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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, 2011 September 30, 2011

or

 

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

For the transition period from             to             

Commission file number: 001-35030

 

 

AMERICAN ASSETS TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland

(State of Organization)

 

27-3338708

(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.    x  Yes    ¨  No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes    ¨  No

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

 

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

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

The number of Registrant’s common shares outstanding on November 10, 2011 was 39,283,796.

 

 

 


Table of Contents

AMERICAN ASSETS TRUST, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2011

 

PART 1. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010      3   
   Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2011 and 2010      4   
   Consolidated Statement of Equity (unaudited) for the nine months ended September 30, 2011      5   
   Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010      6   
   Notes to Consolidated Financial Statements (unaudited)      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      49   

Item 4.

   Controls and Procedures      49   

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      50   

Item 1A.

   Risk Factors      50   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      50   

Item 3.

   Defaults Upon Senior Securities      51   

Item 4.

   Reserved      51   

Item 5.

   Other Information      51   

Item 6.

   Exhibits      52   

SIGNATURES

     53   

 

2


Table of Contents

American Assets Trust, Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Data)

 

     September 30,
2011
    December 31,
2010
 
     (unaudited)     (audited)  

Assets

    

Real estate, at cost

    

Operating real estate

   $ 1,653,329      $ 1,117,831   

Construction in progress

     4,285        925   

Held for development

     22,755        8,081   
  

 

 

   

 

 

 
     1,680,369        1,126,837   

Accumulated depreciation

     (223,624     (209,666
  

 

 

   

 

 

 

Net real estate

     1,456,745        917,171   

Cash and cash equivalents

     123,222        41,953   

Restricted cash

     8,760        4,481   

Marketable securities

     29,596        —     

Accounts receivable, net

     6,525        1,564   

Deferred rent receivables, net

     22,792        19,486   

Notes receivable from affiliate

     —          21,769   

Investment in real estate joint ventures

     —          39,816   

Prepaid expenses and other assets

     77,121        43,718   

Assets of discontinued operations

     —          27,399   
  

 

 

   

 

 

 

Total assets

   $ 1,724,761      $ 1,117,357   
  

 

 

   

 

 

 

Liabilities and equity

    

Liabilities:

    

Secured notes payable

   $ 943,900      $ 828,685   

Unsecured notes payable

     —          38,013   

Notes payable to affiliates

     —          5,266   

Accounts payable and accrued expenses

     27,769        11,284   

Security deposits payable

     4,664        2,510   

Other liabilities and deferred credits

     57,955        38,846   

Distributions in excess of earnings on real estate joint ventures

     —          14,060   

Liabilities of discontinued operations

     —          23,572   
  

 

 

   

 

 

 

Total liabilities

     1,034,288        962,236   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Equity:

    

Owners’ equity

     —          121,874   

American Assets Trust, Inc. stockholders’ equity

    

Common stock $0.01 par value, 490,000,000 authorized, 39,283,796 outstanding at September 30, 2011

     393        —     

Additional paid-in capital

     652,932        —     

Accumulated dividends in excess of net income

     (20,233     —     
  

 

 

   

 

 

 

Total American Assets Trust, Inc. stockholders’ equity

     633,092        —     

Noncontrolling interests

    

Owners in consolidated real estate entities

     —          33,247   

Unitholders in the Operating Partnership

     57,381        —     
  

 

 

   

 

 

 
     57,381        33,247   
  

 

 

   

 

 

 

Total equity

     690,473        155,121   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,724,761      $ 1,117,357   
  

 

 

   

 

 

 

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

 

3


Table of Contents

American Assets Trust, Inc.

