Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
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)
 
(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 45,640,980 shares of common stock, par value $0.01 per share, outstanding as of November 4, 2016.



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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2016 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, 2016, American Assets Trust, Inc. owned an approximate 71.8% partnership interest in the Operating Partnership. The remaining 28.2% 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.


Table of Contents


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, 2016
 
PART 1. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
Consolidated Financial Statements of American Assets Trust, Inc.:
 
 
 
 
 
 
 
 
 
 
Consolidated Financial Statements of American Assets Trust, L.P.:
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Table of Contents

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



American Assets Trust, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
 
 
September 30,
 
December 31,
 
2016
 
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate, at cost
 
 
 
Operating real estate
$
2,226,437

 
$
2,163,444

Construction in progress
52,139

 
73,121

Held for development
9,447

 
9,463

 
2,288,023

 
2,246,028

Accumulated depreciation
(454,503
)
 
(411,166
)
Net real estate
1,833,520

 
1,834,862

Cash and cash equivalents
61,959

 
39,925

Restricted cash
10,246

 
11,623

Accounts receivable, net
8,604

 
7,518

Deferred rent receivables, net
38,283

 
38,422

Other assets, net
36,616

 
41,939

TOTAL ASSETS
$
1,989,228

 
$
1,974,289

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured notes payable, net
$
467,866

 
$
579,000

Unsecured notes payable, net
596,008

 
446,613

Unsecured line of credit

 
30,000

Accounts payable and accrued expenses
42,607

 
31,821

Security deposits payable
6,098

 
5,956

Other liabilities and deferred credits, net
62,137

 
51,972

Total liabilities
1,174,716

 
1,145,362

Commitments and contingencies (Note 11)

 


EQUITY:
 
 
 
American Assets Trust, Inc. stockholders’ equity
 
 
 
Common stock, $0.01 par value, 490,000,000 shares authorized, 45,640,980 and 45,407,719 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
456

 
454

Additional paid-in capital
874,859

 
863,432

Accumulated dividends in excess of net income
(74,328
)
 
(64,066
)
Accumulated other comprehensive loss
(8,583
)
 
(258
)
Total American Assets Trust, Inc. stockholders’ equity
792,404

 
799,562

Noncontrolling interests
22,108

 
29,365

Total equity
814,512

 
828,927

TOTAL LIABILITIES AND EQUITY
$
1,989,228

 
$
1,974,289

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

1

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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,
 
2016
 
2015
 
2016
 
2015
REVENUE:
 
 
 
 
 
 
 
Rental income
$
71,852

 
$
67,471

 
$
207,318

 
$
193,776

Other property income
4,124

 
3,818

 
11,208

 
10,317

Total revenue
75,976

 
71,289

 
218,526

 
204,093

EXPENSES:
 
 
 
 
 
 
 
Rental expenses
20,591

 
18,985

 
58,634

 
52,810

Real estate taxes
7,396

 
6,676

 
20,446

 
18,710

General and administrative
4,513

 
6,357

 
13,456

 
16,161

Depreciation and amortization
17,992

 
15,761

 
53,159

 
46,154

Total operating expenses
50,492

 
47,779

 
145,695

 
133,835

OPERATING INCOME
25,484

 
23,510

 
72,831

 
70,258

Interest expense
(13,049
)
 
(11,258
)
 
(39,148
)
 
(34,250
)
Gain on sale of real estate

 
7,121

 

 
7,121

Other expense, net
(577
)
 
(347
)
 
(454
)
 
(440
)
NET INCOME
11,858

 
19,026

 
33,229

 
42,689

Net income attributable to restricted shares
(42
)
 
(32
)
 
(128
)
 
(115
)
Net income attributable to unitholders in the Operating Partnership
(3,342
)
 
(5,432
)
 
(9,377
)
 
(12,277
)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS
$
8,474

 
$
13,562

 
$
23,724

 
$
30,297

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Earnings per common share, basic
$
0.19

 
$
0.30

 
$
0.52

 
$
0.69

Weighted average shares of common stock outstanding - basic
45,377,719

 
44,998,281

 
45,282,643

 
44,176,007

 
 
 
 
 
 
 
 
