Edgar Filing: American Assets Trust, Inc.

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2015


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

For the transition period from to

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)

Commission file number: 333-202342-01



	Maryland (American Assets Trust, Inc.)	27-3338708 (American Assets Trust, Inc.)
	Maryland (American Assets Trust, L.P.)	27-3338894 (American Assets Trust, L.P.)
	(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

	11455 El Camino Real, Suite 200, San Diego, California (Address of Principal Executive Offices)	92130 (Zip Code)
		92130 (Zip Code)

(858) 350-2600

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

American Assets Trust, Inc. x Yes o No

American Assets Trust, L.P. x Yes o No

(American Assets Trust, L.P. became subject to filing requirements under Section 13 of the Securities Exchange Act of 1934, as amended, upon effectiveness of its Registration Statement on Form S-3 on February 6, 2015 and has filed all required reports subsequent to that date.)

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. x Yes o No

American Assets Trust, L.P. x Yes o No

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

American Assets Trust, Inc.



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

American Assets Trust, L.P.



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

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. o Yes x No

American Assets Trust, L.P. o Yes x No

American Assets Trust, Inc. had 45,346,302 shares of common stock, par value $0.01 per share, outstanding as of November 6, 2015.

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2015 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 September 30, 2015, American Assets Trust, Inc. owned an approximate 71.6% partnership interest in the Operating Partnership. The remaining 28.4% 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 quarterly reports on Form 10-Q of American Assets Trust, Inc. and the Operating Partnership into a single report will result in the following benefits:


•	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:


•	consolidated financial statements;


•	the following notes to the consolidated financial statements:


◦	Debt;


◦	Equity/Partners' Capital; and


◦	Earnings Per Share/Unit; and


•	Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations.

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This report also includes separate Item 4. 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.

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AMERICAN ASSETS TRUST, INC. AND AMERICAN ASSETS TRUST, L.P.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015



PART 1. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Financial Statements of American Assets Trust, Inc.:
		Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	1
		Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2015 and 2014	2
		Consolidated Statement of Equity (unaudited) for the nine months ended September 30, 2015	3
		Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014	4
	Consolidated Financial Statements of American Assets Trust, L.P.:
		Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	5
		Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2015 and 2014	6
		Consolidated Statement of Partners' Capital (unaudited) for the nine months ended September 30, 2015	7
		Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014	8
	Notes to Consolidated Financial Statements (unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50
Item 4.	Controls and Procedures		51
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		52
Item 1A.	Risk Factors		52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3.	Defaults Upon Senior Securities		52
Item 4.	Mine Safety Disclosures		52
Item 5.	Other Information		52
Item 6.	Exhibits		53
SIGNATURES			54

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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American Assets Trust, Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Data)



	September 30,			December 31,
	2015			2014
	(unaudited)
ASSETS
Real estate, at cost
Operating real estate	$	1,994,925		$	1,931,698
Construction in progress	229,212			195,736
Held for development	9,423			9,390
	2,233,560			2,136,824
Accumulated depreciation	(396,464		)	(361,424		)
Net real estate	1,837,096			1,775,400
Cash and cash equivalents	40,158			59,357
Restricted cash	25,208			10,994
Accounts receivable, net	8,151			6,727
Deferred rent receivables, net	37,714			35,883
Other assets, net	47,748			53,401
TOTAL ASSETS	$	1,996,075		$	1,941,762
LIABILITIES AND EQUITY
LIABILITIES:
Secured notes payable	$	579,449		$	812,811
Unsecured notes payable	450,000			250,000
Unsecured line of credit	25,000			—
Accounts payable and accrued expenses	50,806			50,861
Security deposits payable	5,781			5,521
Other liabilities and deferred credits, net	52,526			55,993
Total liabilities	1,163,562			1,175,186
Commitments and contingencies (Note 12)
EQUITY:
American Assets Trust, Inc. stockholders’ equity
Common stock, $0.01 par value, 490,000,000 shares authorized, 45,349,121 and 43,701,669 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	454			437
Additional paid-in capital	863,515			795,065
Accumulated dividends in excess of net income	(60,976		)	(60,291		)
Accumulated other comprehensive (loss) income	(1,030		)	92
Total American Assets Trust, Inc. stockholders’ equity	801,963			735,303
Noncontrolling interests	30,550			31,273
Total equity	832,513			766,576
TOTAL LIABILITIES AND EQUITY	$	1,996,075		$	1,941,762

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

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American Assets Trust, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In Thousands, Except Shares and Per Share Data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
REVENUE:
Rental income	$	67,471		$	63,593		$	193,776		$	182,868
Other property income	3,818			3,750			10,317			10,654
Total revenue	71,289			67,343			204,093			193,522
EXPENSES:
Rental expenses	18,985			17,374			52,810			50,494
Real estate taxes	6,676			5,899			18,710			17,054
General and administrative	6,357			4,682			16,161			13,929
Depreciation and amortization	15,761			16,352			46,154			50,902
Total operating expenses	47,779			44,307			133,835			132,379
OPERATING INCOME	23,510			23,036			70,258			61,143
Interest expense	(11,258		)	(13,325		)	(34,250		)	(40,396		)
Gain on sale of real estate	7,121			—			7,121			—
Other income (expense), net	(347		)	(621		)	(440		)	352
NET INCOME	19,026			9,090			42,689			21,099
Net income attributable to restricted shares	(32		)	(95		)	(115		)	(259		)
Net income attributable to unitholders in the Operating Partnership	(5,432		)	(2,578		)	(12,277		)	(6,108		)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS	$	13,562		$	6,417		$	30,297		$	14,732

EARNINGS PER COMMON SHARE
Earnings per common share, basic	$	0.30		$	0.15		$	0.69		$	0.35
Weighted average shares of common stock outstanding - basic	44,998,281			42,539,019			44,176,007			41,653,229