Consolidated Statements of Operations

(Unaudited)

(In Thousands, Except Shares and Per Share Data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue:

        

Rental income

   $ 53,278      $ 33,903      $ 146,860      $ 88,213   

Other property income

     3,015        1,060        7,416        2,762   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     56,293        34,963        154,276        90,975   

Expenses:

        

Rental expenses

     16,187        5,977        42,720        15,358   

Real estate taxes

     5,390        3,442        14,800        9,208   

General and administrative

     3,733        1,515        10,786        4,908   

Depreciation and amortization

     15,827        12,599        41,916        26,714   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     41,137        23,533        110,222        56,188   

Operating income

     15,156        11,430        44,054        34,787   

Interest expense

     (14,738     (12,416     (41,791     (32,979

Early extinguishment of debt

     —          —          (25,867     —     

Loan transfer and consent fees

     —          —          (9,019     —     

Gain on acquisition

     —          —          46,371        4,297   

Other income (expense), net

     (108     (251     (179     (1,167
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     310        (1,237     13,569        4,938   

Discontinued operations

        

Income from discontinued operations

     327        44        1,119        232   

Gain on sale of real estate property

     3,981        —          3,981        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Results from discontinued operations

     4,308        44        5,100        232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     4,618        (1,193     18,669        5,170   

Net income attributable to restricted shares

     (132     —          (350     —     

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

     —          1,042        2,458        1,941   

Net (income) loss attributable to Predecessor’s controlled owners’ equity

     —          151        (16,995     (7,111

Net income attributable to unitholders in the Operating Partnership

     (1,434     —          (1,209     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American Assets Trust, Inc. stockholders

   $ 3,052      $ —        $ 2,573      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) from continuing operations attributable to common stockholders per share

   $ 0.00        $ (0.03  

Basic net income from discontinued operations attributable to common stockholders per share

     0.08          0.10     
  

 

 

     

 

 

   

Basic net income attributable to common stockholders per share

   $ 0.08        $ 0.07     
  

 

 

     

 

 

   

Weighted average shares of common stock outstanding—basic

     38,655,084          36,106,397     
  

 

 

     

 

 

   

Diluted net income (loss) from continuing operations attributable to common stockholders per share

   $ 0.00        $ (0.03  

Diluted net income from discontinued operations attributable to common stockholders per share

     0.08          0.10     
  

 

 

     

 

 

   

Diluted net income attributable to common stockholders per share

   $ 0.08        $ 0.07     
  

 

 

     

 

 

   

Weighted average shares of common stock outstanding—diluted

     57,051,173          53,265,648     
  

 

 

     

 

 

   

Dividends declared per common share

   $ 0.21        $ 0.59     
  

 

 

     

 

 

   

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

 

4


Table of Contents

American Assets Trust, Inc.

Consolidated Statements of Equity

(Unaudited)

(In Thousands, Except Share Data)

 

     American Assets Trust, Inc. Stockholders’ Equity     Predecessor’s
Controlled
Owners’
Equity
    Noncontrolling
Interests -
Unitholders in the
Operating
Partnership
    Predecessor’s
Noncontrolling
Interests -
Owners in
Consolidated
Entities
    Total  
     Common Shares      Additional
Paid-in
Capital
    Accumulated
dividends in
excess of net
income
         
     Shares     Amount               

Balance at December 31, 2010

     —        $ —         $ —        $ —        $ 121,874      $ —        $ 33,247      $ 155,121   

Net income (loss)

     —          —           —          2,923        16,995        1,209        (2,458     18,669   

Distributions

     —          —           —          —          (33,435     —          (6,525     (39,960

Proceeds from sale of common stock, net

     31,625,000        316         587,695        —          —          —          —          588,011   

Cash paid to non-accredited investors

     —          —           —          —          —          —          (6,075     (6,075

Issuance of restricted stock

     630,663        6         (6     —          —          —          —          —     

Forfeiture of restricted stock

     (1,951     —           —          —          —          —          —          —     

Issuance of common shares and units for acquisition of properties

     262,486        3         6,081        —          —          27,770        —          33,854   

Proceeds from private placement

     —          —           —          —          —          5,410        —          5,410   

Notes receivable from affiliate settled in common units

     —          —           —          —          —          (21,797     —          (21,797

Notes payable to affiliates settled in common units

     —          —           —          —          —          828        —          828   

Dividends declared and paid

     —          —           —          (23,156     —          (10,854     —          (34,010

Stock-based compensation

     —          —           1,902        —          —          —          —          1,902   

