion of any claim in the action. No reported decision of a Maryland appellate court has interpreted
provisions similar to the provisions of the partnership agreement of our Operating Partnership that modify and reduce our
fiduciary duties or obligations as the general partner or reduce or eliminate our liability for money damages to the Operating
Partnership and its partners, and we have not obtained an opinion of counsel as to the enforceability of the provisions set forth
in the partnership agreement that purport to modify or reduce the fiduciary duties that would be in effect were it not for the
partnership agreement.
Our charter and bylaws, the partnership agreement of our Operating Partnership and Maryland law contain provisions that
may delay, defer or prevent a change of control transaction that might involve a premium price for our common stock or
that our stockholders otherwise believe to be in their best interest.
Our charter contains certain ownership limits with respect to our stock. Our charter, subject to certain exceptions,
authorizes our board of directors to take such actions as it determines are advisable to preserve our qualification as a REIT. Our
charter also prohibits the actual, beneficial or constructive ownership by any person of more than 7.275% in value or number of
shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 7.275% in value of the
aggregate outstanding shares of all classes and series of our stock, excluding any shares that are not treated as outstanding for
federal income tax purposes. Our board of directors, in its sole and absolute discretion, may exempt a person, prospectively or
retroactively, from these ownership limits if certain conditions are satisfied. Our board of directors has granted to each of (1)
Mr. Rady (and certain of his affiliates), (2) Cohen & Steers Management, Inc. and (3) BlackRock, Inc. an exemption from the
ownership limits that will allow them to own, in the aggregate, up to 19.9%, 10.0% and 10.0%, respectively, in value or in
number of shares, whichever is more restrictive, of our outstanding common stock, subject to various conditions and
limitations. The restrictions on ownership and transfer of our stock may:
•
•
discourage a tender offer or other transactions or a change in management or of control that might involve a
premium price for our common stock or that our stockholders otherwise believe to be in their best interests;
or
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable
beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
We could increase the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without
stockholder approval.
Our board of directors, without stockholder approval, has the power under our charter to amend our charter to increase
the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue,
to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any
unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the terms of such
newly classified or reclassified shares. As a result, we may issue series or classes of common stock or preferred stock with
preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of
holders of our common stock. Although our board of directors has no such intention at the present time, it could establish a
class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a
change of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in
their best interest.
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Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a
tender offer or seeking other change of control transactions that could involve a premium price for our common stock or
that our stockholders otherwise believe to be in their best interest.
Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party
from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the
holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such
shares, including:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations
between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or
more of the voting power of our shares or an affiliate thereof or an affiliate or associate of ours who was the
beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting
stock at any time within the two-year period immediately prior to the date in question) for five years after the
most recent date on which the stockholder becomes an interested stockholder, and thereafter impose fair price
and/or supermajority and stockholder voting requirements on these combinations; and
“control share” provisions that provide that “control shares” of our company (defined as shares that, when
aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three
increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as
the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no
voting rights with respect to their control shares, except to the extent approved by our stockholders by the
affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested
shares.
As permitted by the MGCL, our board of directors has, by board resolution, elected to opt out of the business
combination provisions of the MGCL. However, we cannot assure you that our board of directors will not opt to be subject to
such business combination provisions of the MGCL in the future.
Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is
currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which (for
example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a
third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of
us under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize
a premium over the then current market price. Our charter contains a provision whereby we elected to be subject to the
provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors.
Certain provisions in the partnership agreement of our Operating Partnership may delay or prevent unsolicited acquisitions
of us.
Provisions in the partnership agreement of our Operating Partnership may delay, or make more difficult, unsolicited
acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving
an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made,
desirable. These provisions include, among others:
•
•
•
•
•
redemption rights of qualifying parties;
a requirement that we may not be removed as the general partner of our Operating Partnership without our
consent;
transfer restrictions on common units;
our ability, as general partner, in some cases, to amend the partnership agreement and to cause the Operating
Partnership to issue units with terms that could delay, defer or prevent a merger or other change of control of
us or our Operating Partnership without the consent of the limited partners; and
the right of the limited partners to consent to direct or indirect transfers of the general partnership interest,
including as a result of a merger or a sale of all or substantially all of our assets, in the event that such transfer
requires approval by our common stockholders.
In particular, we may not, without prior “partnership approval,” directly or indirectly transfer all or any portion of our
interest in our Operating Partnership, before the later of the death of Mr. Rady and the death of his wife, in connection with a
merger, consolidation or other combination of our assets with another entity, a sale of all or substantially all of our assets, a
reclassification, recapitalization or change in any outstanding shares of our stock or other outstanding equity interests or an
issuance of shares of our stock, in any case that requires approval by our common stockholders. The “partnership approval”
requirement is satisfied, with respect to such a transfer, when the sum of (1) the percentage interest of limited partners
consenting to the transfer of our interest, plus (2) the product of (a) the percentage of the outstanding common units held by us
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multiplied by (b) the percentage of the votes that were cast in favor of the event by our common stockholders equals or exceeds
the percentage required for our common stockholders to approve the event resulting in the transfer. As of December 31, 2017,
the limited partners, including Mr. Rady and his affiliates and our other executive officers and directors, owned approximately
28.2% of our outstanding common units and approximately 17.7% of our outstanding common stock, which together represent
an approximate 39.7% beneficial interest in our company on a fully diluted basis.
Our charter and bylaws, the partnership agreement of our Operating Partnership and Maryland law also contain other
provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our
common stock or that our stockholders otherwise believe to be in their best interest.
Our board of directors may change our investment and financing policies without stockholder approval and we may become
more highly leveraged, which may increase our risk of default under our debt obligations.
Our investment and financing policies are exclusively determined by our board of directors. Accordingly, our
stockholders do not control these policies. Further, our charter and bylaws do not limit the amount or percentage of
indebtedness, funded or otherwise, that we may incur. Our board of directors may alter or eliminate our current policy on
borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged which
could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations. In addition,
a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types
of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity
risk. Changes to our policies with regards to the foregoing could adversely affect our financial condition, results of operations,
cash flow and per share trading price of our common stock.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
As permitted by Maryland law, our charter eliminates the liability of our directors and officers to us and our stockholders
for money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was
material to the cause of action adjudicated.
As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise
exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of
our company, your ability to recover damages from such director or officer will be limited.
We are a holding company with no direct operations and, as such, we will rely on funds received from our Operating
Partnership to pay liabilities, and the interests of our stockholders will be structurally subordinated to all liabilities and
obligations of our Operating Partnership and its subsidiaries.
We are a holding company and conduct substantially all of our operations through our Operating Partnership. We do not
have, apart from an interest in our Operating Partnership, any independent operations. As a result, we rely on distributions from
our Operating Partnership to pay any dividends we might declare on shares of our common stock. We also rely on distributions
from our Operating Partnership to meet our obligations, including any tax liability on taxable income allocated to us from our
Operating Partnership. In addition, because we are a holding company, claims of stockholders are structurally subordinated to
all existing and future liabilities and obligations (whether or not for borrowed money) of our Operating Partnership and its
subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our Operating
Partnership and its subsidiaries will be available to satisfy the claims of our stockholders only after all of our and our Operating
Partnership's and its subsidiaries' liabilities and obligations have been paid in full.
Our Operating Partnership may issue additional partnership units to third parties without the consent of our stockholders,
which would reduce our ownership percentage in our Operating Partnership and would have a dilutive effect on the amount
of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to
American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders.
We may, in connection with our acquisition of properties or otherwise, issue additional partnership units to third parties.
Such issuances would reduce our ownership percentage in our Operating Partnership and affect the amount of distributions
made to us by our Operating Partnership and, therefore, the amount of distributions we can make to American Assets Trust,
Inc.'s stockholders or American Assets Trust, L.P.'s unitholders. To the extent that our stockholders do not directly own
partnership units, our stockholders will not have any voting rights with respect to any such issuances or other partnership level
activities of our Operating Partnership.
Our operating structure subjects us to the risk of increased hotel operating expenses.
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Our lease with our TRS lessee requires our TRS lessee to pay us rent based in part on revenues from the Waikiki Beach
Walk-Embassy Suites™. Our operating risks include decreases in hotel revenues and increases in hotel operating expenses,
which would adversely affect our TRS lessee's ability to pay us rent due under the lease, including but not limited to the
increases in:
• wage and benefit costs;
•
repair and maintenance expenses;
•
•
•
•
energy costs;
property taxes;
insurance costs; and
other operating expenses.
Increases in these operating expenses can have an adverse impact on our financial condition, results of operations, the
market price of our common stock and our ability to make distributions to American Assets Trust, Inc.'s stockholders or
American Assets Trust, L.P.'s unitholders.
Future sales of common stock or common units by our directors and officers, or their pledgees, as a result of margin calls
or foreclosures could adversely affect the price of our common stock and could, in the future, result in a loss of control of
our company.
Our directors and officers may pledge shares of common stock or common units owned or controlled by them as
collateral for loans or for margin purposes in favor of third parties. Depending on the status of the various loan obligations for
which the stock or units ultimately serve as collateral and the trading price of our common stock, our directors and/or officers,
and their affiliates, may experience a foreclosure or margin call that could result in the sale of the pledged stock or units, in the
open market or otherwise. Unlike for our directors and officers, sales by these pledgees may not be subject to the volume
limitations of Rule 144 of the Securities Act. A sale of pledged stock or units by pledgees could result in a loss of control of our
company, depending upon the number of shares of stock or units sold and the ownership interests of other stockholders. In
addition, sale of these shares or units, or the perception of possible future sales, could have a materially adverse effect on the
trading price of our common stock or make it more difficult for us to raise additional capital through sales of equity securities.
Risks Related to Our Status as a REIT
Failure to maintain our qualification as a REIT would have significant adverse consequences to us and the value of our
common stock.
We have elected to be taxed as a REIT and believe we are organized and operate in a manner that has allowed us to
qualify and will allow us to remain qualified as a REIT for federal income tax purposes commencing with our taxable year
ended December 31, 2011. We have not requested and do not plan to request a ruling from the Internal Revenue Service, or
IRS, that we qualify as a REIT. Therefore, we cannot assure you that we have qualified as a REIT, or that we will remain
qualified as such in the future. If we lose our REIT status, we will face serious tax consequences that would substantially
reduce the funds available for distribution to you for each of the years involved because:
• we would not be allowed a deduction for distributions to American Assets Trust, Inc.'s stockholders or
American Assets Trust, L.P.'s unitholders in computing our taxable income and would be subject to the
regular U.S. federal corporate income tax rate;
• we also could be subject to increased state and local taxes; and
•
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our
operations and distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders. In
addition, if we fail to maintain our qualification as a REIT, we will not be required to make distributions to our American
Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders. As a result of all these factors, our failure to
maintain our qualification as a REIT also could impair our ability to expand our business and raise capital, and could materially
and adversely affect the value of our common stock.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are
only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury
regulations that have been promulgated under the Code, or the Treasury Regulations, is greater in the case of a REIT that, like
us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within
our control may affect our ability to maintain our qualification as a REIT. In order to maintain our qualification as a REIT, we
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must satisfy a number of requirements, including requirements regarding the ownership of our stock, requirements regarding
the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from
qualifying sources, such as “rents from real property.” Also, we must make distributions to American Assets Trust, Inc.'s
stockholders or American Assets Trust, L.P.'s unitholders aggregating annually at least 90% of our net taxable income,
excluding net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may
materially adversely affect our investors, our ability to maintain our qualification as a REIT for federal income tax purposes or
the desirability of an investment in a REIT relative to other investments.
Even if we maintain our qualification as a REIT for federal income tax purposes, we may be subject to some federal, state
and local income, property and excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event
we sell property as a dealer. In addition, our taxable REIT subsidiaries will be subject to tax as regular corporations in the
jurisdictions they operate.
If our Operating Partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as
a REIT and suffer other adverse consequences.
We believe that our Operating Partnership is treated as a partnership for federal income tax purposes. As a partnership,
our Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including us, is
allocated, and may be required to pay tax with respect to, its share of our Operating Partnership's income. We cannot be
assured, however, that the IRS will not challenge the status of our Operating Partnership or any other subsidiary partnership in
which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If
the IRS were successful in treating our Operating Partnership or any such other subsidiary partnership as an entity taxable as a
corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests
applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our Operating Partnership
or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income
tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including
us.
Our ownership of taxable REIT subsidiaries will be limited, and we will be required to pay a 100% penalty tax on certain
income or deductions if our transactions with our taxable REIT subsidiaries are not conducted on arm's length terms.
We own an interest in one taxable REIT subsidiary, our TRS lessee, and may acquire securities in additional taxable
REIT subsidiaries in the future. A taxable REIT subsidiary is a corporation other than a REIT in which a REIT directly or
indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable
REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation,
such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and
health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or
non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to federal income tax as a regular C
corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its
parent REIT that are not conducted on an arm's length basis.
Not more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s total assets may
be represented by the securities of one or more taxable REIT subsidiaries. A REIT's ownership of securities of a taxable REIT
subsidiary is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of a REIT's total assets may be
represented by securities (including securities of one or more taxable REIT subsidiaries), other than those securities includable
in the 75% asset test. We anticipate that the aggregate value of the stock and securities of our taxable REIT subsidiaries and
other nonqualifying assets will be less than 25% of the value of our total assets, and we will monitor the value of these
investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions
with our taxable REIT subsidiaries to ensure that they are entered into on arm's length terms to avoid incurring the 100% excise
tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation or to avoid
application of the 100% excise tax discussed above.
To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions, and the
unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment
activities and/or to dispose of assets at inopportune times, which could adversely affect our financial condition, results of
operations, cash flow and per share trading price of our common stock.
To maintain our REIT status, we generally must distribute to our stockholders at least 90% of our net taxable income
each year, excluding net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute
less than 100% of our net taxable income each year, including net capital gains. In addition, we will be subject to a 4%
nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of
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85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In
order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow even if the then
prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from, among other
things, differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the
effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. These sources,
however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of
factors, including the market's perception of our growth potential, our current debt levels, the market price of our common
stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable
terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at
inopportune times, and could adversely affect our financial condition, results of operations, cash flow and per share trading
price of our common stock.
We may in the future choose to make dividends payable partly in our common stock, in which case you may be required to
pay tax in excess of the cash you receive.
To maintain our REIT status, we generally must distribute to our stockholders at least 90% of our net taxable income each
year, excluding net capital gains. In order to preserve cash to repay debt or for other reasons, we may choose to satisfy the
REIT distribution requirements by distributing taxable dividends that are payable partly in our stock and partly in cash. Taxable
stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the
extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may
be required to pay tax with respect to such dividends in excess of the cash received. If a U.S. stockholder sells the stock it
receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect
to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S.
stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of
such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our
stock in order to pay taxes owed on dividends, such sales may have an adverse effect on the per share trading price of our
common stock.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals,
trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for the 20% rate. Although these
rules do not adversely affect the taxation of REITs or dividends payable by REITs investors who are individuals, trusts and
estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT
corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the per share trading
price of our common stock. Non-corporate stockholders, including individuals, generally may deduct 20% of dividends from a
REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after
December 31, 2017 and before January 1, 2026. If we fail to qualify as a REIT, such stockholders may not claim this deduction
with respect to dividends paid by us.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which
would be treated as sales for federal income tax purposes.
A REIT's net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are
sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary
course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers
in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such
characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of
our properties or that we will always be able to make use of the available safe harbors.
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Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive
investments.
To maintain our qualification as a REIT, we must continually satisfy tests concerning, among other things, the nature and
diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required
to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain
statutory relief provisions. We also may be required to make distributions to American Assets Trust, Inc.'s stockholders or
American Assets Trust, L.P.'s unitholders at disadvantageous times or when we do not have funds readily available for
distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market
conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be invested in future acquisitions,
capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could have an adverse effect on our
business results, profitability and ability to execute our business plan. Moreover, if we are compelled to liquidate our
investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to
comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such
sales constitute prohibited transactions.
Legislative or other actions affecting REITs could have a negative effect on our investors or us, including our ability to
maintain our qualification as a REIT or the federal income tax consequences of such qualification.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process
and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could
adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New
legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our
ability to qualify as a REIT, the federal income tax consequences of such qualification or the federal income tax consequences
of such qualification or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment
of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive
relative to an investment in a REIT.
The Tax Cuts and Jobs Act, enacted on December 22, 2017, has significantly changed the U.S. federal income taxation of
U.S. businesses and their owners, including REITs and their stockholders. Changes made by the legislation that could affect us
and our stockholders include:
•
•
•
•
•
•
•
temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S.
federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31,
2017 and before January 1, 2026;
permanently eliminating the progressive corporate tax rate structure, with a maximum corporate tax rate of
35% and replacing it with a flat corporate tax rate of 21%;
permitting a deduction for certain pass-through business income, including dividends received by our
stockholders from us that are not designated by us as capital gain dividends or qualified dividend income,
which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years
beginning after December 31, 2017 and before January 1, 2026;
reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are
treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;
limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to
80% of REIT taxable income (prior to the application of the dividends paid deduction);
generally limiting the deduction for net business interest expense in excess of 30% of a business’s “adjusted
taxable income,” except for taxpayers that engage in certain real estate businesses and elect out of this rule
(provided that such electing taxpayers must use an alternative depreciation system); and
eliminating the corporate alternative minimum tax.
Many of these changes are effective immediately, without any transition periods or grandfathering for existing
transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical
corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or
increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will
affect state and local taxation, which often uses U.S. federal taxable income as a starting point for computing state and local tax
liabilities.
While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and
prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and
auditors to determine the full impact that the recent tax legislation as a whole will have on us. We urge our investors to consult
27
with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common
stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
28
ITEM 2.
PROPERTIES
Our Portfolio
As of December 31, 2017, our operating portfolio was comprised of 26 retail, office, multifamily and mixed-use
properties with an aggregate of approximately 6.0 million rentable square feet of retail and office space (including mixed-use
retail space), 2,112 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of December 31, 2017,
we owned land at four of our properties that we classified as held for development and construction in progress.
Retail and Office Portfolios
Number
of
Buildings
Net
Rentable
Square
Feet
Percentage
Leased
Annualized
Base Rent
Annualized
Base Rent
Per Leased
Square
Foot
Property
RETAIL PROPERTIES
Carmel Country Plaza
Carmel Mountain Plaza
(1)
South Bay Marketplace
(1)
Gateway Marketplace
Lomas Santa Fe Plaza
Location
Year Built/
Renovated
San Diego, CA
San Diego, CA
San Diego, CA
San Diego, CA
Solana Beach, CA
1991
1994/2014
1997
1997/2016
1972/1997
Solana Beach Towne Centre
Solana Beach, CA
1973/2000/2004
Del Monte Center
(1)
Geary Marketplace
The Shops at Kalakaua
Waikele Center
Alamo Quarry Market
Hassalo on Eighth - Retail (2)
(1)
Monterey, CA
1967/1984/2006
Walnut Creek, CA
Honolulu, HI
Waipahu, HI
San Antonio, TX
Portland, OR
2012
1971/2006
1993/2008
1997/1999
2015
9
15
9
3
9
12
16
3
3
9
16
3
78,098
528,416
132,877
127,861
209,569
246,730
673,572
35,156
11,671
537,637
588,970
44,153
95.0 % $
3,653,064
$
98.6
100.0
98.7
98.0
97.6
98.6
100.0
100.0
90.7
98.6
76.6
12,872,753
2,383,460
2,438,765
5,752,380
6,074,595
11,440,324
1,214,751
1,949,473
16,487,331
14,171,373
943,203
Subtotal / Weighted Average Retail Portfolio
107
3,214,710
96.8 % $ 79,381,472
$
OFFICE PROPERTIES
Torrey Reserve Campus
San Diego, CA
1996-2000/2014-2016
14
Solana Beach Corporate Centre
The Landmark at One Market (3)
Solana Beach, CA
San Francisco, CA
1982/2005
1917/2000
One Beach Street
First & Main
Lloyd District Portfolio
City Center Bellevue
San Francisco, CA
1924/1972/1987/1992
Portland, OR
Portland, OR
Bellevue, WA
2010
1940-2015
1987
4
1
1
1
6
1
516,677
212,633
419,371
97,614
360,641
581,741
495,800
81.1 % $ 18,701,490
$
92.1
100.0
100.0
98.7
76.1
89.5
7,476,507
25,033,067
3,360,659
11,072,551
11,403,734
16,660,403
Subtotal / Weighted Average Office Portfolio
Total / Weighted Average Retail and Office Portfolio
28
135
2,684,477
5,899,187
88.4 % $ 93,708,411
93.0 % $173,089,883
$
$
49.24
24.71
17.94
19.32
28.01
25.23
17.23
34.55
167.04
33.81
24.40
27.89
25.51
44.63
38.18
59.69
34.43
31.11
25.76
37.55
39.49
31.55
Mixed-Use Portfolio
Retail Portion
Waikiki Beach Walk—Retail (4)
Location
Honolulu, HI
Hotel Portion
Location
Waikiki Beach Walk—Embassy SuitesTM Honolulu, HI
Year Built/
Renovated
Number
of
Buildings
Net
Rentable
Square
Feet
Percent
Leased
Annualized
Base Rent
Annualized
Base Rent
Per Leased
Square
Foot
2006
3
96,707
96.9% $ 10,513,637
$
112.19
Year Built/
Renovated
Number
of
Buildings
Units
Average
Occupancy
Average
Daily Rate
Revenue
per
Available
Room
2008/2014
2
369
92.5% $
317.26
$
293.61
29
Multifamily Portfolio
Property
Loma Palisades
Location
Year Built/
Renovated
Number
of
Buildings
Units
Percentage
Leased
Annualized
Base Rent
Average
Monthly Base
Rent per
Leased Unit
San Diego, CA
1958/2001-2008
Imperial Beach Gardens
Imperial Beach, CA
1959/2008
Mariner’s Point
Santa Fe Park RV Resort (5)
Imperial Beach, CA
1986
San Diego, CA
1971/2007-2008
Pacific Ridge Apartments
San Diego, CA
Hassalo on Eighth -
Multifamily (2)
Total / Weighted Average Multifamily
Portland, OR
2013
2015
80
26
8
1
3
3
548
160
88
126
533
657
94.7 % $ 12,343,980
$
88.8
97.7
74.6
90.6
3,479,904
1,617,300
1,002,180
15,566,364
93.5
11,717,700
121
2,112
91.8% $ 45,727,428
$
1,982
2,041
1,568
888
2,686
1,590
1,965
(1) Net rentable square feet at certain of our retail properties includes square footage leased pursuant to ground leases, as described in the following table:
Property
Carmel Mountain Plaza
South Bay Marketplace
Del Monte Center
Alamo Quarry Market
Number of Ground
Leases
Square Footage
Leased Pursuant to
Ground Leases
Aggregate Annualized
Base Rent
6
1
1
4
125,477
2,824
212,500
31,994
$
$
$
$
1,193,816
102,276
96,000
497,776
(2) The Hassalo on Eighth property is comprised of three multifamily buildings, each with a ground floor retail component: Velomor, Aster Tower and
Elwood.
(3) This property contains 419,371 net rentable square feet consisting of The Landmark at One Market (375,151 net rentable square feet) as well as a separate
long-term leasehold interest in approximately 44,220 net rentable square feet of space located in an adjacent six-story leasehold known as the Annex. We
currently lease the Annex from an affiliate of the Paramount Group pursuant to a long-term master lease effective through June 30, 2021, which we have
the option to extend until 2031 pursuant to two five-year extension options.
(4) Waikiki Beach Walk-Retail contains 96,707 net rentable square feet consisting of 94,093 net rentable square feet that we own in fee and approximately
2,614 net rentable square feet of space in which we have a subleasehold interest pursuant to a sublease from First Hawaiian Bank effective through
December 31, 2021.
(5) The Santa Fe Park RV Resort is subject to seasonal variation, with higher rates of occupancy occurring during the summer months. The number of units at
the Santa Fe Park RV Resort includes 122 RV spaces and four apartments.
In the tables above:
• The net rentable square feet for each of our retail properties and the retail portion of our mixed-use property is the
sum of (1) the square footages of existing leases, plus (2) for available space, the field-verified square footage.
The net rentable square feet for each of our office properties is the sum of (1) the square footages of existing
leases, plus (2) for available space, management's estimate of net rentable square feet based, in part, on past
leases. The net rentable square feet included in such office leases is generally determined consistently with the
Building Owners and Managers Association, or BOMA, 2010 measurement guidelines. Net rentable square
footage may be adjusted from the prior period to reflect re-measurement of leased space at the properties.
Percentage leased for each of our retail and office properties and the retail portion of the mixed-use property is
calculated as square footage under leases as of December 31, 2017, divided by net rentable square feet, expressed
as a percentage. The square footage under lease includes leases which may not have commenced as of
December 31, 2017. Percentage leased for our multifamily properties is calculated as total units rented as of
December 31, 2017, divided by total units available, expressed as a percentage.
•
• Annualized base rent is calculated by multiplying base rental payments (defined as cash base rents, before
abatements) for the month ended December 31, 2017, by 12. Annualized base rent per leased square foot is
calculated by dividing annualized base rent, by square footage under lease as of December 31, 2017. In the case
of triple net or modified gross leases, annualized base rent does not include tenant reimbursements for real estate
taxes, insurance, common area or other operating expenses. Total abatements for leases in effect as of
December 31, 2017 for our retail and office portfolio equaled approximately $2.9 million for the year ended
December 31, 2017. There were no abatements for the retail portion of our mixed-use portfolio for the year ended
December 31, 2017. Total abatements for leases in effect as of December 31, 2017 for our multifamily portfolio
equaled approximately $0.8 million for the year ended December 31, 2017.
• Units represent the total number of units available for sale/rent at December 31, 2017.
30
• Average occupancy represents the percentage of available units that were sold during the 12-month period ended
December 31, 2017, and is calculated by dividing the number of units sold by the product of the total number of
units and the total number of days in the period. Average daily rate represents the average rate paid for the units
sold and is calculated by dividing the total room revenue (i.e., excluding food and beverage revenues or other
hotel operations revenues such as telephone, parking and other guest services) for the 12-month period ended
December 31, 2017, by the number of units sold. Revenue per available room, or RevPAR, represents the total
unit revenue per total available units for the 12-month period ended December 31, 2017 and is calculated by
multiplying average occupancy by the average daily rate. RevPAR does not include food and beverage revenues
or other hotel operations revenues such as telephone, parking and other guest services.
• Average monthly base rent per leased unit represents the average monthly base rent per leased units as of
December 31, 2017.
31
Tenant Diversification
At December 31, 2017, our operating portfolio had approximately 745 leases with office and retail tenants, of which 12
expired on December 31, 2017 and 15 had not yet commenced. Our residential properties had approximately 1,844 leases with
residential tenants at December 31, 2017, excluding Santa Fe Park RV Resort. The retail portion of our mixed-use property had
approximately 68 leases with retailers. No one tenant or affiliated group of tenants accounted for more than 7.9% of our
annualized base rent as of December 31, 2017 for our retail, office and retail portion of our mixed-use property portfolio. The
following table sets forth information regarding the 25 tenants with the greatest annualized base rent for our combined retail,
office and retail portion of our mixed-use property portfolios as of December 31, 2017.
Lease
Expiration
Total Leased
Square Feet
Rentable
Square
Feet as a
Percentage
of Total
Annualized
Base Rent (1)
Annualized
Base Rent
as a
Percentage
of Total
6/30/2019
4/30/2020
5/31/2021
12/31/2018
12/31/2022
6/30/2018
5/31/2028
8/31/2020
4/30/2025
Tenant
Property(ies)
salesforce.com, inc.
The Landmark at One Market
Autodesk, Inc.
The Landmark at One Market
Kmart (2)
Lowe's
Waikele Center
Waikele Center
Veterans Benefits Administration
First & Main
Clearesult Operating, LLC (as
successor to Portland Energy
Conservation)
State of Oregon: Department of
Environmental Quality
First & Main
Lloyd District Portfolio
10/31/2031
Alliant International University
One Beach Street
Nordstrom Rack
Carmel Mountain Plaza,
Alamo Quarry Market
Treasury Call Center (3)
First & Main
HDR Engineering
Quiksilver
Sprouts Farmers Market
Familycare, Inc.
California Bank & Trust
VMware, Inc.(4)
Troutman Sanders, LLP
City Center Bellevue
Waikiki Beach Walk
Solana Beach Towne Centre,
Carmel Mountain Plaza,
Geary Marketplace
Lloyd District Portfolio
Torrey Reserve Campus
City Center Bellevue
Torrey Reserve Campus
First & Main
10/31/2019
9/30/2022
10/31/2022
8/31/2020
12/31/2017
12/31/2021
6/30/2019
3/31/2025
9/30/2032
9/30/2024
2/29/2024
11/30/2022
11/30/2019
4/30/2025
Eisneramper LLP
The Landmark at One Market
12/31/2018
Vistage Worldwide, Inc.
Torrey Reserve Campus
Old Navy
Marshalls
Caradigm USA, LLC
Vons
Cisco Systems, Inc.
Drug Enforcement
Administration(5)
TOTAL
Waikele Center,
South Bay Marketplace,
Alamo Quarry Market
Carmel Mountain Plaza,
Solana Beach Towne Centre
City Center Bellevue
Lomas Santa Fe Plaza
City Center Bellevue
First & Main
6/30/2018
7/31/2020
4/30/2021
9/30/2022
1/31/2019
1/31/2025
12/31/2021
12/31/2022
2/28/2023
8/31/2025
254,118
4.2 % $
14,494,512
7.9 %
114,664
119,590
155,000
93,572
101,848
87,787
64,161
69,047
63,648
56,024
8,365
71,431
61,140
34,731
36,062
33,812
19,126
36,769
59,780
68,055
32,304
49,895
29,415
31,376
1.9
2.0
2.6
1.6
1.7
1.5
1.1
1.2
1.1
0.9
0.1
1.2
1.0
0.6
0.6
0.6
0.3
0.6
1.0
1.1
0.5
0.8
0.5
0.5
8,196,441
4,903,190
4,586,349
3,006,453
2,656,401
2,531,777
2,436,472
2,189,648
2,184,302
2,156,924
2,065,218
1,919,436
1,798,639
1,754,961
1,581,182
1,556,949
1,530,080
1,476,905
*
1,335,447
1,292,160
1,216,700
1,198,661
1,170,062
4.5
2.7
2.5
1.6
1.4
1.4
1.3
1.2
1.2
1.2
1.1
1.0
1.0
1.0
0.9
0.8
0.8
0.8
0.7
0.7
0.7
0.7
0.6
*
1,751,720
29.2% $
69,238,869
37.7%
* Data withheld at tenant’s request.