Earnings per common share, diluted	$	0.30		$	0.15		$	0.69		$	0.35
Weighted average shares of common stock outstanding - diluted	62,897,797			60,444,276			62,076,238			59,559,944

DIVIDENDS DECLARED PER COMMON SHARE	$	0.2325		$	0.2200		$	0.6975		$	0.6600

COMPREHENSIVE INCOME
Net income	$	19,026		$	9,090		$	42,689		$	21,099
Other comprehensive income (loss) - unrealized gain (loss) on swap derivative during the period	(908		)	2,439			(1,394		)	882
Reclassification of amortization of forward-starting swap included in interest expense	(57		)	—			(173		)	—
Comprehensive income	18,061			11,529			41,122			21,981
Comprehensive income attributable to non-controlling interest	(5,155		)	(3,300		)	(11,829		)	(6,366		)
Comprehensive income attributable to American Assets Trust, Inc.	$	12,906		$	8,229		$	29,293		$	15,615

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

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American Assets Trust, Inc.

Consolidated Statement of Equity

(Unaudited)

(In Thousands, Except Share Data)



	American Assets Trust, Inc. Stockholders’ Equity														Noncontrolling Interests - Unitholders in the Operating Partnership			Total
	Common Shares					Additional Paid-in Capital			Accumulated Dividends in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)
	Shares		Amount			Additional Paid-in Capital			Accumulated Dividends in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2014	43,701,669		$	437		$	795,065		$	(60,291	)	$	92		$	31,273		$	766,576
Net income	—		—			—			30,415			—			12,274			42,689
Common shares issued	1,812,451		18			72,818			—			—			—			72,836
Issuance of restricted stock	5,044		—			—			—			—			—			—
Forfeiture of restricted stock	(26,664	)	—			—			—			—			—			—
Conversion of operating partnership units	5,741		—			67			—			—			(67		)	—
Dividends declared and paid	—		—			—			(31,100		)	—			(12,485		)	(43,585		)
Stock-based compensation	—		—			2,137			—			—			—			2,137
Shares withheld for employee taxes	(149,120	)	(1		)	(6,572		)	—			—			—			(6,573		)
Other comprehensive loss - change in value of interest rate swap	—		—			—			—			(999		)	(395		)	(1,394		)
Reclassification of amortization of forward-starting swap included in interest expense	—		—			—			—			(123		)	(50		)	(173		)
Balance at September 30, 2015	45,349,121		$	454		$	863,515		$	(60,976	)	$	(1,030	)	$	30,550		$	832,513

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

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American Assets Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)



	Nine Months Ended September 30,
	2015			2014
OPERATING ACTIVITIES
Net income	$	42,689		$	21,099
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles	(4,206		)	(4,360		)
Depreciation and amortization	46,154			50,902
Amortization of debt issuance costs and debt fair value adjustments	3,160			3,046
Gain on sale of real estate	(7,121		)	—
Stock-based compensation expense	2,137			2,571
Settlement of forward interest rate swap agreement	—			1,617
Other noncash interest expense	(173		)	—
Other, net	(1,074		)	(839		)
Changes in operating assets and liabilities
Change in restricted cash	(1,253		)	(1,438		)
Change in accounts receivable	(1,597		)	(195		)
Change in other assets	(460		)	(168		)
Change in accounts payable and accrued expenses	11,191			7,298
Change in security deposits payable	318			113
Change in other liabilities and deferred credits	278			1,751
Net cash provided by operating activities	90,043			81,397
INVESTING ACTIVITIES
Capital expenditures	(115,156		)	(94,877		)
Proceeds from sale of real estate, net of selling costs	12,259			—
Change in restricted cash	(12,961		)	(1,272		)
Leasing commissions	(3,242		)	(2,805		)
Net cash used in investing activities	(119,100		)	(98,954		)
FINANCING ACTIVITIES
Repayment of secured notes payable	(235,546		)	(1,169		)
Proceeds from term loan	—			100,000
Proceeds from unsecured line of credit	60,000			—
Repayment of unsecured line of credit	(35,000		)	(93,000		)
Proceeds from issuance of unsecured notes payable	200,000			—
Debt issuance costs	(2,274		)	(1,957		)
Proceeds from issuance of common stock, net	72,836			104,148
Dividends paid to common stock and unitholders	(43,585		)	(39,988		)
Shares withheld for employee taxes	(6,573		)	(4,319		)
Net cash provided by financing activities	9,858			63,715
Net (decrease) increase in cash and cash equivalents	(19,199		)	46,158
Cash and cash equivalents, beginning of period	59,357			48,987
Cash and cash equivalents, end of period	$	40,158		$	95,145

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

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American Assets Trust, L.P.

Consolidated Balance Sheets

(In Thousands, Except Unit Data)



	September 30,			December 31,
	2015			2014
	(unaudited)
ASSETS
Real estate, at cost
Operating real estate	$	1,994,925		$	1,931,698
Construction in progress	229,212			195,736
Held for development	9,423			9,390
	2,233,560			2,136,824
Accumulated depreciation	(396,464		)	(361,424		)
Net real estate	1,837,096			1,775,400
Cash and cash equivalents	40,158			59,357
Restricted cash	25,208			10,994
Accounts receivable, net	8,151			6,727
Deferred rent receivables, net	37,714			35,883
Other assets, net	47,748			53,401
TOTAL ASSETS	$	1,996,075		$	1,941,762
LIABILITIES AND EQUITY
LIABILITIES:
Secured notes payable	$	579,449		$	812,811
Unsecured notes payable	450,000			250,000
Unsecured line of credit	25,000			—
Accounts payable and accrued expenses	50,806			50,861
Security deposits payable	5,781			5,521
Other liabilities and deferred credits	52,526			55,993
Total liabilities	1,163,562			1,175,186
Commitments and contingencies (Note 12)
CAPITAL:
Limited partners' capital, 17,899,516 and 17,905,257 units issued and outstanding as of September 30, 2015 and December 31, 2014, respectively	30,957			31,235
General partner's capital, 45,349,121 and 43,701,669 units issued and outstanding as of September 30, 2015 and December 31, 2014, respectively	802,993			735,211
Accumulated other comprehensive (loss) income	(1,437		)	130
Total capital	832,513			766,576
TOTAL LIABILITIES AND CAPITAL	$	1,996,075		$	1,941,762

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

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American Assets Trust, L.P.