Earnings per common share, diluted
$
0.19

 
$
0.30

 
$
0.52

 
$
0.69

Weighted average shares of common stock outstanding - diluted
63,272,702

 
62,897,797

 
63,180,637

 
62,076,238

 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER COMMON SHARE
$
0.2500

 
$
0.2325

 
$
0.7500

 
$
0.6975

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net income
$
11,858

 
$
19,026

 
$
33,229

 
$
42,689

Other comprehensive income (loss) - unrealized gain (loss) on swap derivative during the period
2,432

 
(908
)
 
(11,443
)
 
(1,394
)
Reclassification of amortization of forward-starting swap included in interest expense
(58
)
 
(57
)
 
(173
)
 
(173
)
Comprehensive income
14,232

 
18,061

 
21,613

 
41,122

Comprehensive income attributable to non-controlling interest
(4,018
)
 
(5,155
)
 
(6,086
)
 
(11,829
)
Comprehensive income attributable to American Assets Trust, Inc.
$
10,214

 
$
12,906

 
$
15,527

 
$
29,293


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

2

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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
 
 
Balance at December 31, 2015
45,407,719

 
$
454

 
$
863,432

 
$
(64,066
)
 
$
(258
)
 
$
29,365

 
$
828,927

Net income

 

 

 
23,852

 

 
9,377

 
33,229

Common shares issued
219,480

 
2

 
9,663

 

 

 

 
9,665

Issuance of restricted stock
4,900

 

 

 

 

 

 

Forfeiture of restricted stock
(1,496
)
 

 

 

 

 

 

Conversion of operating partnership units
10,694

 

 
(79
)
 

 

 
79

 

Dividends declared and paid

 

 

 
(34,114
)
 

 
(13,422
)
 
(47,536
)
Stock-based compensation

 

 
1,855

 

 

 

 
1,855

Shares withheld for employee taxes
(317
)
 

 
(12
)
 

 

 

 
(12
)
Other comprehensive loss - change in value of interest rate swaps

 

 

 

 
(8,201
)
 
(3,242
)
 
(11,443
)
Reclassification of amortization of forward-starting swap included in interest expense

 

 

 

 
(124
)
 
(49
)
 
(173
)
Balance at September 30, 2016
45,640,980

 
$
456

 
$
874,859

 
$
(74,328
)
 
$
(8,583
)
 
$
22,108

 
$
814,512

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

3

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American Assets Trust, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
33,229

 
$
42,689

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred rent revenue and amortization of lease intangibles
(2,297
)
 
(4,206
)
Depreciation and amortization
53,159

 
46,154

Amortization of debt issuance costs and debt fair value adjustments
3,354

 
3,160

Gain on sale of real estate

 
(7,121
)
Stock-based compensation expense
1,855

 
2,137

Other noncash interest expense
(173
)
 
(173
)
Other, net
1,168

 
(1,074
)
Changes in operating assets and liabilities
 
 
 
Change in restricted cash
1,177

 
(1,253
)
Change in accounts receivable
(1,564
)
 
(1,597
)
Change in other assets
(23
)
 
(460
)
Change in accounts payable and accrued expenses
10,983

 
11,191

Change in security deposits payable
142

 
318

Change in other liabilities and deferred credits
1,717

 
278

Net cash provided by operating activities
102,727

 
90,043

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(45,583
)
 
(115,156
)
Proceeds from sale of real estate, net of selling costs

 
12,259

Change in restricted cash
200

 
(12,961
)
Leasing commissions
(1,808
)
 
(3,242
)
Net cash used in investing activities
(47,191
)
 
(119,100
)
FINANCING ACTIVITIES
 
 
 
Repayment of secured notes payable
(113,512
)
 
(235,546
)
Proceeds from unsecured term loan
150,000

 

Proceeds from unsecured line of credit
10,000


60,000

Repayment of unsecured line of credit
(40,000
)
 
(35,000
)
Proceeds from issuance of unsecured notes payable

 
200,000

Debt issuance costs
(2,107
)
 
(2,274
)
Proceeds from issuance of common stock, net
9,665

 
72,836

Dividends paid to common stock and unitholders
(47,536
)
 
(43,585
)
Shares withheld for employee taxes
(12
)
 
(6,573
)
Net cash (used in) provided by financing activities
(33,502
)
 
9,858

Net increase (decrease) in cash and cash equivalents
22,034

 
(19,199
)
Cash and cash equivalents, beginning of period
39,925

 
59,357

Cash and cash equivalents, end of period
$
61,959

 
$
40,158

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

4

Table of Contents

American Assets Trust, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit Data)
 