Distribution of investment in joint venture not acquired

     —          —           —          —          (9,084     —          (2,396     (11,480

Exchange of owners’ equity for common stock and units

     6,767,598        68         57,260        —          (96,350     54,815        (15,793     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     39,283,796      $ 393       $ 652,932      $ (20,233   $ —        $ 57,381      $ —        $ 690,473   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

American Assets Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

OPERATING ACTIVITIES

    

Net income

   $ 18,669      $ 5,170   

Results from discontinued operations

     (5,100     (232
  

 

 

   

 

 

 

Income from continuing operations

     13,569        4,938   

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

    

Deferred rent revenue and amortization of lease intangibles

     (1,639     1,099   

Depreciation and amortization

     41,916        26,714   

Amortization of debt issuance costs and debt fair value adjustments

     2,924        418   

Early extinguishment of debt

     25,867        —     

Loan transfer and consent fees

     9,019        —     

Gain on acquisition of controlling interests

     (46,371     (4,297

Stock-based compensation expense

     1,902        —     

Loss from real estate joint ventures

     188        3,431   

Distribution of earnings from real estate joint ventures

     —          3,812   

Other, net

     1,586        497   

Changes in operating assets and liabilities

    

Change in restricted cash

     (848     (730

Change in accounts receivable

     (3,262     (155

Change in prepaid expenses and other assets

     (590     (1,725

Change in accounts payable and accrued expenses

     5,689        2,272   

Change in security deposits and other liabilities

     125        265   
  

 

 

   

 

 

 

Net cash provided by operating activities of continuing operations

     50,075        36,539   

Net cash provided by operating activities of discontinued operations

     1,748        1,055   
  

 

 

   

 

 

 

Net cash provided by operating activities

     51,823        37,594   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Acquisition of real estate, net of cash acquired

     (227,309     (19,762

Capital expenditures

     (5,871     (3,355

Change in restricted cash

     (1,653     16   

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

     15,222        —     

Leasing commissions

     (1,772     (1,650

Purchase of marketable securities

     (33,103     —     

Maturity of marketable securities

     3,502        —     

Distribution of capital from real estate joint ventures

     —          10,607   

Issuance of notes receivable to affiliate

     —          (800
  

 

 

   

 

 

 

Net cash used in investing activities of continuing operations

     (250,984     (14,944

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

     30,078        (444
  

 

 

   

 

 

 

Net cash used in investing activities

     (220,906     (15,388
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Issuance of secured notes payable

     84,500        7,500   

Repayment of secured notes payable

     (263,106     (10,647

Defeasance costs on repayment of secured notes payable

     (24,345     —     

Loan transfer and consent fees paid

     (8,350     —     

Issuance of unsecured notes payable

     —          23,000   

Repayment of unsecured notes payable

     (38,013     (4,488

Repayment of notes payable to affiliates

     (19,279     (1,778

Debt issuance costs

     (2,961     (365

Proceeds from issuance of common stock, net

     596,541        —     

Proceeds from private placement of common units

     5,410        —     

Dividends paid to common stock and unitholders

     (34,010     —     

Payments to nonaccredited investors

     (6,075     —     

Contributions from Predecessor’s controlling interests

     —          1,147   

Distributions to Predecessor’s controlling and non-controlling interests

     (39,960     (23,401
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     250,352        (9,032
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     81,269        13,174   

Cash and cash equivalents, beginning of period

     41,953        24,189   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 123,222      $ 37,363   
  

 

 

   

 

 

 

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

 

6


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Organization

American Assets Trust, Inc. (which may be referred to in these financial statements as the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed on July 16, 2010 that did not have any operating activity until the consummation of our initial public offering (the “Offering”) and the related acquisition of certain assets of our Predecessor (as defined below) on January 19, 2011. The Company is the sole general partner of American Assets Trust, L.P., a Maryland limited partnership formed on July 16, 2010 (the “Operating Partnership”). The Company’s operations are carried on through our Operating Partnership and its subsidiaries, including our taxable REIT subsidiary. Since the formation of our Operating Partnership, the Company has controlled our Operating Partnership as its general partner and has consolidated its assets, liabilities and results of operations.