Consolidated Statements of Comprehensive Income

(Unaudited)

(In Thousands, Except Shares and Per Unit Data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
REVENUE:
Rental income	$	67,471		$	63,593		$	193,776		$	182,868
Other property income	3,818			3,750			10,317			10,654
Total revenue	71,289			67,343			204,093			193,522
EXPENSES:
Rental expenses	18,985			17,374			52,810			50,494
Real estate taxes	6,676			5,899			18,710			17,054
General and administrative	6,357			4,682			16,161			13,929
Depreciation and amortization	15,761			16,352			46,154			50,902
Total operating expenses	47,779			44,307			133,835			132,379
OPERATING INCOME	23,510			23,036			70,258			61,143
Interest expense	(11,258		)	(13,325		)	(34,250		)	(40,396		)
Gain on sale of real estate	7,121			—			7,121			—
Other income (expense), net	(347		)	(621		)	(440		)	352
NET INCOME	19,026			9,090			42,689			21,099
Net income attributable to restricted shares	(32		)	(95		)	(115		)	(259		)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, L.P.	$	18,994		$	8,995		$	42,574		$	20,840

EARNINGS PER UNIT - BASIC
Earnings per unit, basic	$	0.30		$	0.15		$	0.69		$	0.35
Weighted average units outstanding - basic	62,897,797			60,444,276			62,076,238			59,559,944

EARNINGS PER UNIT - DILUTED
Earnings per unit, diluted	$	0.30		$	0.15		$	0.69		$	0.35
Weighted average units outstanding - diluted	62,897,797			60,444,276			62,076,238			59,559,944

DISTRIBUTIONS PER UNIT	$	0.2325		$	0.2200		$	0.6975		$	0.6600

COMPREHENSIVE INCOME
Net income	$	19,026		$	9,090		$	42,689		$	21,099
Other comprehensive income (loss) - unrealized gain (loss) on swap derivative during the period	(908		)	2,439			(1,394		)	882
Reclassification of amortization of forward-starting swap included in interest expense	(57		)	—			(173		)	—
Comprehensive income	18,061			11,529			41,122			21,981
Comprehensive income attributable to Limited Partners	(5,155		)	(3,300		)	(11,829		)	(6,366		)
Comprehensive income attributable to General Partner	$	12,906		$	8,229		$	29,293		$	15,615

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

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American Assets Trust, L.P.

Consolidated Statement of Partners' Capital

(Unaudited)

(In Thousands, Except Unit Data)



	Limited Partners' Capital ⁽¹⁾					General Partner's Capital ⁽²⁾					Accumulated Other Comprehensive Income (Loss)			Total Capital
	Units		Amount			Units		Amount			Accumulated Other Comprehensive Income (Loss)			Total Capital
Balance at December 31, 2014	17,905,257		$	31,235		43,701,669		$	735,211		$	130		$	766,576
Net income	—		12,274			—		30,415			—			42,689
Contributions from American Assets Trust, Inc.	—		—			1,812,451		72,836			—			72,836
Conversion of operating partnership units	(5,741	)	(67		)	5,741		67			—			—
Issuance of restricted units	—		—			5,044		—			—			—
Forfeiture of restricted units	—		—			(26,664	)	—			—			—
Distributions	—		(12,485		)	—		(31,100		)	—			(43,585		)
Stock-based compensation	—		—			—		2,137			—			2,137
Units withheld for employee taxes	—		—			(149,120	)	(6,573		)	—			(6,573		)
Other comprehensive loss - change in value of interest rate swap	—		—			—		—			(1,394		)	(1,394		)
Reclassification of amortization of forward-starting swap included in interest expense	—		—			—		—			(173		)	(173		)
Balance at September 30, 2015	17,899,516		$	30,957		45,349,121		$	802,993		$	(1,437	)	$	832,513

(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.

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American Assets Trust, L.P.

Consolidated Statements of Cash Flows

(Unaudited, In Thousands)



	Nine Months Ended September 30,
	2015			2014
OPERATING ACTIVITIES
Net income	$	42,689		$	21,099
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles	(4,206		)	(4,360		)
Depreciation and amortization	46,154			50,902
Amortization of debt issuance costs and debt fair value adjustments	3,160			3,046
Gain on sale of real estate	(7,121		)	—
Stock-based compensation expense	2,137			2,571
Settlement of forward interest rate swap agreement	—			1,617
Other noncash interest expense	(173		)	—
Other, net	(1,074		)	(839		)
Changes in operating assets and liabilities
Change in restricted cash	(1,253		)	(1,438		)
Change in accounts receivable	(1,597		)	(195		)
Change in other assets	(460		)	(168		)
Change in accounts payable and accrued expenses	11,191			7,298
Change in security deposits payable	318			113
Change in other liabilities and deferred credits	278			1,751
Net cash provided by operating activities	90,043			81,397
INVESTING ACTIVITIES
Capital expenditures	(115,156		)	(94,877		)
Proceeds from sale of real estate, net of selling costs	12,259			—
Change in restricted cash	(12,961		)	(1,272		)
Leasing commissions	(3,242		)	(2,805		)
Net cash used in investing activities	(119,100		)	(98,954		)
FINANCING ACTIVITIES
Repayment of secured notes payable	(235,546		)	(1,169		)
Proceeds from term loan	—			100,000
Proceeds from unsecured line of credit	60,000			—
Repayment of unsecured line of credit	(35,000		)	(93,000		)
Proceeds from issuance of unsecured notes payable	200,000			—
Debt issuance costs	(2,274		)	(1,957		)
Contributions from American Assets Trust, Inc.	72,836			104,148
Distributions	(43,585		)	(39,988		)
Shares withheld for employee taxes	(6,573		)	(4,319		)
Net cash provided by financing activities	9,858			63,715
Net (decrease) increase in cash and cash equivalents	(19,199		)	46,158
Cash and cash equivalents, beginning of period	59,357			48,987
Cash and cash equivalents, end of period	$	40,158		$	95,145

