Edgar Filing: American Assets Trust, Inc.

Document

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 March 31, 2019


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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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
Emerging growth 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
Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



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

Securities registered pursuant to Section 12(b) of the Act:



Name of Registrant	Title of each class	Trading Symbol	Name of each exchange on which registered
American Assets Trust, Inc.	Common Stock, par value $0.01 per share	AAT	New York Stock Exchange
American Assets Trust, L.P.	None	None	None

American Assets Trust, Inc. had 48,006,276 shares of common stock, par value $0.01 per share, outstanding as of May 3, 2019.

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2019 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 March 31, 2019, American Assets Trust, Inc. owned an approximate 73.3% partnership interest in the Operating Partnership. The remaining 26.7% 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 MARCH 31, 2019



PART 1. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Financial Statements of American Assets Trust, Inc.:
		Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	1
		Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2019 and 2018	2
		Consolidated Statement of Equity (unaudited) for the three months ended March 31, 2019 and 2018	3
		Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018	4
	Consolidated Financial Statements of American Assets Trust, L.P.:
		Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	5
		Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2019 and 2018	6
		Consolidated Statement of Partners' Capital (unaudited) for the three months ended March 31, 2019 and 2018	7
		Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018	8
	Notes to Consolidated Financial Statements (unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		43
Item 4.	Controls and Procedures		44
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		45
Item 1A.	Risk Factors		45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3.	Defaults Upon Senior Securities		45
Item 4.	Mine Safety Disclosures		45
Item 5.	Other Information		45
Item 6.	Exhibits		46
SIGNATURES			47

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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

American Assets Trust, Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Data)



	March 31,			December 31,
	2019			2018
	(unaudited)
ASSETS
Real estate, at cost
Operating real estate	$	2,569,407		$	2,549,571
Construction in progress	77,094			71,228
Held for development	9,392			9,392
	2,655,893			2,630,191
Accumulated depreciation	(609,020		)	(590,338		)
Net real estate	2,046,873			2,039,853
Cash and cash equivalents	54,538			47,956
Restricted cash	9,777			9,316
Accounts receivable, net	9,137			9,289
Deferred rent receivables, net	40,554			39,815
Other assets, net	56,169			52,021
TOTAL ASSETS	$	2,217,048		$	2,198,250
LIABILITIES AND EQUITY
LIABILITIES:
Secured notes payable, net	$	162,688		$	182,572
Unsecured notes payable, net	1,045,709			1,045,863
Unsecured line of credit, net	86,438			62,337
Accounts payable and accrued expenses	53,683			46,616
Security deposits payable	7,579			8,844
Other liabilities and deferred credits, net	55,618			49,547
Total liabilities	1,411,715			1,395,779
Commitments and contingencies (Note 11)
EQUITY:
American Assets Trust, Inc. stockholders’ equity
Common stock, $0.01 par value, 490,000,000 shares authorized, 47,486,894 and 47,335,409 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	475			474
Additional paid-in capital	928,792			920,661
Accumulated dividends in excess of net income	(130,841		)	(128,778		)
Accumulated other comprehensive income	8,825			10,620
Total American Assets Trust, Inc. stockholders’ equity	807,251			802,977
Noncontrolling interests	(1,918		)	(506		)
Total equity	805,333			802,471
TOTAL LIABILITIES AND EQUITY	$	2,217,048		$	2,198,250

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 March 31,
	2019			2018
REVENUE:
Rental income	$	76,831		$	76,201
Other property income	8,488			4,531
Total revenue	85,319			80,732
EXPENSES:
Rental expenses	20,796			20,420
Real estate taxes	9,046			8,546
General and administrative	6,073			5,567
Depreciation and amortization	20,583			33,279
Total operating expenses	56,498			67,812
OPERATING INCOME	28,821			12,920
Interest expense	(13,349		)	(13,820		)
Other (expense) income, net	(229		)	209
NET INCOME (LOSS)	15,243			(691		)
Net (income) loss attributable to restricted shares	(93		)	72
Net (income) loss attributable to unitholders in the Operating Partnership	(4,055		)	166
NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS	$	11,095		$	(453	)

EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share, basic	$	0.24		$	(0.01	)
Weighted average shares of common stock outstanding - basic	47,004,465			46,935,820

Earnings (loss) per common share, diluted	$	0.24		$	(0.01	)
Weighted average shares of common stock outstanding - diluted	64,182,073			46,935,820

DIVIDENDS DECLARED PER COMMON SHARE	$	0.28		$	0.27

COMPREHENSIVE INCOME
Net income (loss)	$	15,243		$	(691	)
Other comprehensive (loss) income - unrealized (loss) income on swap derivative during the period	(2,132		)	2,861
Reclassification of amortization of forward-starting swap included in interest expense	(320		)	(320		)
Comprehensive income	12,791			1,850
Comprehensive income attributable to non-controlling interest	(3,398		)	(502		)
Comprehensive income attributable to American Assets Trust, Inc.	$	9,393		$	1,348

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, 2018	47,335,409		$	474	$	920,661	$	(128,778	)	$	10,620		$	(506	)	$	802,471
Net income	—		—		—		11,188			—			4,055			15,243
Common shares issued	162,531		1		7,033		—			—			—			7,034
Forfeiture of restricted stock	(11,046	)	—		—		—			—			—			—
Dividends declared and paid	—		—		—		(13,251		)	—			(4,810		)	(18,061		)
Stock-based compensation	—		—		1,098		—			—			—			1,098
Other comprehensive income - change in value of interest rate swaps	—		—		—		—			(1,561		)	(571		)	(2,132		)
Reclassification of amortization of forward-starting swap included in interest expense	—		—		—		—			(234		)	(86		)	(320		)
Balance at March 31, 2019	47,486,894		$	475	$	928,792	$	(130,841	)	$	8,825		$	(1,918	)	$	805,333



	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, 2017	47,204,588		$	473	$	919,066	$	(97,280	)	$	11,451		$	10,434		$	844,144
Net loss	—		—		—		(525		)	—			(166		)	(691		)
Forfeiture of restricted stock	(1,104	)	—		—		—			—			—			—
Dividends declared and paid	—		—		—		(12,745		)	—			(4,643		)	(17,388		)
Stock-based compensation	—		—		727		—			—			—			727
Other comprehensive income - change in value of interest rate swaps	—		—		—		—			2,107			754			2,861
Reclassification of amortization of forward-starting swap included in interest expense	—		—		—		—			(234		)	(86		)	(320		)
Balance at March 31, 2018	47,203,484		$	473	$	919,793	$	(110,550	)	$	13,324		$	6,293		$	829,333

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)



	Three Months Ended March 31,
	2019			2018
OPERATING ACTIVITIES
Net income (loss)	$	15,243		$	(691	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles	(1,111		)	47
Depreciation and amortization	20,583			33,279
Amortization of debt issuance costs and debt fair value adjustments	368			446
Stock-based compensation expense	1,098			727
Lease termination income	(4,518		)	—
Other noncash interest expense	(320		)	(320		)
Other, net	678			2,031
Changes in operating assets and liabilities
Change in accounts receivable	466			577
Change in other assets	45			(337		)
Change in accounts payable and accrued expenses	7,150			5,434
Change in security deposits payable	(1,265		)	2,113
Change in other liabilities and deferred credits	(1,586		)	666
Net cash provided by operating activities	36,831			43,972
INVESTING ACTIVITIES
Capital expenditures	(20,932		)	(10,138		)
Leasing commissions	(1,505		)	(1,227		)
Net cash used in investing activities	(22,437		)	(11,365		)
FINANCING ACTIVITIES
Repayment of secured notes payable	(19,909		)	(74,116		)
Proceeds from unsecured line of credit	24,000			35,000
Debt issuance costs	(415		)	(2,656		)
Proceeds from issuance of common stock, net	7,034			(176		)
Dividends paid to common stock and unitholders	(18,061		)	(17,388		)
Net cash used in financing activities	(7,351		)	(59,336		)
Net increase (decrease) in cash and cash equivalents	7,043			(26,729		)
Cash, cash equivalents and restricted cash, beginning of period	57,272			91,954
Cash, cash equivalents and restricted cash, end of period	$	64,315		$	65,225