(1) Annualized base rent is calculated by multiplying (i) base rental payments (defined as cash base rents before abatements) for the month ended
(2)
December 31, 2017 for the applicable lease(s) by (ii) 12.
In December 2016, the Kmart store at Waikele Center ceased its operations, but continues to remain fully liable for all of its lease obligations until the
lease's scheduled expiration on June 30, 2018.
(3) The tenant may terminate its lease at any time with 90 days notice.
(4) The tenant may terminate its lease at any time with 6 months notice.
(5) The earliest option termination date under this lease is August 31, 2020.
32
Geographic Diversification
Our properties are located in Southern California, Northern California, Oregon, Washington, Texas and Hawaii. The
following table shows the number of properties, the net rentable square feet and the percentage of total portfolio net rentable
square footage in each region as of December 31, 2017. Our six multifamily properties are excluded from the table below and
are located in Southern California and Portland, Oregon. The hotel portion of our mixed-use property is also excluded and is
located in Hawaii.
Region
Southern California
Northern California
Oregon
Washington
Texas
Hawaii (2)
Total
Number of
Properties
Net Rentable Square Feet
2,052,861
1,225,713
986,535
495,800
588,970
646,015
5,995,894
8
4
3
1
1
3
20
Percentage of Net
Rentable Square Feet (1)
34.2 %
20.4
16.5
8.3
9.8
10.8
100.0%
(1) Percentage of Net Rentable Square Feet is calculated based on the total net rentable square feet available in our retail portfolio, office portfolio and
the retail portion of our mixed-use portfolio.
Includes the retail portion related to the mixed-use property.
(2)
Segment Diversification
The following table sets forth information regarding the total property operating income for each of our segments for the
year ended December 31, 2017 (dollars in thousands).
Segment
Retail
Office
Mixed-Use
Multifamily
Total
Lease Expirations
Number of
Properties
Property Operating
Income
Percentage of Property
Operating Income
12
7
1
6
26
$
$
75,444
72,574
25,635
24,653
198,306
38.0 %
36.6
12.9
12.5
100.0%
The following table sets forth a summary schedule of the lease expirations for leases in place as of December 31, 2017,
plus available space, for each of the ten calendar years beginning January 1, 2018 at the properties in our retail portfolio, office
portfolio and the retail portion of our mixed-use portfolio. The square footage of available space includes the space from 12
leases that terminated on December 31, 2017. In 2018, we expect a similar level of leasing activity for new and expiring leases
compared to prior years with overall positive increases in rental income. However, changes in rental income associated with
individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the rents on
new leases will continue to increase at the above disclosed levels, if at all.
33
The lease expirations for our multifamily portfolio and the hotel portion of our mixed-use portfolio are excluded from
this table because multifamily unit leases generally have lease terms ranging from seven to 15 months, with a majority having
12-month lease terms, and because rooms in the hotel are rented on a nightly basis. The information set forth in the table
assumes that tenants do not exercise any renewal options.
Year of Lease Expiration
Available
Month to Month
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Thereafter
Signed Leases Not Commenced
Total:
Square
Footage of
Expiring
Leases
414,759
42,297
710,387
707,884
688,091
485,748
700,894
438,275
418,629
394,837
126,165
131,843
658,631
77,454
5,995,894
Percentage
of Portfolio
Net
Rentable
Square
Feet
Annualized Base
Rent (1)
Percentage
of Portfolio
Annualized
Base Rent
6.9 % $
0.7
11.8
11.8
11.5
8.1
11.7
7.3
7.0
6.6
2.1
2.2
11.0
1.3
—
1,231,636
28,086,547
26,298,192
24,627,935
23,667,679
24,399,244
12,038,351
12,945,775
10,727,433
3,282,915
4,096,231
12,201,584
—
100.0% $ 183,603,522
Annualized
Base Rent Per
Leased
Square Foot (2)
—
29.12
39.54
37.15
35.79
48.72
34.81
27.47
30.92
27.17
26.02
31.07
18.53
—
30.62
— % $
0.7
15.3
14.3
13.4
12.9
13.3
6.6
7.1
5.8
1.8
2.2
6.6
—
100.0% $
(1) Annualized base rent is calculated by multiplying base rental payments (defined as cash base rents (before abatements)) for the month ended
December 31, 2017 for the leases expiring during the applicable period, by 12.
(2) Annualized base rent per leased square foot is calculated by dividing annualized base rent for leases expiring during the applicable period by square
footage under such expiring leases.
ITEM 3.
LEGAL PROCEEDINGS
We are not currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or which,
individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of
operation if determined adversely to us. We may be subject to ongoing litigation and we expect to otherwise be party from time
to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
34
PART II
ITEM 5.
MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
American Assets Trust, Inc.
Shares of American Assets Trust, Inc.'s common stock began trading on the NYSE under the symbol “AAT” on
January 13, 2011. Prior to that time there was no public market for the company's common stock. On February 9, 2018, the
reported close sale price per share was $32.86. The following table sets forth, for the periods indicated, the high and low close
prices in dollars on the NYSE for the company's common stock and the dividends we declared per share.
Period
Per Share Price
Low
High
Dividend per
Common Share
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
$
$
$
$
$
$
$
$
34.61
37.64
42.06
38.20
40.80
38.38
38.25
37.66
$
$
$
$
$
$
$
$
39.92
42.44
45.95
43.14
44.57
44.53
40.95
41.37
$
$
$
$
$
$
$
$
0.2500
0.2500
0.2500
0.2600
0.2600
0.2600
0.2600
0.2700
On February 9, 2018, we had 108 stockholders of record of our common stock. Certain shares are held in “street” name
and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
American Assets Trust, L.P.
There is no established trading market for American Assets Trust, L.P.'s operating partnership units. The following table
sets forth the distributions we declared with respect to American Assets Trust, L.P.'s operating partnership units for the periods
indicated:
Period
Distribution
per Unit
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
$
$
$
$
$
$
$
$
0.2500
0.2500
0.2500
0.2600
0.2600
0.2600
0.2600
0.2700
As of February 9, 2018, we had 24 holders of record of American Assets Trust, L.P.'s operating partnership units,
including American Assets Trust, Inc.
Distribution Policy
We pay and intend to continue to pay regular quarterly dividends to holders of our common stock and unitholders of our
Operating Partnership and to make dividend distributions that will enable us to meet the distribution requirements applicable to
REITs and to eliminate or minimize our obligation to pay income and excise taxes. Dividend amounts depend on our available
cash flows, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the
Code and such other factors as our board of directors deems relevant.
35
Recent Sales of Unregistered Equity Securities
No unregistered equity securities were sold by us during 2017.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
No equity securities were purchased by us during 2017.
Equity Compensation Plan Information
Information about our equity compensation plans is incorporated by reference in Item 12 of Part III of this annual report
on Form 10-K.
Stock Performance Graph
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to
Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the
Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically
incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The graph below compares the cumulative total return on the company’s common stock with that of the Standard &
Poor's 500 Stock Index, or S&P 500 Index, and an industry peer group, SNL US REIT Equity Index from December 31, 2012
through December 31, 2017. The stock price performance graph assumes that an investor invested $100 in each of AAT and
the indices, and the reinvestment of any dividends. The comparisons in the graph are provided in accordance with the SEC
disclosure requirements and are not intended to forecast or be indicative of the future performance of AAT’s shares of common
stock.
36
ITEM 6.
SELECTED FINANCIAL DATA
The following tables set forth, on a historical basis, selected financial and operating data. The financial information has
been derived from our consolidated balance sheets and statements of operations. You should read the following summary
selected financial data in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations” and “Item 8. Financial Statements and Supplementary Data.” The following data is in thousands, except per
share and share data.
Statement of Operations Data:
Revenue:
Rental income
Other property income
Total revenues
Expenses:
Rental expenses
Real estate taxes
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Gain on sale of real estate
Other income (expense), net
Net income
Net income attributable to restricted shares
Net income attributable to unitholders in the
Operating Partnership
Net income attributable to American Assets
Trust, Inc. stockholders
Income from operations attributable to common
stockholders per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
Net income attributable to common stockholders per
share
Basic earnings per share
Diluted earnings per share
Weighted average shares of common stock
outstanding - basic
Weighted average shares of common stock
outstanding - diluted
Dividends declared per share
American Assets Trust, Inc.
Year Ended December 31,
2017
2016
2015
2014
2013
$
$
298,803
16,180
314,983
279,498
15,590
295,088
$
261,887
13,736
275,623
$
$
246,078
13,922
260,000
242,757
12,300
255,057
84,006
32,671
21,382
83,278
221,337
93,646
(53,848)
—
334
40,132
(241)
79,553
28,378
17,897
71,319
197,147
97,941
(51,936)
—
(368)
45,637
(189)
73,187
24,819
20,074
63,392
181,472
94,151
(47,260)
7,121
(97)
53,915
(168)
68,267
22,964
18,532
66,568
176,331
83,669
(52,965)
—
441
31,145
(374)
68,608
21,378
17,195
66,775
173,956
81,101
(58,020)
—
(487)
22,594
(536)
(10,814)
(12,863)
(15,238)
(9,015)
(6,838)
29,077
$
32,585
$
38,509
$
21,756
$
15,220
0.62
0.62
0.62
0.62
$
$
$
$
0.72
0.72
0.72
0.72
$
$
$
$
0.87
0.86
0.87
0.86
$
$
$
$
0.52
0.51
0.52
0.51
$
$
$
$
0.38
0.38
0.38
0.38
$
$
$
$
$
46,715,520
45,332,471
44,439,112
42,041,126
39,539,457
64,087,250
1.0500
$
63,228,159
1.0100
$
62,339,163
0.9475
$
59,947,474
0.8925
$
57,515,810
0.8500
$
37
Balance Sheet Data:
Net real estate
Total assets
Notes payable
Total liabilities
Stockholders' equity and owner's equity
Noncontrolling interests
Total equity
Total liabilities and equity
Other Data:
Funds from operations (FFO) (1)
FFO attributable to common stock and units
American Assets Trust, Inc.
Year Ended December 31,
2017
2016
2015
2014
2013
$ 2,076,707
2,259,864
$ 1,831,546
1,986,933
$ 1,834,862
1,974,289
$ 1,775,400
1,936,401
$ 1,676,836
1,832,443
1,325,020
1,415,720
833,710
10,434
844,144
2,259,864
1,061,530
1,148,382
809,556
28,995
838,551
1,986,933
1,055,613
1,145,362
799,562
29,365
828,927
1,974,289
1,057,450
1,169,825
735,303
31,273
766,576
1,936,401
1,045,174
1,145,865
648,511
38,067
686,578
1,832,443
$ 123,410
$
116,956
$
110,186
$
97,713
$
123,174
116,773
110,027
97,576
89,369
89,012
(1) We present FFO because we consider FFO an important supplemental measure of our operating performance and believe it is frequently used by
securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. We
calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents net
income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, impairment losses, real
estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships
and joint ventures. FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure because it
believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related
depreciation and amortization and gains and losses from property dispositions, which do not relate to or are not indicative of operating performance, FFO
provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe
that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with
that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that
result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of
our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our
performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our
FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our
performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to
pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in
accordance with GAAP.
The following table sets forth a reconciliation of our FFO to net income, the nearest GAAP equivalent, for the periods presented (in thousands):
Net income
Plus: Real estate depreciation and amortization
Less: Gain on sale of real estate
Funds from operations, as defined by NAREIT
Less: Nonforfeitable dividends on restricted stock awards
FFO attributable to common stock and units
Year Ended December 31,
2017
2016
2015
2014
2013
$ 40,132
$ 45,637
$
53,915
$ 31,145
$ 22,594
83,278
71,319
—
—
63,392
(7,121)
66,568
66,775
—
—
123,410
116,956
110,186
97,713
89,369
(236)
(183)
(159)
(137)
(357)
$ 123,174
$ 116,773
$ 110,027
$ 97,576
$ 89,012
38
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the audited historical consolidated financial statements and
notes thereto appearing in “Item 8. Financial Statements and Supplementary Data” of this report. As used in this section, unless
the context otherwise requires, “we,” “us,” “our,” and “our company” mean American Assets Trust, Inc., a Maryland
corporation and its consolidated subsidiaries, including American Assets Trust, L.P. This discussion may contain forward-
looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward looking statements as a result of various factors, including those set forth under “Item
1A. Risk Factors” or elsewhere in this document. See “Item 1A. Risk Factors” and “Forward-Looking Statements.”
Overview
Our Company
We are a full service, vertically integrated and self-administered 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, Oregon, Washington, Texas, and Hawaii. As of December 31, 2017, our portfolio was comprised of twelve
retail shopping centers; seven office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail
shopping center; and six multifamily properties. Additionally, as of December 31, 2017, we owned land at four of our
properties that we classified as held for development and construction in progress. Our core markets include San Diego, the San
Francisco Bay Area, Portland, Oregon, Bellevue, Washington and Oahu, Hawaii. Our company, as the sole general partner of
our Operating Partnership, has control of our Operating Partnership and owned 73.2% of our Operating Partnership as of
December 31, 2017. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership.
Taxable REIT Subsidiary
On November 5, 2010, we formed American Assets Services, Inc., a Delaware corporation that is wholly owned by our
Operating Partnership and which we refer to as our services company. We have elected, together with our services company, to
treat our services company as a taxable REIT subsidiary for federal income tax purposes. A taxable REIT subsidiary generally
may provide non-customary and other services to our tenants and engage in activities that we may not engage in directly
without adversely affecting our qualification as a REIT, provided a taxable REIT subsidiary may not operate or manage a
lodging facility or provide rights to any brand name under which any lodging facility is operated. We may form additional
taxable REIT subsidiaries in the future, and our Operating Partnership may contribute some or all of its interests in certain
wholly owned subsidiaries or their assets to our services company. Any income earned by our taxable REIT subsidiaries will
not be included in our taxable income for purposes of the 75% or 95% gross income tests, except to the extent such income is
distributed to us as a dividend, in which case such dividend income will qualify under the 95%, but not the 75%, gross income
test. Because a taxable REIT subsidiary is subject to federal income tax, and state and local income tax (where applicable) as a
regular corporation, the income earned by our taxable REIT subsidiaries generally will be subject to an additional level of tax
as compared to the income earned by our other subsidiaries.
Outlook
We seek growth in earnings, funds from operations, and cash flows primarily through a combination of the following:
growth in our same-store portfolio, growth in our portfolio from property development and redevelopments and expansion of
our portfolio through property acquisitions. Our properties are located in some of the nation's most dynamic, high-barrier-to-
entry markets primarily in Southern California, Northern California, Oregon, Washington and Hawaii, which we believe allow
us to take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion,
reconfiguration, and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities.
We intend to opportunistically pursue projects in our development pipeline including future phases of Lloyd District
Portfolio, Solana Beach - Highway 101, as well as other redevelopments at Solana Beach Corporate Centre and Lomas Santa
Fe Plaza. The commencement of these developments is based on, among other things, market conditions and our evaluation of
whether such opportunities would generate appropriate risk adjusted financial returns. Our redevelopment and development
opportunities are subject to various factors, including market conditions and may not ultimately come to fruition. We continue
to review acquisition opportunities in our primary markets that would complement our portfolio and provide long-term growth
opportunities. Some of our acquisitions do not initially contribute significantly to earnings growth; however, we believe they
provide long-term re-leasing growth, redevelopment opportunities and other strategic opportunities. Any growth from
acquisitions is contingent on our ability to find properties that meet our qualitative standards at prices that meet our financial
hurdles. Changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting both
the price that must be paid to acquire a property, as well as our ability to economically finance a property acquisition.
39
Generally, our acquisitions are initially financed by available cash, mortgage loans and/or borrowings under our second
amended and restated credit facility, which may be repaid later with funds raised through the issuance of new equity or new
long-term debt.
Same-store
We have provided certain information on a total portfolio, same-store and redevelopment 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 for which significant redevelopment or expansion occurred during either of the periods
being compared, properties under development, properties classified as held for development and properties classified as
discontinued operations. Information provided on a redevelopment same-store basis includes the results of properties
undergoing significant redevelopment for the entirety or portion of both periods being compared. Same-store and
redevelopment same-store is considered by management to be an important measure because it assists in eliminating disparities
due to the development, acquisition or disposition of properties during the particular period presented, and thus provides a more
consistent performance measure for the comparison of the company's stabilized and redevelopment properties, as applicable.
Additionally, redevelopment same-store is considered by management to be an important measure because it assists in
evaluating the timing of the start and stabilization of our redevelopment opportunities and the impact that these redevelopments
have in enhancing our operating performance.
While there is judgment surrounding changes in designations, we typically reclassify significant development,
redevelopment or expansion properties to same-store properties once they are stabilized. Properties are deemed stabilized
typically at the earlier of (1) reaching 90% occupancy or (2) four quarters following a property's inclusion in operating real
estate. We typically remove properties from same-store properties when the development, redevelopment or expansion has or
is expected to have a significant impact on the property's annualized base rent, occupancy and operating income within the
calendar year. Acquired properties are classified to same-store properties once we have owned such properties for the entirety
of comparable period(s) and the properties are not under significant development or expansion.
In our determination of same-store and redevelopment same-store properties, Torrey Reserve Campus has been identified
as a redevelopment same-store property due to the significant construction activity noted above. Office same-store net
operating income increased approximately 2.2% for the year ended December 31, 2017, respectively, compared to the same
periods in 2016. Office redevelopment same-store net operating income increased approximately 1.6% for the year ended
December 31, 2017, respectively, compared to the same periods in 2016.
Below is a summary of our same-store composition for the years ended December 31, 2017, 2016 and 2015. For the year
ended December 31, 2017, when compared to the designations for the year ended December 31, 2016, Lloyd District Portfolio
was transferred into same-store properties due to the completion of development activity at Hassalo on Eighth - Retail during
the fourth quarter of 2016. Additionally, Pacific Ridge Apartments and Gateway Marketplace were classified as non-same-store
properties as they were acquired on April 28, 2017 and July 6, 2017, respectively, when compared to the designations for the
year ended December 31, 2017.
For the year ended December 31, 2016, when compared to the designations for the year ended December 31, 2015,
Hassalo on Eighth - Retail was included in non-same-store properties and one development property, Torrey Reserve Land, was
removed from development properties, due to the completion of all Torrey Reserve Campus development during the second
quarter of 2016.
Same-Store
Non-Same Store
Total Properties
Redevelopment Same-Store
Total Development Properties
2017
December 31,
2016
2015
21
5
26
22
4
20
4
24
22
4
20
3
23
22
5
40
Revenue Base
Rental income consists of scheduled rent charges, straight-line rent adjustments and the amortization of above market and
below market rents acquired. We also derive revenue from tenant recoveries and other property revenues, including parking
income, lease termination fees, late fees, storage rents and other miscellaneous property revenues.
Retail Leases. Our retail portfolio included twelve properties with a total of approximately 3.2 million rentable square feet
available for lease as of December 31, 2017. As of December 31, 2017, these properties were 96.8% leased. For the year ended
December 31, 2017, the retail segment contributed 33.0%, of our total revenue. Historically, we have leased retail properties to
tenants primarily on a triple-net lease basis, and we expect to continue to do so in the future. In a triple-net lease, the tenant is
responsible for all property taxes and operating expenses. As such, the base rent payment does not include any operating
expense, but rather all such expenses, to the extent they are paid by the landlord, are billed to the tenant. The full amount of the
expenses for this lease type, to the extent they are paid by the landlord, is reflected in operating expenses, and the
reimbursement is reflected in tenant recoveries.
During the year ended December 31, 2017, we signed 72 retail leases for 332,641 square feet with an average rent of
$36.34 per square foot during the initial year of the lease term, including leases signed for the retail portion of our mixed-use
property. Of the leases, 62 represent comparable leases where there was a prior tenant, with a decrease of 3.0% in cash basis
rent and an increase of 13.1% in straight-line rent compared to the prior leases.
Office Leases. Our office portfolio included seven properties with a total of approximately 2.7 million rentable square feet
available for lease as of December 31, 2017. As of December 31, 2017, these properties were 88.4% leased. For the year ended
December 31, 2017, the office segment contributed 33.6% of our total revenue. Historically, we have leased office properties to
tenants primarily on a full service gross or a modified gross basis and to a limited extent on a triple-net lease basis. We expect
to continue to do so in the future. A full-service gross or modified gross lease has a base year expense stop, whereby the tenant
pays a stated amount of certain expenses as part of the rent payment, while future increases in property operating expenses
(above the base year stop) are billed to the tenant based on such tenant's proportionate square footage of the property. The
increased property operating expenses billed are reflected as operating expenses and amounts recovered from tenants are
reflected as rental income in the statements of operations.
During the year ended December 31, 2017, we signed 58 office leases for 367,802 square feet with an average rent of
$48.81 per square foot during the initial year of the lease term. Of the leases, 41 represent comparable leases where there was a
prior tenant, with an increase of 16.4% in cash basis rent and an increase of 23.7% in straight-line rent compared to the prior
leases.
Multifamily Leases. Our multifamily portfolio included six apartment properties, as well as an RV resort, with a total of
2,112 units (including 122 RV spaces) available for lease as of December 31, 2017. As of December 31, 2017, these properties
were 91.8% leased. For the year ended December 31, 2017, the multifamily segment contributed 13.8% of our total revenue.
Our multifamily leases, other than at our RV Resort, generally have lease terms ranging from 7 to 15 months, with a majority
having 12-month lease terms. Tenants normally pay a base rental amount, usually quoted in terms of a monthly rate for the
respective unit. Spaces at the RV Resort can be rented at a daily, weekly, or monthly rate. The average monthly base rent per
leased unit as of December 31, 2017 was $1,965, compared to $1,713 at December 31, 2016.
Mixed-Use Property Revenue. Our mixed-use property consists of approximately 97,000 rentable square feet of retail
space and a 369-room all-suite hotel. Revenue from the mixed-use property consists of revenue earned from retail leases, and
revenue earned from the hotel, which consists of room revenue, food and beverage services, parking and other guest services.
As of December 31, 2017, the retail portion of the property was 96.9% leased, and for the year ended December 31, 2017, the
hotel had an average occupancy of 92.5%. For the year ended December 31, 2017, the mixed-use segment contributed 19.6%,
of our total revenue. We have leased the retail portion of such property to tenants primarily on a triple-net lease basis, and we
expect to continue to do so in the future. As such, the base rent payment under such leases does not include any operating
expenses, but rather all such expenses, to the extent they are paid by the landlord, are billed to the tenant. Rooms at the hotel
portion of our mixed-use property are rented on a nightly basis.
41
Leasing
Our same-store growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in
portfolio occupancy. Over the long-term, we believe that the infill nature and strong demographics of our properties provide us
with a strategic advantage, allowing us to maintain relatively high occupancy and increase rental rates. We have continued to
see signs of improvement for many of our tenants as well as increased interest from prospective tenants for our spaces. While
there can be no assurance that these positive signs will continue, we remain cautiously optimistic regarding the improved trends
we have seen over the past few years. We believe the locations of our properties and diverse tenant base mitigate the potentially
negative impact of a poor economic environment. However, any reduction in our tenants' abilities to pay base rent, percentage
rent or other charges, may adversely affect our financial condition and results of operations.
During the twelve months ended December 31, 2017, we signed 72 retail leases for a total of 332,641 square feet of retail
space including 309,082 square feet of comparable space leases (leases for which there was a prior tenant), an decrease of 3.0%
on a cash basis and an increase of 13.1% on a straight-line basis. New retail leases for comparable spaces were signed for
31,763 square feet at an average rental rate decrease of 9.3% on a cash basis and an average rental rate increase of 0.6% on a
straight-line basis. Renewals for comparable retail spaces were signed for 277,319 square feet at an average rental rate decrease
of 2.0% on a cash basis and an increase of 15.3% on a straight-line basis. Tenant improvements and incentives were $38.18 per
square foot of retail space for comparable new leases for the twelve months ended December 31, 2017. There were $6.98 per
square foot of retail space of tenant improvement or incentives for comparable renewal leases for the twelve months ended
December 31, 2017.
During the twelve months ended December 31, 2017, we signed 58 office leases for a total of 367,802 square feet of
office space including 269,873 square feet of comparable space leases, at an average rental rate increase of 16.4% on a cash
basis and an average rental increase of 23.7% on a straight-line basis. New office leases for comparable spaces were signed for
101,686 square feet at an average rental rate increase of 11.3% on a cash basis and an average rental rate increase of 15.7% on a
straight-line basis. Renewals for comparable office spaces were signed for 168,187 square feet at an average rental rate increase
of 19.0% on a cash basis and increase of 27.8% on a straight-line basis. Tenant improvements and incentives were $35.77 per
square foot of office space for comparable new leases for the twelve months ended December 31, 2017. There were $9.63 per
square foot of office space of tenant improvement or incentives for comparable renewal leases for the twelve months ended
December 31, 2017.
The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions
reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring
leases and new leases is determined by including minimum rent and percentage rent paid on the expiring lease and minimum
rent and, in some instances, projections of first lease year percentage rent, to be paid on the new lease. In some instances,
management exercises judgment as to how to most effectively reflect the comparability of spaces reported in this calculation.
The change in rental income on comparable space leases is impacted by numerous factors including current market rates,
location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, capital
investment made in the space and the specific lease structure. Tenant improvements and incentives include the total dollars
committed for the improvement of a space as it relates to a specific lease, but may also include base building costs (i.e.,
expansion, escalators or new entrances) which are required to make the space leasable. Incentives include amounts paid to
tenants as an inducement to sign a lease that do not represent building improvements.
The leases signed in 2017 generally become effective over the following year, though some may not become effective
until 2019. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants for
both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However, we
believe that these increases do provide information about the tenant/landlord relationship and the potential fluctuations we may
achieve in rental income over time.
In 2018, we believe our leasing volume will be in-line with our historical averages with overall positive increases in rental
income. However, changes in rental income associated with individual signed leases on comparable spaces may be positive or
negative, and we can provide no assurance that the rents on new leases will continue to increase at the above disclosed levels, if
at all.
42
Critical Accounting Policies
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 and current events and economic conditions. In addition, information relied upon by management in preparing such
estimates includes internally generated financial and operating information, external market information, when available, and
when necessary, information obtained from consultations with third party experts. Actual results could differ from these
estimates. A discussion of possible risks which may affect these estimates is included in the section above entitled “Item 1A.
Risk Factors.” Management considers an accounting estimate to be critical if changes in the estimate could have a material
impact on our consolidated results of operations or financial condition.
Our significant accounting policies are more fully described in the notes to the consolidated financial statements included
elsewhere in this report; however, the most critical accounting policies, which involve the use of estimates and assumptions as
to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:
Revenue Recognition and Accounts Receivable
Our leases with tenants are classified as operating leases. Substantially all such leases contain fixed rent escalations which
occur at specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the tenant
controls the space through the term of the related lease, net of valuation adjustments, based on management's assessment of
credit, collection and other business risks. When we determine that we are the owner of tenant improvements and the tenant
has reimbursed us for a portion or all of the tenant improvement costs, we consider the amount paid to be additional rent, which
is recognized on a straight-line basis over the term of the related lease. For first generation tenants, in instances in which we
fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the
improvements are substantially completed and possession or control of the space is turned over to the tenant. When we
determine that the tenant is the owner of tenant improvements, tenant allowances are recorded as lease incentives and we
commence revenue recognition and lease incentive amortization when possession or control of the space is turned over to the
tenant for tenant work to begin. Percentage rents, which represent additional rents based upon the level of sales achieved by
certain tenants, are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved
and the percentage rents are collectible. Real estate tax and other cost reimbursements are recognized on an accrual basis over
the periods in which the related expenditures are incurred.
Other property income includes parking income, general excise tax billed to tenants, fees charged to tenants at our
multifamily properties and food and beverage sales at the hotel portion of our mixed-use property. Other property income is
recognized when earned. For a tenant to terminate its lease agreement prior to the end of the agreed term, we may require that
they pay a fee to cancel the lease agreement. Lease termination fees for which the tenant has relinquished control of the space
are generally recognized on the termination date. When a lease is terminated early but the tenant continues to control the space
under a modified lease agreement, the lease termination fee is generally recognized evenly over the remaining term of the
modified lease agreement.
Current accounts receivable from tenants primarily relate to contractual minimum rent and percentage rent as well as real
estate tax and other cost reimbursements. Accounts receivable from straight-line rent is typically longer term in nature and
relates to the cumulative amount by which straight-line rental income recorded to date exceeds cash rents billed to date under
the contractual lease agreement.
We recognize revenue on the hotel portion of our mixed-use property from the rental of hotel rooms and guest services
when the rooms are occupied and services have been provided. Food and beverage sales are recognized when the customer has
been served or at the time the transaction occurs. Revenue from room rental is included in rental revenue on the statement of
income. Revenue from other sales and services provided is included in other property income on the statement of income.
We make estimates of the collectability of our current accounts receivable and straight-line rents receivable which
requires significant judgment by management. The collectability of receivables is affected by numerous different factors
including current economic conditions, tenant bankruptcies, the status of collectability of current cash rents receivable, tenants'
recent and historical financial and operating results, changes in our tenants' credit ratings, communications between our
operating personnel and tenants, the extent of security deposits and letters of credits held with respect to tenants, and the ability
of the tenant to perform under the terms of their lease agreement. While we make estimates of potentially uncollectible amounts
and provide an allowance for them through bad debt expense, actual collectability could differ from those estimates which
could affect our net income. With respect to the allowance for current uncollectible tenant receivables, we assess the
collectability of outstanding receivables by evaluating such factors as nature and age of the receivable, past history and current
43
financial condition of the specific tenant including our assessment of the tenant's ability to meet its contractual lease
obligations, and the status of any pending disputes or lease negotiations with the tenant. A change in the estimate of
collectability of a receivable would result in a change to our allowance for doubtful accounts and corresponding bad debt
expense and net income.
Additionally, our assessment of our tenants' abilities to meet their contractual lease obligations includes consideration of
the status of collectability of current cash rents receivable, tenants' recent and historical financial and operating results, changes
in our tenants' credit ratings, communications between our operating personnel and tenants and the extent of security deposits
and letters of credits held with respect to tenants.
Due to the nature of the accounts receivable from straight-line rents, the collection period of these amounts typically
extends beyond one year. Our experience relative to unbilled straight-line rents is that a portion of the amounts otherwise
recognizable as revenue is never billed to or collected from tenants due to early lease terminations, lease modifications,
bankruptcies and other factors. Accordingly, the extended collection period for straight-line rents along with our evaluation of
tenant credit risk may result in the nonrecognition of a portion of straight-line rental income until the collection of such income
is reasonably assured. If our evaluation of tenant credit risk changes indicating more straight-line revenue is reasonably
collectible than previously estimated and realized, the additional straight-line rental income is recognized as revenue. If our
evaluation of tenant credit risk changes indicating a portion of realized straight-line rental income is no longer collectible, a
reserve and bad debt expense is recorded. Correspondingly, these estimates of collectability have a direct impact on our net
income.