 
September 30,
 
December 31,
 
2016
 
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate, at cost
 
 
 
Operating real estate
$
2,226,437

 
$
2,163,444

Construction in progress
52,139

 
73,121

Held for development
9,447

 
9,463

 
2,288,023

 
2,246,028

Accumulated depreciation
(454,503
)
 
(411,166
)
Net real estate
1,833,520

 
1,834,862

Cash and cash equivalents
61,959

 
39,925

Restricted cash
10,246

 
11,623

Accounts receivable, net
8,604

 
7,518

Deferred rent receivables, net
38,283

 
38,422

Other assets, net
36,616

 
41,939

TOTAL ASSETS
$
1,989,228

 
$
1,974,289

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured notes payable, net
$
467,866

 
$
579,000

Unsecured notes payable, net
596,008

 
446,613

Unsecured line of credit

 
30,000

Accounts payable and accrued expenses
42,607

 
31,821

Security deposits payable
6,098

 
5,956

Other liabilities and deferred credits
62,137

 
51,972

Total liabilities
1,174,716

 
1,145,362

Commitments and contingencies (Note 11)

 


CAPITAL:
 
 
 
Limited partners' capital, 17,888,822 and 17,899,516 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
25,480

 
29,446

General partner's capital, 45,640,980 and 45,407,719 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
800,987

 
799,820

Accumulated other comprehensive loss
(11,955
)
 
(339
)
Total capital
814,512

 
828,927

TOTAL LIABILITIES AND CAPITAL
$
1,989,228

 
$
1,974,289


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


5

Table of Contents

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,
 
2016
 
2015
 
2016
 
2015
REVENUE:
 
 
 
 
 
 
 
Rental income
$
71,852

 
$
67,471

 
$
207,318

 
$
193,776

Other property income
4,124

 
3,818

 
11,208

 
10,317

Total revenue
75,976

 
71,289

 
218,526

 
204,093

EXPENSES:
 
 
 
 
 
 
 
Rental expenses
20,591

 
18,985

 
58,634

 
52,810

Real estate taxes
7,396

 
6,676

 
20,446

 
18,710

General and administrative
4,513

 
6,357

 
13,456

 
16,161

Depreciation and amortization
17,992

 
15,761

 
53,159

 
46,154

Total operating expenses
50,492

 
47,779

 
145,695

 
133,835

OPERATING INCOME
25,484

 
23,510

 
72,831

 
70,258

Interest expense
(13,049
)
 
(11,258
)
 
(39,148
)
 
(34,250
)
Gain on sale of real estate

 
7,121

 

 
7,121

Other expense, net
(577
)
 
(347
)
 
(454
)
 
(440
)
NET INCOME
11,858

 
19,026

 
33,229

 
42,689

Net income attributable to restricted shares
(42
)
 
(32
)
 
(128
)
 
(115
)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, L.P.
$
11,816

 
$
18,994

 
$
33,101

 
$
42,574

 
 
 
 
 
 
 
 
EARNINGS PER UNIT - BASIC
 
 
 
 
 
 
 
Earnings per unit, basic
$
0.19

 
$
0.30

 
$
0.52

 
$
0.69

Weighted average units outstanding - basic
63,272,702

 
62,897,797

 
63,180,637

 
62,076,238

 
 
 
 
 
 
 
 
EARNINGS PER UNIT - DILUTED
 
 
 
 
 
 
 
Earnings per unit, diluted
$
0.19

 
$
0.30

 
$
0.52

 
$
0.69

Weighted average units outstanding - diluted
63,272,702

 
62,897,797

 
63,180,637

 
62,076,238

 
 
 
 
 
 
 
 
DISTRIBUTIONS PER UNIT
$
0.2500

 
$
0.2325

 
$
0.7500

 
$
0.6975

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net income
$
11,858

 
$
19,026

 
$
33,229

 
$
42,689

Other comprehensive income (loss) - unrealized gain (loss) on swap derivative during the period
2,432

 
(908
)
 
(11,443
)
 
(1,394
)
Reclassification of amortization of forward-starting swap included in interest expense
(58
)
 
(57
)
 
(173
)
 
(173
)
Comprehensive income
14,232

 
18,061

 
21,613

 
41,122

Comprehensive income attributable to Limited Partners
(4,018
)
 
(5,155
)
 
(6,086
)
 
(11,829
)
Comprehensive income attributable to General Partner
$
10,214

 
$
12,906

 
$
15,527

 
$
29,293


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


6

Table of Contents

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
 
Balance at December 31, 2015
17,899,516

 
$
29,446

 
45,407,719

 
$
799,820

 
$
(339
)
 
$
828,927

Net income

 
9,377

 

 
23,852

 

 
33,229

Contributions from American Assets Trust, Inc.