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:



	Three Months Ended March 31,
	2019		2018
Cash and cash equivalents	$	54,538	$	55,336
Restricted cash	9,777		9,889
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows	$	64,315	$	65,225

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)



	March 31,			December 31,
	2019			2018
	(unaudited)
ASSETS
Real estate, at cost
Operating real estate	$	2,569,407		$	2,549,571
Construction in progress	77,094			71,228
Held for development	9,392			9,392
	2,655,893			2,630,191
Accumulated depreciation	(609,020		)	(590,338		)
Net real estate	2,046,873			2,039,853
Cash and cash equivalents	54,538			47,956
Restricted cash	9,777			9,316
Accounts receivable, net	9,137			9,289
Deferred rent receivables, net	40,554			39,815
Other assets, net	56,169			52,021
TOTAL ASSETS	$	2,217,048		$	2,198,250
LIABILITIES AND CAPITAL
LIABILITIES:
Secured notes payable, net	$	162,688		$	182,572
Unsecured notes payable, net	1,045,709			1,045,863
Unsecured line of credit, net	86,438			62,337
Accounts payable and accrued expenses	53,683			46,616
Security deposits payable	7,579			8,844
Other liabilities and deferred credits	55,618			49,547
Total liabilities	1,411,715			1,395,779
Commitments and contingencies (Note 11)
CAPITAL:
Limited partners' capital, 17,177,608 and 17,177,608 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively	(5,232		)	(4,477		)
General partner's capital, 47,486,894 and 47,335,409 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively	798,426			792,357
Accumulated other comprehensive income	12,139			14,591
Total capital	805,333			802,471
TOTAL LIABILITIES AND CAPITAL	$	2,217,048		$	2,198,250

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 March 31,
	2019			2018
REVENUE:
Rental income	$	76,831		$	76,201
Other property income	8,488			4,531
Total revenue	85,319			80,732
EXPENSES:
Rental expenses	20,796			20,420
Real estate taxes	9,046			8,546
General and administrative	6,073			5,567
Depreciation and amortization	20,583			33,279
Total operating expenses	56,498			67,812
OPERATING INCOME	28,821			12,920
Interest expense	(13,349		)	(13,820		)
Other (expense) income, net	(229		)	209
NET INCOME (LOSS)	15,243			(691		)
Net income (loss) attributable to restricted shares	(93		)	72
NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN ASSETS TRUST, L.P.	$	15,150		$	(619	)

EARNINGS (LOSS) PER UNIT - BASIC
Earnings (loss) per unit, basic	$	0.24		$	(0.01	)
Weighted average units outstanding - basic	64,182,073			64,130,800

EARNINGS (LOSS) PER UNIT - DILUTED
Earnings (loss) per unit, diluted	$	0.24		$	(0.01	)
Weighted average units outstanding - diluted	64,182,073			64,130,800

DISTRIBUTIONS PER UNIT	$	0.28		$	0.27

COMPREHENSIVE INCOME
Net income (loss)	$	15,243		$	(691	)
Other comprehensive income (loss) - unrealized income (loss) on swap derivative during the period	(2,132		)	2,861
Reclassification of amortization of forward-starting swap included in interest expense	(320		)	(320		)
Comprehensive income	12,791			1,850
Comprehensive income attributable to Limited Partners	(3,398		)	(502		)
Comprehensive income attributable to General Partner	$	9,393		$	1,348