Real Estate
Depreciation and maintenance costs relating to our properties constitute substantial costs for us. Land, buildings and
improvements are recorded at cost. Depreciation is computed using the straight-line method. Estimated useful lives range
generally from 30 years to a maximum of 40 years on buildings and major improvements. Minor improvements, furniture and
equipment are capitalized and depreciated over useful lives ranging from 3 to 15 years. Maintenance and repairs that do not
improve or extend the useful lives of the related assets are charged to operations as incurred. Tenant improvements are
capitalized and depreciated over the life of the related lease or their estimated useful life, whichever is shorter. If a tenant
vacates its space prior to contractual termination of its lease, the undepreciated balance of any tenant improvements are written
off if they are replaced or have no future value. Our estimates of useful lives have a direct impact on our net income. If
expected useful lives of our real estate assets were shortened, we would depreciate the assets over a shorter time period,
resulting in an increase to depreciation expense and a corresponding decrease to net income on an annual basis.
Acquisitions of properties are accounted for in accordance with the authoritative accounting guidance on acquisitions and
business combinations. Our methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is
based on estimated fair values, replacement cost and appraised values. When we acquire operating real estate properties, the
purchase price is allocated to land and buildings, intangibles such as in-place leases, and to current assets and liabilities
acquired, if any. Such valuations include a consideration of the noncancelable terms of the respective leases as well as any
applicable renewal period(s). The fair values associated with below market renewal options are determined based on a review
of several qualitative and quantitative factors on a lease-by-lease basis at acquisition to determine whether it is probable that the
tenant would exercise its option to renew the lease agreement. These factors include: (1) the type of tenant in relation to the
property it occupies, (2) the quality of the tenant, including the tenant's long term business prospects, and (3) whether the fixed
rate renewal option was sufficiently lower than the fair rental of the property at the date the option becomes exercisable such
that it would appear to be reasonably assured that the tenant would exercise the option to renew. Each of these estimates
requires a great deal of judgment, and some of the estimates involve complex calculations. These allocation assessments have
a direct impact on our results of operations because if we were to allocate more value to land, there would be no depreciation
with respect to such amount. If we were to allocate more value to the buildings, as opposed to allocating to the value of tenant
leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to
buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized
over the remaining terms of the leases.
The value allocated to in-place leases is amortized over the related lease term and reflected as depreciation and
amortization in the statement of operations. The value of above and below market leases associated with the original
noncancelable lease terms are amortized to rental income over the terms of the respective noncancelable lease periods and are
reflected as either an increase (for below market leases) or a decrease (for above market leases) to rental income in the
statement of operations. If a tenant vacates its space prior to contractual termination of its lease or the lease is not renewed, the
unamortized balance of any in-place lease value is written off to rental income and amortization expense. The value of the
leases associated with below market lease renewal options that are likely to be exercised are amortized to rental income over
44
the respective renewal periods. We make assumptions and estimates related to below market lease renewal options, which
impact revenue in the period in which the renewal options are exercised and could result in significant increases to revenue if
the renewal options are not exercised at which time the related below market lease liabilities would be written off as an increase
to revenue.
Transaction costs related to the acquisition of a business, such as broker fees, transfer taxes, legal, accounting, valuation,
and other professional and consulting fees, are expensed as incurred and included in “general and administrative expenses” in
our consolidated statements of comprehensive income. For asset acquisitions not meeting the definition of a business,
transaction costs are capitalized as part of the acquisition cost.
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, interest, 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 $9.4
million and $31.0 million for the years ended December 31, 2017 and 2016, respectively.
We capitalized external and internal costs related to other property improvements combined of $35.3 million and $28.2
million for the years ended December 31, 2017 and 2016, respectively.
Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not
yet placed in service. Capitalization of interest commences when development activities and expenditures begin and end upon
completion, which is when the asset is ready for its intended use as noted above. We make judgments as to the time period over
which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not
subtracted in calculating net income. If the time period for capitalizing interest is extended, more interest is capitalized, thereby
decreasing interest expense and increasing net income during that period. We capitalized interest costs related to both
development and redevelopment activities combined of $1.6 million for both the years ended December 31, 2017 and 2016.
45
Segment capital expenditures for the years ended December 31, 2017 and 2016 are as follows (dollars in thousands):
Year Ended December 31, 2017
Segment
Tenant
Improvements and
Leasing
Commissions
Maintenance
Capital
Expenditures
Total Tenant
Improvements,
Leasing
Commissions and
Maintenance
Capital
Expenditures
Redevelopment
and Expansions
New
Development
Total Capital
Expenditures
Retail Portfolio
Office Portfolio
Multifamily Portfolio
Mixed-Use Portfolio
Total
$
$
8,416
$
2,050
$
10,466
$
— $
12,856
—
328
21,600
$
8,744
6,318
342
17,454
$
21,600
6,318
670
39,054
$
—
—
—
— $
(54)
13,423
—
—
13,369
$
$
10,412
35,023
6,318
670
52,423
Year Ended December 31, 2016
Tenant
Improvements and
Leasing
Commissions
Maintenance
Capital
Expenditures
Total Tenant
Improvements,
Leasing
Commissions and
Maintenance
Capital
Expenditures
Redevelopment
and Expansions
New
Development
Total Capital
Expenditures
$
$
2,589
$
2,733
$
5,322
$
— $
14,911
—
118
12,202
1,727
777
27,113
1,727
895
243
—
—
8,049 (1) $
19,120
736 (1)
—
13,371
46,476
2,463
895
17,618
$
17,439
$
35,057
$
243
$
27,905
$
63,205
Segment
Retail Portfolio
Office Portfolio
Multifamily Portfolio
Mixed-Use Portfolio
Total
(1) New development capital expenditures for the retail and multifamily segments include capital expenditures incurred for Hassalo on Eighth, which consists
of 657 multifamily units and 47,000 square feet of retail space. Hassalo on Eighth - Multifamily was completed and became available for occupancy during
the third and fourth quarters of 2015. From inception of construction through the third quarter of 2015, all capital expenditures incurred for Hassalo on Eighth
were included in the multifamily segment. Since the fourth quarter of 2015, capital expenditures incurred for Hassalo on Eighth have been recorded in both the
retail and multifamily segments.
The decrease in maintenance capital expenditures in our office portfolio was primarily related to the completion of City
Center Bellevue building renovations during 2016. This is offset with the increase in maintenance capital expenditures for the
completion of Torrey Reserve Campus building renovations during 2017. The increase in maintenance capital expenditures in
our multifamily portfolio was primarily related to the 21 units repositioning at Loma Palisades.
The decrease in new development expenditures for the year ended December 31, 2017 was primarily related to the
completion of Hassalo on Eighth - Retail during 2016. New development expenditures for the office portfolio incurred during
the year ended December 31, 2017 and 2016 reflect costs incurred for the development of Torrey Point.
Our capital expenditures during 2018 will depend upon acquisition opportunities, the level of improvements and
redevelopments on existing properties and the timing and cost of development of our development, held for development and
construction in progress properties. While the amount of future expenditures will depend on numerous factors, we expect
expenditures incurred in 2018 will be less than those incurred in 2017 as our development of Torrey Point was completed in
2017. We anticipate an increase in tenant improvements and leasing commissions noting lease expirations of approximately
11.8% in our total portfolio, assuming tenants do not exercise their options to extend their leases.
Derivative Instruments
We may use derivative instruments to manage exposure to variable interest rate risk. We may enter into interest rate swaps
to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the
issuance of debt.
Any interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess
effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value
46
of the interest rate swaps associated with our cash flow hedges is recorded in other comprehensive income which is included in
accumulated other comprehensive loss on our consolidated balance sheet and our consolidated statement of equity. Our cash
flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not match, such as
notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of
the counterparty by monitoring the credit worthiness of the counterparty which includes reviewing debt ratings and financial
performance. However, management does not anticipate non-performance by the counterparty. If a cash flow hedge is deemed
ineffective, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is
recognized in earnings in the period affected.
Impairment of Long-Lived Assets
We review for impairment on a property by property basis. Impairment is recognized on properties held for use when the
expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to
fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future
cash flows including revenues, operating expenses, required maintenance and development expenditures, market conditions,
demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions
used to estimate the future recoverability of book value requires significant management judgment. Actual results could be
significantly different from the estimates. These estimates have a direct impact on net income because recording an impairment
charge results in a negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based
in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual
results in future periods.
Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell.
Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise
dictate an earlier sale date, an impairment loss may be recognized to reduce the property to fair value and such loss could be
material.
As of December 31, 2017 and 2016, none of our properties were impaired.
Income Taxes
We elected to be taxed as a REIT under the Code commencing with the taxable year ended December 31, 2011. To
maintain our qualification as a REIT, we are required to distribute at least 90% of our net taxable income to our stockholders,
excluding net capital gains, and meet the various other requirements imposed by the Code relating to such matters as operating
results, asset holdings, distribution levels and diversity of stock ownership. Provided we maintain our qualification for taxation
as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders.
If we fail to maintain our qualification as a REIT in any taxable year, and are unable to avail ourselves of certain savings
provisions set forth in the Code, our taxable income generally would be subject to regular U.S. federal corporate income tax.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our
operations and distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders.
We, together with one of our subsidiaries, have elected to treat such subsidiary as a taxable REIT subsidiary for federal
income tax purposes. A taxable REIT subsidiary is subject to federal and state income taxes.
Property Acquisitions and Dispositions
2017 Acquisitions and Dispositions
On April 28, 2017, we acquired the Pacific Ridge Apartments, a 533-unit, multifamily community, built in 2013 and
located in San Diego, California. The purchase price was approximately $232 million, excluding closing costs and prorations.
On July 6, 2017, we acquired Gateway Marketplace, an approximately 128,000 square feet dual-grocery anchored
shopping center located in Chula Vista, California. The purchase price was approximately $42 million, excluding closing costs
and prorations.
On September 1, 2017, we acquired the building and related improvements in which Forever 21 and Gold's Gym are
currently in tenancy at Del Monte Center for approximately $5.3 million.
During 2017, there were no dispositions.
47
2016 Acquisitions and Dispositions
During 2016, there were no acquisitions or dispositions.
2015 Acquisitions and Dispositions
On August 6, 2015, we sold Rancho Carmel Plaza located in San Diego, California, which was previously included in our
retail segment. The sales price of this property of approximately $12.7 million, less costs to sell, resulted in net proceeds to us
of approximately $12.3 million. Accordingly, we recorded a gain on sale of approximately $7.1 million for the year ended
December 31, 2015.
During 2015, there were no acquisitions.
Results of Operations
For our discussion of results of operations, we have provided information on a total portfolio and same-store basis.
Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016
The following summarizes our consolidated results of operations for the year ended December 31, 2017 compared to our
consolidated results of operations for the year ended December 31, 2016. As of December 31, 2017, our operating portfolio was
comprised of 26 retail, office, multifamily and mixed-use properties with an aggregate of approximately 6.0 million rentable
square feet of retail and office space (including mixed-use retail space), 2,112 residential units (including 122 RV spaces) and a
369-room hotel. Additionally, as of December 31, 2017, we owned land at four of our properties that we classified as held for
development and construction in progress. As of December 31, 2016, our operating portfolio was comprised of 24 retail, office,
multifamily and mixed-use properties with an aggregate of approximately 5.9 million rentable square feet of retail and office
space (including mixed-use retail space), 1,579 residential units (including 122 RV spaces) and a 369-room hotel. Additionally,
as of December 31, 2016, we owned land at four of our properties that we classified as held for development and construction
in progress.
The following table sets forth selected data from our consolidated statements of income for the years ended December 31,
2017 and 2016 (dollars in thousands):
Year Ended December 31,
2017
2016
Change
%
$
298,803
$
279,498
$ 19,305
7 %
16,180
314,983
84,006
32,671
116,677
198,306
(21,382)
(83,278)
(53,848)
334
40,132
(241)
15,590
590
295,088
19,895
79,553
28,378
107,931
187,157
(17,897)
(71,319)
(51,936)
(368)
45,637
(189)
4,453
4,293
8,746
11,149
(3,485)
(11,959)
(1,912)
702
(5,505)
(52)
4
7
6
15
8
6
19
17
4
(191)
(12)
28
(10,814)
(12,863)
2,049
(16)
$
29,077
$
32,585
$ (3,508)
(11)%
Revenues
Rental income
Other property income
Total property revenues
Expenses
Rental expenses
Real estate taxes
Total property expenses
Net operating income
General and administrative
Depreciation and amortization
Interest expense
Other income (expense), net
Net income
Net income attributable to restricted shares
Net income attributable to unitholders in the Operating
Partnership
Net income attributable to American Assets Trust, Inc.
stockholders
48
Revenue
Total property revenues. Total property revenue consists of rental revenue and other property income. Total property
revenue increased $19.9 million, or 7%, to $315.0 million for the year ended December 31, 2017, compared to $295.1 million
for the year ended December 31, 2016. The percentage leased was as follows for each segment as of December 31, 2017 and
2016:
Retail
Office
Multifamily
Mixed-Use (2)
Percentage Leased (1)
Year Ended
December 31,
2017
2016
96.8%
88.4%
91.8%
96.9%
96.6%
90.1%
90.3%
98.7%
(1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of December 31, 2017 or
December 31, 2016, as applicable.
Includes the retail portion of the mixed-use property only.
(2)
The increase in total property revenue was attributable primarily to the factors discussed below.
Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents.
Rental revenue increased $19.3 million, or 7%, to $298.8 million for the year ended December 31, 2017, compared to $279.5
million for the year ended December 31, 2016. Rental revenue by segment was as follows (dollars in thousands):
Total Portfolio
Same-Store Portfolio (1)
Year Ended December 31,
Year Ended December 31,
Retail
Office
Multifamily
Mixed-Use
2017
102,510
100,429
40,360
55,504
298,803
$
$
$
$
2016
Change
%
2017
2016
Change
99,655
97,396
26,998
55,449
279,498
$
2,855
3,033
13,362
55
$ 19,305
3% $
3
49
—
7% $
99,506
82,823
18,682
55,504
256,515
$
$
99,190
80,490
18,100
55,449
253,229
$
$
316
2,333
582
55
3,286
%
—%
3
3
—
1%
(1) For this table and tables following, the same-store portfolio excludes: (i) Torrey Reserve Campus due to significant redevelopment activity
during the period; (ii) Hassalo on Eighth - Multifamily, which became available for occupancy in July and October of 2015; (iii) Hassalo on
Eighth - Retail, which was placed in operation in April and July of 2016; (iv) the Pacific Ridge Apartments, as it was acquired on April 28,
2017; (v) Gateway Marketplace, as it was acquired on July 6, 2017; and (vi) land held for development.
Retail rental revenue increased $2.9 million for the year ended December 31, 2017 compared to the year ended December
31, 2016 primarily due to the acquisition of Gateway Marketplace on July 6, 2017, which had rental revenue of approximately
$1.7 million during the period. The increase in total retail rental revenue is also attributed to the completion of Hassalo on
Eighth - Retail, which became available for occupancy during 2016, and had incremental rental revenue of approximately $0.9
million during the period. Same-store retail rental revenue increased $0.3 million for the year ended December 31, 2017
compared to the year ended December 31, 2016 primarily due to higher annualized base rents at Alamo Quarry Market and Del
Monte Center. The increases in same-store retail rental revenue were offset by a decrease in vacancy and lower annualized base
rents at Waikele Center during the period.
Office rental revenue increased $3.0 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 due to an increase in annualized base rent for the year ended December 31, 2017, primarily at Lloyd
District Portfolio, The Landmark at One Market, First & Main and Torrey Reserve Campus.
Multifamily rental revenue increased $13.4 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to the acquisition of the Pacific Ridge Apartments on April 28, 2017, which had rental
revenue of approximately $10.5 million for the period. The increase in multifamily rental revenue is also attributed to an
increase in occupancy at Hassalo on Eighth - Multifamily for the year ended December 31, 2017, which had incremental rental
revenue of approximately $2.3 million during the period. Same-store multifamily rental revenue increased $0.6 million during
the period due to higher average base rent per unit of $1,816 during the year ended December 31, 2017 compared to $1,702
during the year ended December 31, 2016.
49
Other property income. Other property income increased $0.6 million, or 4%, to $16.2 million for the year ended
December 31, 2017, compared to $15.6 million for the year ended December 31, 2016. Other property income by segment was
as follows (dollars in thousands):
Total Portfolio
Same-Store Portfolio
Year Ended December 31,
Year Ended December 31,
Retail
Office
Multifamily
Mixed-Use
$
$
2017
2016
Change
1,458
5,265
3,173
6,284
16,180
$
$
1,327
5,858
2,190
6,215
15,590
$
$
131
(593)
983
69
590
%
10% $
(10)
45
1
4% $
2017
2016
Change
1,270
5,299
1,390
6,284
14,243
$
$
1,256
5,643
1,254
6,215
14,368
$
$
14
(344)
136
69
(125)
%
1 %
(6)
11
1
(1)%
Retail other property income increased $0.1 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to an increase in parking garage income at Hassalo on Eighth - Retail during the period.
Office other property income decreased $0.6 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to lease termination fees from tenants at City Center Bellevue received in the prior year.
Multifamily other property income increased $1.0 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 primarily due to the acquisition of the Pacific Ridge Apartments on April 28, 2017, which had other
property income of approximately $0.5 million for the period. The increase in multifamily rental revenue is also attributed to
an increase in occupancy at Hassalo on Eighth - Multifamily for the year ended December 31, 2017, which had incremental
other property income of approximately $0.3 million during the period.
Property Expenses
Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses
increased by $8.7 million, or 8%, to $116.7 million for the year ended December 31, 2017, compared to $107.9 million for the
year ended December 31, 2016. This increase in total property expenses was attributable primarily to the factors discussed
below.
Rental Expenses. Rental expenses increased $4.5 million, or 6%, to $84.0 million for the year ended December 31, 2017,
compared to $79.6 million for the year ended December 31, 2016. Rental expense by segment was as follows (dollars in
thousands):
Total Portfolio
Same-Store Portfolio
Year Ended December 31,
Year Ended December 31,
Retail
Office
Multifamily
Mixed-Use
$
$
2017
2016
Change
15,049
21,860
12,742
34,355
84,006
$
$
15,564
21,031
9,878
33,080
79,553
$
$
(515)
829
2,864
1,275
4,453
%
(3)% $
4
29
4
6 % $
2017
2016
Change
14,513
18,355
5,192
34,355
72,415
$
$
15,395
17,983
4,961
33,080
71,419
$
$
(882)
372
231
1,275
996
%
(6)%
2
5
4
1 %
Retail rental expenses decreased $0.5 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to bad debt expense for Waikele Center related to the Sports Authority bankruptcy and
announcement of its Kmart store closure during 2016.
Office rental expenses increased $0.8 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to an increase in bad debt expense for tenants at the Lloyd District Portfolio.
Multifamily rental expenses increased $2.9 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to the acquisition of the Pacific Ridge Apartments on April 28, 2017, which had other rental
50
expense of approximately $2.9 million for the period. The increase in total multifamily rental expenses was offset by a
decrease in salary and marketing expenses at Hassalo on Eighth during the period.
Mixed-use rental expenses increased $1.3 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to an increase in bad debt expense primarily at the hotel portion of our mixed-use property
attributable to a bankruptcy filed by one of the hotel's travel agencies. The increase in rental expenses is also attributed to an
increase in room expenses at the hotel portion of our mixed-use property attributable to the increase in occupancy during the
period.
Real Estate Taxes. Real estate tax expense increased $4.3 million, or 15%, to $32.7 million for the year ended December
31, 2017, compared to $28.4 million for the year ended December 31, 2016. Real estate tax expense by segment was as follows
(dollars in thousands):
Total Portfolio
Same-Store Portfolio
Year Ended December 31,
Year Ended December 31,
2017
2016
Change
%
2017
2016
Change
%
Retail
Office
Multifamily
Mixed-Use
$
$
13,475
11,260
5,156
2,780
32,671
$
$
12,370
10,808
2,620
2,580
28,378
$
$
1,105
452
2,536
200
4,293
9% $
4
97
8
15% $
12,991
8,999
1,740
2,780
26,510
$
$
12,226
8,712
1,710
2,580
25,228
$
$
765
287
30
200
1,282
6%
3
2
8
5%
Retail real estate taxes increased $1.1 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to an increase in the assessed values of Alamo Quarry Market and Waikele Center. The
increase is also attributed to the acquisition of Gateway Marketplace on July 6, 2017, which had real estate taxes of
approximately $0.3 million during the period.
Office real estate taxes increased $0.5 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to an increase in the assessed values of City Center Bellevue and Torrey Reserve Campus.
The increase in real estate taxes is partially offset by nonrecurring real estate taxes for tenants with tax exemptions at First &
Main.
Multifamily real estate taxes increased $2.5 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to the acquisition of the Pacific Ridge Apartments on April 28, 2017, which had real estate
taxes of approximately $1.9 million during the year ended December 31, 2017. The increase is also attributed to receipt of
assessed taxes at Hassalo on Eighth - Multifamily, which were estimated for by the company during the prior period and had
incremental real estate tax expense of approximately $0.7 million during the period.
Mixed-use real estate taxes increased $0.2 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to an increase in real estate taxes for the hotel portion of our mixed-use property that are
assessed annually based on the hotel's room rates, which have increased from the prior year.
Property Operating Income.
Property operating income increased $11.1 million, or 6%, to $198.3 million for the year ended December 31, 2017,
compared to $187.2 million for the year ended December 31, 2016. Property operating income by segment was as follows
(dollars in thousands):
Total Portfolio
Same-Store Portfolio
Year Ended December 31,
Year Ended December 31,
2017
2016
Change
%
2017
2016
Change
%
Retail
Office
Multifamily
Mixed-Use
$
$
75,444
72,574
25,635
24,653
198,306
$
$
$
73,048
71,415
16,690
2,396
1,159
8,945
26,004
187,157
(1,351)
$ 11,149
3% $
2
54
(5)
6% $
73,272
60,768
13,140
24,653
171,833
$
$
72,825
59,438
12,683
26,004
170,950
$
$
447
1,330
457
(1,351)
883
1%
2
4
(5)
1%
51
Retail property operating income increased $2.4 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 primarily due to the acquisition of Gateway Marketplace on July 6, 2017, an increase in the
percentage leased at Hassalo on Eighth and higher annualized base rent for same-store properties during the period.
Office property operating income increased $1.2 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 primarily due to higher annualized base rent during the period.
Multifamily property operating income increased $8.9 million for the year ended December 31, 2017 compared to the
year ended December 31, 2016 primarily due to the acquisition of the Pacific Ridge Apartments on April 28, 2017, an increase
in occupancy at Hassalo on Eighth during the period and higher average base rent for same-store properties during the period.
Mixed-use property operating income decreased $1.4 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 primarily to an increase in bad debt expense during the period at the hotel portion of our mixed-use
property attributable to a bankruptcy filed by one of the hotel's travel agents and a decrease in the percentage leased at the retail
portion of our mixed-use property.
Other
General and administrative. General and administrative expenses increased $3.5 million, or 19%, to $21.4 million for the
year ended December 31, 2017, compared to $17.9 million for the year ended December 31, 2016. This increase was primarily
due to an increase in employee related costs associated with a one-time charge associated with vesting of previously granted
restricted stock awards.
Depreciation and amortization. Depreciation and amortization expense increased $12.0 million, or 17%, to $83.3 million
for the year ended December 31, 2017, compared to $71.3 million for the year ended December 31, 2016. This increase was
primarily due to depreciation and amortization attributable to the acquisitions of the Pacific Ridge Apartments on April 28,
2017, which had depreciation and amortization expense of approximately $10.4 million during the period, and Gateway
Marketplace on July 6, 2017, which had depreciation and amortization expense of approximately $0.5 million during the
period. The increase was also due to the depreciation and amortization attributable to the completion of the Hassalo on Eighth
retail buildings completed in 2016, which had incremental expense of approximately $0.7 million.
Interest expense. Interest expense increased $1.9 million, or 4%, to $53.8 million for the year ended December 31, 2017
compared with $51.9 million for the year ended December 31, 2016. This increase was primarily due to the closing of our
offerings of Series D Notes on March 1, 2017, Series E Notes on May 23, 2017 and Series F Notes on July 19, 2017, offset by
the payoff of property mortgages for Southbay Marketplace in the fourth quarter of 2016, Waikiki Beach Walk - Retail during
the first quarter of 2017 and Solana Beach Corporate Center III-IV during the second quarter of 2017.
Other Income (Expense), Net. Other income (expense), net decreased $0.7 million, or 191%, to other income, net of $0.3
million for the year ended December 31, 2017 compared to other expense, net of $0.4 million for the year ended December 31,
2016, primarily due to an increase in interest and investment income attributed to higher cash balances during the period.
Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015
The following summarizes the historical results of operations for the year ended December 31, 2016 compared to our
consolidated results of operations for the year ended December 31, 2015. As of December 31, 2016, our operating portfolio was
comprised of 24 retail, office, multifamily and mixed-used properties with an aggregate of approximately 5.9 million rentable
square feet of retail and office space (including mixed-use retail space), 1,579 residential units (including 122 RV spaces) and a
369-room hotel. Additionally, as of December 31, 2016, we owned land at four of our properties that we classified as held for
development and construction in progress. As of December 31, 2015, our operating portfolio was comprised of 23 retail, office,
multifamily and mixed-used properties with an aggregate of approximately 5.8 million rentable square feet of retail and office
space (including mixed-use retail space), 1,579 residential units (including 122 RV spaces) and a 369-room hotel. Additionally,
as of December 31, 2015, we owned land at five of our properties that we classified as held for development and construction
in progress.
52
The following table sets forth selected data from our consolidated statements of income for the years ended December 31,
2016 and 2015 (dollars in thousands):
Revenues
Rental income
Other property income
Total property revenues
Expenses
Rental expenses
Real estate taxes
Total property expenses
Net operating income
General and administrative
Depreciation and amortization
Interest expense
Gain on sale of real estate
Other income (expense), net
Net income
Net income attributable to restricted shares
Net income attributable to unitholders in the Operating
Partnership
Net income attributable to American Assets Trust, Inc.
stockholders
Revenue
Year Ended December 31,
2015
2016
Change
%
$
$
279,498
15,590
295,088
$
261,887
13,736
275,623
17,611
1,854
19,465
7 %
13
7
79,553
28,378
107,931
187,157
(17,897)
(71,319)
(51,936)
—
(368)
45,637
(189)
73,187
24,819
98,006
177,617
(20,074)
(63,392)
(47,260)
7,121
(97)
53,915
(168)
6,366
3,559
9,925
9,540
2,177
(7,927)
(4,676)
(7,121)
(271)
(8,278)
(21)
(12,863)
(15,238)
2,375
9
14
10
5
(11)
13
10
100
279
(15)
13
(16)
$
32,585
$
38,509
$
(5,924)
(15)%
Total property revenues. Total property revenue consists of rental revenue and other property income. Total property
revenue increased $19.5 million, or 7%, to $295.1 million for the year ended December 31, 2016, compared to $275.6 million
for the year ended December 31, 2015. The percentage leased was as follows for each segment as of December 31, 2016 and
2015:
Retail
Office
Multifamily
Mixed-Use (2)
Percentage Leased (1)
Year Ended
December 31,
2016
2015
96.6%
90.1%
90.3%
98.7%
98.6%
92.4%
73.4%
100.0%
(1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of December 31, 2016 or
December 31, 2015, as applicable.
Includes the retail portion of the mixed-use property only.
(2)
The increase in total property revenue was attributable primarily to the factors discussed below.
53
Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents.
Rental revenue increased $17.6 million, or 7%, to $279.5 million for the year ended December 31, 2016 compared to $261.9
million for the year ended December 31, 2015. Rental revenue by segment was as follows (dollars in thousands):
Total Portfolio
Same-Store Portfolio (1)
Year Ended December 31,
Year Ended December 31,
2016
2015
Change
%
2016
2015
Change
%
Retail
Office
Multifamily
Mixed-Use
$
$
99,655
97,396
26,998
55,449
279,498
$
$
97,568
92,670
18,147
53,502
261,887
$
2,087
4,726
8,851
1,947
$ 17,611
2% $
5
49
4
7% $
99,190
69,808
18,100
55,449
242,547
$
$
96,917
66,584
16,758
53,502
233,761
$
$
2,273
3,224
1,342
1,947
8,786
2%
5
8
4
4%
(1) For this table and tables following, the same-store portfolio excludes: (i) Torrey Reserve Campus and Lloyd District Portfolio due to
significant redevelopment activity during the period; (ii) Rancho Carmel Plaza, as it was sold on August 6, 2015; (iii) Hassalo on Eighth -
Multifamily, which became available for occupancy in July and October of 2015; (iv) Hassalo on Eighth - Retail, which was placed in
operation in April, July and October of 2016; and (v) land held for development.
Retail rental revenue increased $2.1 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to an increase in annualized base rent and additional cost reimbursements for the year ended
December 31, 2015, minimally offset by the sale of Rancho Carmel Plaza on August 6, 2015. The increase in annualized base
rent was attributed to higher base rents for tenants at Alamo Quarry Market and Carmel Mountain Plaza. The increase was
also attributed to the completion of the retail component of Hassalo on Eighth in 2016, which had generated rental revenue of
approximately $0.4 million for the year ended December 31, 2016.
Office rental revenue increased $4.7 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 due to an increase in annualized base rent and additional cost reimbursements for the year ended December
31, 2016, primarily at Torrey Reserve Campus, The Landmark at One Market, First & Main and City Center Bellevue.
Multifamily rental revenue increased $8.9 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to the completion of the Hassalo on Eighth multifamily buildings, which became available
for occupancy during the third and fourth quarters of 2015, and had incremental rental revenue of approximately $7.5 million
for the year ended December 31, 2016. Same-store multifamily rental revenue increased $1.3 million during the period due to
higher average base rent per unit of $1,702 for the year ended December 31, 2016, compared to $1,592 for the year ended
December 31, 2015.
Mixed-use rental revenue increased $1.9 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to higher revenue per available room of $292 for the year ended December 31, 2016,
compared to $284 for the year ended December 31, 2015.