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

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Organization

American Assets Trust, Inc. (which may be referred to in these financial statements as the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed on July 16, 2010 that did not have any operating activity until the consummation of our initial public offering on January 19, 2011. The Company is the sole general partner of American Assets Trust, L.P., a Maryland limited partnership formed on July 16, 2010 (the “Operating Partnership”). The Company’s operations are carried on through our Operating Partnership and its subsidiaries, including our taxable real estate investment trust ("REIT") subsidiary ("TRS"). 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 full service vertically integrated and self-administered REIT with approximately 131 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.

As of September 30, 2015, we owned or had a controlling interest in 23 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of September 30, 2015, we owned land at five of our properties that we classify as held for development and/or construction in progress. A summary of the properties owned by us is as follows:



Retail
Carmel Country Plaza	Del Monte Center
Carmel Mountain Plaza	Geary Marketplace
South Bay Marketplace	The Shops at Kalakaua
Lomas Santa Fe Plaza	Waikele Center
Solana Beach Towne Centre	Alamo Quarry Market



Office
Torrey Reserve Campus	Lloyd District Portfolio
Solana Beach Corporate Centre	City Center Bellevue
The Landmark at One Market
One Beach Street
First & Main



Multifamily
Loma Palisades
Imperial Beach Gardens
Mariner's Point
Santa Fe Park RV Resort
Hassalo on Eighth



Mixed-Use
Waikiki Beach Walk Retail and Embassy Suites™ Hotel



Held for Development and/or Construction in Progress
Solana Beach Corporate Centre – Land
Solana Beach – Highway 101 – Land
Torrey Point (formerly Sorrento Pointe) – Land
Torrey Reserve – Land
Lloyd District Portfolio – Land

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

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.

The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (“GAAP”) for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and notes therein included in the Company's and Operating Partnership's annual report on Form 10-K for the year ended December 31, 2014.

The preparation of financial statements in conformity with GAAP requires us 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 our best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.

Any reference to the number of properties, square footage or percentages of beneficial ownership of our shares are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Consolidated Statements of Cash Flows—Supplemental Disclosures

The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):



	Nine Months Ended September 30,
	2015			2014
Supplemental cash flow information
Total interest costs incurred	$	41,305		$	43,912
Interest capitalized	$	7,055		$	3,516
Interest expense	$	34,250		$	40,396
Cash paid for interest, net of amounts capitalized	$	30,562		$	37,557
Cash paid for income taxes	$	382		$	319
Supplemental schedule of noncash investing and financing activities
Accounts payable and accrued liabilities for construction in progress	$	(9,092	)	$	8,982
Accrued leasing commissions	$	(431	)	$	(124	)

Significant Accounting Policies

We describe our significant accounting policies in Note 1 to the consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no changes to our significant accounting policies during the nine months ended September 30, 2015.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

Segment Information

Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate in four business segments: the acquisition, redevelopment, ownership and management of retail real estate, office real estate, multifamily real estate and mixed-use real estate. The products for our retail segment primarily include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our office segment primarily include rental of office space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our multifamily segment include rental of apartments and other tenant services. The products of our mixed-use segment include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental and operation of a 369-room all-suite hotel.

Business Transition Costs

From time to time, we incur costs related to integration and business transition activities which include severance, relocation, consulting, and other costs directly associated with such activities that we believe warrants specific disclosure. During the three months ended September 30, 2015, we incurred $2.5 million of such business transition costs, which represent a charge associated with the resignation of the our former President and Chief Executive Officer, John W. Chamberlain. Such resignation occurred in the third quarter of 2015 and was disclosed on September 14, 2015 by our filing of a Current Report on Form 8-K with the Securities and Exchange Commission. The $2.5 million charge includes certain severance and compensation-related charges, net of certain forfeitures of previously recognized equity compensation of approximately $0.4 million, and is included in "general and administrative expense" on the consolidated statements of comprehensive income.

Recent Accounting Pronouncements

In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 revises the definition of a discontinued operation to a disposal, sale or held-for-sale component or group of components that represents a strategic shift that will have a major effect on an entity's operations and financial results. This pronouncement is effective in 2015, however, calendar year-end companies may early adopt during the first quarter of 2014. We have chosen to early adopt this pronouncement and it became effective for us in the first quarter of 2014. This ASU requires prospective application and since our adoption, no additional real estate met the criteria for classification as discontinued operations in our consolidated financial statements. The adoption of the ASU did not impact assets classified as discontinued operations prior to the adoption. Accordingly, the results of the individual property disposals that occurred during 2015 remained in “Income from continuing operations.”

In May 2014, the FASB issued Update No. 2014-09, Revenue from Contracts with Customers. Update No. 2014-09 establishes that companies may recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period; early adoption is not permitted. We are in the process of evaluating the impact this pronouncement will have on our consolidated financial statements.

In February 2015, the FASB issued an ASU that requires reporting entities to evaluate whether they should consolidate certain legal entities. The ASU modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. This affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply the amendments in the ASU using: (i) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (ii) by applying the amendments retrospectively. We are in the process of evaluating the impact of adopting this ASU and currently do not expect that the adoption will have a material impact on our consolidated financial statements.