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

 

   

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

 

   

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

 

   

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

 

   

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

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

Our “Predecessor” is not a legal entity but rather a combination of entities whose assets included entities owned and/or controlled by Ernest S. Rady and his affiliates, including the Ernest Rady Trust U/D/T March 13, 1983 (the “Rady Trust”), which in turn owned (1) controlling interests in entities owning 17 properties and the property management business of American Assets, Inc. (“AAI”) (the “controlled entities”), and (2) noncontrolling interests in entities owning four properties (the “noncontrolled entities”) (the assets described at (1) and (2) are the “Acquired Assets,” and do not include our Predecessor’s noncontrolling 25% ownership interest in Novato FF Venture, LLC, the entity that owns the Fireman’s Fund Headquarters in Novato, California). The Formation Transactions included the acquisition by our Operating Partnership of the (a) Acquired Assets, (b) the entities that own Waikiki Beach Walk (a mixed-use property consisting of a retail portion and a hotel portion) (the “Waikiki Beach Walk entities”) and (c) the entities that own Solana Beach Towne Centre and Solana Beach Corporate Centre (the “Solana Beach Centre entities”) (including our Predecessor’s ownership interest in these entities).

The Formation Transactions enabled us to (1) consolidate the ownership of our property portfolio under our Operating Partnership, (2) succeed to the property management business of AAI, (3) facilitate the Offering, and (4) qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2011. As a result of the Formation Transactions, we are a vertically integrated and self-administered REIT with approximately 110 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.

 

7


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

We determined that our Predecessor was the acquirer for accounting purposes, and therefore the contribution or acquisition by merger of interests in the controlled entities was considered a transaction between entities under common control since our Executive Chairman, Ernest S. Rady or his affiliates, including the Rady Trust, owned the controlling interest in each of the entities comprising our Predecessor, which, in turn, owned a controlling interest in each of the controlled entities. As a result, the acquisition of interests in each of the controlled entities was recorded at our historical cost. The contribution or acquisition by merger of interests in certain of the noncontrolled entities, which include the Waikiki Beach Walk entities and the Solana Beach Centre entities (including our Predecessor’s ownership interest in these noncontrolled entities), was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of such contribution or acquisition.

Since these transactions occurred on January 19, 2011, the financial condition and results of operations for the entities acquired by us in connection with the Offering and related Formation Transactions are not included in certain historical financial statements. More specifically, our financial condition as of December 31, 2010 and results of operations for the nine months ended September 30, 2010 reflect the financial condition and results of operations for our Predecessor. Our financial condition as of September 30, 2011 and results of operations for the nine months ended September 30, 2011 reflect the financial condition and results of operation for our Predecessor together with the entities we acquired at the time of the Offering, namely, the Waikiki Beach Walk entities and the Solana Beach Centre entities, as well as First & Main, Lloyd District Portfolio and Solana Beach – Highway 101, each acquired subsequent to the Offering. We have included the results of operations for the acquired entities in our consolidated statements of operations from the date of acquisition.

Prior to the Offering, the Predecessor’s combined financial statements included investments in certain real estate joint ventures in which Ernest Rady and his affiliates had significant influence, but not control, over major decisions, including the decision to sell or refinance the properties. These investments, which represent non-controlling 25% to 80% ownership interests, were accounted for using the equity method of accounting. The Predecessor’s investments in certain real estate joint ventures for which it had unilateral control, evidenced by the ability to make all major decisions, such as the acquisition, sale or refinancing of the property without approval of the minority party, were combined in these financial statements as they were under the common control of Ernest Rady and his affiliates.