Other property income. Other property income increased $1.9 million, or 13%, to $15.6 million for the year ended
December 31, 2016, compared to $13.7 million for the year ended December 31, 2015. Other property income by segment was
as follows (dollars in thousands):
Total Portfolio
Same-Store Portfolio
Year Ended December 31,
Year Ended December 31,
2016
2015
Change
%
2016
2015
Change
%
Retail
Office
Multifamily
Mixed-Use
$
$
1,327
5,858
2,190
6,215
15,590
$
$
1,227
4,981
1,308
6,220
13,736
$
$
100
877
882
(5)
1,854
8% $
18
67
—
13% $
1,256
3,967
1,254
6,215
12,692
$
$
1,224
3,440
1,206
6,220
12,090
$
$
32
527
48
(5)
602
3%
15
4
—
5%
Office other property income increased $0.9 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to lease termination fees from tenants at City Center Bellevue and parking garage income at
Lloyd District Portfolio due to the completion of the shared Hassalo on Eighth parking garage, which was placed into service
during the fourth quarter of 2015.
54
Multifamily other property income increased $0.9 million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 primarily due to the completion of the Hassalo on Eighth multifamily buildings, which became
available for occupancy during the third and fourth quarters of 2015, and had incremental other property income of
approximately $0.8 million for the year ended December 31, 2016.
Property Expenses
Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses
increased by $9.9 million, or 10%, to $107.9 million for the year ended December 31, 2016, compared to $98.0 million for the
year ended December 31, 2015. This increase in total property expenses was attributable primarily to the factors discussed
below.
Rental Expenses. Rental expenses increased $6.4 million, to $79.6 million for the year ended December 31, 2016,
compared to $73.2 million for the year ended December 31, 2015. Rental expense by segment was as follows (dollars in
thousands):
Total Portfolio
Same-Store Portfolio
Year Ended December 31,
Year Ended December 31,
2016
2015
Change
%
2016
2015
Change
Retail
Office
Multifamily
Mixed-Use
$
$
15,564
21,031
9,878
33,080
79,553
$
$
14,243
19,475
6,601
32,868
73,187
$
$
1,321
1,556
3,277
212
6,366
9% $
8
50
1
9% $
15,395
14,002
4,961
33,080
67,438
$
$
14,026
12,882
4,726
32,868
64,502
$
$
1,369
1,120
235
212
2,936
%
10%
9
5
1
5%
Retail rental expenses increased $1.3 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 due to an increase in bad debt expense for Waikele Center related to the Sports Authority bankruptcy and
announcement of its Kmart store closure. The increase was also due to an increase in repair and maintenance expenses at
Waikele Center, Alamo Quarry Market and Del Monte Center.
Office rental expenses increased $1.6 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to an increase in rent expense for the Annex lease at The Landmark at One Market, which
was extended during the fourth quarter of 2015. The increase was also attributed to an increase in parking lot expenses at
Lloyd District Portfolio due to the completion of the shared Hassalo on Eighth parking garage, which was placed into service
during the fourth quarter of 2015.
Multifamily rental expenses increased $3.3 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to the completion of the Hassalo on Eighth multifamily buildings, which became available
for occupancy during the third and fourth quarters of 2015 and had incremental other rental expenses of approximately $3.0
million for the year ended December 31, 2016. Same-store multifamily rental expenses increased $0.2 million for the year
ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to additional rental expenses at Loma
Palisades.
Mixed-use rental expenses increased $0.2 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to an increase in room expenses of our hotel operations during the period.
55
Real Estate Taxes. Real estate tax expense increased $3.6 million, or 14%, to $28.4 million for the year ended December
31, 2016, compared to $24.8 million for the year ended December 31, 2015. Real estate tax expense by segment was as follows
(dollars in thousands):
Total Portfolio
Same-Store Portfolio
Year Ended December 31,
Year Ended December 31,
2016
2015
Change
%
2016
2015
Change
%
Retail
Office
Multifamily
Mixed-Use
$
$
12,370
10,808
2,620
2,580
28,378
$
$
11,429
9,368
1,733
2,289
24,819
$
$
941
1,440
887
291
3,559
8% $
15
51
13
14% $
12,226
7,288
1,710
2,580
23,804
$
$
11,279
6,218
1,689
2,289
21,475
$
$
947
1,070
21
291
2,329
8%
17
1
13
11%
Retail real estate taxes increased $0.9 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to higher assessments for Alamo Quarry Market and Waikele Center during the period.
Office real estate taxes increased $1.4 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to an increase in real estate taxes at First & Main and One Beach Street due to decreases in
property tax exemptions for certain tenants. The increase was also attributed to completion of redevelopment activity at Torrey
Reserve Campus, for which real estate taxes were capitalized in the prior year during the construction period.
Multifamily real estate taxes increased $0.9 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to the completion of the Hassalo on Eighth multifamily buildings, which became available
for occupancy during the third and fourth quarters of 2015, and had incremental real estate taxes of approximately $0.8 million
for the year ended December 31, 2016.
Mixed-use real estate taxes increased $0.3 million for the year ended December 31, 2016 compared to the year ended
December 31, 2015 primarily due to an increase in real estate taxes for the hotel portion of our mixed-use property that are
assessed annually based on the hotel's room rates, which had increased from the prior year.
Property Operating Income
Property operating income increased $9.5 million, or 5%, to $187.2 million for the year ended December 31, 2016,
compared to $177.6 million for the year ended December 31, 2015. Property operating income by segment was as follows
(dollars in thousands):
Total Portfolio
Year Ended December 31,
2016
2015
73,048
71,415
16,690
26,004
187,157
$
$
73,123
68,808
11,121
24,565
177,617
$
$
Retail
Office
Multifamily
Mixed-Use
Same-Store Portfolio
Year Ended December 31,
Change
%
(75) — % $
$
2,607
5,569
1,439
9,540
$
4
50
6
5 % $
2016
2015
Change
%
72,825
52,485
12,683
26,004
163,997
$
$
72,836
50,924
11,549
24,565
159,874
$
(11) — %
1,561
1,134
1,439
4,123
$
3
10
6
3 %
Retail property operating income decreased by less than $0.1 million for the year ended December 31, 2016 compared to
the year ended December 31, 2015 primarily due to an increase in bad debt expense for Waikele Center related to the Sports
Authority bankruptcy and announcement of its Kmart store closure.
Office property operating income increased $2.6 million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 primarily due to higher annualized base rent during the period.
Multifamily property operating income increased $5.6 million for the year ended December 31, 2016 compared to the
year ended December 31, 2015 primarily due to the completion of the Hassalo on Eighth multifamily buildings, which became
available for occupancy during the third and fourth quarters of 2015, and higher average base rent for same-store
properties during the period.
56
Mixed-use property operating income increased $1.4 million for the year ended December 31, 2016 compared to the year
ended December 31, 2015 primarily due to higher revenue per available room during the period.
Other
General and administrative. General and administrative expenses decreased $2.2 million, or 11%, to $17.9 million for the
year ended December 31, 2016, compared to $20.1 million for the year ended December 31, 2015. This decrease was primarily
due to a decrease in stock compensation expense during the period due to lower valuations assigned to the 2015 stock awards,
the final vesting of initial public offering awards during the first quarter of 2015 incurred during the period and business
transition costs incurred during 2015 associated with the resignation of our former President and Chief Executive Officer, John
W. Chamberlain.
Depreciation and amortization. Depreciation and amortization expense increased $7.9 million, or 13% to $71.3 million
for the year ended December 31, 2016, compared to $63.4 million for the year ended December 31, 2015. This increase was
primarily due to an increase in depreciation for Hassalo on Eighth multifamily buildings which were placed into service during
the third and fourth quarters of 2015.
Interest expense. Interest expense increased $4.7 million, or 10%, to $51.9 million for the year ended December 31, 2016
compared with $47.3 million for the year ended December 31, 2015. This increase was primarily due to the completion of the
Hassalo on Eighth multifamily buildings during the third and fourth quarters of 2015, in that capitalization of interest costs
ceased when the buildings were placed into service.
Gain on sale of real estate. Gain on sale of real estate of $7.1 million relates to our sale of Rancho Carmel Plaza on
August 6, 2015.
Other Income (Expense), Net. Other income (expense), net increased $0.3 million, or 279%, to other expense, net of $0.4
million for the year ended December 31, 2016, compared to other income, net of $0.1 million for the year ended December 31,
2015, primarily due to tax refunds received in 2015 relating to prior years' amended Hawaii state tax returns.
Liquidity and Capital Resources of American Assets Trust, Inc.
In this “Liquidity and Capital Resources of American Assets Trust, Inc.” section, the term the “company” refers only to
American Assets Trust, Inc. on an unconsolidated basis, and excludes the Operating Partnership and all other subsidiaries.
The company’s business is operated primarily through the Operating Partnership, of which the company is the parent
company and sole general partner, and which it consolidates for financial reporting purposes. Because the company operates on
a consolidated basis with the Operating Partnership, the section entitled “Liquidity and Capital Resources of American Assets
Trust, L.P.” should be read in conjunction with this section to understand the liquidity and capital resources of the company on
a consolidated basis and how the company is operated as a whole.
The company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any
business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by the
Operating Partnership. The company itself does not have any indebtedness, and its only material asset is its ownership of
partnership interests of the Operating Partnership. Therefore, the consolidated assets and liabilities and the consolidated
revenues and expenses of the company and the Operating Partnership are the same on their respective financial
statements. However, all debt is held directly or indirectly by the Operating Partnership. The company’s principal funding
requirement is the payment of dividends on its common stock. The company’s principal source of funding for its dividend
payments is distributions it receives from the Operating Partnership.
As of December 31, 2017, the company owned an approximate 73.2% partnership interest in the Operating Partnership.
The remaining 26.8% are owned by non-affiliated investors and certain of the company's directors and executive officers. As
the sole general partner of the Operating Partnership, American Assets Trust, Inc. has the full, exclusive and complete authority
and control over the Operating Partnership’s day-to-day management and business, can cause it to enter into certain major
transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital
structure and distribution policies. The company causes the Operating Partnership to distribute such portion of its available
cash as the company may in its discretion determine, in the manner provided in the Operating Partnership’s partnership
agreement.
The liquidity of the company is dependent on the Operating Partnership’s ability to make sufficient distributions to the
company. The primary cash requirement of the company is its payment of dividends to its stockholders. The company also
57
guarantees some of the Operating Partnership’s debt, as discussed further in Note 7 of the Notes to Consolidated Financial
Statements included elsewhere herein. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger
the company’s guarantee obligations, then the company will be required to fulfill its cash payment commitments under such
guarantees. However, the company’s only significant asset is its investment in the Operating Partnership.
We believe the Operating Partnership’s sources of working capital, specifically its cash flow from operations, and
borrowings available under its unsecured line of credit, are adequate for it to make its distribution payments to the company
and, in turn, for the company to make its dividend payments to its stockholders. As of December 31, 2017, the company has
determined that it has adequate working capital to meet its dividend funding obligations for the next 12 months. However, we
cannot assure you that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient
to meet its needs, including its ability to make distribution payments to the company. The unavailability of capital could
adversely affect the Operating Partnership’s ability to pay its distributions to the company, which would in turn, adversely
affect the company’s ability to pay cash dividends to its stockholders.
Our short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to the
company’s stockholders, operating expenses and other expenditures directly associated with our properties, interest expense
and scheduled principal payments on outstanding indebtedness, general and administrative expenses, funding construction
projects, capital expenditures, tenant improvements and leasing commissions.
The company may from time to time seek to repurchase or redeem the Operating Partnership’s outstanding debt, the
company’s shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise.
Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material.
For the company to maintain its qualification as a REIT, it must pay dividends to its stockholders aggregating annually at
least 90% of its REIT taxable income, excluding net capital gains. While historically the company has satisfied this distribution
requirement by making cash distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s
unitholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited
circumstances, the company’s own stock. As a result of this distribution requirement, the Operating Partnership cannot rely on
retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs
can. The company may need to continue to raise capital in the equity markets to fund the operating partnership’s working
capital needs, acquisitions and developments.
The company is a well-known seasoned issuer. As circumstances warrant, the company may issue equity from time to
time on an opportunistic basis, dependent upon market conditions and available pricing. When the company receives proceeds
from preferred or common equity issuances, it is required by the Operating Partnership’s partnership agreement to contribute
the proceeds from its equity issuances to the Operating Partnership in exchange for preferred or common partnership units of
the operating partnership. The operating partnership may use the proceeds to repay debt, to develop new or existing properties,
to acquire properties or for general corporate purposes.
In February 2018, the company filed a universal shelf registration statement on Form S-3ASR with the SEC, which
became effective upon filing and which replaced the prior Form S-3ASR that was filed with the SEC in February 2015. The
universal shelf registration statement may permit the company from time to time to offer and sell equity securities of the
company. However, there can be no assurance that the company will be able to complete any such offerings of securities.
Factors influencing the availability of additional financing include investor perception of our prospects and the general
condition of the financial markets, among others.
On May 6, 2013, the company entered into an at-the-market, or ATM, equity program with four sales agents under which
the company could from time to time offer and sell shares of common stock having an aggregate offering price of up to $150.0
million (the “2013 ATM Program”). The sales of shares of the company's common stock made through the 2013 ATM Program
were made in “at-the-market” offerings as defined in Rule 415 of the Securities Act. The company completed $150.0 million of
issuances under the 2013 ATM Program on May 21, 2015.
On May 27, 2015, the company entered into a new ATM equity program with five sales agents under which the company
may, from time to time, offer and sell shares of common stock having an aggregate offering price of up to $250.0 million (the
"2015 ATM Program"). As of December 31, 2017, the company has issued 5,983,450 shares of common stock at a weighted
average price per share of $37.40 for gross cash proceeds of $223.8 million under the 2013 ATM Program and 2015 ATM
Program, in the aggregate.
58
The company intends to use the net proceeds to fund development or redevelopment activities, repay amounts
outstanding from time to time under our amended and restated credit facility or other debt financing obligations, fund potential
acquisition opportunities and/or for general corporate purposes. As of December 31, 2017, the company had the capacity to
issue up to an additional $176.2 million in shares of common stock under the 2015ATM Program. Actual future sales will
depend on a variety of factors including, but not limited to, market conditions, the trading price of the company's common
stock and the company's capital needs. The company has no obligation to sell the remaining shares available for sale under the
2015 ATM Program.
Liquidity and Capital Resources of American Assets Trust, L.P.
In this “Liquidity and Capital Resources of American Assets Trust, L.P.” section, the terms “we,” “our” and “us” refer to
the Operating Partnership together with its consolidated subsidiaries, or the Operating Partnership and American Assets Trust,
Inc. together with their consolidated subsidiaries, as the context requires. American Assets Trust, Inc. is our sole general partner
and consolidates our results of operations for financial reporting purposes. Because we operate on a consolidated basis with
American Assets Trust, Inc., the section entitled “Liquidity and Capital Resources of American Assets Trust, Inc.” should be
read in conjunction with this section to understand our liquidity and capital resources on a consolidated basis.
Due to the nature of our business, we typically generate significant amounts of cash from operations. The cash generated
from operations is used for the payment of operating expenses, capital expenditures, debt service and dividends to American
Assets Trust, Inc.'s stockholders and our unitholders. As a REIT, American Assets Trust, Inc. must generally make annual
distributions to its stockholders of at least 90% of its net taxable income.
Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our
properties, regular debt service requirements, dividend payments to American Assets Trust, Inc.'s stockholders required to
maintain its REIT status, distributions to our other unitholders, capital expenditures and, potentially, acquisitions. We expect to
meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash
and, if necessary, borrowings available under our second amended and restated credit facility.
Our long-term liquidity needs consist primarily of funds necessary to pay for the repayment of debt at maturity, property
acquisitions, tenant improvements and capital improvements. We expect to meet our long-term liquidity requirements to pay
scheduled debt maturities and to fund property acquisitions and capital improvements with net cash from operations, long-term
secured and unsecured indebtedness and, if necessary, the issuance of equity and debt securities. We also may fund property
acquisitions and capital improvements using our second amended and restated credit facility pending permanent financing. We
believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence
of additional debt, noting that during the third quarter of 2015, the company obtained investment grade credit ratings from
Moody’s Investors Service (Baa3), Standard & Poor’s Ratings Services (BBB-) and Fitch Ratings, Inc. (BBB), and the issuance
of additional equity. However, we cannot be assured that this will be the case. Our ability to incur additional debt will be
dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing
restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of
factors as well, including general market conditions for REITs and market perceptions about our company. Given our past
ability to access the capital markets, we expect debt or equity to be available to us. Although there is no intent at this time, if
market conditions deteriorate, we may also delay the timing of future development and redevelopment projects as well as limit
future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy.
Our overall capital requirements will depend upon acquisition opportunities, the level of improvements and
redevelopments on existing properties and the timing and cost of developments. Our capital investments will be funded on a
short-term basis with cash on hand, cash flow from operations and/or our second amended and restated credit facility.
We intend to operate with and maintain a conservative capital structure that will allow us to maintain strong debt service
coverage and fixed-charge coverage ratios as part of our commitment to investment-grade debt ratings. In the short and long
term, we may seek to obtain funds through the issuance of additional equity, unsecured and/or secured debt financings, and
property dispositions that are consistent with this conservative structure.
We currently believe that cash flows from operations, cash on hand, our ATM equity program, our revolving credit facility
and our general ability to access the capital markets will be sufficient to finance our operations and fund our debt service
requirements and capital expenditures.
59
Contractual Obligations
The following table outlines the timing of required payments related to our commitments as of December 31, 2017
(dollars in thousands):
Contractual Obligations
Principal payments on long-term
indebtedness
Interest payments
Operating lease (1)
Tenant-related commitments
Construction-related commitments
Total
Total
Within
1 Year
2 Years
3 Years
4 Years
5 Years
Payments by Period
$ 1,329,889
323,078
38,326
11,195
4,136
$ 1,706,624
$ 75,224
54,344
3,274
10,595
4,136
$ 147,573
$ 142,662
47,403
3,347
366
—
$ 193,778
$ 51,003
44,517
3,422
—
—
$ 98,942
$ 150,000
41,943
3,460
104
—
$ 195,507
$ 111,000
36,525
2,613
130
—
$ 150,268
More than
5 Years
$ 800,000
98,346
22,210
—
—
$ 920,556
(1) Lease payments on The Landmark at One Market lease will be equal to fair rental value from July 2021 through the end of the options lease term. In
the table, we have shown the option lease payments for this period based on the stated rate for the month of June 2021 of $217,744.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Cash Flows
Comparison of the year ended December 31, 2017 to the year ended December 31, 2016
Total cash, cash equivalents, and restricted cash were $92.0 million and $54.8 million at December 31, 2017 and 2016,
respectively.
Net cash provided by operating activities increased $25.2 million to $145.9 million for the year ended December 31,
2017, compared to $120.7 million for the year ended December 31, 2016. The increase in cash from operations was due to the
acquisition of the Pacific Ridge Apartments, which were acquired on April 28, 2017 and cash settlements of derivatives
associated with the Company's Series D Notes and Series E Notes, which will be amortized over the respective terms of the
Series D Notes and Series E Notes.
Net cash used in investing activities increased $267.4 million to $330.6 million for the year ended December 31, 2017,
compared to $63.2 million for the year ended December 31, 2016. The increase was primarily due to the acquisitions of the
Pacific Ridge Apartments on April 28, 2017 and Gateway Marketplace on July 6, 2017, offset by the completion of
development activity at the Hassalo on Eighth retail buildings during 2016.
Net cash provided by financing activities was $221.9 million for the year ended December 31, 2017, compared to net
cash used in financing activities of $54.3 million for the year ended December 31, 2016. The increase in cash provided by
financing activities was primarily due to the closing of the Series D Notes issued on March 1, 2017 and Series E Notes issued
on May 23, 2017 and Series F Notes issued on July 19, 2017. The increase is offset by repayment of the mortgages at Waikiki
Beach Walk - Retail and Solana Beach Corporate Centre III-IV in 2017.
Comparison of the year ended December 31, 2016 to the year ended December 31, 2015
Total cash, cash equivalents, and restricted cash were $54.8 million and $51.5 million at December 31, 2016 and 2015,
respectively.
Net cash provided by operating activities increased $10.2 million to $120.7 million for the year ended December 31,
2016, compared to $110.5 million for the year ended December 31, 2015. The increase was primarily the result of an increase
in cash net operating income from office properties due to an increase in annualized base rents and the percentage leased.
Net cash used in investing activities decreased $63.2 million to $63.2 million for the year ended December 31, 2016,
compared to $126.4 million for the year ended December 31, 2015. The decrease was primarily attributable to a decrease in
capital expenditures for our development and redevelopment activities at Torrey Reserve Campus and Lloyd District Portfolio,
which were completed in 2015.
60
Net cash used in financing activities was $54.3 million for the year ended December 31, 2016, compared to net cash used
by financing activities of $2.9 million for the year ended December 31, 2015. The decrease of cash provided by financing
activities was primarily due to fewer sales of shares of our common stock under our ATM program during the year ended
December 31, 2016.
Net Operating Income
Net Operating Income, or NOI, is a non-GAAP financial measure of performance. We define NOI as operating revenues
(rental income, tenant reimbursements, lease termination fees, ground lease rental income and other property income) less
property and related expenses (property expenses, ground lease expense, property marketing costs, real estate taxes and
insurance). NOI excludes general and administrative expenses, interest expense, depreciation and amortization, acquisition-
related expense, other non-property income and losses, gains and losses from property dispositions, extraordinary items, tenant
improvements and leasing commissions. Other REITs may use different methodologies for calculating NOI, and accordingly,
our NOI may not be comparable to other REITs.
NOI is used by investors and our management to evaluate and compare the performance of our properties and to
determine trends in earnings and to compute the fair value of our properties as it is not affected by (1) the cost of funds of the
property owner, (2) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating
real estate assets that are included in net income computed in accordance with GAAP, or (3) general and administrative
expenses and other gains and losses that are specific to the property owner. The cost of funds is eliminated from net income
because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated
because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the
appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as
well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the
actual change in value in our retail, office, multifamily or mixed-use properties that result from use of the properties or changes
in market conditions. While certain aspects of real property do decline in value over time in a manner that is intended to be
captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a
result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and
losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale
which will usually change from period to period. These gains and losses can create distortions when comparing one period to
another or when comparing our operating results to the operating results of other real estate companies that have not made
similarly timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting
measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in
occupancy rates, rental rates and operating costs.
However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest
income and other expense, depreciation and amortization expense and gains or losses from the sale of properties, and other
gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating
performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these
components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI
is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in
conjunction with net income computed in accordance with GAAP and discussions elsewhere in “Management's Discussion and
Analysis of Financial Condition and Results of Operations” regarding the components of net income that are eliminated in the
calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and,
accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the
measure exactly as we do.
61
The following is a reconciliation of our NOI to net income for the years ended December 31, 2017, 2016 and 2015
computed in accordance with GAAP (in thousands):
Net operating income
General and administrative
Depreciation and amortization
Interest expense
Gain on sale of real estate
Other income (expense), net
Net income
Funds from Operations
Year Ended December 31,
$
2017
198,306
(21,382)
(83,278)
(53,848)
—
334
40,132
$
2016
187,157
(17,897)
(71,319)
(51,936)
—
(368)
45,637
$
$
2015
177,617
(20,074)
(63,392)
(47,260)
7,121
(97)
53,915
$
$
We present FFO because we consider FFO an important supplemental measure of our operating performance and believe
it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which
present FFO when reporting their results. We calculate FFO in accordance with the standards established by the National
Association of Real Estate Investment Trusts, or NAREIT. FFO represents net income (loss) (computed in accordance with
GAAP), excluding gains (or losses) from sales of depreciable operating property, impairment losses, real estate related
depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated
partnerships and joint ventures.
FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure
because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically,
in excluding real estate related depreciation and amortization and gains and losses from property dispositions, which do not
relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over
year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure
of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other
REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our
properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to
maintain the operating performance of our properties, all of which have real economic effects and could materially impact our
results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not
calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such
other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our
performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or
substitute for cash flow from operating activities computed in accordance with GAAP.
The following table sets forth a reconciliation of our FFO for the years ended December 31, 2017, 2016 and 2015 to net
income, the nearest GAAP equivalent (in thousands, except per share and share data):
Net income
Plus: Real estate depreciation and amortization
Less: Gain on sale of real estate
Funds from operations, as defined by NAREIT
Less: Nonforfeitable dividends on incentive stock awards
FFO attributable to common stock and units
FFO per diluted share/unit
Weighted average number of common shares and units, diluted (1)
Year Ended December 31,
$
$
$
$
2017
2016
2015
40,132
83,278
—
123,410
(236)
123,174
1.92
64,089,921
$
$
$
$
45,637
71,319
—
116,956
(183)
116,773
1.85
63,230,829
$
$
$
$
53,915
63,392
(7,121)
110,186
(159)
110,027
1.76
62,342,953
(1) For the years ended December 31, 2017, 2016 and 2015 the weighted average common shares used to compute FFO per diluted share include unvested
restricted stock awards that are subject to time vesting, as the vesting of the restricted stock awards is dilutive in the computation of FFO per diluted
62
shares, but is anti-dilutive for the computation of diluted EPS for the periods. Diluted shares exclude incentive restricted stock as these awards are
considered contingently issuable.
Inflation
Substantially all of our office and retail leases provide for separate real estate tax and operating expense escalations. In
addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least
partially offset by the contractual rent increases and expense escalations described above. In addition, our multifamily leases
(other than at our RV resort where spaces can be rented at a daily, weekly or monthly rate) generally have lease terms ranging
from seven to 15 months, with a majority having 12-month lease terms, and generally allow for rent adjustments at the time of
renewal, which we believe reduces our exposure to the effects of inflation. For the hotel portion of our mixed-use property, we
possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit our
ability to raise room rates.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market
interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates.
We may enter into certain types of derivative financial instruments to further reduce interest rate risk. We use interest rate
swap agreements, for example, to convert some of our variable rate debt to a fixed-rate basis or to hedge anticipated financing
transactions. We use derivatives for hedging purposes rather than speculation and do not enter into financial instruments for
trading purposes. See the discussion under Note 8, “Derivative and Hedging Activities,” to the accompanying consolidated
financial statements for certain quantitative details related to the interest rate swaps.
Interest Rate Risk
Outstanding Debt
The following discusses the effect of hypothetical changes in market rates of interest on the fair value of our total
outstanding debt. Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our
debt. Discounted cash flow analysis is generally used to estimate the fair value of our mortgages payable. Considerable
judgment is necessary to estimate the fair value of financial instruments. This analysis does not purport to take into account all
of the factors that may affect our debt, such as the effect that a changing interest rate environment could have on the overall
level of economic activity or the action that our management might take to reduce our exposure to the change. This analysis
assumes no change in our financial structure.
Fixed Interest Rate Debt
Except as described below, all of our outstanding debt obligations (maturing at various times through May 2029) have
fixed interest rates which limit the risk of fluctuating interest rates. However, interest rate fluctuations may affect the fair value
of our fixed rate debt instruments. At December 31, 2017, we had $1,079.9 million of fixed-rate debt outstanding with an
estimated fair value of $1,088.9 million. If interest rates at December 31, 2017 had been 1.0% higher, the fair value of those
debt instruments on that date would have decreased by approximately $25.6 million. If interest rates at December 31, 2017 had
been 1.0% lower, the fair value of those debt instruments on that date would have increased by approximately $45.9 million.
Variable Interest Rate Debt
At December 31, 2017, we had $250.0 million of variable rate debt outstanding. We have entered into term loans that
have interest rates that contain both fixed and variable components. See the discussion under Note 8 to the accompanying
consolidated financial statements for details related to the interest rate swaps and for a discussion on how we value derivative
financial instruments.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data are included as a separate section of this Annual Report on
Form 10-K commencing on page F-1 and are incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
63
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Controls and Procedures (American Assets Trust, Inc.)
Evaluation of Disclosure Controls and Procedures
American Assets Trust, Inc. maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e)
under the Exchange Act) that are designed to ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, American Assets Trust, Inc. carried out an evaluation, under the
supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of its disclosure controls and procedures. Based on the foregoing, American Assets
Trust, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this
report, American Assets Trust, Inc.’s disclosure controls and procedures were effective and were operating at a reasonable
assurance level.
Management’s Report on Internal Control over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, American Assets
Trust, Inc.’s Chief Executive Officer and Chief Financial Officer, and effected by American Assets Trust, Inc.’s board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into
the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the
company, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of
management, including American Assets Trust, Inc.’s Chief Executive Officer and Chief Financial Officer, American Assets
Trust, Inc. conducted an evaluation of the effectiveness of its internal control over financial reporting. Management has used
the framework set forth in the report entitled “Internal Control — Integrated Framework (2013)” published by the Committee
of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the company’s internal control over
financial reporting. Based on its evaluation, management has concluded that the company’s internal control over financial
reporting was effective as of December 31, 2017.
American Assets Trust, Inc.’s independent registered public accounting firm, Ernst & Young LLP, has issued an
attestation report over American Assets Trust, Inc.’s internal control over financial reporting, which report is contained
elsewhere in this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in American Assets Trust, Inc.'s internal control over financial reporting during the quarter ended
December 31, 2017 that materially affected, or are reasonably likely to materially affect, American Assets Trust, Inc.'s internal
control over financial reporting.
64
Controls and Procedures (American Assets Trust, L.P.)
Evaluation of Disclosure Controls and Procedures
The Operating Partnership maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e)
under the Exchange Act) that are designed to ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial
Officer of its general partner, as appropriate, to allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, the Operating Partnership carried out an evaluation, under the
supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of its
general partner, of the effectiveness of the design and operation of the Operating Partnership’s disclosure controls and
procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of the Operating Partnership's
general partner concluded that, as of the end of the period covered by this report, the Operating Partnership’s disclosure
controls and procedures were effective and were operating at a reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, the Chief Executive
Officer and Chief Financial Officer of the Operating Partnership's general partner and effected by the general partner's board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Operating Partnership; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the
Operating Partnership are being made only in accordance with authorizations of management and directors of the general
partner of the Operating Partnership; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Operating Partnership’s assets that could have a material effect on the
financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into
the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the
Operating Partnership, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the
participation of management, including the Chief Executive Officer and Chief Financial Officer of the Operating Partnership's
general partner, the Operating Partnership conducted an evaluation of the effectiveness of its internal control over financial
reporting. Management has used the framework set forth in the report entitled “Internal Control — Integrated Framework
(2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of
the Operating Partnership’s internal control over financial reporting. Based on its evaluation, management has concluded that
the Operating Partnership’s internal control over financial reporting was effective as of December 31, 2017.
Changes in Internal Control over Financial Reporting
There were no changes in the Operating Partnership's internal control over financial reporting during the quarter ended
December 31, 2017 that materially affected, or are reasonably likely to materially affect, the Operating Partnership's internal
control over financial reporting.