 

 
219,480

 
9,665

 

 
9,665

Conversion of operating partnership units
(10,694
)
 
79

 
10,694

 
(79
)
 

 

Issuance of restricted units

 

 
4,900

 

 

 

Forfeiture of restricted units

 

 
(1,496
)
 

 

 

Distributions

 
(13,422
)
 

 
(34,114
)
 

 
(47,536
)
Stock-based compensation

 

 

 
1,855

 

 
1,855

Units withheld for employee taxes

 

 
(317
)
 
(12
)
 

 
(12
)
Other comprehensive loss - change in value of interest rate swap

 

 

 

 
(11,443
)
 
(11,443
)
Reclassification of amortization of forward-starting swap included in interest expense

 

 

 

 
(173
)
 
(173
)
Balance at September 30, 2016
17,888,822

 
$
25,480

 
45,640,980

 
$
800,987

 
$
(11,955
)
 
$
814,512



(1) Consists of limited partnership interests held by third parties.
(2) Consists of general partnership interests held by American Assets Trust, Inc.
The accompanying notes are an integral part of these consolidated financial statements.


7

Table of Contents

American Assets Trust, L.P.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
33,229

 
$
42,689

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred rent revenue and amortization of lease intangibles
(2,297
)
 
(4,206
)
Depreciation and amortization
53,159

 
46,154

Amortization of debt issuance costs and debt fair value adjustments
3,354

 
3,160

Gain on sale of real estate

 
(7,121
)
Stock-based compensation expense
1,855

 
2,137

Other noncash interest expense
(173
)
 
(173
)
Other, net
1,168

 
(1,074
)
Changes in operating assets and liabilities
 
 
 
Change in restricted cash
1,177

 
(1,253
)
Change in accounts receivable
(1,564
)
 
(1,597
)
Change in other assets
(23
)
 
(460
)
Change in accounts payable and accrued expenses
10,983

 
11,191

Change in security deposits payable
142

 
318

Change in other liabilities and deferred credits
1,717

 
278

Net cash provided by operating activities
102,727

 
90,043

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(45,583
)
 
(115,156
)
Proceeds from sale of real estate, net of selling costs

 
12,259

Change in restricted cash
200

 
(12,961
)
Leasing commissions
(1,808
)
 
(3,242
)
Net cash used in investing activities
(47,191
)
 
(119,100
)
FINANCING ACTIVITIES
 
 
 
Repayment of secured notes payable
(113,512
)
 
(235,546
)
Proceeds from unsecured term loan
150,000

 

Proceeds from unsecured line of credit
10,000

 
60,000

Repayment of unsecured line of credit
(40,000
)
 
(35,000
)
Proceeds from issuance of unsecured notes payable

 
200,000

Debt issuance costs
(2,107
)
 
(2,274
)
Contributions from American Assets Trust, Inc.
9,665

 
72,836

Distributions
(47,536
)
 
(43,585
)
Shares withheld for employee taxes
(12
)
 
(6,573
)
Net cash (used in) provided by financing activities
(33,502
)
 
9,858

Net increase (decrease) in cash and cash equivalents
22,034

 
(19,199
)
Cash and cash equivalents, beginning of period
39,925

 
59,357

Cash and cash equivalents, end of period
$
61,959

 
$
40,158

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


8

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements
September 30, 2016
(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 152 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, 2016, we owned or had a controlling interest in 24 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of September 30, 2016, we owned land at four 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
Hassalo on Eighth
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
 
Lloyd District Portfolio – Land
 
 

9

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(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, 2015.
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, employee numbers 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,
 
2016
 
2015
Supplemental cash flow information
 
 
 
Total interest costs incurred
$
40,368

 
$
41,305

Interest capitalized
$
1,220

 
$
7,055

Interest expense
$
39,148

 
$
34,250

Cash paid for interest, net of amounts capitalized
$
36,070

 
$
30,562

Cash paid for income taxes
$
459

 
$
382

Supplemental schedule of noncash investing and financing activities
 

 
 

Accounts payable and accrued liabilities for construction in progress
$
(471
)
 
$
(9,092
)
Accrued leasing commissions
$
275

 
$
(431
)

 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, 2015. Except for the adoption of the consolidation and debt issuance costs standards discussed below, there have been no changes to our significant accounting policies during the nine months ended September 30, 2016.