In April 2015, the FASB issued an ASU that requires reporting entities to present debt issuance cost related to a note as a direct deduction from the face amount of that note presented in the balance sheet. The ASU requires the amortization of debt issuance costs presented as interest expense. The ASU is effective for fiscal years, and for interim periods within those fiscal

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

years, beginning after December 15, 2015, with early adoption permitted. A reporting entity may apply the amendments in the ASU retrospectively to all prior periods. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.

NOTE 2. REAL ESTATE

Dispositions

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 three and nine months ended September 30, 2015. The proceeds from the sale of Rancho Carmel Plaza remain in an escrow account and is included in restricted cash on the consolidated balance sheets. The disposition was structured to accommodate a possible tax deferred exchange pursuant to the provisions of Section 1031 of the Internal Revenue Code of 1986 and applicable state income and taxation code sections.

NOTE 3. ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES

The following summarizes our acquired lease intangibles and leasing costs, which are included in other assets and other liabilities and deferred credits, as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30, 2015			December 31, 2014
In-place leases	$	52,338		$	53,967
Accumulated amortization	(37,347		)	(35,336		)
Above market leases	22,201			22,500
Accumulated amortization	(18,434		)	(17,397		)
Acquired lease intangible assets, net	$	18,758		$	23,734
Below market leases	$	68,988		$	70,013
Accumulated accretion	(29,646		)	(27,161		)
Acquired lease intangible liabilities, net	$	39,342		$	42,852

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

Except as disclosed below, the carrying amounts of our financial instruments approximate their fair value. 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.

We measure the fair value of our deferred compensation liability, which is included in other liabilities and deferred credits on the consolidated balance sheet, on a recurring basis using Level 2 inputs. We measure the fair value of this liability based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.

The fair value of the interest rate swap agreement on our term loan of $100 million is based on the estimated amounts we would receive or pay to terminate the contract at the reporting date and are determined using interest rate pricing models and

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

interest rate related observable inputs. The fair value of our swap at September 30, 2015 was a liability of $2.8 million and is included in "other liabilities and deferred credits" on our consolidated balance sheets. For the three and nine months ended September 30, 2015, the change in valuation on our interest rate swap were losses of $0.9 million and $1.4 million, respectively. The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in accumulated other comprehensive income (loss) and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.

We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contract for the effect of non-performance risk, we considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2015 we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivative. As a result, we have determined that our derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.

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):



	September 30, 2015								December 31, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Deferred compensation liability	$	—	$	883	$	—	$	883	$	—	$	981	$	—	$	981
Interest rate swap	$	—	$	2,842	$	—	$	2,842	$	—	$	1,448	$	—	$	1,448

The fair value of our secured notes payable and unsecured senior guaranteed notes are sensitive to fluctuations in interest rates. Discounted cash flow analysis using observable market interest rates (Level 2) is generally used to estimate the fair value of our secured notes payable, using rates ranging from 3.4% to 5.5%.

Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The carrying values of our revolving 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 secured financial instruments, all of which are based on Level 2 inputs, is as follows (in thousands):



	September 30, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
Secured notes payable	$	579,449	$	609,687	$	812,811	$	850,475
Unsecured term loan	$	100,000	$	100,000	$	100,000	$	100,000
Unsecured senior guaranteed notes	$	350,000	$	361,227	$	150,000	$	154,560
Unsecured line of credit	$	25,000	$	25,000	$	—	$	—

NOTE 5. DERIVATIVE AND HEDGING ACTIVITIES

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily 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 the term loan at approximately 3.08% through its maturity date and

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

extension options, subject to adjustments based on our consolidated leverage ratio. The following is a summary of the terms of the interest rate swap as of September 30, 2015 (dollars in thousands):

Swap Counterparty

Notional Amount

Effective Date

Maturity Date

Fair Value

Bank of America, N.A.

100,000

1/9/2014

1/9/2019

2,842

The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in 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 swap 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.

NOTE 6. OTHER ASSETS

Other assets consist of the following (in thousands):



	September 30, 2015		December 31, 2014
Leasing commissions, net of accumulated amortization of $22,800 and $20,659 respectively	$	19,178	$	19,484
Acquired above market leases, net	3,767		5,103
Acquired in-place leases, net	14,991		18,631
Lease incentives, net of accumulated amortization of $3,244 and $2,960, respectively	543		740
Other intangible assets, net of accumulated amortization of $1,648 and $1,590, respectively	466		453
Debt issuance costs, net of accumulated amortization of $4,322 and $4,147, respectively	4,451		5,361
Prepaid expenses and other	4,352		3,629
Total other assets	$	47,748	$	53,401

NOTE 7. OTHER LIABILITIES AND DEFERRED CREDITS

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



	September 30, 2015		December 31, 2014
Acquired below market leases, net	$	39,342	$	42,852
Prepaid rent and deferred revenue	6,419		7,288
Interest rate swap liability	2,842		1,448
Deferred rent expense and lease intangible	436		584
Deferred compensation	883		981
Deferred tax liability	204		219
Straight-line rent liability	2,329		2,533
Other liabilities	71		88
Total other liabilities and deferred credits, net	$	52,526	$	55,993

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.

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Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

NOTE 8. 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. and certain of its subsidiaries have guaranteed the Operating Partnership's obligations under the (i) amended and restated credit facility, (ii) term loan and (iii) senior guaranteed notes. Additionally, American Assets Trust, Inc. has provided carve-out guarantees on certain property-level debt.

Debt of American Assets Trust, L.P.