65
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning our directors, executive officers and corporate governance required by Item 10 will be
included in the Proxy Statement to be filed relating to American Assets Trust, Inc.'s 2018 Annual Meeting of Stockholders and
is incorporated herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning audit committee financial expert disclosure set forth
under the heading “Information Regarding the Board - Committees of the Board - Audit Committee” will be included in the
Proxy Statement to be filed relating to American Assets Trust, Inc.'s 2018 Annual Meeting of Stockholders and is incorporated
herein by reference.
Pursuant to instruction G(3) to Form 10-K, information concerning compliance with Section 16(a) of the Exchange Act
concerning our directors and executive officers set forth under the heading entitled “General - Section 16(a) Beneficial
Ownership Reporting Compliance” will be included in the Proxy Statement to be filed relating to American Assets Trust, Inc.'s
2018 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information concerning our executive compensation required by Item 11 will be included in the Proxy Statement to
be filed relating to American Assets Trust, Inc.'s 2018 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information concerning the security ownership of certain beneficial owners and management and related stockholder
matters required by Item 12 will be included in the Proxy Statement to be filed relating to American Assets Trust, Inc.'s 2018
Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information concerning certain relationships and related transactions, and director independence required by Item 13
will be included in the Proxy Statement to be filed relating to American Assets Trust, Inc.'s 2018 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information concerning our principal accountant fees and services required by Item 14 will be included in the Proxy
Statement to be filed relating to American Assets Trust, Inc.'s 2018 Annual Meeting of Stockholders and is incorporated herein
by reference.
66
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
(1) Financial Statements
Our consolidated financial statements and notes thereto, together with Report of Independent Registered
Public Accounting Firm are included as a separate section of this Annual Report on Form 10-K commencing on page
F-1.
(2) Financial Statement Schedule
Our financial statement schedule are included in a separate section of this Annual Report on Form 10-K
commencing on page F-1.
(3) Exhibits
A list of exhibits to this Annual Report on Form 10-K is set forth on the Exhibit Index immediately preceding
such exhibits and is incorporated herein by reference.
(b) See Exhibit Index
(c) Not Applicable
67
Exhibit No.
3.1(1)
3.2(1)
3.3(2)
4.1(1)
10.1(3)
10.2(3)
10.3(1)
10.4(1)
10.5*
10.6(1)
10.7(1)
10.8(3)
10.9(1)
10.10(1)
10.11(3)
10.12(4)
10.13(5)
10.14(5)
10.15(6)
10.16(7)
10.17(7)
10.18(8)
10.19*
10.20(9)
EXHIBIT INDEX
Description
Articles of Amendment and Restatement of American Assets Trust, Inc.
Amended and Restated Bylaws of American Assets Trust, Inc.
Certificate of Limited Partnership of American Assets Trust, L.P.
Form of Certificate of Common Stock of American Assets Trust, Inc.
Amended and Restated Agreement of Limited Partnership of American Assets Trust, L.P., dated January 19,
2011
Registration Rights Agreement among American Assets Trust, Inc. and the persons named therein, dated
January 19, 2011
American Assets Trust, Inc. and American Assets Trust, L.P. 2011 Equity Incentive Award Plan
Form of Indemnification Agreement between American Assets Trust, Inc. and its directors and officers
Form of American Assets Trust, Inc. Restricted Stock Award Agreement (Performance Vesting)
Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing by Loma
Palisades, a California general partnership, as trustor, to First American Title Insurance Company, as
trustee, for the benefit of Wells Fargo Bank, National Association, as beneficiary, dated as of June 30, 2008
Multifamily Note by Loma Palisades, a California general partnership, to Wells Fargo Bank, National
Association, dated as of June 30, 2008
Transition Services Agreement between American Assets, Inc. and American Assets Trust, L.P., dated
January 19, 2011
Management Agreement for Waikiki Beach Walk®—Retail between ABW Holdings LLC and Retail Resort
Properties LLC, dated as of November 1, 2007
Outrigger Hotels Hawaii—Hotel Management Agreement—Embassy SuitesTM—Waikiki Beach WalkTM
Hotel by and among EBW Hotel LLC, Waikele Venture Holdings, LLC, Broadway 225 Sorrento Holdings,
LLC, Broadway 225 Stonecrest Holdings, LLC and Outrigger Hotels Hawaii, dated as of January 10, 2006
Franchise License Agreement—Embassy Suites—Waikiki Beach Walk—Honolulu, Hawaii between
Embassy Suites Franchise LLC and WBW Hotel Lessee, LLC, dated January 19, 2011
Credit Agreement among American Assets Trust, L.P., as the Borrower, American Assets Trust, Inc., as a
Guarantor, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the
other lenders party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo
Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners and Wells Fargo Bank, N.A., as
Syndication Agent and KeyBank National Association and Royal Bank of Canada as Co-Documentation
Agents, dated January 19, 2011
First Amendment to Credit Agreement, dated March 7, 2011, by and among the company, the Operating
Partnership, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and other
entities named therein
Second Amendment to Credit Agreement, dated January 10, 2012, by and among the company, the
Operating Partnership, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C
Issuer, and other entities named therein
Third Amendment to Credit Agreement, dated September 7, 2012, by and among the company, the
Operating Partnership, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C
Issuer, and other entities named herein.
Deed of Trust and Security Agreement by and between AAT CC Bellevue, LLC, as Borrower, and PNC
Bank, National Association, as Lender, dated October 10, 2012.
Promissory Note by AAT CC Bellevue, LLC, as maker, to PNC Bank, National Association, dated as of
October 10, 2012.
Amended and Restated Credit Agreement, dated January 9, 2014, among American Assets Trust, L.P., as the
Borrower, American Assets Trust, Inc., as a Guarantor, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, and the other lenders party thereto and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners and
Wells Fargo Bank, N.A., as Syndication Agent and KeyBank National Association, Royal Bank of Canada
and U.S. Bank National Association as Documentation Agents
American Assets Trust, Inc. and American Assets Trust, L.P. Amended and Restated Incentive Bonus Plan,
effective as of January 5, 2018.
American Assets Trust, Inc. and American Assets Trust, L.P. Amended and Restated Incentive Bonus Plan,
effective as of March 25, 2014.
68
Exhibit No.
10.21(9)
10.22(9)
10.23(9)
10.24(10)
10.25(11)
10.26(12)
10.27(13)
10.28(14)
10.29(15)
10.30(16)
10.31(17)
10.32(18)
10.33(18)
10.34(18)
10.35(18)
10.36(18)
10.37(19)
10.38(20)
10.39(20)
21.1*
23.1*
23.2*
31.1*
31.2*
31.3*
Description
Amended and Restated Employment Agreement among American Assets Trust, Inc., American Assets
Trust, L.P. and Ernest S. Rady dated March 25, 2014
Amended and Restated Employment Agreement among American Assets Trust, Inc., American Assets
Trust, L.P. and Robert F. Barton dated March 25, 2014
Amended and Restated Employment Agreement among American Assets Trust, Inc., American Assets
Trust, L.P. and Adam Wyll dated March 25, 2014
Common Stock Purchase Agreement dated as of September 12, 2014 by and between American Assets
Trust, Inc. and Insurance Company of the West.
First Amendment to Amended and Restated Credit Agreement, dated as of October 16, 2014, by and among
the company, the Operating Partnership, Bank of America, N. A., as Administrative Agent, Swing Line
Lender and L/C Issuer, and other entities named therein.
Note Purchase Agreement, dated as of October 31, 2014 by and among American Assets Trust, Inc.,
American Assets Trust, L.P. and the purchasers named therein. (Series A, B and C)
Common Stock Purchase Agreement dated as of March 9, 2015 by and between American Assets Trust, Inc.
and Explorer Insurance Company.
General Release by and among American Assets Trust, Inc., American Assets Trust, L.P. and John W.
Chamberlain dated September 16, 2015.
Joinder and First Amendment to Term Loan Agreement, dated as of May 2, 2016, among American Assets
Trust, Inc., the American Assets Trust, L.P., the Lenders party thereto and U.S. Bank National Association,
as Administrative Agent.
Note Purchase Agreement, dated as of March 1, 2017 by and among American Assets Trust, Inc., American
Assets Trust, L.P. and the purchasers named therein. (Series D)
Purchase Agreement and Escrow Instructions between CP III Pacific Ridge RF, LLC, CP III Pacific Ridge
Solar, LLC, collectively as Seller, and American Assets Trust, Inc., as Purchaser, dated March 24, 2017
Note Purchase Agreement, dated as of May 23, 2017 by and among American Assets Trust, Inc., American
Assets Trust, L.P. and the purchasers named therein. (Series E)
Second Amendment to the Amended and Restated Credit Agreement dated as of May 23, 2017, by and
among American Assets Trust, Inc., American Assets Trust, L.P., the lenders from time to time party thereto,
Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other entities
named therein.
Second Amendment to the Term Loan Agreement dated as of May 23, 2017, by and among American
Assets Trust, Inc., American Assets Trust, L.P., the lenders from time to time party thereto, U.S. Bank
National Association, as Administrative Agent, and the other entities named therein.
First Amendment, dated as of May 23, 2017, to the Note Purchase Agreement, dated as if October 31, 2014,
by and among American Assets Trust, Inc., American Assets Trust, L.P. and the purchasers named therein.
(Series E)
First Amendment, dated as of May 23, 2017, to the Note Purchase Agreement, dated as of March 1, 2017,
by and among American Assets Trust, Inc., American Assets Trust, L.P. and the purchasers named therein.
(Series E)
Note Purchase Agreement, dated as of July 19, 2017, by and among American Assets Trust, Inc., American
Assets Trust, L.P. and the purchasers named therein. (Series F)
Second Amended and Restated Credit Agreement dated January 9, 2018, by and among the Company, the
Operating Partnership, Bank of America, N.A., as Administrative Agent, and other entities named therein.
Third Amendment to Term Loan Agreement dated January 9, 2018, by and among the Company, the
Operating Partnership, each lender from time to time party thereto, and U.S. Bank National Association, as
Administrative Agent.
List of Subsidiaries of American Assets Trust, Inc.
Consent of Independent Registered Public Accounting Firm for American Assets Trust, Inc.
Consent of Independent Registered Public Accounting Firm for American Assets Trust, L.P.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of
American Assets Trust, Inc.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of
American Assets Trust, L.P.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of
American Assets Trust, Inc.
69
Exhibit No.
31.4*
32.1*
32.2*
101*
Description
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of
American Assets Trust, L.P.
Certification of Chief Executive Officer and Chief Financial Officer of American Assets Trust, Inc. pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer of American Assets Trust, L.P.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The company's Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL
(Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements
of Operations, (iii) Consolidated Statement of Equity, (iv) Consolidated Statements of Cash Flows and (v)
the Notes to Consolidated Financial Statements, tagged as blocks of text
*
Filed herewith.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated herein by reference to American Assets Trust, Inc.'s Registration Statement on Form S-11, as amended (File
No. 333-169326), filed with the Securities and Exchange Commission on September 13, 2010.
Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 10-K filed with the Securities
and Exchange Commission on February 20, 2015.
Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 19, 2011.
Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 20, 2011.
Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 10, 2012.
Incorporated herein by reference to American Assets Trust, Inc’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 7, 2012.
Incorporated herein by reference to American Assets Trust, Inc’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 10, 2012.
Incorporated herein by reference to American Assets Trust, Inc’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 9, 2014.
Incorporated herein by reference to American Assets Trust, Inc’s Current Report on Form 10-Q filed with the Securities
and Exchange Commission on May 2, 2014.
(10) Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 15, 2014.
(11) Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 17, 2014.
(12) Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 31, 2014.
(13) Incorporated herein by reference to American Assets Trust, Inc.'s Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 10, 2015.
(14) Incorporated herein by reference to American Assets Trust, Inc's Current Report on Form 10-Q filed with the Securities
and Exchange Commission on November 6, 2015.
(15) Incorporated herein by reference to American Assets Trust, Inc's Current Report on Form 10-Q filed with the Securities
and Exchange Commission on July 29, 2016.
(16) Incorporated herein by reference to American Assets Trust, Inc's Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 1, 2017.
(17) Incorporated herein by reference to American Assets Trust, Inc's Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 27, 2017.
(18) Incorporated herein by reference to American Assets Trust, Inc's Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 23, 2017.
(19) Incorporated herein by reference to American Assets Trust, Inc's Current Report on Form 8-K filed with the Securities
and Exchange Commission on July 19, 2017.
(20) Incorporated herein by reference to American Assets Trust, Inc's Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 9, 2018.
SIGNATURES
70
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrants have
duly caused this Report to be signed on their behalf by the undersigned thereunto duly authorized this 16th day of February,
2018.
American Assets Trust, Inc.
American Assets Trust, L.P.
By: American Assets Trust, Inc.
Its: General Partner
/s/ ERNEST RADY
Ernest Rady
Chairman, President and Chief Executive Officer
/s/ ERNEST RADY
Ernest Rady
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
(Principal Executive Officer)
/s/ ROBERT F. BARTON
Robert F. Barton
Executive Vice President and Chief Financial Officer
/s/ ROBERT F. BARTON
Robert F. Barton
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrants and in the capacities and on the dates indicated.
Signature
/s/ ERNEST RADY
Ernest Rady
/s/ ROBERT F. BARTON
Robert F. Barton
/s/ LARRY E. FINGER
Larry E. Finger
/s/ DUANE A. NELLES
Duane A. Nelles
/s/ THOMAS S. OLINGER
Thomas S. Olinger
/s/ ROBERT S. SULLIVAN
Robert S. Sullivan
Title
Chairman of the Board, President and
Chief Executive Officer
Date
February 16, 2018
Executive Vice President, Chief Financial
Officer and Treasurer
February 16, 2018
Director
Director
Director
Director
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
71
Item 8 and Item 15(a) (1) and (2)
Index to Consolidated Financial Statements and Schedule
Reports of Independent Registered Public Accounting Firm
American Assets Trust, Inc.
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Equity for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
American Assets Trust, L.P.
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Partners' Capital for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements of American Assets Trust, Inc. and American Assets Trust, L.P.
Schedule III—Consolidated Real Estate and Accumulated Depreciation
F-2
F-5
F-6
F-7
F-9
F-10
F-11
F-12
F-14
F-15
F-48
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of American Assets Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American Assets Trust, Inc. (the Company) as of December
31, 2017 and 2016, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the
three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at
Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2017
and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 Framework) and our report dated February 16, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2010.
San Diego, California
February 16, 2018
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of American Assets Trust, Inc.
Opinion on Internal Control over Financial Reporting
We have audited American Assets Trust, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 Framework) (the COSO criteria). In our opinion, American Assets Trust, Inc. (the Company) maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of American Assets Trust, Inc. as of December 31, 2017 and 2016, and the related
consolidated statements of comprehensive income, equity, and cash flows for each of the three years in the period ended December
31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February
16, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Diego, California
February 16, 2018
F-3
Report of Independent Registered Public Accounting Firm
To the Partners of American Assets Trust, L.P.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American Assets Trust, L.P. (the Company) as of December
31, 2017 and 2016, and the related consolidated statements of comprehensive income, partners’ capital, and cash flows for each
of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the
Index at Item 15(a), (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company at December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
San Diego, California
February 16, 2018
F-4
American Assets Trust, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
ASSETS
Real estate, at cost
Operating real estate
Construction in progress
Held for development
Accumulated depreciation
Net real estate
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Deferred rent receivables, net
Other assets, net
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES:
Secured notes payable
Unsecured notes payable
Unsecured line of credit
Accounts payable and accrued expenses
Security deposits payable
Other liabilities and deferred credits
Total liabilities
Commitments and contingencies (Note 12)
EQUITY:
American Assets Trust, Inc. stockholders' equity
Common stock, $0.01 par value, 490,000,000 shares authorized,
47,204,588 and 45,732,109 shares issued and outstanding at December 31,
2017 and December 31, 2016, respectively
Additional paid-in capital
Accumulated dividends in excess of net income
Accumulated other comprehensive income (loss)
Total American Assets Trust, Inc. stockholders' equity
Noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY
December 31, 2017
December 31, 2016
$
$
$
$
2,536,474
68,272
9,392
2,614,138
(537,431)
2,076,707
82,610
9,344
9,869
38,973
42,361
2,259,864
279,550
1,045,470
—
38,069
6,570
46,061
1,415,720
473
919,066
(97,280)
11,451
833,710
10,434
844,144
2,259,864
$
$
$
$
2,241,061
50,498
9,447
2,301,006
(469,460)
1,831,546
44,801
9,950
9,330
38,452
52,854
1,986,933
445,180
596,350
20,000
32,401
6,114
48,337
1,148,382
457
874,597
(77,296)
11,798
809,556
28,995
838,551
1,986,933
The accompanying notes are an integral part of these consolidated financial statements.
F-5
American Assets Trust, Inc.
Consolidated Statements of Comprehensive Income
(In Thousands, Except Shares and Per Share Data)
Year Ended December 31,
2017
2016
2015
REVENUE:
Rental income
Other property income
Total revenue
EXPENSES:
Rental expenses
Real estate taxes
General and administrative
Depreciation and amortization
Total operating expenses
OPERATING INCOME
Interest expense
Gain on sale of real estate
Other income (expense), net
NET INCOME
Net income attributable to restricted shares
Net income attributable to unitholders in the Operating Partnership
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST,
INC. STOCKHOLDERS
EARNINGS PER COMMON SHARE, BASIC
Basic income attributable to common stockholders per share
Weighted average shares of common stock outstanding - basic
EARNINGS PER COMMON SHARE, DILUTED
Diluted income attributable to common stockholders per share
Weighted average shares of common stock outstanding - diluted
COMPREHENSIVE INCOME
Net income
Other comprehensive gain (loss) - unrealized gain (loss) on swap derivative
during the period
Reclassification of amortization of forward starting swap included in interest
expense
Comprehensive income
Comprehensive income attributable to non-controlling interest
Comprehensive income attributable to American Assets Trust, Inc.
$
$
$
$
$
$
$
298,803
16,180
314,983
$
279,498
15,590
295,088
84,006
32,671
21,382
83,278
221,337
93,646
(53,848)
—
334
40,132
(241)
(10,814)
29,077
0.62
46,715,520
0.62
64,087,250
$
$
$
79,553
28,378
17,897
71,319
197,147
97,941
(51,936)
—
(368)
45,637
(189)
(12,863)
32,585
0.72
45,332,471
0.72
63,228,159
$
$
$
261,887
13,736
275,623
73,187
24,819
20,074
63,392
181,472
94,151
(47,260)
7,121
(97)
53,915
(168)
(15,238)
38,509
0.87
44,439,112
0.86
62,339,163
40,132
$
45,637
$
53,915
386
17,048
(238)
(1,114)
39,404
(10,433)
28,971
$
(231)
62,454
(17,624)
44,830
$
(231)
53,446
(15,119)
38,327
The accompanying notes are an integral part of these consolidated financial statements.
F-6
American Assets Trust, Inc.
Consolidated Statements of Equity
(In Thousands, Except Share Data)
American Assets Trust, Inc. Stockholders' Equity
Common Shares
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Dividends in
Excess of Net
Income
Accumulated
Other
Comprehensive
Income (Loss)
43,701,669
—
$
437
—
$ 795,065
—
$
(60,291) $
38,677
Balance at December 31, 2014
Net income
Common shares issued
Issuance of restricted stock
Forfeiture of restricted stock
Conversion of operating
partnership units
Dividends declared and paid
Stock-based compensation
Shares withheld for employee
taxes
Other comprehensive loss -
change in value of interest
rate swap
Reclassification of
amortization of forward
starting swap included in
interest expense
Balance at December 31, 2015
Net income
Common shares issued
Issuance of restricted stock
Forfeiture of restricted stock
Conversion of operating
partnership units
Dividends declared and paid
Stock-based compensation
Shares withheld for employee
taxes
Other comprehensive loss -
change in value of interest
rate swap
Reclassification of
amortization of forward
starting swap included in
interest expense
Balance at December 31, 2016
Net income
Common shares issued
Issuance of restricted stock
Forfeiture of restricted stock
Conversion of operating
partnership units
Dividends declared and paid
Stock-based compensation
Shares withheld for employee
taxes
1,812,451
98,354
(40,687)
5,741
—
—
18
1
—
—
—
—
72,818
(1)
—
67
—
2,877
(169,809)
(2)
(7,394)
—
—
—
—
45,407,719
—
219,480
148,110
(33,707)
10,694
—
—
(20,187)
—
—
45,732,109
—
700,000
150,098
(48,624)
693,842
—
—
(22,837)
—
454
—
2
1
—
—
—
—
—
—
—
457
—
7
2
—
7
—
—
—
—
863,432
—
9,638
(1)
—
(79)
—
2,414
(807)
—
—
874,597
—
29,866
(2)
—
10,752
—
4,735
—
—
—
—
(42,452)
—
—
—
—
(64,066)
32,774
—
—
—
—
(46,004)
—
—
—
—
(77,296)
29,318
—
—
—
—
(49,302)
—
(882)
—
F-7
Noncontrolling
Interests -
Unitholders in
the Operating
Partnership
Total
$
31,273
15,238
$766,576
53,915
—
—
—
72,836
—
—
(67)
(16,960)
—
—
(59,412)
2,877
—
(7,396)
92
—
—
—
—
—
—
—
—
(184)
(54)
(238)
(166)
(258)
—
—
—
—
—
—
—
—
(65)
29,365
12,863
—
—
—
79
(18,073)
—
(231)
828,927
45,637
9,640
—
—
—
(64,077)
2,414
—
(807)
12,222
4,826
17,048
(166)
11,798
—
—
—
—
—
—
—
—
(65)
28,995
10,814
—
—
—
(10,759)
(18,235)
—
(231)
838,551
40,132
29,873
—
—
—
(67,537)
4,735
—
(882)
Other comprehensive loss -
change in value of interest
rate swap
Other comprehensive income -
unrealized gain on forward-
starting interest rate swaps
Reclassification of
amortization of forward-
starting swap included in
interest expense
Balance at December 31, 2017
—
—
—
—
—
—
—
—
(7,310)
(2,971)
(10,281)
7,775
2,892
10,667
—
47,204,588
$
—
473
—
$ 919,066
$
—
(97,280) $
(812)
11,451
$
(302)
10,434
(1,114)
$844,144
The accompanying notes are an integral part of these consolidated financial statements.
F-8
American Assets Trust, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred rent revenue and amortization of lease intangibles
Depreciation and amortization
Amortization of debt issuance costs and debt fair value adjustments
Gain on sale of real estate
Stock-based compensation expense
Settlement of forward interest rate swap agreement
Other noncash interest expense
Other, net
Changes in operating assets and liabilities
Change in accounts receivable
Change in other assets
Change in accounts payable and accrued expenses
Change in security deposits payable
Change in other liabilities and deferred credits
Net cash provided by operating activities
INVESTING ACTIVITIES
Acquisition of real estate, net
Capital expenditures
Proceeds from sale of real estate, net of selling costs
Leasing commissions
Net cash used in investing activities
FINANCING ACTIVITIES
Repayment of secured notes payable
Proceeds from unsecured term loan
Proceeds from unsecured line of credit
Repayment of unsecured line of credit
Proceeds from issuance of unsecured notes payable
Debt issuance costs
Proceeds from issuance of common stock, net
Dividends paid to common stock and unitholders
Shares withheld for employee taxes
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
$
Year ended December 31,
2017
2016
2015
$
40,132
$
45,637
$
53,915
(2,547)
83,278
3,058
—
4,735
10,667
(1,114)
901
(1,116)
(499)
7,632
456
270
145,853
(278,141)
(47,496)
—
(4,927)
(330,564)
(167,139)
—
173,000
(193,000)
450,000
(2,401)
29,873
(67,537)
(882)
221,914
37,203
54,751
91,954
$
(2,637)
71,319
4,473
—
2,414
—
(231)
(769)
(2,347)
(982)
1,371
158
2,275
120,681
—
(59,633)
—
(3,572)
(63,205)
(136,974)
150,000
34,000
(44,000)
—
(2,055)
9,640
(64,077)
(807)
(54,273)
3,203
51,548
54,751
$
(5,587)
63,392
4,214
(7,121)
2,877
—
(231)
879
(1,011)
(243)
(1,081)
493
(36)
110,460
—
(134,174)
12,259
(4,461)
(126,376)
(235,980)
—
65,000
(35,000)
200,000
(2,881)
72,782
(59,412)
(7,396)
(2,887)
(18,803)
70,351
51,548
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated
balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in Statement of Cash
Flows
Year ended December 31,
2017
2016
2015
82,610
$
44,801
$
9,344
9,950
39,925
11,623
91,954
$
54,751
$
51,548
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-9
American Assets Trust, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit Data)
ASSETS
Real estate, at cost
Operating real estate
Construction in progress
Held for development
Accumulated depreciation
Net real estate
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Deferred rent receivables, net
Other assets, net
TOTAL ASSETS
LIABILITIES AND CAPITAL
LIABILITIES:
Secured notes payable
Unsecured notes payable
Unsecured line of credit
Accounts payable and accrued expenses
Security deposits payable
Other liabilities and deferred credits
Total liabilities
Commitments and contingencies (Note 12)
CAPITAL:
Limited partners' capital, 17,194,980 and 17,888,822 units issued and
outstanding as of December 31, 2017 and December 31, 2016, respectively
General partner's capital, 47,204,588 and 45,732,109 units issued and
outstanding as of December 31, 2017 and December 31, 2016, respectively
Accumulated other comprehensive income (loss)
Total capital
TOTAL LIABILITIES AND CAPITAL
December 31,
2017
December 31,
2016
$
$
$
$
$
$
$
2,536,474
68,272
9,392
2,614,138
(537,431)
2,076,707
82,610
9,344
9,869
38,973
42,361
2,259,864
279,550
1,045,470
—
38,069
6,570
46,061
1,415,720
2,241,061
50,498
9,447
2,301,006
(469,460)
1,831,546
44,801
9,950
9,330
38,452
52,854
1,986,933
445,180
596,350
20,000
32,401
6,114
48,337
1,148,382
6,135
24,315
822,259
15,750
844,144
2,259,864
$
797,758
16,478
838,551
1,986,933
The accompanying notes are an integral part of these consolidated financial statements.
F-10
American Assets Trust, L.P.
Consolidated Statements of Comprehensive Income
(In Thousands, Except Units and Per Unit Data)
Year Ended December 31,
2017
2016
2015
REVENUE:
Rental income
Other property income
Total revenue
EXPENSES:
Rental expenses
Real estate taxes
General and administrative
Depreciation and amortization
Total operating expenses
OPERATING INCOME
Interest expense
Gain on sale of real estate
Other income (expense), net
NET INCOME
Net income attributable to restricted shares
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST,
L.P.
EARNINGS PER UNIT - BASIC
Earnings per unit, basic
Weighted average units outstanding, basic
EARNINGS PER UNIT - DILUTED
Earnings per unit, diluted
Weighted average units outstanding, diluted
DISTRIBUTIONS PER UNIT
COMPREHENSIVE INCOME
Net income
Other comprehensive gain (loss) - unrealized gain (loss) on swap derivative
during the period
Reclassification of amortization of forward starting swap included in
interest expense
Comprehensive income
Comprehensive income attributable to Limited Partners
Comprehensive income attributable to General Partners
$
$
$
$
$
$
$
$
298,803
16,180
314,983
$
279,498
15,590
295,088
84,006
32,671
21,382
83,278
221,337
93,646
(53,848)
—
334
40,132
(241)
39,891
0.62
64,087,250
0.62
64,087,250
$
$
$
79,553
28,378
17,897
71,319
197,147
97,941
(51,936)
—
(368)
45,637
(189)
45,448
0.72
63,228,159
0.72
63,228,159
$
$
$
261,887
13,736
275,623
73,187
24,819
20,074
63,392
181,472
94,151
(47,260)
7,121
(97)
53,915
(168)
53,747
0.86
62,339,163
0.86
62,339,163
1.0500
$
1.0100
$
0.9475
40,132
$
45,637
$
53,915
386
17,048
(238)
(1,114)
39,404
(10,433)
28,971
$
(231)
62,454
(17,624)
44,830
$
(231)
53,446
(15,119)
38,327
The accompanying notes are an integral part of these consolidated financial statements.
F-11
Balance at December 31, 2014
Net income
Contributions from American
Assets Trust, Inc.
Conversion of operating
partnership units
Issuance of restricted units
Forfeiture of restricted units
Distributions
Stock-based compensation
Shares withheld for employee taxes
Other comprehensive loss - change
in value of interest rate swap
Reclassification of amortization of
forward starting swap included in
interest expense
Balance at December 31, 2015
Net income
Contributions from American
Assets Trust, Inc.
Conversion of operating
partnership units
Issuance of restricted units
Forfeiture of restricted units
Distributions
Stock-based compensation
Shares withheld for employee taxes
Other comprehensive loss - change
in value of interest rate swap
Reclassification of amortization of
forward starting swap included in
interest expense
Balance at December 31, 2016
Net income
Contributions from American
Assets Trust, Inc.
Conversion of operating
partnership units
Issuance of restricted units
Forfeiture of restricted units
Distributions
Stock-based compensation
Units withheld for employee taxes
Other comprehensive loss - change
in value of interest rate swap
Other comprehensive income -
unrealized gain on forward-starting
interest rate swaps
American Assets Trust, L.P.
Consolidated Statements of Partners' Capital
(In Thousands, Except Unit Data)
Limited Partners' Capital (1)
General Partners' Capital (2)
Units
17,905,257
—
Amount
$
31,235
15,238
Units
43,701,669
—
Amount
$
735,211
38,677
—
— 1,812,451
72,836
(5,741)
—
—
—
—
—
—
(67)
—
—
(16,960)
—
—
—
5,741
98,354
(40,687)
—
—
(169,809)
67
—
—
(42,452)
2,877
(7,396)
Accumulated
Other
Comprehensive
Income (Loss)
130
$
—
Total Capital
766,576
$
53,915
—
—
—
—
—
—
—
72,836
—
—
—
(59,412)
2,877
(7,396)
—
—
(238)
(238)
—
17,899,516
—
—
29,446
12,863
—
45,407,719
—
—
799,820
32,774
—
—
219,480
9,640
(10,694)
—
—
—
—
—
79
—
—
(18,073)
—
—
10,694
148,110
(33,707)
—
—
(20,187)
(79)
—
—
(46,004)
2,414
(807)
(231)
(339)
—
—
—
—
—
—
—
—
(231)
828,927
45,637
9,640
—
—
—
(64,077)
2,414
(807)
—
—
—
—
17,048
17,048
—
17,888,822
—
—
24,315
10,814
—
45,732,109
—
—
797,758
29,318
(231)
16,478
—
(231)
838,551
40,132
29,873
—
—
—
(67,537)
4,735
(882)
—
—
—
—
—
—
—
(10,281)
(10,281)
10,667
10,667
—
—
700,000
29,873
693,842
150,098
(48,624)
—
—
(22,837)
—
—
10,759
—
—
(49,302)
4,735
(882)
—
—
(693,842)
—
—
—
—
—
—
—
(10,759)
—
—
(18,235)
—
—
—
—
F-12
Reclassification of amortization of
forward-starting swap included in
interest expense
Balance at December 31, 2017
—
17,194,980
$
—
6,135
—
47,204,588
$
—
822,259
$
(1,114)
15,750
$
(1,114)
844,144
(1) Consists of limited partnership interests held by third parties.