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Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


Segment Information
Segment information is prepared on the same basis that our chief operating decision maker 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.
Recent Accounting Pronouncements
 
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. 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 voting interest entities ("VIEs") 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 adopted this standard during the first quarter of 2016. The guidance does not amend the existing disclosure requirements for variable interest entities (“VIEs”) or voting interest model entities. The guidance, however, modified the requirements to qualify under the voting interest model. Under the revised guidance, the Operating Partnership will be a variable interest entity of the Company and the Company is considered the primary beneficiary. As the Operating Partnership is already consolidated in the balance sheets of the Company, the identification of this entity as a variable interest entity has no impact on the consolidated financial statements of the Company. There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption of this guidance. In addition, there were no other voting interest entities under prior existing guidance determined to be variable interest entities under the revised guidance.
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 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 adopted this standard during the first quarter of 2016, resulting in the presentation of current period and prior period debt issuance costs associated with our secured notes payable, unsecured notes payable and unsecured line of credit as a direct reduction from the carrying amount of the related debt instrument. These costs were previously included in other assets, net in our consolidated balance sheets.
In February 2016, the FASB issued an ASU that establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. The accounting applied by lessors under this ASU is largely unchanged. Leases will be either classified as sales-type, finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU also requires significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are in the process of evaluating the impact this pronouncement will have on our consolidated financial statements.

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Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


NOTE 2. 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, 2016 and December 31, 2015 (in thousands): 
 
September 30, 2016
 
December 31, 2015
In-place leases
$
49,859

 
$
52,289

Accumulated amortization
(38,976
)
 
(38,425
)
Above market leases
21,780

 
22,201

Accumulated amortization
(19,398
)
 
(18,864
)
Acquired lease intangible assets, net
$
13,265

 
$
17,201

Below market leases
$
67,287

 
$
68,973

Accumulated accretion
(32,628
)
 
(30,806
)
Acquired lease intangible liabilities, net
$
34,659

 
$
38,167

NOTE 3. 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 agreements are 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 interest rate related observable inputs. The fair value of our swaps at September 30, 2016 was a liability of $13.1 million and is included in "other liabilities and deferred credits" on our consolidated balance sheets. For the three and nine months ended September 30, 2016, the change in valuation on our interest rate swaps were gains of $2.4 million and losses of $11.4 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.


12

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


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, 2016 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, 2016
 
December 31, 2015
 
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
Deferred compensation liability
$

$
962

$

$
962

 
$

$
929

$

$
929

Interest rate swaps
$

$
13,129

$

$
13,129

 
$

$
1,686

$

$
1,686

 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 3.1% to 5.6%.
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 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, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Secured notes payable, net
$
467,866

 
$
491,059

 
$
579,000

 
$
592,956

Unsecured term loans, net
$
247,600

 
$
250,000

 
$
98,383

 
$
100,000

Unsecured senior guaranteed notes, net
$
348,408

 
$
368,719

 
$
348,230

 
$
357,779

Unsecured line of credit
$

 
$

 
$
30,000

 
$
30,000

NOTE 4. 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. 
    
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,

13

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


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 the prospective debt offering. 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 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.

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 our interest rate swaps as of September 30, 2016 (dollars in thousands):
Swap Counterparty
 
Notional Amount
 
Effective Date
 
Maturity Date
 
Fair Value Liability
Bank of America, N.A.
 
$
100,000

 
1/9/2014
 
1/9/2019
 
$
2,261

U.S. Bank N.A.
 
$
100,000

 
3/1/2016
 
3/1/2023
 
$
2,359

Wells Fargo Bank, N.A.
 
$
50,000

 
5/2/2016
 
3/1/2023
 
$
1,162

Wells Fargo Bank, N.A.
 
$
150,000

 
3/31/2017
 
3/31/2027
 
$
5,159

Wells Fargo Bank, N.A.
 