Secured notes payable

The following is a summary of our total secured notes payable outstanding as of September 30, 2015 and December 31, 2014 (in thousands):



	Principal Balance as of						Stated Interest Rate		Stated Maturity Date
Description of Debt	September 30, 2015			December 31, 2014			as of September 30, 2015		Stated Maturity Date
The Shops at Kalakaua ⁽¹⁾⁽²⁾	$	—		$	19,000		—		May 1, 2015
The Landmark at One Market ⁽¹⁾⁽³⁾	—			133,000			—		July 5, 2015
Del Monte Center ⁽¹⁾⁽⁴⁾	—			82,300			—		July 8, 2015
First & Main ⁽¹⁾	84,500			84,500			3.97	%	July 1, 2016
Imperial Beach Gardens ⁽¹⁾	20,000			20,000			6.16	%	September 1, 2016
Mariner’s Point ⁽¹⁾	7,700			7,700			6.09	%	September 1, 2016
South Bay Marketplace ⁽¹⁾	23,000			23,000			5.48	%	February 10, 2017
Waikiki Beach Walk—Retail ⁽¹⁾	130,310			130,310			5.39	%	July 1, 2017
Solana Beach Corporate Centre III-IV ⁽⁵⁾	36,038			36,376			6.39	%	August 1, 2017
Loma Palisades ⁽¹⁾	73,744			73,744			6.09	%	July 1, 2018
One Beach Street ⁽¹⁾	21,900			21,900			3.94	%	April 1, 2019
Torrey Reserve—North Court ⁽⁵⁾	20,833			21,075			7.22	%	June 1, 2019
Torrey Reserve—VCI, VCII, VCIII ⁽⁵⁾	7,023			7,101			6.36	%	June 1, 2020
Solana Beach Corporate Centre I-II ⁽⁵⁾	11,167			11,302			5.91	%	June 1, 2020
Solana Beach Towne Centre ⁽⁵⁾	37,222			37,675			5.91	%	June 1, 2020
City Center Bellevue ⁽¹⁾	111,000			111,000			3.98	%	November 1, 2022
	584,437			819,983
Unamortized fair value adjustment	(4,988		)	(7,172		)
Total Secured Notes Payable Outstanding	$	579,449		$	812,811


(1)	Interest only.


(2)	Loan repaid in full, without premium or penalty, on February 2, 2015.


(3)	Loan repaid in full, without premium or penalty, on April 6, 2015.


(4)	Loan repaid in full, without premium or penalty, on February 6, 2015.


(5)	Principal payments based on a 30-year amortization schedule.

Certain loans require us to comply with various financial covenants. As of September 30, 2015, the Operating Partnership was in compliance with these financial covenants.

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Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

Unsecured notes payable

The following is a summary of the Operating Partnership's total unsecured notes payable outstanding as of September 30, 2015 and December 31, 2014 (in thousands):



Description of Debt	Principal Balance as of				Stated Interest Rate			Stated Maturity Date
Description of Debt	September 30, 2015		December 31, 2014		as of September 30, 2015			Stated Maturity Date
Term Loan	$	100,000	$	100,000	Variable		⁽¹⁾	January 9, 2019	⁽²⁾
Senior Guaranteed Notes, Series A	150,000		150,000		4.04	%	⁽³⁾	October 31, 2021
Senior Guaranteed Notes, Series B	100,000		—		4.45	%		February 2, 2025
Senior Guaranteed Notes, Series C	100,000		—		4.50	%		April 1, 2025
Total Unsecured Notes Payable	$	450,000	$	250,000


(1)	The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with the loan term at approximately 3.08% through its maturity date and extension options, subject to adjustments based on our consolidated leverage ratio.


(2)	The Operating Partnership has an option to extend the term loan 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.


(3)	The Operating Partnership 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. 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.

On October 31, 2014, the Operating Partnership entered into a 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”, and collectively with the Series A Notes and Series B Notes, are referred to herein as, the “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 Notes pay interest quarterly on the last day of January, April, July and October 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).

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 jointly and severally, and fully and unconditionally guaranteed by American Assets Trust, Inc. and certain of our subsidiaries.

Credit Facility

On January 9, 2014, Operating Partnership entered into an amended and restated credit agreement (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 "Revolver Loan") and a term loan of $100 million (the "Term Loan"). The Amended and Restated Credit Facility has an accordion feature that may allow 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 September 30, 2015, $25 million was outstanding under the Revolver Loan.

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Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

Borrowings under the Amended and Restated Credit Facility initially bear 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 Revolver Loan) and (b) 1.30% to 1.90% (with respect to the Term Loan), 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 Revolver Loan) and (ii) 0.30% to 0.90% (with respect to the Term Loan), in each case based on our consolidated leverage ratio. If American Assets Trust, Inc. obtains an investment-grade debt rating, under the terms set forth in the Amended and Restated Credit Facility, the spreads will further improve.

The Revolver Loan initially matures on January 9, 2018, subject to the Operating Partnership's option to extend the Revolver Loan up to two times, with each such extension for a six-month period. The Term Loan initially matures on January 9, 2016, subject to the Operating Partnership's option to extend the Term Loan up to three times, with each such extension for a 12-month period. The foregoing extension options are exercisable by the Operating Partnership's subject to the satisfaction of certain conditions.

Concurrent with the closing of the Amended and Restated Credit Facility, the Operating Partnership's drew down on the entirety of the $100 million Term Loan and 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 our consolidated leverage ratio.

Additionally, the 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 45% at any time prior to December 31, 2015, and 40% thereafter,


•	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 Amended and Restated Credit Facility provides that American Assets Trust, Inc.'s annual distributions may not exceed the greater of (1) 95% of our funds from operations or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution, we may be precluded from making distributions other than those necessary to qualify and maintain our status as a REIT.

As of September 30, 2015, the Operating Partnership was in compliance with the Amended and Restated Credit Facility financial covenants.

NOTE 9. PARTNERS' CAPITAL OF AMERICAN ASSETS TRUST, L.P.