(2) Consists of general and limited partnership interests held by American Assets Trust, Inc.
The accompanying notes are an integral part of these consolidated financial statements.
F-13
American Assets Trust, L.P.
Consolidated Statements of Cash Flows
(In Thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred rent revenue and amortization of lease intangibles
Depreciation and amortization
Amortization of debt issuance costs and debt fair value adjustments
Gain on sale of real estate
Stock-based compensation expense
Settlement of forward interest rate swap agreement
Other noncash interest expense
Other, net
Changes in operating assets and liabilities
Change in accounts receivable
Change in other assets
Change in accounts payable and accrued expenses
Change in security deposits payable
Change in other liabilities and deferred credits
Net cash provided by operating activities
INVESTING ACTIVITIES
Acquisition of real estate, net
Capital expenditures
Proceeds from sale of real estate, net of selling costs
Leasing commissions
Net cash used in investing activities
FINANCING ACTIVITIES
Repayment of secured notes payable
Proceeds from unsecured term loan
Proceeds from unsecured line of credit
Repayment of unsecured line of credit
Proceeds from issuance of unsecured notes payable
Debt issuance costs
Contributions from American Assets Trust, Inc.
Distributions
Shares withheld for employee taxes
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
$
Year Ended December 31,
2017
2016
2015
$
40,132
$
45,637
$
53,915
(2,547)
83,278
3,058
—
4,735
10,667
(1,114)
901
(1,116)
(499)
7,632
456
270
145,853
(278,141)
(47,496)
—
(4,927)
(330,564)
(167,139)
—
173,000
(193,000)
450,000
(2,401)
29,873
(67,537)
(882)
221,914
37,203
54,751
91,954
$
(2,637)
71,319
4,473
—
2,414
—
(231)
(769)
(2,347)
(982)
1,371
158
2,275
120,681
—
(59,633)
—
(3,572)
(63,205)
(136,974)
150,000
34,000
(44,000)
—
(2,055)
9,640
(64,077)
(807)
(54,273)
3,203
51,548
54,751
$
(5,587)
63,392
4,214
(7,121)
2,877
—
(231)
879
(1,011)
(243)
(1,081)
493
(36)
110,460
—
(134,174)
12,259
(4,461)
(126,376)
(235,980)
—
65,000
(35,000)
200,000
(2,881)
72,782
(59,412)
(7,396)
(2,887)
(18,803)
70,351
51,548
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated
balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in Statement of
Cash Flows
$
$
Year ended December 31,
2017
2016
2015
$
82,610
9,344
$
44,801
9,950
39,925
11,623
91,954
$
54,751
$
51,548
The accompanying notes are an integral part of these consolidated financial statements.
F-14
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements
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 on January 19, 2011 of certain assets of 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 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.
We are a vertically integrated and self-administered REIT with 194 employees providing substantial in-house expertise in
asset management, property management, property development, leasing, tenant improvement construction, acquisitions,
repositioning, redevelopment and financing.
Any reference to the number of properties or units, square footage or acres, employees; or references to beneficial
ownership interests, 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.
As of December 31, 2017, we owned or had a controlling interest in 26 office, retail, multifamily and mixed-use
operating properties, the operations of which we consolidate. Additionally, as of December 31, 2017, we owned land at four of
our properties that we classify as held for development and construction in progress. A summary of the properties owned by us
is as follows:
Alamo Quarry Market
Hassalo on Eighth - Retail
Retail
Carmel Country Plaza
Carmel Mountain Plaza
South Bay Marketplace
Lomas Santa Fe Plaza
Solana Beach Towne Centre
Office
Torrey Reserve Campus
Solana Beach Corporate Centre
The Landmark at One Market
One Beach Street
First & Main
Multifamily
Loma Palisades
Imperial Beach Gardens
Mariner's Point
Santa Fe Park RV Resort
Pacific Ridge Apartments
Gateway Marketplace
Del Monte Center
Geary Marketplace
The Shops at Kalakaua
Waikele Center
Lloyd District Portfolio
City Center Bellevue
Hassalo on Eighth - Multifamily
Mixed-Use
Waikiki Beach Walk Retail and Embassy Suites™ Hotel
F-15
Held for Development and Construction in Progress
Solana Beach Corporate Centre – Land
Solana Beach – Highway 101 – Land
Torrey Point (formerly Sorrento Pointe) – Construction in Progress
Lloyd District Portfolio – Construction in Progress
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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America, referred to as “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.
Consolidated Statements of Cash Flows-Supplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in
thousands):
Supplemental cash flow information
Total interest costs incurred
Interest capitalized
Interest expense
Cash paid for interest, net of amounts capitalized
Cash paid for income taxes
Supplemental schedule of noncash investing and financing activities
Accounts payable and accrued liabilities for construction in progress
Accrued leasing commissions
Reduction to capital for prepaid equity financing costs
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
$
$
55,418
1,570
53,848
47,473
461
$
$
$
$
$
(2,746) $
$
726
— $
53,487
1,551
51,936
47,793
641
$
$
$
$
$
54,829
7,569
47,260
42,691
633
(435) $
(355) $
— $
(14,733)
(901)
54
Revenue Recognition and Accounts Receivable
Our leases with tenants are classified as operating leases. Substantially all such leases contain fixed rent escalations
which occur at specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the
tenant controls the space through the term of the related lease, net of valuation adjustments, based on management's assessment
of credit, collection and other business risks. When we determine that we are the owner of tenant improvements and the tenant
has reimbursed us for a portion or all of the tenant improvement costs, we consider the amount paid to be additional rent, which
is recognized on a straight-line basis over the term of the related lease. For first generation tenants, in instances in which we
fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the
improvements are substantially completed and possession or control of the space is turned over to the tenant. When we
determine that the tenant is the owner of tenant improvements, tenant allowances are recorded as lease incentives and we
commence revenue recognition and lease incentive amortization when possession or control of the space is turned over to the
tenant for tenant work to begin. Percentage rents, which represent additional rents based upon the level of sales achieved by
certain tenants, are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved
F-16
and the percentage rents are collectible. Real estate tax and other cost reimbursements are recognized on an accrual basis over
the periods in which the related expenditures are incurred.
Other property income includes parking income, general excise tax billed to tenants and fees charged to tenants at our
multifamily properties. Other property income is recognized when earned. We recognize general excise tax gross, with the
amounts billed to tenants and customers recorded in other property income and the related taxes paid as rental expense. The
general excise tax included in other income was $3.7 million, $3.8 million and $3.7 million for the years ended December 31,
2017, 2016 and 2015, respectively. For a tenant to terminate its lease agreement prior to the end of the agreed term, we may
require that they pay a fee to cancel the lease agreement. Lease termination fees for which the tenant has relinquished control of
the space are generally recognized on the termination date. When a lease is terminated early but the tenant continues to control
the space under a modified lease agreement, the lease termination fee is generally recognized evenly over the remaining term of
the modified lease agreement.
We recognize revenue on the hotel portion of our mixed-use property from the rental of hotel rooms and guest services
when the rooms are occupied and services have been provided. Food and beverage sales are recognized when the customer has
been served or at the time the transaction occurs. Revenue from room rental is included in rental revenue on the statement of
income. Revenue from other sales and services provided is included in other property income on the statement of income.
We make estimates of the collectability of our accounts receivable related to minimum rents, straight-line rents, expense
reimbursements and other revenue. Accounts receivable and deferred rent receivable are carried net of this allowance for
doubtful accounts. We generally do not require collateral or other security from our tenants, other than letters of credit or
security deposits. Our determination as to the collectability of accounts receivable and correspondingly, the adequacy of this
allowance, is based primarily upon evaluations of individual receivables, current economic conditions, historical experience
and other relevant factors. The allowance for doubtful accounts is increased or decreased through bad debt expense. In some
cases, primarily relating to straight-line rents, the collection of these amounts extends beyond one year. Our experience relative
to unbilled straight-line rents is that a portion of the amounts otherwise recognizable as revenue is never billed to or collected
from tenants due to early lease terminations, lease modifications, bankruptcies and other factors. Accordingly, the extended
collection period for straight-line rents along with our evaluation of tenant credit risk may result in the nonrecognition of a
portion of straight-line rental income until the collection of such income is reasonably assured. If our evaluation of tenant credit
risk changes indicating more straight-line revenue is reasonably collectible than previously estimated and realized, the
additional straight-line rental income is recognized as revenue. If our evaluation of tenant credit risk changes indicating a
portion of realized straight-line rental income is no longer collectible, a reserve and bad debt expense is recorded. At
December 31, 2017 and December 31, 2016, our allowance for doubtful accounts was $0.4 million and $0.4 million,
respectively. Our allowance for deferred rent receivables at December 31, 2017 and December 31, 2016 was $1.4 million and
$1.3 million, respectively. Total bad debt expense was $0.8 million, $0.8 million and $0.4 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
We recognize gains on sales of properties upon the closing of the transaction with the purchaser. Gains on properties sold
are recognized using the full accrual method when (1) the collectability of the sales price is reasonably assured, (2) we are not
obligated to perform significant activities after the sale, (3) the initial investment from the buyer is sufficient and (4) other
profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in part until the
requirements for gain recognition have been met.
Real Estate
Land, buildings and improvements are recorded at cost. Depreciation is computed using the straight-line method.
Estimated useful lives range generally from 30 years to a maximum of 40 years on buildings and major improvements. Minor
improvements, furniture and equipment are capitalized and depreciated over useful lives ranging from 3 years to 15 years.
Maintenance and repairs that do not improve or extend the useful lives of the related assets are charged to operations as
incurred. Tenant improvements are capitalized and depreciated over the life of the related lease or their estimated useful life,
whichever is shorter. If a tenant vacates its space prior to the contractual termination of its lease, the undepreciated balance of
any tenant improvements are written off if they are replaced or have no future value. For the years ended December 31, 2017,
2016 and 2015, real estate depreciation expense was $70.2 million, $62.5 million and $54.2 million, respectively.
Acquisitions of properties are accounted for in accordance with the authoritative accounting guidance on acquisitions and
business combinations. Our methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is
based on estimated fair values, replacement cost and appraised values. When we acquire operating real estate properties, the
purchase price is allocated to land and buildings, intangibles such as in-place leases, and to current assets and liabilities
F-17
acquired, if any. Such valuations include a consideration of the noncancelable terms of the respective leases as well as any
applicable renewal periods. The fair values associated with below market renewal options are determined based on a review of
several qualitative and quantitative factors on a lease-by-lease basis at acquisition to determine whether it is probable that the
tenant would exercise its option to renew the lease agreement. These factors include: (1) the type of tenant in relation to the
property it occupies, (2) the quality of the tenant, including the tenant's long term business prospects and (3) whether the fixed
rate renewal option was sufficiently lower than the fair rental of the property at the date the option becomes exercisable such
that it would appear to be reasonably assured that the tenant would exercise the option to renew. The value allocated to in-place
leases is amortized over the related lease term and reflected as depreciation and amortization in the statement of income.
The value of above and below market leases associated with the original noncancelable lease terms are amortized to
rental income over the terms of the respective noncancelable lease periods and are reflected as either an increase (for below
market leases) or a decrease (for above market leases) to rental income in the statement of income. The value of the leases
associated with below market lease renewal options that are likely to be exercised are amortized to rental income over the
respective renewal periods. If a tenant vacates its space prior to contractual termination of its lease or the lease is not renewed,
the unamortized balance of any in-place lease value is written off to rental income and amortization expense.
Transaction costs related to the acquisition of a business, such as broker fees, transfer taxes, legal, accounting, valuation,
and other professional and consulting fees, are expensed as incurred and included in “general and administrative expenses” in
our consolidated statements of comprehensive income. For asset acquisitions not meeting the definition of a business,
transaction costs are capitalized as part of the acquisition cost.
Capitalized Costs
We capitalize certain costs related to the development and redevelopment of real estate including pre-construction costs,
real estate taxes, insurance and construction costs and salaries and related costs of personnel directly involved. Additionally, we
capitalize interest costs related to development and significant redevelopment activities. Capitalization of these costs begins
when the activities and related expenditures commence and cease when the project is substantially complete and ready for its
intended use, at which time the project is placed in service and depreciation commences. Additionally, we make estimates as to
the probability of certain development and redevelopment projects being completed. If we determine that the completion of
development or redevelopment is no longer probable, we expense all capitalized costs which are not recoverable.
Impairment of Long Lived Assets
We review for impairment on a property by property basis whenever events or changes in circumstances indicate that the
carrying value of a property may not be fully recoverable. Impairment is recognized on properties held for use when the
expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to
fair value. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell.
There were no impairment charges during the years ended December 31, 2017, December 31, 2016 and December 31, 2015.
Financial Instruments
The estimated fair values of financial instruments are determined using available market information and appropriate
valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair values. The use of
different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.
Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market
exchanges.
Derivative Instruments
At times, we may use derivative instruments to manage exposure to variable interest rate risk. We may enter into interest
rate swaps to manage our exposure to variable interest rate risk. If and when we enter into derivative instruments, we ensure
that such instruments qualify as cash flow hedges and would not enter into derivative instruments for speculative purposes.
Any interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess
effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value
of the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive income (loss)
and is subsequently reclassified into interest expense as interest is incurred on the related variable rate debt. Our cash flow
hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as
notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of
F-18
the counterparty by monitoring the credit worthiness of the counterparty. When ineffectiveness exists, the ineffective portion of
changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period
affected. See the discussion under Note 8 for certain quantitative details related to interest rate swaps and for a discussion on
how we value derivative financial instruments.
Cash and Cash Equivalents
We define cash and cash equivalents as cash on hand, demand deposits with financial institutions and short term liquid
investments with an initial maturity of less than 3 months. Cash balances in individual banks may exceed the federally insured
limit of $250,000 by the Federal Deposit Insurance Corporation (the "FDIC"). No losses have been experienced related to such
accounts. At December 31, 2017 and December 31, 2016, we had $45.7 million and $37.1 million, respectively, in excess of
the FDIC insured limit. At December 31, 2017 and December 31, 2016, we had $29.4 million and $0.2 million, respectively, in
money market funds that are not FDIC insured.
Restricted Cash
Restricted cash consists of amounts held by lenders to provide for future real estate tax expenditures, insurance
expenditures and reserves for capital improvements. At December 31, 2017 and 2016, we had $9.3 million and $10.0 million,
respectively, in restricted cash.
Other Assets
Other assets consist primarily of lease costs, lease incentives, acquired in-place leases and acquired above market leases.
Capitalized lease costs are direct costs incurred which were essential to originate a lease and would not have been incurred had
the leasing transaction not taken place and include third party commissions related to obtaining a lease. Capitalized lease costs
are amortized over the life of the related lease and included in depreciation and amortization expense on the statement of
income. If a tenant vacates its space prior to the contractual termination of its lease, the unamortized balance of any lease costs
are written off. We view these lease costs as part of the up-front initial investment we made in order to generate a long-term
cash inflow. Therefore, we classify cash outflows for lease costs as an investing activity in our consolidated statements of cash
flows.
Variable Interest Entities
Certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling
financial interest qualify as variable interest entities (“VIEs”). VIEs are required to be consolidated by their primary
beneficiary. The primary beneficiary of a VIE is the party that has a controlling interest in the VIE. Identifying the party with
the controlling interest requires a focus on which entity has the power to direct the activities of the VIE that most significantly
impact the VIE's economic performance and (1) the obligation to absorb the expected losses of the VIE or (2) the right to
receive the benefits from the VIE. At December 31, 2017 and December 31, 2016 we had no investments in real estate joint
ventures, and accordingly we had no VIEs which needed to be consolidated.
Stock-Based Compensation
We grant stock-based compensation awards to our employees and directors typically in the form of restricted shares of
common stock, options to purchase common stock and/or shares of common stock. We measure stock-based compensation
expense based on the fair value of the award on the grant date and recognize the expense ratably over the vesting period.
Modifications of stock-based compensation awards are treated as an exchange of the original award for a new award with
the resulting total compensation cost equal to the grant-date fair value of the original award plus the incremental value of the
modification to the award. The calculation of the incremental value is based on the excess of the fair value of the new
(modified) award based on current circumstances over the fair value of the original option measured immediately before its
terms are modified. For the year ended December 31, 2017, we incurred incremental compensation cost of approximately $2.2
million related to the discretionary vesting of previously granted restricted stock awards that did not meet the original vesting
criteria. For the year ended December 31, 2016 and 2015, there were no modifications of stock-based compensation awards.
Deferred Compensation
Our Operating Partnership has adopted the American Assets Trust Executive Deferral Plan V (“EDP V”) and the
American Assets Trust Executive Deferral Plan VI (“EDP VI”). These plans were adopted by our Operating Partnership as
F-19
successor plans to those deferred compensation plans maintained by American Assets Inc. ("AAI") in which certain employees
of AAI, who were transferred to us in connection with the Offering (the “Transferred Participants”), participated prior to the
Offering. EDP V and EDP VI contain substantially the same terms and conditions as these predecessor plans. AAI transferred
to our Operating Partnership the Transferred Participants' account balances under the predecessor plans. These transferred
account balances represent amounts deferred by the Transferred Participants prior to the Offering while they were employed by
AAI.
At the time eligible participants defer compensation, we record compensation cost and a corresponding deferred
compensation plan liability, which is included in other liabilities and deferred credits on our consolidated balance sheets. This
liability is adjusted to fair value at the end of each accounting period based on the performance of the benchmark funds selected
by each participant, and the impact of adjusting the liability to fair value is recorded as an increase or decrease to compensation
cost.
Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with
the taxable year ending December 31, 2011. To maintain our qualification as a REIT, we are required to distribute at least 90%
of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such
matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we maintain our
qualification for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed
currently to our stockholders that we derive from our REIT qualifying activities. If we fail to maintain our qualification as a
REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable
income would be subject to regular U.S. federal income tax. We are subject to certain state and local income taxes.
We, together with one of our subsidiaries, have elected to treat such subsidiary as a taxable REIT subsidiary (a “TRS”)
for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as non-customary
services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to federal and state income taxes.
Segment Information
Segment information is prepared on the same basis that our management reviews information for operational decision-
making purposes. We operate in four reportable 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.
Recent Accounting Pronouncements
In August 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging: Targeted
Improvements to Accounting for Hedging Activities. The pronouncement was issued to simplify the on-going assessment of
hedge effectiveness and increase transparency related to hedge accounting. The pronouncement is effective for fiscal years, and
for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The company
early adopted the provisions of ASU No. 2017-12 effective October 1, 2017 using the modified retrospective approach. The
company determined there is no impact to the company’s historical results as a result of adoption of the new standard and
therefore no adjustment to retained earnings from application of the ASU.
In January 2017, the FASB issued ASU 2017-1, Business Combinations: Clarifying the Definition of a Business. The
pronouncement changes the definition of a business to assist entities with evaluating when a set of transferred assets and
activities is a business. The pronouncement requires an entity to evaluate if substantially all of the fair value of the gross assets
acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets
and activities is not a business. The pronouncement is effective for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2018, with early adoption permitted. The company early adopted this ASU effective
January 1, 2017. For the period from January 1, 2017 through December 31, 2017, the company acquired three properties for
which we concluded that substantially all of the fair value of the assets acquired were concentrated in a single identifiable asset
F-20
and that the assets therefore did not meet the definition of a business under ASU 2017-01. Acquisition transaction costs
associated with these property acquisitions were approximately $0.2 million and were capitalized to real estate investments.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. This pronouncement requires companies to include
restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The pronouncement also requires a disclosure of a
reconciliation between the statement of financial position and the statement of cash flows when the balance sheet includes more
than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. Entities with material restricted
cash and restricted cash equivalents balances will be required to disclose the nature of the restrictions. The ASU is effective for
reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all
periods presented. The company adopted this ASU effective December 31, 2017. The adoption of this ASU impacted the
presentation of cash flows with inclusion of restricted cash flows for each of the presented periods. As of December 31, 2017
and December 31, 2016 , we had $9.3 million and $10.0 million of restricted cash, respectively, on our consolidated balance
sheets.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which
simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is
effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The company
adopted this ASU effective January 1, 2017 and the adoption did not have a material impact on our consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-2, Leases. This pronouncement is expected to result in the recognition
of a right-to-use asset and related liability to account for future obligations under ground lease agreements for which the
Company is the lessee. In addition, this pronouncement will require that lessees and lessors capitalize, as initial direct costs,
only those costs that are incurred due to the execution of a lease. As of December 31, 2017, the remaining contractual payments
under lease agreements for which the company is the lessee aggregated approximately $38.3 million.
As a lessor, under current accounting standards, the company recognizes rental revenue from our operating leases on a
straight-line basis over the respective lease terms. The company commences recognition of rental revenue at the date the
property is ready for its intended use and the tenant takes possession of or controls the physical use of the property. Under
current accounting standards, tenant recoveries related to payments of real estate taxes, insurance, utilities, repairs and
maintenance, common area expenses, and other operating expenses are considered lease components. The company recognizes
these tenant recoveries as revenue when services are rendered in an amount equal to the related operating expenses incurred
that are recoverable under the terms of the applicable lease.
Under this pronouncement, each lease agreement will be evaluated to identify the lease components and nonlease
components at lease inception. The total consideration in the lease agreement will be allocated to the lease and nonlease
components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component
using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis). In January
2018, the FASB issued a proposed amendment to the lease ASU that would allow lessors to elect, as a practical expedient, not
to allocate the total consideration to lease and nonlease components based on their relative standalone selling prices. If adopted,
this practical expedient will allow lessors to elect a combined single lease component presentation if (i) the timing and pattern
of the revenue recognition of the combined single lease component is the same, and (ii) the related lease component and, the
combined single lease component would be classified as an operating lease.
The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2018, with early adoption permitted. The company plans to adopt the provisions of ASU No. 2016-2 effective January 1, 2019
using the modified retrospective approach. The company continues to evaluate the impact this pronouncement will have on the
company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The pronouncement was
issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements
for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods
beginning after December 15, 2017. The company will adopt the provisions of the ASU effective January 1, 2018 using the
modified retrospective approach. As discussed above, leases are specifically excluded from this and will be governed by the
F-21
applicable lease codification; however, this update may have implications on certain variable payment terms included in lease
agreements. Upon adoption of the new lease ASU in 2019, we may be required to classify our tenant recoveries into lease and
nonlease components, whereby the nonlease components would be subject to the revenue recognition ASU, pending the
resolution of the proposed amendment issued by the FASB in January 2018. Property services categorized as nonlease
components that are reimbursed by our tenants may need to be presented on a net basis if it is determined that we hold an agent
arrangement.
The Company evaluated the revenue recognition for all contracts within this scope under existing accounting standards and
under the new revenue recognition ASU and confirmed that there were no differences in the amounts recognized or the pattern of
recognition. This evaluation included revenues from the hotel portion of our mixed-use property, parking income and excise taxes
charged to customers. Therefore, the adoption of this ASU did not result in an adjustment to the Company’s retained earnings on
January 1, 2018.
NOTE 2. REAL ESTATE
A summary of our real estate investments is as follows (in thousands):
December 31, 2017
Land
Buildings
Land improvements
Tenant improvements
Furniture, fixtures, and equipment
Construction in progress
Accumulated depreciation
Net real estate
December 31, 2016
Land
Buildings
Land improvements
Tenant improvements
Furniture, fixtures, and equipment
Construction in progress
Accumulated depreciation
Net real estate
Retail
Office
Multifamily
Mixed-Use
Total
$
262,860
$
143,575
$
72,668
$
76,635
$
555,738
548,062
705,999
383,210
125,859
1,763,130
42,401
67,879
372
3,086
924,660
(266,006)
658,654
245,553
522,032
40,736
61,323
702
2,805
$
$
9,313
80,968
2,085
52,512
994,452
(181,331)
813,121
143,575
697,558
8,777
74,747
1,764
40,123
$
$
6,758
—
12,377
6,505
481,518
(57,474)
424,044
24,696
210,873
3,304
—
8,421
851
$
$
2,606
1,955
6,429
24
213,508
(32,620)
180,888
76,635
125,860
2,482
1,846
5,769
574
$
$
61,078
150,802
21,263
62,127 (1)
2,614,138
(537,431)
2,076,707
490,459
1,556,323
55,299
137,916
16,656
44,353 (1)
873,151
(243,890)
629,261
$
966,544
(153,130)
813,414
$
248,145
(45,131)
203,014
$
213,166
(27,309)
185,857
$
2,301,006
(469,460)
1,831,546
$
$
$
(1) Land related to held for development and construction in progress is included in the Held for Development and Construction in Progress classifications on
the consolidated balance sheets.
Property Asset Acquisitions
On April 28, 2017, we acquired the Pacific Ridge Apartments, a 533-unit luxury apartment community located in San
Diego, California. The purchase price was approximately $232 million, excluding closing costs of approximately $0.1 million.
On July 6, 2017, we acquired Gateway Marketplace, an approximately 128,000 square feet dual-grocery anchored
shopping center located in Chula Vista, California. The purchase price was approximately $42 million, excluding closing costs
of approximately $0.1 million.
F-22
The properties were acquired with cash on hand and borrowings under our Amended and Restated Credit Agreement (as
defined herein).
The financial information set forth below summarizes the company’s purchase price allocations for the Pacific Ridge
Apartments and Gateway Marketplace during the year ended December 31, 2017 (in thousands):
Land
Building
Land improvements
Furniture, fixtures, and equipment
Total real estate
Lease intangibles
Prepaid expenses and other assets
Assets acquired
Accounts payable and accrued expenses
Security deposits payable
Other liabilities and deferred credits
Liabilities assumed
Pacific Ridge
Apartments
Gateway
Marketplace
$
$
$
$
47,971 $
171,813
3,403
3,281
226,468
5,592
424
232,484 $
74 $
673
49
796 $
17,363
19,192
1,522
930
39,007
2,920
—
41,927
203
22
1,034
1,259
The following table summarizes the operating results for the Pacific Ridge Apartments and Gateway Marketplace
included in the company’s historical consolidated statement of operations for the period of acquisition through December 31,
2017 (in thousands):
Revenues
Operating expenses
Operating (loss) income
Net (loss) income attributable to American Assets Trust, Inc.
Pro Forma Financial Information
Pacific Ridge
Apartments
Gateway
Marketplace
Total
$
$
$
$
10,983 $
15,238 $
(4,255) $
(4,255) $
1,667 $
1,082 $
585 $
585 $
12,650
16,320
(3,670)
(3,670)
The unaudited financial information in the table below summarizes the combined results of operations of the Pacific
Ridge Apartments and Gateway Marketplace with the company’s historical consolidated statements of operations as though the
entities were acquired on January 1, 2016. The pro forma financial information includes adjustments to depreciation expense
for acquired property and equipment and adjustments to amortization charges for acquired intangible assets and liabilities. The
pro forma financial information set forth below is presented for informational purposes only and may not be indicative of what
actual results of operations would have been had the transactions occurred at the beginning of 2016, nor does it purport to
represent the results of future operations (in thousands).
Total revenue
Total operating expenses
Operating income
Net income
Dispositions
Year Ended December 31, 2017
Year Ended December 31, 2016
As Reported
ProForma
As Reported
ProForma
$
$
$
$
314,983
221,337
93,646
40,132
$
$
$
$
322,050
230,796
91,255
36,433
$
$
$
$
295,088
197,147
97,941
45,637
$
$
$
$
312,414
215,631
96,783
41,916
F-23
On August 6, 2015, we sold Rancho Carmel Plaza. The property is located in San Diego, California and was previously
included in our retail segment. The sales price of this property of approximately $12.7 million, less costs to sell, resulted in net
proceeds to us of approximately $12.3 million. Accordingly, we recorded a gain on sale of approximately $7.1 million for the
year ended December 31, 2015.
NOTE 3. ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES
The following summarizes our acquired lease intangibles, which are included in other assets and other liabilities and
deferred credits (in thousands):
In-place leases
Accumulated amortization
Above market leases
Accumulated amortization
Acquired lease intangible assets, net
Below market leases
Accumulated accretion
Acquired lease intangible liabilities, net
December 31, 2017
54,206
$
(45,835)
21,262
(20,084)
9,549
67,423
(37,241)
30,182
$
$
$
December 31, 2016
48,741
$
(38,906)
21,667
(19,579)
11,923
66,521
(33,073)
33,448
$
$
$
The value allocated to in-place leases is amortized over the related lease term as depreciation and amortization expense in
the statement of income. Above and below market leases are amortized over the related lease term as additional rental income
for below market leases or a reduction of rental income for above market leases in the statement of income. Rental income
(loss) includes net amortization from acquired above and below market leases of $3.3 million, $3.5 million and $2.9 million in
2017, 2016 and 2015, respectively. The remaining weighted-average amortization period as of December 31, 2017, is 7.9 years,
1.3 years and 6.4 years for in-place leases, above market leases and below market leases, respectively. Below market leases
include $15.3 million related to below market renewal options, and the weighted-average period prior to the commencement of
the renewal options is 9.1 years.
Increases (decreases) in net income as a result of amortization of our in-place leases, above market leases and below
market leases are as follows (in thousands):
Amortization of in-place leases
Amortization of above market leases
Amortization of below market leases
Net loss
Year Ended December 31,
2017
2016
2015
$
$
(8,769) $
(934)
4,239
(5,464) $
(4,029) $
(1,248)
4,719
(558) $
(4,767)
(1,767)
4,686
(1,848)
F-24
As of December 31, 2017, the amortization for acquired leases during the next five years and thereafter, assuming no
early lease terminations, is as follows (in thousands):
In-Place
Leases
Above Market
Leases
Below Market
Leases
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
2,060
$
1,618
1,075
724
637
2,257
8,371
$
$
631
322
103
28
28
66
1,178
$
$
3,656
3,561
2,997
2,555
2,242
15,171
30,182
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability.
The hierarchy for inputs used in measuring fair value is as follows:
1. Level 1 Inputs—quoted prices in active markets for identical assets or liabilities
2. Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities
3. Level 3 Inputs—unobservable inputs
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.