$
100,000

 
3/31/2017
 
3/31/2027
 
$
2,188

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. 

14

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


NOTE 5. OTHER ASSETS

Other assets consist of the following (in thousands): 
 
September 30, 2016
 
December 31, 2015
Leasing commissions, net of accumulated amortization of $24,673 and $23,565, respectively
$
18,024

 
$
18,952

Acquired above market leases, net
2,382

 
3,337

Acquired in-place leases, net
10,883

 
13,864

Lease incentives, net of accumulated amortization of $3,635 and $3,341, respectively
228

 
509

Other intangible assets, net of accumulated amortization of $2,030 and $1,904, respectively
227

 
941

Prepaid expenses and other
4,872

 
4,336

Total other assets
$
36,616

 
$
41,939

NOTE 6. OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits consist of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
Acquired below market leases, net
$
34,659

 
$
38,167

Prepaid rent and deferred revenue
8,742

 
8,203

Interest rate swap liability
13,129

 
1,686

Deferred rent expense and lease intangible
1,622

 
434

Deferred compensation
962

 
929

Deferred tax liability
176

 
174

Straight-line rent liability
2,794

 
2,319

Other liabilities
53

 
60

Total other liabilities and deferred credits, net
$
62,137

 
$
51,972

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.
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. 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.

15

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


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, 2016 and December 31, 2015 (in thousands):
 
Principal Balance as of
 
Stated Interest Rate
 
Stated Maturity Date
Description of Debt
September 30, 2016
 
December 31, 2015
 
as of September 30, 2016
First & Main (1)(2)
$

 
$
84,500

 
3.97
%
 
July 1, 2016
Imperial Beach Gardens (1)(3)

 
20,000

 
6.16
%
 
September 1, 2016
Mariner’s Point (1)(3)

 
7,700

 
6.09
%
 
September 1, 2016
South Bay Marketplace (1)(4)
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)
35,566

 
35,920

 
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)
20,489

 
20,749

 
7.22
%
 
June 1, 2019
Torrey Reserve—VCI, VCII, VCIII (5)
6,913

 
6,995

 
6.36
%
 
June 1, 2020
Solana Beach Corporate Centre I-II (5)
10,977

 
11,119

 
5.91
%
 
June 1, 2020
Solana Beach Towne Centre (5)
36,591

 
37,065

 
5.91
%
 
June 1, 2020
City Center Bellevue (1)
111,000

 
111,000

 
3.98
%
 
November 1, 2022
 
470,490

 
584,002

 
 
 
 
Unamortized fair value adjustment
(2,075
)
 
(4,259
)
 
 
 
 
Debt issuance costs, net of accumulated amortization of $1,209 and $1,649, respectively
(549
)
 
(743
)
 
 
 
 
Total Secured Notes Payable Outstanding
$
467,866

 
$
579,000

 
 
 
 
(1)
Interest only.
(2)
Loan repaid in full, without premium or penalty, on March 1, 2016.
(3)
Loans repaid in full, without premium or penalty, on June 1, 2016.
(4)
Loan repaid in full, without premium or penalty, on October 10, 2016.
(5)
Principal payments based on a 30-year amortization schedule.

Certain loans require us to comply with various financial covenants. As of September 30, 2016, the Operating Partnership was in compliance with these financial covenants.


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Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


Unsecured notes payable
The following is a summary of the Operating Partnership's total unsecured notes payable outstanding as of September 30, 2016 and December 31, 2015 (in thousands):
Description of Debt
Principal Balance as of
 
Stated Interest Rate
 
Stated Maturity Date
September 30, 2016
 
December 31, 2015
 
as of September 30, 2016
 
Term Loan A
$
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

 
100,000

 
4.45
%
 
 
February 2, 2025
 
Senior Guaranteed Notes, Series C
100,000

 
100,000

 
4.50
%
 
 
April 1, 2025
 
Term Loan B
100,000

 

 
Variable

(4) 
 
March 1, 2023
 
Term Loan C
50,000

 

 
Variable

(5) 
 
March 1, 2023
 
 
600,000

 
450,000

 
 
 
 
 
 
Debt issuance costs, net of accumulated amortization of $3,975 and $2,999, respectively
(3,992
)
 
(3,387
)
 
 
 
 
 
 
Total Unsecured Notes Payable
$
596,008

 
$
446,613

 
 
 
 
 
 
 
(1)
The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan A 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 two 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.
(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.