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, 2018	17,177,608	$	(4,477	)	47,335,409		$	792,357		$	14,591		$	802,471
Net income	—	4,055			—		11,188			—			15,243
Contributions from American Assets Trust, Inc.	—	—			162,531		7,034			—			7,034
Forfeiture of restricted units	—	—			(11,046	)	—			—			—
Distributions	—	(4,810		)	—		(13,251		)	—			(18,061		)
Stock-based compensation	—	—			—		1,098			—			1,098
Other comprehensive income - change in value of interest rate swap	—	—			—		—			(2,132		)	(2,132		)
Reclassification of amortization of forward-starting swap included in interest expense	—	—			—		—			(320		)	(320		)
Balance at March 31, 2019	17,177,608	$	(5,232	)	47,486,894		$	798,426		$	12,139		$	805,333



	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, 2017	17,194,980	$	6,135		47,204,588		$	822,259		$	15,750		$	844,144
Net loss	—	(166		)	—		(525		)	—			(691		)
Forfeiture of restricted units	—	—			(1,104	)	—			—			—
Distributions	—	(4,643		)	—		(12,745		)	—			(17,388		)
Stock-based compensation	—	—			—		727			—			727
Other comprehensive income - change in value of interest rate swap	—	—			—		—			2,861			2,861
Reclassification of amortization of forward-starting swap included in interest expense	—	—			—		—			(320		)	(320		)
Balance at March 31, 2018	17,194,980	$	1,326		47,203,484		$	809,716		$	18,291		$	829,333

(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.

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American Assets Trust, L.P.

Consolidated Statements of Cash Flows

(Unaudited, In Thousands)



	Three Months Ended March 31,
	2019			2018
OPERATING ACTIVITIES
Net income (loss)	$	15,243		$	(691	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles	(1,111		)	47
Depreciation and amortization	20,583			33,279
Amortization of debt issuance costs and debt fair value adjustments	368			446
Stock-based compensation expense	1,098			727
Lease termination income	(4,518		)	—
Other noncash interest expense	(320		)	(320		)
Other, net	678			2,031
Changes in operating assets and liabilities
Change in accounts receivable	466			577
Change in other assets	45			(337		)
Change in accounts payable and accrued expenses	7,150			5,434
Change in security deposits payable	(1,265		)	2,113
Change in other liabilities and deferred credits	(1,586		)	666
Net cash provided by operating activities	36,831			43,972
INVESTING ACTIVITIES
Capital expenditures	(20,932		)	(10,138		)
Leasing commissions	(1,505		)	(1,227		)
Net cash used in investing activities	(22,437		)	(11,365		)
FINANCING ACTIVITIES
Repayment of secured notes payable	(19,909		)	(74,116		)
Proceeds from unsecured line of credit	24,000			35,000
Debt issuance costs	(415		)	(2,656		)
Contributions from American Assets Trust, Inc.	7,034			(176		)
Distributions	(18,061		)	(17,388		)
Net cash used in financing activities	(7,351		)	(59,336		)
Net increase (decrease) in cash and cash equivalents	7,043			(26,729		)
Cash, cash equivalents and restricted cash, beginning of period	57,272			91,954
Cash, cash equivalents and restricted cash, end of period	$	64,315		$	65,225



	Three Months Ended March 31,
	2019		2018
Cash and cash equivalents	$	54,538	$	55,336
Restricted cash	9,777		9,889
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows	$	64,315	$	65,225

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

March 31, 2019

(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 186 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.

As of March 31, 2019, we owned or had a controlling interest in 27 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of March 31, 2019, we owned land at three 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	Gateway Marketplace	Alamo Quarry Market
Carmel Mountain Plaza	Del Monte Center	Hassalo on Eighth - Retail
South Bay Marketplace	Geary Marketplace
Lomas Santa Fe Plaza	The Shops at Kalakaua
Solana Beach Towne Centre	Waikele Center

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

Multifamily
Loma Palisades	Hassalo on Eighth - Residential
Imperial Beach Gardens
Mariner's Point
Santa Fe Park RV Resort
Pacific Ridge Apartments

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

Held for Development and/or Construction in Progress
Solana Crossing – Land
Solana Beach – Highway 101 – Land
Lloyd District Portfolio – Construction in Progress

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

Notes to Consolidated Financial Statements—(Continued)

March 31, 2019

(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, 2018.