Except as disclosed below, the carrying amount of our financial instruments approximates their fair value. Financial
assets and liabilities whose fair values we measure on a recurring basis using Level 2 inputs consist of our deferred
compensation liability and interest rate swap liability. We measure the fair values of these liabilities based on prices provided
by independent market participants that are based on observable inputs using market-based valuation techniques provided by
third parties using proprietary valuation models and analytical tools as of December 31, 2017 and 2016. These valuation
models and analytical tools use market pricing or similar instruments that are both objective and publicly available, including
matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark
securities, bids and/or offers.
A summary of our financial liabilities that are measured at fair value on a recurring basis by level within the fair value
hierarchy is as follows (in thousands):
December 31, 2017
December 31, 2016
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Deferred compensation liability
Interest rate swap asset
Interest rate swap liability
$
$
$
— $
— $
— $
1,156 $
5,091 $
10 $
— $
— $
— $
1,156
5,091
10
$
$
$
1,006 $
— $
— $ 16,428 $
1,006
— $
— $ 16,428
— $
1,067 $
— $
1,067
The fair value of our secured notes payable and unsecured 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 mortgages and notes payable, using
rates ranging from 3.9% to 4.6%.
Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value
presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial
instruments. The carrying values of our line of credit and term loan set forth below are deemed to be at fair value since the
outstanding debt is directly tied to monthly LIBOR contracts. A summary of the carrying amount and fair value of our financial
instruments, all of which are based on Level 2 inputs, is as follows (in thousands):
F-25
Secured notes payable
Unsecured term loan
Unsecured senior guaranteed notes
Unsecured line of credit
NOTE 5. OTHER ASSETS
Other assets consist of the following (in thousands):
December 31, 2017
December 31, 2016
Carrying Value
279,550
$
248,839
$
$
$
Fair Value
286,156
250,000
Carrying Value
445,180
$
247,883
$
$
$
796,631
$
— $
802,699
$
— $
348,467
20,000
$
$
$
$
Fair Value
457,621
250,000
351,357
20,000
Leasing commissions, net of accumulated amortization of $28,318 and $25,194,
respectively
Interest rate swap asset
Acquired above market leases, net
Acquired in-place leases, net
Lease incentives, net of accumulated amortization of $136 and $41, respectively
Other intangible assets, net of accumulated amortization of $1,115 and $1,128,
respectively
Prepaid expenses, deposits and other
Total other assets
December 31, 2017
December 31, 2016
$
$
20,633
5,091
1,178
8,371
916
227
5,945
$
42,361
$
18,131
16,428
2,088
9,835
313
206
5,853
52,854
Lease incentives are amortized over the term of the related lease and included as a reduction of rental income in the
statement of income.
NOTE 6. OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits consist of the following (in thousands):
Acquired below market leases, net
Prepaid rent and deferred revenue
Interest rate swap liability
Straight-line rent liability
Deferred rent expense and lease intangible
Deferred compensation
Deferred tax liability
Other liabilities
Total other liabilities and deferred credits, net
December 31, 2017
30,182
$
December 31, 2016
33,448
$
8,429
10
4,428
1,670
1,156
123
63
46,061
$
$
7,720
1,067
3,028
1,756
1,006
265
47
48,337
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.
F-26
NOTE 7. DEBT
Debt of American Assets Trust, Inc.
American Assets Trust, Inc. does not hold any indebtedness. All debt is held directly or indirectly by the Operating
Partnership; however, American Assets Trust, Inc. has guaranteed the Operating Partnership's second amended and restated
credit facility, term loan and carve-out guarantees on property-level debt.
Debt of American Assets Trust, L.P.
Secured notes payable
The following is a summary of the Operating Partnership's total secured notes payable outstanding as of December 31,
2017 and December 31, 2016 (in thousands):
Description of Debt
Waikiki Beach Walk—Retail (1)(2)
Solana Beach Corporate Centre III-IV (3)(4)
Loma Palisades (1)
One Beach Street (1)
Torrey Reserve—North Court (3)
Torrey Reserve—VCI, VCII, VCIII (3)
Solana Beach Corporate Centre I-II (3)
Solana Beach Towne Centre (3)
City Center Bellevue (1)
Unamortized fair value adjustment
Debt issuance costs, net of accumulated
amortization of $1,191 and $1,029,
respectively
Total Secured Notes Payable
Principal Balance as of
Stated Interest Rate
December 31, 2017
—
December 31, 2016
130,310
as of December 31, 2017
N/A
Stated Maturity Date
July 1, 2017
N/A
6.09%
3.94%
7.22%
6.36%
5.91%
5.91%
August 1, 2017
July 1, 2018
April 1, 2019
June 1, 2019
June 1, 2020
June 1, 2020
June 1, 2020
3.98% November 1, 2022
—
73,744
21,900
20,023
6,764
10,721
35,737
111,000
279,889
—
(339)
$
279,550
$
35,440
73,744
21,900
20,399
6,884
10,927
36,424
111,000
447,028
(1,347)
(501)
445,180
Interest only.
(1)
(2) Loan repaid in full, without premium or penalty, on March 1, 2017.
(3) Principal payments based on a 30-year amortization schedule.
(4) Loan repaid in full, without premium or penalty, on April 3, 2017.
Certain loans require us to comply with various financial covenants, including the maintenance of minimum debt
coverage ratios. As of December 31, 2017, we were in compliance with all loan covenants.
F-27
Unsecured notes payable
The following is a summary of the Operating Partnership's total unsecured notes payable outstanding as of December 31,
2017 and December 31, 2016 (in thousands):
Description of Debt
Term Loan A
Senior Guaranteed Notes, Series A
Term Loan B
Term Loan C
Senior Guaranteed Notes, Series F
Senior Guaranteed Notes, Series B
Senior Guaranteed Notes, Series C
Senior Guaranteed Notes, Series D
Senior Guaranteed Notes, Series E
Debt issuance costs, net of
accumulated amortization of $5,866
and $4,317, respectively
Total Unsecured Notes Payable
Principal Balance as of
Stated Interest Rate
December 31, 2017
100,000
$
December 31, 2016
100,000
$
as of December 31,
2017
Variable (1)
Stated Maturity Date
January 9, 2019 (2)
4.04% (3) October 31, 2021
March 1, 2023
Variable (4)
Variable (5)
3.78% (6)
4.45%
4.50%
4.29% (7)
4.24% (8)
March 1, 2023
July 19, 2024
February 2, 2025
April 1, 2025
March 1, 2027
May 23, 2029
150,000
100,000
50,000
100,000
100,000
100,000
250,000
100,000
150,000
100,000
50,000
—
100,000
100,000
—
—
1,050,000
600,000
(4,530)
1,045,470
$
$
(3,650)
596,350
(1) The company has entered into an interest rate swap agreement that is intended to fix the interest rate associated with the Term Loan at approximately
3.08% through its maturity date and extension options, subject to adjustments based on the Operating Partnership's consolidated leverage ratio.
(2) The Operating Partnership's Term Loan had an original maturity date of January 9, 2016 with an option to extend the Term Loan up to three times, with
each such extension for a 12-month period, which we plan to exercise. The foregoing extension options are exercisable by the Operating Partnership
subject to the satisfaction of certain conditions. On January 8, 2016, the Operating Partnership exercised the first of three options to extend the maturity
date of the Term Loan to January 9, 2017. Effective as of January 9, 2017, the Operating Partnership exercised the second of three options to extend the
maturity date of the Term Loan to January 9, 2018.
(3) The company entered into a one-month forward-starting seven-year swap contract on August 19, 2014, which was settled on September 19, 2014 at a gain
of approximately $1.6 million (see Note 8). The forward-starting seven-year swap contract was deemed to be a highly effective cash flow hedge,
accordingly, the effective interest rate is approximately 3.88% per annum.
(4) The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan B at
approximately 3.15% through its maturity date, subject to adjustments based on our consolidated leverage ratio.
(5) The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan C at
approximately 3.14% through its maturity date, subject to adjustments based on our consolidated leverage ratio.
(6) The Operating Partnership entered into a treasury lock contract on May 31, 2017, which was settled on June 23, 2017 at a loss of approximately $0.5
million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.85%
per annum.
(7) The Operating Partnership entered into forward-starting interest rate swap contracts on March 29, 2016 and April 7, 2016, which were settled on January
18, 2017 at a gain of approximately $10.4 million. The forward-starting interest swap rate contracts were deemed to be a highly effective cash flow
hedges, accordingly, the effective interest rate is approximately 3.87% per annum.
(8) The Operating Partnership entered into a treasury lock contract on April 25, 2017, which was settled on May 11, 2017 at a gain of approximately $0.7
million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 4.18%
per annum.
On March 1, 2016, the Operating Partnership entered into a Term Loan Agreement with each lender from time to time
party thereto, and U.S. Bank National Association, as Administrative Agent (as amended, the “Term Loan Agreement”). The
Term Loan Agreement provides for a new, seven-year unsecured term loan to the Operating Partnership of $100 million that
matures on March 1, 2023 (“Term Loan B”). Concurrent with the closing of the Term Loan Agreement, the Operating
Partnership drew down the entirety of Term Loan B.
On May 2, 2016, the Operating Partnership entered into a Joinder and First Amendment to the Term Loan Agreement to
provide for a new lender to fund an incremental term loan. The Joinder and First Amendment provides for a new, seven-year
unsecured term loan to the Operating Partnership of $50 million that matures on March 1, 2023 ("Term Loan C"). Term Loan
C has the same borrowing terms as the Term Loan Agreement noted below. Concurrent with the closing of the Joinder and First
Amendment, the Operating Partnership drew down the entirety of Term Loan C.
F-28
Borrowings under the Term Loan Agreement with respect to Term Loan B and Term Loan C bear interest at floating rates
equal to, at our option, either (1) LIBOR, plus a spread which ranges from 1.70% to 2.35% based on our consolidated leverage
ratio, or (2) a base rate equal to the highest of (a) 0%, (b) the prime rate, (c) the federal funds rate plus 50 bps or (d) the
Eurodollar rate plus 100 bps, in each case plus a spread which ranges from 0.70% to 1.35% based on our consolidated leverage
ratio. The company entered into interest rate swap agreements intended to fix the interest rates associated with Term Loan B
and Term Loan C at approximately 3.15% and 3.14%, respectively, through the maturity dates, subject to adjustments based on
our consolidated leverage ratio.
The Term Loan Agreement contains a number of customary financial covenants, including, without limitation, tangible
net worth thresholds, secured and unsecured leverage ratios and fixed charge coverage ratios. Subject to the terms of the Term
Loan Agreement, upon certain events of default, including, but not limited to, (i) a default in the payment of any principal or
interest under Term Loan B or Term Loan C, and (ii) a default in the payment of certain other indebtedness of the Operating
Partnership, the company or their subsidiaries, the principal and accrued and unpaid interest and prepayment penalties on the
outstanding Term Loan B or Term Loan C will become due and payable at the option of the lenders.
On January 9, 2018, we entered into the Third Amendment (“Third Amendment”) to the Term Loan Agreement, which
maintains the seven-year $150 million unsecured term loan (Term Loan B and Term Loan C) to the Operating Partnership that
matures on March 1, 2023 (the “$150mm Term Loan”). Effective as of March 1, 2018, borrowings under the Term Loan
Agreement with respect to the $150mm Term Loan bear interest at floating rates equal to, at the Operating Partnership’s option,
either (1) LIBOR, plus a spread which ranges from 1.20% to 1.70% based on the Operating Partnership’s consolidated leverage
ratio, or (2) a base rate equal to the highest of (a) 0%, (b) the prime rate, (c) the federal funds rate plus 50 bps or (d) the
Eurodollar rate plus 100 bps, in each case plus a spread which ranges from 0.70% to 1.35% based on the Operating
Partnership’s consolidated leverage ratio. The foregoing rates are intended to be more favorable than previously contained in
the Term Loan Agreement. Additionally, the Operating Partnership may elect for borrowings to bear interest based on a
ratings-based pricing grid as per the Operating Partnership’s then-applicable investment grade debt ratings under the terms set
forth in the Term Loan Agreement.
On October 31, 2014, the Operating Partnership entered into a note purchase agreement (the "Note Purchase Agreement")
with a group of institutional purchasers that provided for the private placement of an aggregate of $350 million of senior
guaranteed notes, of which (i) $150 million are designated as 4.04% Senior Guaranteed Notes, Series A, due October 31, 2021
(the “Series A Notes”), (ii) $100 million are designated as 4.45% Senior Guaranteed Notes, Series B, due February 2, 2025 (the
“Series B Notes”) and (iii) $100 million are designated as 4.50% Senior Guaranteed Notes, Series C, due April 1, 2025 (the
“Series C Notes”). The Series A Notes were issued on October 31, 2014, the Series B Notes were issued on February 2, 2015
and the Series C Notes were issued on April 2, 2015. The Series A Notes, the Series B Notes and the Series C Notes will pay
interest quarterly on the last day of January, April, July and October until their respective maturities.
On March 1, 2017, the Operating Partnership entered into a Note Purchase Agreement for the private placement of $250
million of 4.29% Senior Guaranteed Notes, Series D, due March 1, 2027 (the "Series D Notes"). The Series D Notes were
issued on March 1, 2017 and will pay interest quarterly on the last day of January, April, July and October until their respective
maturities.
On May 23, 2017, the Operating Partnership entered into a Note Purchase Agreement for the private placement of $100
million of 4.24% Senior Guaranteed Notes, Series E, due May 23, 2029 (the "Series E Notes"). The Series E Notes were issued
on May 23, 2017 and will pay interest semi-annually on the 23rd of May and November until their respective maturities.
On July 19, 2017, the Operating Partnership entered into a Note Purchase Agreement for the private placement of $100
million of 3.78% Senior Guaranteed Notes, Series F, due July 19, 2024 (the "Series F Notes," and collectively with the Series A
Notes, Series B Notes, Series C Notes, Series D Notes and Series E Notes are referred to herein as, the “Notes".). The Series F
Notes were issued on July 19, 2017 and will pay interest semi-annually on the 31st of January and July until their respective
maturities.
The Operating Partnership may prepay at any time all, or from time to time any part of, the Notes, in an amount not less
than 5% of the aggregate principal amount of any series of the Notes then outstanding in the case of a partial prepayment, at
100% of the principal amount so prepaid plus a Make-Whole Amount (as defined in the Note Purchase Agreement).
F-29
The Note Purchase Agreement contains a number of customary financial covenants, including, without limitation,
tangible net worth thresholds, secured and unsecured leverage ratios and fixed charge coverage ratios. Subject to the terms of
the Note Purchase Agreement and the Notes, upon certain events of default, including, but not limited to, (i) a default in the
payment of any principal, Make-Whole Amount or interest under the Notes, and (ii) a default in the payment of certain other
indebtedness by us or our subsidiaries, the principal, accrued and unpaid interest, and the Make-Whole Amount on the
outstanding Notes will become due and payable at the option of the purchasers.
The Operating Partnership's obligations under the Notes are fully and unconditionally guaranteed by the Operating
Partnership and certain of the Operating Partnership's subsidiaries.
Certain loans require the Operating Partnership to comply with various financial covenants, including the maintenance of
minimum debt coverage ratios. As of December 31, 2017, the Operating Partnership was in compliance with all loan covenants.
Scheduled principal payments on secured and unsecured notes payable as of December 31, 2017 are as follows (in
thousands):
2018
2019
2020
2021
2022
Thereafter
Credit Facility
$
$
75,224
142,662
51,003
150,000
111,000
800,000
1,329,889
On January 9, 2014, the company and the Operating Partnership entered into an amended and restated credit agreement
(the "Prior Credit Facility"), or the amended and restated credit facility, which amended and restated the then in-place credit
facility. The amended and restated credit facility provides for aggregate, unsecured borrowing of $350 million, consisting of a
revolving line of credit of $250 million (the "Prior Revolver Loan") and a term loan of $100 million (the "Term Loan A"). The
Prior Credit Facility had an accordion feature that allowed the Operating Partnership to increase the availability thereunder up
to an additional $250 million, subject to meeting specified requirements and obtaining additional commitments from lenders.
At December 31, 2017, there was no outstanding balance under the Prior Revolver Loan.
On October 16, 2014, we entered into a first amendment to the Prior Credit Agreement that amended provisions of the
Prior Credit Agreement to, among other things, (1) describe the treatment of our pari passu obligations under the amended and
restated credit agreement and (2) remove the material acquisition provisions previously set forth in the Prior Credit Agreement.
Borrowings under the Prior Credit Facility initially beared interest at floating rates equal to, at our option, either (1)
LIBOR, plus a spread which ranges from (a) 1.35%-1.95% (with respect to the Prior Revolver Loan) and (b) 1.30% to 1.90%
(with respect to Term Loan A), in each case based on our consolidated leverage ratio, or (2) a base rate equal to the highest of
(a) the prime rate, (b) the federal funds rate plus 50 bps or (c) the Eurodollar rate plus 100 bps, plus a spread which ranges from
(i) 0.35%-0.95% (with respect to the Prior Revolver Loan) and (ii) 0.30% to 0.90% (with respect to Term Loan A), in each case
based on our consolidated leverage ratio. The foregoing rates were more favorable than previously contained in the credit
agreement in place as of December 31, 2013. If American Assets Trust, Inc. obtained an investment-grade debt rating, under the
terms set forth in the Prior Credit Facility, the spreads would further improve. For the year-ended December 31, 2017, the
weighted average interest rate on the Revolver Loan was 2.36%.
The Prior Revolver Loan initially matured on January 9, 2018, subject to the Operating Partnership's option to extend the
Prior Revolver Loan up to two times, with each such extension for a six-month period. The Term Loan initially matured on
January 9, 2016, subject to our option to extend the Term Loan A up to three times, with each such extension for a 12-month
period. The foregoing extension options are exercisable by us subject to the satisfaction of certain conditions. Effective as of
January 8, 2018, the Operating Partnership exercised the third of three options to extend the maturity date of Term Loan A to
January 9, 2019.
F-30
Concurrent with the closing of the Prior Credit Facility, the Operating Partnership drew down on the entirety of the $100
million Term Loan, which remains outstanding and is included in unsecured notes payable as discussed above.
Additionally, the Prior Credit Facility included a number of financial covenants, including:
•
•
•
•
•
•
•
A maximum leverage ratio (defined as total indebtedness net of certain cash and cash equivalents to total asset
value) of 60%,
A maximum secured leverage ratio (defined as total secured debt to secured total asset value) of 40%,
A minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes, depreciation and
amortization to consolidated fixed charges) of 1.50x,
A minimum unsecured interest coverage ratio of 1.75x,
A maximum unsecured leverage ratio of 60%,
A minimum tangible net worth of $721.16 million, and 75% of the net proceeds of any additional equity issuances
(other than additional equity issuances in connection with any dividend reinvestment program), and
Recourse indebtedness at any time cannot exceed 15% of total asset value.
The Prior Credit Facility provided that American Assets Trust, Inc.'s annual distributions may not exceed the greater of (1)
95% of our funds from operations (“FFO”) or (2) the amount required for us to (a) qualify and maintain our REIT status and (b)
avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution,
we may be precluded from making distributions other than those necessary to qualify and maintain our status as a REIT.
American Assets Trust, Inc. and certain of its subsidiaries guaranteed the obligations under the Prior Credit Agreement,
and certain of its subsidiaries pledged specified equity interests in our subsidiaries as collateral for our obligations under the
Prior Credit Facility.
As of December 31, 2017, the Operating Partnership was in compliance with all then in-place Prior Credit Facility
covenants.
On January 9, 2018, we entered into a second amended and restated credit agreement (the "Second Amended and Restated
Credit Facility"), which amended and restated the Prior Credit Agreement. The Second Amended and Restated Credit Facility
provides for aggregate, unsecured borrowing of $450 million, consisting of a revolving line of credit of $350 million (the
"Revolver Loan") and a term loan of $100 million (the "Term Loan A"). The Second Amended and Restated Credit Facility has
an accordion feature that may allow us to increase the availability thereunder up to an additional $350 million, subject to
meeting specified requirements and obtaining additional commitments from lenders.
Borrowings under the Second Amended and Restated Credit Agreement initially bear interest at floating rates equal to, at
our option, either (1) LIBOR, plus a spread which ranges from (a) 1.05% to 1.50% (with respect to the Revolver Loan) and (b)
1.30% to 1.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio, or (2) a base rate equal to
the highest of (a) the prime rate, (b) the federal funds rate plus 50 bps or (c) LIBOR plus 100 bps, plus a spread which ranges
from (i) 0.10% to 0.50% (with respect to the Revolver Loan) and (ii) 0.30% to 0.90% (with respect to Term Loan A), in each
case based on our consolidated leverage ratio. The foregoing rates are more favorable than previously contained in the Prior
Credit Facility in place as of December 31, 2017.
The Revolver Loan initially matures on January 9, 2022, subject to our option to extend the Revolver Loan up to two
times, with each such extension for a six-month period. The Term Loan A matures on January 9, 2019. The foregoing extension
options are exercisable by us subject to the satisfaction of certain conditions.
Additionally, the Second Amended and Restated Credit Facility includes a number of customary financial covenants,
including:
•
•
•
A maximum leverage ratio (defined as total indebtedness net of certain cash and cash equivalents to total asset
value) of 60%,
A maximum secured leverage ratio (defined as total secured debt to secured total asset value) of 40%,
A minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes, depreciation and
amortization to consolidated fixed charges) of 1.50x,
F-31
•
•
•
A minimum unsecured interest coverage ratio of 1.75x,
A maximum unsecured leverage ratio of 60%, and
Recourse indebtedness at any time cannot exceed 15% of total asset value.
The Second Amended and Restated Credit Facility provides that our annual distributions may not exceed the greater of
(1) 95% of our FFO or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of
federal or state income or excise tax. If certain events of default exist or would result from a distribution, we may be precluded
from making distributions other than those necessary to qualify and maintain our status as a REIT.
NOTE 8. DERIVATIVE AND HEDGING ACTIVITIES
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest
rate movement. To accomplish these objectives, we use interest rate swaps as part of our interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in
exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional
amount.
Concurrent with the closing of our amended and restated credit facility, we entered into an interest rate swap agreement
that is intended to fix the interest rate associated with our term loan of $100 million at approximately 3.08% through its
maturity date and extension options, subject to adjustments based on our consolidated leverage ratio.
On January 29, 2016, we entered into a forward-starting interest rate swap contract with U.S. Bank National Association
to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective $100 million seven-
year term loan. The forward-starting seven-year swap contract had a notional amount of $100 million, a termination date
of March 1, 2023, a fixed pay rate of 1.4485%, and a receive rate equal to the one-month LIBOR, with fixed rate payments due
monthly commencing April 1, 2016, floating payments due monthly commencing April 1, 2016, and floating reset dates two
days prior to the first day of each calculation period. The forward-starting seven-year swap contract accrual period, March 1,
2016 to March 1, 2023, was designed to match the expected tenor of our then prospective $100 million seven-year term loan,
which successfully closed on March 1, 2016.
On March 23, 2016, we entered into a forward-starting interest rate swap contract with Wells Fargo Bank, National
Association to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective
incremental $50 million seven-year term loan. The forward-starting seven-year swap contract had a notional amount of $50
million, a termination date of March 1, 2023, a fixed pay rate of 1.4410%, and a receive rate equal to the one-month LIBOR,
with fixed rate payments due monthly commencing June 1, 2016, floating payments due monthly commencing June 1, 2016,
and floating reset dates two days prior to the first day of each calculation period. The forward-starting seven-year swap
contract accrual period, May 2, 2016 to March 1, 2023, was designed to match the expected tenor of our then prospective
incremental $50 million seven-year term loan, which successfully closed on May 2, 2016.
On March 29, 2016, we entered into a forward-starting interest rate swap contract with Wells Fargo Bank, National
Association to reduce the interest rate variability exposure of the projected interest cash flows of our prospective new ten-year
debt offering (private placement, investment grade bonds, term loan or otherwise) (anticipated to close on or before March 31,
2017). The forward-starting ten-year swap contract had a notional amount of $150 million, a termination date of March 31,
2027, a fixed pay rate of 1.8800%, and a receive rate equal to the three-month LIBOR, with fixed rate payments due semi-
annually commencing September 29, 2017, floating payments due semi-annually commencing September 29, 2017, and
floating reset dates the first day of each quarterly period. The forward-starting ten-year swap contract accrual period, March
31, 2017 to March 31, 2027, was designed to match the expected tenor of our prospective new ten-year debt offering (private
placement, investment grade bonds, term loan or otherwise). There can be no assurances that the prospective debt offering
described above will close on the terms described herein, or at all.
On April 7, 2016, we entered into a forward-starting interest rate swap contract with Wells Fargo Bank, National
Association to reduce the interest rate variability exposure of the projected interest cash flows of our prospective new ten-year
debt offering (private placement, investment grade bonds, term loan or otherwise) (anticipated to close on or before March 31,
2017). The forward-starting ten-year swap contract had a notional amount of $100 million, a termination date of March 31,
2027, a fixed pay rate of 1.7480%, and a receive rate equal to the three-month LIBOR, with fixed rate payments due semi-
annually commencing September 29, 2017, floating payments due semi-annually commencing September 29, 2017, and
F-32
floating reset dates the first day of each quarterly period. The forward-starting ten-year swap contract accrual period, March 31,
2017 to March 31, 2027, was designed to match the expected tenor of our prospective new ten-year debt offering (private
placement, investment grade bonds, term loan or otherwise). There can be no assurances that the prospective debt offering
described above will close on the terms described herein, or at all.
On January 18, 2017, we settled the March 29, 2016 $150 million and April 7, 2016 $100 million ten-year forward-
starting interest rate swaps resulting in an aggregate gain of approximately $10.4 million. This gain is included in accumulated
other comprehensive income and will be amortized to interest expense over the life of the Series D Notes. The forward-starting
interest rate swap contracts have been deemed to be highly effective cash flow hedges and we elected to designate all the
forward-starting swap contracts as accounting hedges.
On April 25, 2017, we entered into a treasury lock contract (the "April 2017 Treasury Lock") with Bank of America,
National Association, to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective
new twelve-year private placement. The April 2017 Treasury Lock had a notional amount of $100 million, termination date of
May 18, 2017, a fixed pay rate of 2.313%, and a receive rate equal to the ten-year treasury rate on the settlement date.
On May 11, 2017, we settled the April 2017 Treasury Lock, resulting in a gain of approximately $0.7 million. This gain is
included in accumulated other comprehensive income and will be amortized to interest expense over ten years. The April 2017
Treasury Lock has been deemed to be a highly effective cash flow hedge and we elected to designate the April 2017 Treasury
Lock as an accounting hedge.
On May 31, 2017, we entered into a treasury lock contract (the "May 2017 Treasury Lock") with Bank of America,
National Association, to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective
new seven-year private placement. The May 2017 Treasury Lock had a notional amount of $100 million, termination date of
July 26, 2017, a fixed pay rate of 2.064%, and a receive rate equal to the seven-year treasury rate on the settlement date.
On June 23, 2017, we settled the May 2017 Treasury Lock, resulting in a loss of approximately $0.5 million. This loss is
included in accumulated other comprehensive income and will be amortized to interest expense over seven years. The May
2017 Treasury Lock has been deemed to be a highly effective cash flow hedge and we elected to designate the May 2017
Treasury Lock as an accounting hedge.
The forward-starting interest rate swap contracts have been deemed to be highly effective cash flow hedges and we
elected to designate all the forward-starting swap contracts as accounting hedges.
The following is a summary of the terms of the interest rate swap as of December 31, 2017 (dollars in thousands):
Swap Counterparty
Bank of America, N.A.
U.S. Bank N.A.
Wells Fargo Bank, N.A.
$
$
$
Notional Amount
100,000
100,000
50,000
Effective Date
1/9/2014
3/1/2016
5/2/2016
Maturity Date
1/9/2019
3/1/2023
3/1/2023
$
$
$
Fair Value
(10)
3,379
1,711
The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being
recorded as accumulated other comprehensive income and will be subsequently reclassified into earnings during the period in
which the hedged forecasted transaction affects earnings.
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash
flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivative,
including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied
volatilities. The fair value of the interest rate swaps is determined using the market standard methodology of netting the
discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The
variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from
observable market interest rate curves.
F-33
NOTE 9. PARTNERS' CAPITAL OF AMERICAN ASSETS TRUST, L.P.
As of December 31, 2017, the Operating Partnership had 17,194,980 common units (the “Noncontrolling Common
Units”) outstanding. American Assets Trust, Inc. owned 73.2% of the Operating Partnership at December 31, 2017. The
remaining 26.8% of the partnership interests are owned by non-affiliated investors and certain of our directors and executive
officers. Common units and shares of the company's common stock have essentially the same economic characteristics in that
common units and shares of the company's common stock share equally in the total net income or loss distributions of the
Operating Partnership.
American Assets Trust, Inc. is the Operating Partnership’s general partner and is responsible for the management of the
Operating Partnership’s business. As the general partner of the Operating Partnership, the company effectively controls the
ability to issue common stock of American Assets Trust, Inc. upon a limited partner’s notice of redemption. Investors who own
common units have the right to cause the Operating Partnership to redeem any or all of their common units for cash equal to the
then-current market value of one share of the company's common stock, or, at the company's election, shares of the company's
common stock on a one-for-one basis. In addition, American Assets Trust, Inc. has generally acquired common units upon a
limited partner’s notice of redemption in exchange for shares of the company's common stock. The redemption provisions of
common units owned by limited partners that permit the Operating Partnership to settle in either cash or common stock at the
option of the company are further evaluated in accordance with applicable accounting guidance to determine whether
temporary or permanent equity classification on the balance sheet is appropriate. The Operating Partnership evaluated this
guidance, including the requirement to settle in unregistered shares, and determined that these common units meet the
requirements to qualify for presentation as permanent equity.
During the years ended December 31, 2017, 2016 and 2015, approximately 693,842, 10,694 and 5,741, respectively,
common units were converted into shares of the company's common stock.
NOTE 10. EQUITY OF AMERICAN ASSETS TRUST, INC.
Stockholders' Equity
On May 6, 2013, we entered into an at-the-market (“ATM”) equity program with four sales agents pursuant to which we
may, from time to time, offer and sell shares of our common stock having an aggregate offering price of up to $150.0 million.
We completed $150.0 million of issuances under such ATM program on May 21, 2015. On May 27, 2015, we entered into a
new ATM equity program with five sales agents under which we may, from time to time, offer and sell shares of our common
stock having an aggregate offering price of up to $250.0 million. The sales of shares of our common stock made through the
ATM equity program are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended.