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.

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

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


outstanding Term Loan B or Term Loan C will become due and payable at the option of the lenders.
The Operating Partnership’s obligations under the Term Loan Agreement are initially fully and unconditionally guaranteed by the Company and certain of its subsidiaries.

As of September 30, 2016, the Operating Partnership was in compliance with the Term Loan Agreement's financial covenants.

Credit Facility
On January 9, 2014, the 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 ("Revolver Loan") and a term loan of $100 million ("Term Loan A"). 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, 2016, there was no outstanding balance under the Revolver Loan.
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 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 Revolver Loan) and (ii) 0.30% to 0.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio. For the nine months ended September 30, 2016, the weighted average interest rate on the Revolver Loan was 1.77%.
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. Term Loan A initially matures on January 9, 2016, subject to the Operating Partnership's option to extend Term Loan A up to three times, with each such extension for a 12-month period. The foregoing extension options are exercisable by the Operating Partnership subject to the satisfaction of certain conditions. Effective as of January 8, 2016, the Operating Partnership exercised the first of three options to extend the maturity date of Term Loan A to January 9, 2017.
As of September 30, 2016, the Operating Partnership was in compliance with the Amended and Restated Credit Facility financial covenants.
NOTE 8. 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 17,888,822 common units (the “noncontrolling common units”), and represented approximately 28.2% of the ownership interests in our Operating Partnership at September 30, 2016. Common units and shares of our common stock have essentially the same economic characteristics in that common units and shares of our common stock share equally in the total net income or loss distributions of our Operating Partnership. Investors who own common units have the right to cause our Operating Partnership to redeem any or all of their common units for cash equal to the then-current market value of one share of our common stock, or, at our election, shares of our common stock on a one-for-one basis.
During the nine months ended September 30, 2016, 10,694 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

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


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, 2016 and 2015 does not include the weighted average of 169,963 and 168,529 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 months ended September 30, 2016 and 2015 does not include the weighted average of 171,760 and 196,927 unvested Operating Partnership units, respectively.
NOTE 9. EQUITY OF AMERICAN ASSETS TRUST, INC.
Stockholders' Equity
On May 27, 2015, we entered into an at-the-market ("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 program 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, 2016, the following shares of common stock were sold through the ATM equity programs (in thousands, except per share data and share amounts):
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Number of shares of common stock issued through ATM programs
219,480
 
219,480
Weighted average price per share
$45.50
 
$45.50
 
 
 
 
Proceeds, gross
$
9,986

 
$
9,986

Sales agent compensation
(100
)
 
(100
)
Offering costs
(221
)
 
(221
)
Proceeds, net
$
9,665

 
$
9,665

 
We intend to use the net proceeds from the ATM equity program 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, 2016, we had the capacity to issue up to an additional $206.6 million in shares of our common stock under our 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 ATM equity program.
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, 2016: 
Period
 
Amount  per
Share/Unit
 
Period Covered
 
Dividend Paid Date
First Quarter 2016
 
$
0.25

 
January 1, 2016 to March 31, 2016
 
March 25, 2016
Second Quarter 2016
 
$
0.25

 
April 1, 2016 to June 30, 2016
 
June 24, 2016
Third Quarter 2016
 
$
0.25

 
July 1, 2016 to September 30, 2016
 
September 29, 2016
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.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(Unaudited)


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 14, 2016, we awarded a total of 4,900 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 was estimated using a Monte Carlo Simulation model. Our stock price, along with the stock prices of a group of peer REITs, is assumed to follow the Multivariate Geometric Brownian Motion Process. Multivariate Geometric Brownian Motion is a common assumption when modeling in financial markets, as it allows the modeled quantity (in this case, the stock price) to vary randomly from its current value and take any value greater than zero. The volatilities of the returns on the stock price of the Company and the group of REITs were estimated based on a three year look-back period. The expected growth rate of the stock prices over the “derived service period” of the employee is determined with consideration of the risk free rate as of the grant date.
The following table summarizes the activity of restricted stock awards during the nine months ended September 30, 2016:
 
Units
 
Weighted Average Grant Date Fair Value
Nonvested at January 1, 2016
174,744

 
$27.11
Granted
4,900

 
$40.81
Vested
(8,185
)
 