Noncontrolling interests in our Operating Partnership are interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of 17,899,516 common units (the “noncontrolling common units”), and represented approximately 28.4% of the ownership interests in our Operating Partnership at September 30, 2015. Common units and shares of our common stock have essentially the same economic characteristics in that common units and shares of our common stock share equally in the total net income or loss distributions of our Operating Partnership. Investors who own common units have the right to cause our Operating Partnership to redeem any or all of their common units for cash equal to the then-current market value of one share of our common stock, or, at our election, shares of our common stock on a one-for-one basis.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

During the nine months ended September 30, 2015, approximately 5,741 common units were converted into shares of our common stock.

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 that have non-forfeitable dividend equivalent rights 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 three month periods ended September 30, 2015 and 2014 does not include the weighted average of 168,529 and 432,311 unvested Operating Partnership units, respectively, as these equity securities are either considered contingently issuable or the effect of including these equity securities was anti-dilutive to income from continuing operations and net income attributable to the unitholders. The calculation of diluted earnings per unit for the nine month periods ended September 30, 2015 and 2014 does not include the weighted average of 196,927 and 423,502 unvested Operating Partnership units, respectively.

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 that authorized the sale of up to $150.0 million of shares of our common stock. 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 in 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 programs are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended. During the three and nine months ended September 30, 2015, the following shares of common stock and related proceeds were sold through the ATM equity programs (in thousands, except per share data):



	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
Number of shares of common stock issued through ATM programs	466,525			1,612,451
Weighted average price per share	$	40.85		$	40.77

Proceeds, gross	$	19,059		$	65,740
Sales agent compensation	(191		)	(657		)
Offering costs	(40		)	(355		)
Proceeds, net	$	18,828		$	64,728

We intend to use the net proceeds from the ATM equity programs to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving line of credit or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of September 30, 2015, we had the capacity to issue up to an additional $216.6 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.

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Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

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, the Executive Chairman of our board of directors. 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.

Dividends

The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units during the nine months ended September 30, 2015:



Period	Amount per Share/Unit		Period Covered	Dividend Paid Date
First Quarter 2015	$	0.2325	January 1, 2015 to March 31, 2015	March 27, 2015
Second Quarter 2015	$	0.2325	April 1, 2015 to June 30, 2015	June 26, 2015
Third Quarter 2015	$	0.2325	July 1, 2015 to September 30, 2015	September 25, 2015

Taxability of Dividends

Earnings and profits, which determine the taxability of distributions to stockholders and holders of common units, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

Stock-Based Compensation

We follow the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.

In addition, on the date of each annual meeting of our stockholders, each non-employee director who continues to serve on our board of directors (the "Board") following such annual meeting will be granted restricted shares of our common stock pursuant to the 2011 Equity Incentive Award Plan (the "2011 Plan"). On June 16, 2015, we awarded a total of 5,044 shares of restricted common stock pursuant to our 2011 Plan to our non-employee directors. These awards of restricted stock will vest subject to the director's continued service on the Board 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 until the next annual meeting of stockholders, but not thereafter, pursuant to our independent director compensation policy.

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

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Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

The following table summarizes the activity of restricted stock awards during the nine months ended September 30, 2015:



	Units		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2015	493,539		$22.01
Granted	5,044		$39.64
Vested	(335,646	)	$16.76
Forfeited	(26,664	)	$33.28
Nonvested at September 30, 2015	136,273		$33.39

We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $0.4 million and $1.1 million, respectively, in noncash compensation expense for the three months ended September 30, 2015 and 2014, which is included in general and administrative expense on the consolidated statements of comprehensive income. We recognized $2.1 million and $2.6 million, respectively, in noncash compensation expense for the nine months ended September 30, 2015 and 2014. Unrecognized compensation expense was $1.6 million at September 30, 2015.

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. The weighted average unvested shares outstanding, which are considered participating securities, were 168,529 and 432,311 for the three months ended September 30, 2015 and 2014, respectively, and 196,927 and 423,502 for the nine months ended September 30, 2015 and 2014, respectively. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares as these unvested shares have nonforfeitable dividend equivalent rights.

Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method. For the three and nine months ended September 30, 2015 and 2014, diluted shares exclude incentive restricted stock as these awards are considered contingently issuable. Additionally, the unvested restricted stock awards subject to time vesting are not material for all periods presented, and accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
NUMERATOR
Net income from operations	$	19,026		$	9,090		$	42,689		$	21,099
Less: Net income attributable to restricted shares	(32		)	(95		)	(115		)	(259		)
Less: Income from operations attributable to unitholders in the Operating Partnership	(5,432		)	(2,578		)	(12,277		)	(6,108		)
Net income attributable to common stockholders—basic	$	13,562		$	6,417		$	30,297		$	14,732
Income from operations attributable to American Assets Trust, Inc. common stockholders—basic	$	13,562		$	6,417		$	30,297		$	14,732
Plus: Income from operations attributable to unitholders in the Operating Partnership	5,432			2,578			12,277			6,108
Net income attributable to common stockholders—diluted	$	18,994		$	8,995		$	42,574		$	20,840
DENOMINATOR
Weighted average common shares outstanding—basic	44,998,281			42,539,019			44,176,007			41,653,229
Effect of dilutive securities—conversion of Operating Partnership units	17,899,516			17,905,257			17,900,231			17,906,715
Weighted average common shares outstanding—diluted	62,897,797			60,444,276			62,076,238			59,559,944

Earnings per common share, basic	$	0.30		$	0.15		$	0.69		$	0.35
Earnings per common share, diluted	$	0.30		$	0.15		$	0.69		$	0.35

NOTE 11. INCOME TAXES

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 initial taxable year. 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 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 of $0.2 million as of September 30, 2015 and December 31, 2014 is included in our consolidated balance sheets in relation to real estate asset basis differences of property subject to the Texas margin tax and certain prepaid expenses of our TRS.