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, number of units, 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):



	Three Months Ended March 31,
	2019		2018
Supplemental cash flow information
Total interest costs incurred	$	13,534	$	14,277
Interest capitalized	$	185	$	457
Interest expense	$	13,349	$	13,820
Cash paid for interest, net of amounts capitalized	$	13,301	$	14,059
Cash paid for income taxes	$	157	$	31
Supplemental schedule of noncash investing and financing activities
Accounts payable and accrued liabilities for construction in progress	$	12,838	$	5,674
Accrued leasing commissions	$	663	$	710
Reduction to capital for prepaid offering costs	$	—	$	176

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, 2018. Except for the adoption of the accounting standards during the first quarter of 2019 as discussed below, there have been no changes to our significant accounting policies during the three months ended March 31, 2019.

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

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

Notes to Consolidated Financial Statements—(Continued)

March 31, 2019

(Unaudited)

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 February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. This ASU significantly changes the accounting for leases by requiring lessees to recognize assets and liabilities for leases greater than 12 months on their balance sheet. The lessor model stays substantially the same; however, there were modifications to conform lessor accounting with the lessee model, eliminate real estate specific guidance, further define certain lease and non-lease components, and change the definition of initial direct costs of leases requiring significantly more leasing related costs to be expensed upfront.

We adopted the provisions of ASU No. 2016-02 effective January 1, 2019 using the modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows lessors to elect a practical expedient by class of underlying assets to not separate non-lease components from the lease component if certain conditions are met. The lessor’s practical expedient election would be limited to circumstances in which the non-lease components otherwise would be accounted for under the new revenue guidance and both (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the lease component would be classified as an operating lease. The Company elected the practical expedient, which allows the Company the ability to combine the lease and non-lease components if the underlying asset meets the criteria above. Due to our election of the practical expedient approach, approximately $7.8 million of non-lease components are combined with lease rental income. ASU 2018-11 also includes an optional transition method in addition to the existing requirements for transition to the new standard by recognizing a cumulative effect adjustment to the opening balance sheet of retained earnings in the period of adoption. Consequently, a company’s reporting for the comparative periods presented in the financial statements would continue to be in accordance with previous GAAP (Topic 840). The Company elected this practical expedient as well. Further, bad debt expense, which has previously been recorded in rental expenses, has now been classified as a contra-revenue account in rental income in the Company’s consolidated statements of comprehensive income.

We evaluated all leases within this scope under existing accounting standards and under the new ASU lease standard recognized approximately $7.7 million of right-of-use assets and lease liabilities. Approximately $0.8 million of deferred rent expense was reclassified to lease liability within the other liabilities and deferred credits, net.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods beginning after December 15, 2017. We adopted the provisions of the ASU effective January 1, 2018 using the modified retrospective approach. As discussed above, leases are specifically excluded from this and are governed by the applicable lease codification.

We evaluated the revenue recognition for all contracts within this scope under existing accounting standards and under the new revenue recognition ASU and confirmed that there were no differences in the amounts recognized or the pattern of recognition. This evaluation included revenues from the hotel portion of our mixed-use property, parking income and excise taxes charged to customers. Therefore, the adoption of this ASU did not result in an adjustment to our retained earnings on January 1, 2018.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Topics. The pronouncement requires companies to adopt a new approach to estimating credit losses on certain types of financial instruments, such as trade and other receivables and loans. The standard requires entities to estimate a lifetime expected credit loss for most financial instruments, including trade receivables. The pronouncement is effective for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We continue to evaluate the impact this pronouncement will have on our consolidated financial statements.

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

Notes to Consolidated Financial Statements—(Continued)

March 31, 2019

(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 March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019			December 31, 2018
In-place leases	$	40,884		$	40,884
Accumulated amortization	(35,058		)	(34,603		)
Above market leases	11,963			11,963
Accumulated amortization	(11,587		)	(11,445		)
Acquired lease intangible assets, net	$	6,202		$	6,799
Below market leases	$	63,172		$	63,172