$35.13
Forfeited
(1,496
)
 
$28.68
Nonvested at September 30, 2016
169,963

 
$28.19
We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $0.6 million and $0.4 million, respectively, in noncash compensation expense for the three months ended September 30, 2016 and 2015, which is included in general and administrative expense on the consolidated statements of comprehensive income. We recognized $1.9 million and $2.1 million, respectively, in noncash compensation expense for the nine months ended September 30, 2016 and 2015. Unrecognized compensation expense was $1.8 million at September 30, 2016.
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 169,963 and 168,529 for the three months ended September 30, 2016 and 2015, respectively, and 171,760 and 196,927 for the nine months ended September 30, 2016 and 2015, 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, 2016 and 2015, 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.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
September 30, 2016
(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,
 
2016
 
2015
 
2016
 
2015
NUMERATOR
 
 
 
 
 
 
 
Net income from operations
$
11,858

 
$
19,026

 
$
33,229

 
$
42,689

Less: Net income attributable to restricted shares
(42
)
 
(32
)
 
(128
)
 
(115
)
Less: Income from operations attributable to unitholders in the Operating Partnership
(3,342
)
 
(5,432
)
 
(9,377
)
 
(12,277
)
Net income attributable to common stockholders—basic
$
8,474

 
$
13,562

 
$
23,724

 
$
30,297

Income from operations attributable to American Assets Trust, Inc. common stockholders—basic
$
8,474

 
$
13,562

 
$
23,724

 
$
30,297

Plus: Income from operations attributable to unitholders in the Operating Partnership
3,342

 
5,432

 
9,377

 
12,277

Net income attributable to common stockholders—diluted
$
11,816

 
$
18,994

 
$
33,101

 
$
42,574

DENOMINATOR
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
45,377,719

 
44,998,281

 
45,282,643

 
44,176,007

Effect of dilutive securities—conversion of Operating Partnership units
17,894,983

 
17,899,516

 
17,897,994

 
17,900,231

Weighted average common shares outstanding—diluted
63,272,702

 
62,897,797

 
63,180,637

 
62,076,238

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
0.19

 
$
0.30

 
$
0.52

 
$
0.69

Earnings per common share, diluted
$
0.19

 
$
0.30

 
$
0.52

 
$
0.69

NOTE 10. 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, 2016 and December 31, 2015 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 each of the three and nine months ended September 30, 2016, we recorded income tax expense of $0.6 million. For the three and nine months ended September 30, 2015, we recorded income tax expense of $0.4 million and $0.5 million, respectively.
NOTE 11. 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, 2016
(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 (the "Annex 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 (the "FHB 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 FHB Sublease will increase by approximately 3.4% annually through 2017 and, thereafter, will be equal to fair rental value, as defined in the FHB Sublease, through lease expiration.
Current minimum annual payments under the leases are as follows, as of September 30, 2016 (in thousands): 
Year Ending December 31,
 
 
2016 (three months ending December 31, 2016)
$
572

 
2017
3,097

(1) 
2018
3,167

 
2019
3,240

 
2020
3,315


Thereafter
28,176

(2) 
Total
$
41,567

 
(1)
Lease payments on the FHB Sublease 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.
(2)
Lease payments on the Annex 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.

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, 2016
(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 SuitesTM 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 $7.2 million based on operating performance through September 30, 2016.
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 Torrey Plaza (formerly 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. Eleven 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 34.0% of total revenues for the nine months ended September 30, 2016. 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 35.0% of total revenues for the nine months ended September 30, 2016. 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, 2016 and 2015, 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, 2016
(Unaudited)


NOTE 12. 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, 2016, 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,
 
2016 (three months ending December 31, 2016)
$
41,469

2017
166,694

2018
136,023

2019
101,968

2020
78,794

Thereafter
214,701

Total
$
739,649

 
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 13. 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,
 
2016
 
2015
 
2016
 
2015
Minimum rents
 
 
 
 
 
 
 
Retail
$
18,524

 
$
18,274

 
$
55,548

 
$
54,741

Office
22,458

 
22,193

 
67,427

 
64,913

Multifamily
7,451

 
4,650

 
19,806

 
12,820

Mixed-use
2,650

 
2,603

 
7,962

 
7,703

Cost reimbursement
8,344

 
8,049

 
23,832