Income tax expense is recorded in other income (expense), net in our consolidated statements of comprehensive income. For the three and nine months ended September 30, 2015, we recorded income tax expense of $0.4 million and $0.5 million, respectively. For the three and nine months ended September 30, 2014, we recorded an income tax expense of $0.7 million and $0.5 million, respectively.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Legal

We are sometimes involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. We do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also, under our leases, tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us as owner of the properties due to certain matters relating to the operation of the properties by the tenant.

Commitments

At The Landmark at One Market, we lease, as lessee, a building adjacent to The Landmark under an operating lease effective through June 30, 2016, which we have the option to extend until 2031 by way of three five-year extension options.

At Waikiki Beach Walk, we sublease a portion of the building of which Quiksilver is currently in possession, under an operating lease effective through December 31, 2021, which we have the option to extend at fair rental value in the event the sublessor extends its lease for the space with the master landlord. The lease payments under the lease will increase by approximately 3.4% annually through 2017 and, thereafter, will be equal to fair rental value, as defined in the lease, through lease expiration.

Current minimum annual payments under the leases are as follows, as of September 30, 2015 (in thousands):



Year Ending December 31,
2015 (three months ending December 31, 2015)	$	666
2016	2,682		⁽¹⁾
2017	2,686		⁽²⁾
2018	2,686
2019	2,686
Thereafter	23,856
Total	$	35,262


(1)	Lease payments on The Landmark at One Market lease will be equal to fair rental value from July 2016 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 2016 of $162,140.


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

We have management agreements with Outrigger Hotels & Resorts or an affiliate thereof (“Outrigger”) pursuant to which Outrigger manages each of the retail and hotel portions of the Waikiki Beach Walk property. Under the management agreement with Outrigger relating to the retail portion of Waikiki Beach Walk (the “retail management agreement”), we pay Outrigger a monthly management fee of 3.0% of net revenues from the retail portion of Waikiki Beach Walk. Pursuant to the terms of the retail management agreement, if the agreement is terminated in certain instances, including our election not to repair damage or destruction at the property, a condemnation or our failure to make required working capital infusions, we would be obligated to pay Outrigger a termination fee equal to the sum of the management fees paid for the two calendar months immediately preceding the termination date. The retail management agreement may not be terminated by us or by Outrigger without cause. Under our management agreement with Outrigger relating to the hotel portion of Waikiki Beach Walk (the “hotel management agreement”), we pay Outrigger a monthly management fee of 6.0% of the hotel's gross operating profit, as well as 3.0% of the hotel's gross revenues; provided that the aggregate management fee payable to Outrigger for any year shall not exceed 3.5% of the hotel's gross revenues for such fiscal year. Pursuant to the terms of the hotel management agreement, if the agreement is 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.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

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^TM 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 $6.7 million based on operating performance through September 30, 2015.

Our Del Monte Center property has ongoing environmental remediation related to ground water contamination. The environmental issue existed at purchase and remains in 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 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.

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

Concentrations of Credit Risk

Our properties are located in Southern California, Northern California, Hawaii, Oregon, Texas, and Washington. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate. Twelve of our consolidated properties are located in Southern California, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. Tenants in the retail industry accounted for 36.0% of total revenues for the nine months ended September 30, 2015. 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. Furthermore, tenants in the office industry accounted for 35.6% of total revenues for the nine months ended September 30, 2015. 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 nine months ended September 30, 2015 and 2014, no tenant accounted for more than 10% of our total rental revenue.

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American Assets Trust, Inc. and American Assets Trust, L.P.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2015

(Unaudited)

NOTE 13. OPERATING LEASES

Our leases with office, retail, mixed-use and residential tenants are classified as operating leases. Leases at our office and retail properties and the retail portion of our mixed-use property generally range from three to ten years (certain leases with anchor tenants may be longer), and in addition to minimum rents, usually provide for cost recoveries for the tenant’s share of certain operating costs and also may include percentage rents based on the tenant’s level of sales achieved. Leases on apartments generally range from 7 to 15 months, with a majority having 12-month lease terms. Rooms at the hotel portion of our mixed-use property are rented on a nightly basis.

As of September 30, 2015, 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 (in thousands):



Year Ending December 31,
2015 (three months ending December 31, 2015)	$	33,368
2016	164,755
2017	151,950
2018	118,789
2019	83,803
Thereafter	231,702
Total	$	784,367

The above future minimum rentals exclude residential leases, which typically have a term of 12 months or less, and exclude the hotel, as rooms are rented on a nightly basis.

NOTE 14. COMPONENTS OF RENTAL INCOME AND EXPENSE

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Minimum rents
Retail	$	18,274	$	17,841	$	54,741	$	52,581
Office	22,193		20,534		64,913		60,970
Multifamily	4,650		3,992		12,820		11,723
Mixed-use	2,603		2,523		7,703		7,489
Cost reimbursement	8,049		7,405		22,654		21,115
Percentage rent	552		732		1,277		1,548
Hotel revenue	10,796		10,122		28,531		26,167
Other	354		444		1,137		1,275
Total rental income	$	67,471	$	63,593	$	193,776	$	182,868

Minimum rents include $0.9 million and $0.8 million for the three months ended September 30, 2015 and 2014, respectively, and $2.0 million and $2.4 million for the nine months ended September 30, 2015 and 2014, respectively, to recognize minimum rents on a straight-line basis. In addition, net amortization of above and below market leases included in minimum rents were $0.7 million and $0.7 million for the three months ended September 30, 2015 and 2014, respectively, and $2.2 million and $2.0 million for the nine months ended September 30, 2015 and 2014, respectively.

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American Assets Trust, Inc. and American Assets Trust, L.P.