For the year ended December 31, 2017, we issued 700,000 shares of common stock through the ATM equity program at a
weighted average price per share of $43.46 for gross proceeds of $30.4 million and paid $0.3 million in sales agent
compensation and $0.25 million in additional offering expenses related to the sales of these shares of common stock. As of
December 31, 2017, we had the capacity to issue up to an additional $176.2 million in shares of our common stock under our
active ATM equity program.
Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of
our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under the active
ATM equity program.
On March 9, 2015, we entered into a common stock purchase agreement (the “Purchase Agreement”) with Explorer
Insurance Company, a California corporation ("EIC"), an entity owned and controlled by Ernest Rady, our Chairman, President
and Chief Executive Officer. The Purchase Agreement provided for the sale by us to EIC, in a private placement,
of 200,000 shares of our common stock at a purchase price of $40.54 per share, resulting in gross proceeds to us of
approximately $8.1 million. The price per share paid by EIC was equal to the closing price of a share of our common stock on
the New York Stock Exchange on the date of the Purchase Agreement. These shares were registered on March 27, 2015 by
virtue of our filing of a prospectus supplement to our universal shelf registration statement on Form S-3 filed on February 6,
2015.
Preferred Stock Authorized Shares
F-34
We have been authorized to issue 10,000,000 shares of preferred stock with a par value of $0.01, of which no shares were
outstanding at December 31, 2017. Upon issuance, our board of directors has the ability to define the terms of the preferred
shares, including voting rights, liquidation preferences, conversion and redemption provisions and dividend rates.
Dividends
The following table lists the dividends declared and paid on our shares of common stock and Noncontrolling Common
Units for the years ended December 31, 2017, 2016 and 2015:
Period
Amount per
Share/Unit
Period Covered
Dividend Paid Date
First Quarter 2015
Second Quarter 2015
Third Quarter 2015
Fourth Quarter 2015
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
Fourth Quarter 2016
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
Taxability of Dividends
$
$
$
$
$
$
$
$
$
$
$
$
January 1, 2015 to March 31, 2015
0.2325
0.2325 April 1, 2015 to June 30, 2015
0.2325
July 1, 2015 to September 30, 2015
0.25 October 1, 2015 to December 31, 2015
0.25
January 1, 2016 to March 31, 2016
0.25 April 1, 2016 to June 30, 2016
March 27, 2015
June 26, 2015
September 25, 2015
December 23, 2015
March 25, 2016
June 24, 2016
0.25
July 1, 2016 to September 30, 2016
September 29, 2016
0.26 October 1, 2016 to December 31, 2016
December 22, 2016
January 1, 2017 to March 31, 2017
0.26
0.26 April 1, 2017 to June 30, 2017
March 30, 2017
June 29, 2017
0.26
July 1, 2017 to September 30, 2017
September 28, 2017
0.27 October 1, 2017 to December 31, 2017
December 21, 2017
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. A summary of the income tax status of dividends per share paid
is as follows:
Ordinary income
Capital gain
Return of capital
Total
Stock-Based Compensation
Year Ended December 31,
2017
Per Share
$
$
1.05
—
—
1.05
%
100.0% $
—%
—%
100.0% $
2016
Per Share
1.01
—
—
1.01
2015
%
100.0% $
Per Share
0.72
—%
—%
100.0% $
0.04
0.19
0.95
%
75.9%
4.4%
19.7%
100.0%
The company has established the 2011 Equity Incentive Award Plan (the "2011 Plan"), which provides for grants to
directors, employees and consultants of the company and the Operating Partnership of stock options, restricted stock, dividend
equivalents, stock payments, performance shares, LTIP units, stock appreciation rights and other incentive awards. An
aggregate of 4,054,411 shares of our common stock are authorized for issuance under awards granted pursuant to the 2011 Plan,
and as of December 31, 2017, 2,800,299 shares of common stock remain available for future issuance.
F-35
The following shares of restricted common stock have been issued as of December 31, 2017:
Grant
June 16, 2015 (1)
December 1, 2015 (2)
June 14, 2016(1)
December 1, 2016 (3)
June 13, 2017(1)
December 15, 2017 (4)
Fair Value at Grant Date
Number
$39.64
$13.67 - $26.39
$40.81
$28.24 - $35.71
$40.99
$27.27
5,044
93,310
4,900
143,210
4,880
145,218
(1) Restricted common stock issued to members of the company's non-employee directors. These awards of restricted stock will vest subject to the director's
continued service on the Board of Directors on the earlier of (i) the one year anniversary of the date of grant or (ii) the date of the next annual meeting of
our stockholders, if such non-employee director continues his or her service on the Board of Directors until the next annual meeting of stockholders, but
not thereafter, pursuant to our independent director compensation policy.
(2) Restricted common stock issued to certain of the company's senior management and other employees, which are subject to pre-defined market specific
performance criteria based vesting. Up to one-third of the shares of restricted stock may vest based on performance calculations determined as of
November 30, 2016, 2017 and 2018, subject to the employee's continued employment on those dates.
(3) Restricted common stock issued to certain of the company's senior management and other employees, which are subject to pre-defined market specific
performance criteria based vesting. Up to one-third of the shares of restricted stock may vest based on performance calculations determined as of
November 30, 2017, 2018 and 2019, subject to the employee's continued employment on those dates.
(4) Restricted common stock issued to certain of the company's senior management and other employees, which are subject to pre-defined market specific
performance criteria based vesting. Shares of restricted stock may vest based on performance calculations determined as of November 30, 2018, subject
to the employee's continued employment on that date.
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 the 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 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.
The following table summarizes the activity of non-vested restricted stock awards during the year ended December 31,
2017:
Balance at beginning of year
Granted
Vested
Forfeited
Balance at end of year
2017
Units
Weighted Average
Grant Date Fair
Value
232,765
$
150,098
(65,471)
(48,624)
268,768
$
31.24
27.72
30.21
29.21
29.89
We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $4.7
million, $2.4 million and $2.9 million in noncash compensation expense for the years ended December 31, 2017, 2016 and
2015, respectively, each of which is included in general and administrative expense on the statement of income. Unrecognized
compensation expense was $4.0 million at December 31, 2017, which will be recognized over a weighted-average period of 1.6
years.
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 years ended December 31, 2017, 2016 and 2015,
we had a weighted average of approximately 230,602 shares, 176,408 shares and 184,545 unvested shares outstanding,
F-36
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 attributable 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
year ended December 31, 2017, diluted shares exclude incentive restricted stock as these awards are considered contingently
issuable. Additionally, the unvested restricted stock awards subject to time vesting are anti-dilutive for all periods presented and
accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.
Earnings Per Unit of the Operating Partnership
Basic earnings (loss) per unit (“EPU”) of the Operating Partnership is computed by dividing income (loss) applicable
to unitholders by the weighted average Operating Partnership units outstanding, as adjusted for the effect of participating
securities. Operating Partnership units granted in equity-based payment transactions are considered participating securities prior
to vesting. The impact of unvested Operating Partnership unit awards on EPU has been calculated using the two-class method
whereby earnings are allocated to the unvested Operating Partnership unit awards based on distributions and the unvested
Operating Partnership units’ participation rights in undistributed earnings (losses).
The calculation of diluted earnings per unit for the year ended December 31, 2017, 2016 and 2015 does not include
230,602 units, 176,408 units, and 184,545 unvested weighted average Operating Partnership units, respectively, as these equity
securities are either considered contingently issuable or the effect of including these equity securities was anti-dilutive.
The computation of basic and diluted EPS is presented below (dollars in thousands, except share and per share amounts):
NUMERATOR
Net income
Less: Net income attributable to restricted shares
Less: Income from operations attributable to unitholders in the
Operating Partnership
Net income attributable to common stockholders—basic
Income from operations attributable to American Assets Trust, Inc.
common stockholders—basic
Plus: Income from operations attributable to unitholders in the Operating
Partnership
Net income attributable to common stockholders—diluted
DENOMINATOR
Weighted average common shares outstanding—basic
Effect of dilutive securities—conversion of Operating Partnership units
Weighted average common shares outstanding—diluted
Earnings per common share, basic
Earnings per common share, diluted
NOTE 11. INCOME TAXES
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
40,132
(241)
(10,814)
29,077
29,077
10,814
39,891
46,715,520
17,371,730
64,087,250
0.62
0.62
$
$
$
$
$
$
45,637
(189)
(12,863)
32,585
32,585
12,863
45,448
45,332,471
17,895,688
63,228,159
0.72
0.72
$
$
$
$
$
$
53,915
(168)
(15,238)
38,509
38,509
15,238
53,747
44,439,112
17,900,051
62,339,163
0.87
0.86
We elected to be taxed as a REIT and operate in a manner that allows us to qualify as a REIT, for federal income tax
purposes commencing with our taxable year ending December 31, 2011. As a REIT, we are generally not subject to corporate
level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities.
Taxable income from non-REIT activities managed through our TRS is subject to federal and state income taxes.
We lease our hotel property to a wholly owned TRS that is subject to federal and state income taxes. We account for
income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future
F-37
tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases. Additionally, we
classify certain state taxes as income taxes for financial reporting purposes in accordance with ASC Topic 740, Income Taxes.
A deferred tax liability is included in our consolidated balance sheets of $0.1 million and $0.3 million as of December 31,
2017 and 2016, respectively, in relation to real estate asset basis differences and prepaid expenses for our TRS.
The income tax provision included in other income (expense) on the consolidated statement of income is as follows (in
thousands):
Current:
Federal
State
Deferred:
Federal
State
Provision for income taxes
NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Year Ended
December 31, 2015
$
$
$
— $
422
— $
(208)
214
$
$
132
341
— $
93
566
$
305
35
—
(45)
295
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, 2021, which we have the option to extend until 2031 by way of two five-year extension options.
At Waikiki Beach Walk, we sublease a portion of the building of which Quiksilver is currently in possession, under an
operating lease effective through December 31, 2021.
Current minimum annual payments under the leases are as follows, as of December 31, 2017 (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
3,274
3,347
3,422
3,460 (1)
2,613
22,210
38,326
(1) Lease payments on The Landmark at One Market lease will be equal to fair rental value from July 2021 through the end of the options lease term. In the
table, we have shown the option lease payments for this period based on the stated rate for the month of June 2021 of $217,744.
F-38
We have management agreements with Outrigger Hotels & Resorts or an affiliate thereof (“Outrigger”) pursuant to which
Outrigger manages each of the retail and hotel portions of the Waikiki Beach Walk property. Under the management agreement
with Outrigger relating to the retail portion of Waikiki Beach Walk (the “retail management agreement”), we pay Outrigger a
monthly management fee of 3.0% of net revenues from the retail portion of Waikiki Beach Walk. Pursuant to the terms of the
retail management agreement, if the agreement is terminated in certain instances, including our election not to repair damage or
destruction at the property, a condemnation or our failure to make required working capital infusions, we would be obligated to
pay Outrigger a termination fee equal to the sum of the management fees paid for the two calendar months immediately
preceding the termination date. The retail management agreement may not be terminated by us or by Outrigger without cause.
Under our management agreement with Outrigger relating to the hotel portion of Waikiki Beach Walk (the “hotel management
agreement”), we pay Outrigger a monthly management fee of 6.0% of the hotel's gross operating profit, as well as 3.0% of the
hotel's gross revenues; provided that the aggregate management fee payable to Outrigger for any year shall not exceed 3.5% of
the hotel's gross revenues for such fiscal year. Pursuant to the terms of the hotel management agreement, if the agreement is
terminated in certain instances, including upon a transfer by us of the hotel or upon a default by us under the hotel management
agreement, we would be required to pay a cancellation fee calculated by multiplying (1) the management fees for the previous
12 months by (2) (a) eight, if the agreement is terminated in the first 11 years of its term, or (b) four, three, two or one, if the
agreement is terminated in the twelfth, thirteenth, fourteenth or fifteenth year, respectively, of its term. The hotel management
agreement may not be terminated by us or by Outrigger without cause.
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 $7.5 million based on operating performance through
December 31, 2017.
Our Del Monte Center property has ongoing environmental remediation related to ground water contamination. The
environmental issue existed at purchase and is currently in the final stages of remediation. The final stages of the remediation
will include routine, long term ground monitoring by the appropriate regulatory agency over the next five to seven years. The
work performed is financed through an escrow account funded by the seller upon our purchase of the Del Monte Center. We
believe the funds in the escrow account are sufficient for the remaining work to be performed. However, if further work is
required costing more than the remaining escrow funds, we could be required to pay such overage, although we may have a
contractual claim for such costs against the prior owner or our environmental remediation consultant.
As of December 31, 2017, the company accrued approximately $6.6 million for transfer taxes in connection with its
Offering. The company believes that it has filed all necessary forms with the requisite taxing authorities.
Concentrations of Credit Risk
Our properties are located in Southern California, Northern California, Hawaii, Oregon, Texas and Washington. The
ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors
affecting the markets in which the tenants operate. Thirteen of our consolidated properties, representing 31.0% of our total
revenue for the year ended December 31, 2017, are located in Southern California, which exposes us to greater economic risks
than if we owned a more geographically diverse portfolio. Our mixed-use property located in Honolulu, Hawaii accounted for
19.6% of total revenues for the year ended December 31, 2017.
Tenants in the retail industry accounted for 33.0% and 34.2% of total revenues for the years December 31, 2017 and
2016, respectively. 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. Two retail properties, Alamo Quarry Market and
Waikele Center, accounted for 13.2% and 14.4% of total revenues for the years ended December 31, 2017 and 2016,
respectively.
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Tenants in the office industry accounted for 33.6% and 35.0% of total revenues for the years December 31, 2017 and
2016, respectively. This makes us susceptible to demand for office rental space and subject to the risks associated with an
investment in real estate with a concentration of tenants in the office industry.
For the years ended December 31, 2017 and 2016, no tenant accounted for more than 10.0% of our total rental revenue.
At December 31, 2017, salesforce.com, inc. at The Landmark at One Market accounted for 7.9% of total annualized base rent.
Three other tenants (Autodesk, Inc., Kmart, and Lowe's) comprise 9.7% of our total annualized base rent at December 31,
2017, in the aggregate. No other tenants represent greater than 2.0% of our total annualized base rent. Total annualized base
rent used for the percentage calculations includes the annualized base rent as of December 31, 2017 for our office properties,
retail properties and the retail portion of our mixed-use property.
NOTE 13. OPERATING LEASES
At December 31, 2017, our retail, office and mixed-use properties are located in five states: California, Oregon, Hawaii,
Washington and Texas. At December 31, 2017, we had approximately 813 leases with office and retail tenants, including the
retail portion of our mixed-use property. Our multifamily properties are located in Southern California, and we had
approximately 1,844 leases with residential tenants at December 31, 2017, excluding Santa Fe Park RV Resort.
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 seven to fifteen 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 December 31, 2017, 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 ended December 31 (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
172,669
145,167
121,451
98,773
79,924
191,215
809,199
The above future minimum rentals exclude residential leases, which are typically range from seven to fifteen months, and
exclude the hotel, as rooms are rented on a nightly basis.
F-40
NOTE 14. COMPONENTS OF RENTAL INCOME AND EXPENSE
The principal components of rental income are as follows (in thousands):
Minimum rents
Retail
Office
Multifamily
Mixed-Use
Cost reimbursement
Percentage rent
Hotel revenue
Other
Total rental income
Year Ended December 31,
2016
2015
2017
$
$
76,201
93,128
40,217
10,564
34,267
3,214
39,545
1,667
298,803
$
$
74,050
90,281
26,962
10,616
33,610
3,096
39,371
1,512
279,498
$
$
72,999
87,125
18,137
10,313
30,796
2,834
38,191
1,492
261,887
Minimum rents include $0.8 million, $0.8 million and $2.7 million for the years ended December 31, 2017, 2016 and
2015, respectively, to recognize minimum rents on a straight-line basis. In addition, minimum rents include $3.3 million, $3.5
million and $2.9 million for the years ended December 31, 2017, 2016 and 2015, respectively, to recognize the amortization of
above and below market leases.
The principal components of rental expenses are as follows (in thousands):
Rental operating
Hotel operating
Repairs and maintenance
Marketing
Rent
Hawaii excise tax
Management fees
Total rental expenses
Year Ended December 31,
2017
2016
2015
34,944
24,254
13,136
2,053
3,119
4,454
2,046
84,006
$
$
31,709
23,607
12,705
2,117
2,925
4,511
1,979
79,553
$
$
27,611
23,112
11,503
2,104
2,511
4,408
1,938
73,187
$
$
NOTE 15. OTHER INCOME (EXPENSE)
The principal components of other income (expense), net are as follows (in thousands):
Interest and investment income
Income tax expense
Other non-operating income
Total other income (expense)
Year Ended December 31,
2017
2016
2015
$
$
548
(214)
—
334
$
$
$
72
(566)
126
(368) $
90
(295)
108
(97)
F-41
NOTE 16. RELATED PARTY TRANSACTIONS
At Torrey Reserve Campus, we previously leased space to ICW, an entity owned and controlled by Ernest Rady. Rental
revenue recognized on the leases of $0.1 million, $2.2 million and $2.2 million for the years ended December 31, 2017, 2016
and 2015, respectively, is included in rental income. Additionally, on July 1, 2014, we entered into a workers' compensation
insurance policy with ICW. The policy premium was approximately $0.4 million for the period July 1, 2014 through July 1,
2015. We renewed this policy with ICW on July 1, 2015 and the premium was approximately $0.2 million for the period July
1, 2015 through July 1, 2016. We renewed this policy with ICW on July 1, 2016 and the premium was approximately $0.2
million for the period July 1, 2016 through July 1, 2017. We renewed this policy with ICW on June 30, 2017 and the premium
is approximately $0.2 million for the period July 1, 2017 through July 1, 2018.
At Torrey Reserve Campus, we lease space to American Assets, Inc., an entity owned and controlled by Ernest Rady.
Rental revenue recognized on the lease of $0.1 million for the year ended December 31, 2017 is included in rental income.
On occasion, the company utilizes aircraft services provided by AAI Aviation, Inc. ("AAIA"), an entity owned and
controlled by Ernest Rady. For the years ending December 31, 2017, 2016 and 2015, we incurred approximately $0.1 million,
$0.2 million and $0.2 million, respectively, of expenses related to aircraft services of AAIA or reimbursement to Mr. Rady (or
his trust) for use of the aircraft owned by AAIA. These expenses are recorded as general and administrative expenses in our
consolidated statements of comprehensive income.
On March 9, 2015, we entered into a Common Stock Purchase Agreement with EIC, an entity owned and controlled by
Ernest Rady. The Common Stock Purchase Agreement provided for the sale by us to EIC, in a private placement, of 200,000
shares of common stock at a price of $40.54 per share, resulting in gross proceeds to us of approximately $8.1 million. The
price per share paid by EIC was equal to the closing price of a share of our common stock on the New York Stock Exchange on
the date of the Common Stock Purchase Agreement.
As of December 31, 2017, Mr. Rady and his affiliates owned approximately 12.2% of our outstanding common stock and
23.1% of our outstanding common units, which together represent an approximate 35.2% beneficial interest in our company on
a fully diluted basis.
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 $1.0 million, $0.9 million and $1.0 million were made for the years ended December 31, 2017, 2016 and 2015,
respectively, and included in rental expenses on the statements of income.
NOTE 17. SEGMENT REPORTING
Segment information is prepared on the same basis that our management reviews information for operational decision-
making purposes. We review operating and financial information for each property on an individual basis and therefore, each
property represents an individual operating segment. However, we have aggregated our properties into reportable segments as
the properties share similar long-term economic characteristics and have other similarities including the fact that they are
operated using consistent business strategies.
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.
F-42
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.
The following table represents operating activity within our reportable segments (in thousands):
Total Retail
Property revenue
Property expense
Segment profit
Total Office
Property revenue
Property expense
Segment profit
Total Multifamily
Property revenue
Property expense
Segment profit
Total Mixed-Use
Property revenue
Property expense
Segment profit
Total segments’ profit
Year Ended December 31,
2017
2016
2015
$
$
103,968
(28,524)
75,444
$
100,982
(27,934)
73,048
105,694
(33,120)
72,574
43,533
(17,898)
25,635
103,254
(31,839)
71,415
29,188
(12,498)
16,690
61,788
(37,135)
24,653
198,306
$
61,664
(35,660)
26,004
187,157
$
$
98,795
(25,672)
73,123
97,651
(28,843)
68,808
19,455
(8,334)
11,121
59,722
(35,157)
24,565
177,617
The following table is a reconciliation of segment profit to net income attributable to stockholders (in thousands):
Total segments' profit
General and administrative
Depreciation and amortization
Interest expense
Gain on sale of real estate
Other income (expense), net
Net income
Net income attributable to restricted shares
Net income attributable to unitholders in the Operating Partnership
Net income attributable to American Assets Trust, Inc. stockholders
Year Ended December 31,
2017
198,306
(21,382)
(83,278)
(53,848)
—
334
40,132
(241)
(10,814)
29,077
$
$
2016
187,157
(17,897)
(71,319)
(51,936)
—
(368)
45,637
(189)
(12,863)
32,585
$
$
2015
177,617
(20,074)
(63,392)
(47,260)
7,121
(97)
53,915
(168)
(15,238)
38,509
$
$
F-43
The following table shows net real estate and secured note payable balances for each of the segments, along with their
capital expenditures for each year (in thousands):
Net real estate
Retail
Office
Multifamily
Mixed-Use
Secured Notes Payable (1)
Retail
Office
Multifamily
Mixed-Use
Capital Expenditures (2)
Retail
Office
Multifamily
Mixed-Use
December 31, 2017
December 31, 2016
$
$
$
$
$
$
658,654
$
813,121
424,044
180,888
2,076,707
35,737
170,408
73,744
—
279,889
10,412
35,023
6,318
670
52,423
$
$
$
$
$
629,261
813,414
203,014
185,857
1,831,546
36,424
206,550
73,744
130,310
447,028
13,371
46,476
2,463
895
63,205
(1) Excludes unamortized fair market value adjustments and debt issuance costs of $0.3 million and $1.8 million as of December 31, 2017 and 2016,
respectively.
(2) Capital expenditures represent cash paid for capital expenditures during the year and includes leasing commissions paid.
F-44
NOTE 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The tables below reflect selected American Assets Trust, Inc. quarterly information for 2017 and 2016 (in thousands,
except per shares data):
Total revenue
Operating income
Net income
Net income attributable to restricted shares
Net income attributable to unitholders in the Operating
Partnership
Net income attributable to American Assets Trust, Inc.
stockholders
Net income per share attributable to common
stockholders - basic and diluted
Total revenue
Operating income
Net income
Net income attributable to restricted shares
Net income attributable to unitholders in the Operating
Partnership
Net income attributable to American Assets Trust, Inc.
stockholders
Net income per share attributable to common
stockholders - basic and diluted
Three Months Ended
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
$
81,746
$
82,339
$
77,106
$
23,792
9,731
(60)
26,477
12,505
(60)
20,048
7,588
(61)
73,792
23,329
10,308
(60)
(2,594)
(3,351)
(2,008)
(2,861)
7,077
0.15
$
$
9,094
0.19
$
$
5,519
0.12
$
$
7,387
0.16
Three Months Ended
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
76,562
$
75,976
$
71,819
$
25,110
12,408
(61)
25,484
11,858
(42)
23,704
10,650
(43)
70,731
23,643
10,721
(43)
(3,486)
(3,342)
(3,008)
(3,027)
8,861
0.19
$
$
8,474
0.19
$
$
7,599
0.17
$
$
7,651
0.17
$
$
$
$
$
F-45
The tables below reflect selected American Assets Trust, L.P. quarterly information for 2017 and 2016 (in thousands,
except per shares data):
Total revenue
Operating income
Net income
Net income attributable to restricted shares
Net income attributable to American Assets Trust, L.P.
unit holders
Net income per unit attributable to unit holders - basic and
diluted
Total revenue
Operating income
Net income
Net income attributable to restricted shares
Net income attributable to American Assets Trust, L.P.
unit holders
Net income per unit attributable to common unit holders -
basic and diluted
Three Months Ended
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
81,746
23,792
9,731
(60)
9,671
0.15
$
$
$
82,339
26,477
12,505
(60)
12,445
0.19
$
$
$
77,106
20,048
7,588
(61)
7,527
0.12
$
$
$
73,792
23,329
10,308
(60)
10,248
0.16
Three Months Ended
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
76,562
$
75,976
$
71,819
$
25,110
12,408
(61)
12,347
0.19
$
$
25,484
11,858
(42)
11,816
0.19
$
$
23,704
10,650
(43)
10,607
0.17
$
$
70,731
23,643
10,721
(43)
10,678
0.17
$
$
$
$
$
$
NOTE 19. SUBSEQUENT EVENTS
Second Amended and Restated Credit Agreement
On January 9, 2018, we entered into a the Second Amended and Restated Credit Facility, which amended and restated the
Prior Credit Agreement. The Second Amended and Restated Credit Facility provides for aggregate, unsecured borrowing of
$450 million, consisting of a revolving line of credit of $350 million (the "Revolver Loan") and a term loan of $100 million (the
"Term Loan A"). The Second Amended and Restated Credit Facility has an accordion feature that may allow us to increase the
availability thereunder up to an additional $350 million, subject to meeting specified requirements and obtaining additional
commitments from lenders.
Borrowings under the Second Amended and Restated Credit Agreement initially bear interest at floating rates equal to, at
our option, either (1) LIBOR, plus a spread which ranges from (a) 1.05% to 1.50% (with respect to the Revolver Loan) and (b)
1.30% to 1.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio, or (2) a base rate equal to
the highest of (a) the prime rate, (b) the federal funds rate plus 50 bps or (c) LIBOR plus 100 bps, plus a spread which ranges
from (i) 0.10% to 0.50% (with respect to the Revolver Loan) and (ii) 0.30% to 0.90% (with respect to Term Loan A), in each
case based on our consolidated leverage ratio. The foregoing rates are more favorable than previously contained in the Prior
Credit Agreement in place as of December 31, 2017.
The Revolver Loan initially matures on January 9, 2022, subject to our option to extend the Revolver Loan up to two
times, with each such extension for a six-month period. The Term Loan A matures on January 9, 2019. The foregoing extension
options are exercisable by us subject to the satisfaction of certain conditions.
Third Amendment to Term Loan Agreement
On January 9, 2018, we entered into the Third Amendment to the Term Loan Agreement, which maintains the seven-year
$150 million unsecured term loan (Term Loan B and Term Loan C) to the Operating Partnership that matures on March 1,
2023. Effective as of March 1, 2018, borrowings under the Term Loan Agreement with respect to the $150mm Term Loan bear
interest at floating rates equal to, at the Operating Partnership’s option, either (1) LIBOR, plus a spread which ranges from
1.20% to 1.70% based on the Operating Partnership’s consolidated leverage ratio, or (2) a base rate equal to the highest of (a)
F-46
0%, (b) the prime rate, (c) the federal funds rate plus 50 bps or (d) the Eurodollar rate plus 100 bps, in each case plus a spread
which ranges from 0.70% to 1.35% based on the Operating Partnership’s consolidated leverage ratio. The foregoing rates are
intended to be more favorable than previously contained in the Term Loan Agreement. Additionally, the Operating Partnership
may elect for borrowings to bear interest based on a ratings-based pricing grid as per the Operating Partnership’s then-
applicable investment grade debt ratings under the terms set forth in the Term Loan Agreement.
F-47
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American Assets Trust, Inc. and American Assets Trust, L.P.
SCHEDULE III—Consolidated Real Estate and Accumulated Depreciation -(Continued)
(In Thousands)
Real estate assets
Balance, beginning of period
Additions:
Property acquisitions
Improvements
Deductions:
Cost of Real Estate Sold
Other (1)
Balance, end of period
Accumulated depreciation
Balance, beginning of period
Additions—depreciation
Deductions:
Cost of Real Estate Sold
Other (1)
Balance, end of period
Year Ended December 31,
2016
2015
2017
$
2,301,006
2,246,028
2,136,824
270,602
44,755
—
59,199
—
119,719
—
(2,225)
2,614,138
469,460
70,196
—
(2,225)
537,431
$
$
$
—
(4,221)
2,301,006
411,166
62,515
—
(4,221)
469,460
$
$
$
(7,396)
(3,119)
2,246,028
361,424
54,534
(2,334)
(2,458)
411,166
$
$
$
(1) Other deductions for the years ended December 31, 2017, 2016 and 2015 represent the write-off of fully depreciated assets.
F-50
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
INTO VALUE
AMERICAN ASSETS TRUST, INC. IS A FULL SERVICE,
VERTICALLY INTEGRATED AND SELF-ADMINISTERED
REAL ESTATE INVESTMENT TRUST, OR REIT,
HEADQUARTERED IN SAN DIEGO, CALIFORNIA.
WE HAVE OVER 50 YEARS OF EXPERIENCE IN
ACQUIRING, IMPROVING, DEVELOPING AND
MANAGING PREMIER RETAIL, OFFICE AND
RESIDENTIAL PROPERTIES THROUGHOUT THE
UNITED STATES IN SOME OF THE NATION’S MOST
DYNAMIC, HIGH-BARRIER-TO-ENTRY MARKETS
PRIMARILY IN SOUTHERN CALIFORNIA, NORTHERN
CALIFORNIA, OREGON, WASHINGTON AND HAWAII.
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA
CORPORATE
INFORMATION
EXECUTIVE OFFICERS
Ernest Rady
Chairman, President and
Chief Executive Officer
Robert Barton
Executive Vice President
and Chief Financial Officer
Adam Wyll
Senior Vice President,
General Counsel and Secretary
Jerry Gammieri
Vice President, Construction
and Development
BOARD OF DIRECTORS
Ernest Rady
Larry Finger
Duane Nelles
Thomas Olinger
Dr. Robert Sullivan
CORPORATE OFFICE
11455 El Camino Real, Suite 200
San Diego, CA 92130
Phone: (858) 350-2600
Fax: (858) 350-2620
INDEPENDENT AUDITORS
Ernst & Young LLP
San Diego, CA
LEGAL COUNSEL
Latham & Watkins LLP
San Diego, CA
STOCK EXCHANGE LISTING
NYSE Symbol: AAT
REGISTRAR AND
TRANSFER AGENT
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: (718) 921-8200
www.astfinancial.com
WEBSITE
For additional information on the
Company, visit our website at
www.AmericanAssetsTrust.com
2017
ANNUAL REPORT
TRANSFORMING
VISION
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11455 EL CAMINO RE AL, SUITE 200
SAN DIEGO, CA 92130
PHONE: (858) 350-2600
FA X: (858) 350-2620
(NYSE: A AT)
W W W. AMERICANA SSE TSTRUST.COM
FRONT COVER: PACIFIC RIDGE APARTMENTS // SAN DIEGO, CA