As of September 30, 2011, we owned or had a controlling interest in 21 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of September 30, 2011, we owned land at five of our properties that we classify as held for development. A summary of the properties owned by us is as follows:

Retail

Carmel Country Plaza

Carmel Mountain Plaza

South Bay Marketplace

Rancho Carmel Plaza

Lomas Santa Fe Plaza

Solana Beach Towne Centre

Del Monte Center

The Shops at Kalakaua

Waikele Center

Alamo Quarry Market

Office

Torrey Reserve Campus

Solana Beach Corporate Centre

160 King Street

The Landmark at One Market

First & Main

Lloyd District Portfolio

Multifamily

Loma Palisades

Imperial Beach Gardens

Mariner’s Point

Santa Fe Park RV Resort

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

Mixed-Use

Waikiki Beach Walk Retail and Hotel

Held for Development

Solana Beach Corporate Centre – Land

Solana Beach – Highway 101 – Land

Sorrento Pointe – Land

Torrey Reserve – Land

Lloyd District Portfolio – Land

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. The combined financial statements of our Predecessor include the accounts of our Predecessor and all entities in which our Predecessor had a controlling interest. When our Predecessor was the general partner or managing member of a limited partnership or limited liability company, as the case may be, our Predecessor was presumed to control the limited partnership or limited liability company unless the limited partners or non-managing members possessed or possess either (1) the substantive ability to dissolve the partnership or otherwise remove our Predecessor as the general partner or managing member without cause (commonly referred to as “kick-out rights”), or (2) the right to participate in substantive operating and financial decisions of the limited partnership or limited liability company that were expected to be made in the course of their business. The equity interests of other investors were reflected as noncontrolling interests. Our Predecessor accounted for its interests in joint ventures which it did not control using the equity method of accounting.

All significant intercompany transactions and balances are eliminated in consolidation.

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

The accompanying consolidated financial statements of the Company have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (“GAAP”) for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.

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,
 
     2011     2010  

Supplemental cash flow information

    

Cash paid for interest

   $ 39,158      $ 33,131   
  

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

    

Accounts payable and accrued liabilities for property under development

   $ 1,525      $ (103
  

 

 

   

 

 

 

Assumption of debt upon acquisition (Note 2)

   $ 268,008      $ 133,000   
  

 

 

   

 

 

 

Assumption of notes to affiliates upon acquisition (Note 2)

   $ 14,824      $ —     
  

 

 

   

 

 

 

Acquisition of working capital deficit, net of cash (Note 2)

   $ (4,175   $ (1,972
  

 

 

   

 

 

 

Distribution of investment in joint venture not acquired

   $ 11,480      $ —     
  

 

 

   

 

 

 

Issuance of common shares and units for acquisition of properties

   $ 33,854      $ —     
  

 

 

   

 

 

 

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2011      2010  

Notes receivable from affiliate settled in common units

   $ 21,797       $  —    
  

 

 

    

 

 

 

Notes payable to affiliates settled in common units

   $ 828       $ —     
  

 

 

    

 

 

 

Reduction to capital for prepaid Offering costs

   $ 1,974       $ —     
  

 

 

    

 

 

 

Transfer taxes accrued at time of Offering

   $ 6,556       $ —     
  

 

 

    

 

 

 

Offering Costs

In connection with the Offering, affiliates incurred legal, accounting and related costs, which were assumed or reimbursed by the Company upon the consummation of the Offering and such costs were deducted from the gross proceeds of the Offering.

Revenue Recognition and Accounts Receivable

Our leases with tenants are classified as operating leases. Substantially all such leases contain fixed rent escalations which occur at specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the tenant controls the space through the term of the related lease, net of valuation adjustments, based on management’s assessment of credit, collection and other business risks. Percentage rents, which represent additional rents based upon the level of sales achieved by certain tenants, are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved and the percentage rents are collectible. Real estate tax and other cost reimbursements are recognized on an accrual basis over the periods in which the related expenditures are incurred. Other property income includes parking income, general excise tax billed to tenants and fees charged to tenants at our multifamily properties. Other property income is recognized when earned. For a tenant to terminate its lease agreement prior to the end of the agreed term, we may require that they pay a fee to cancel the lease agreement. Lease termination fees for which the tenant has relinquished control of the space are generally recognized on the termination date. When a lease is terminated early but the tenant continues to control the space under a modified lease agreement, the lease termination fee is generally recognized evenly over the remaining term of the modified lease agreement.

We recognize revenue on the hotel portion of our mixed-use property from the rental of hotel rooms and guest services when the rooms are occupied and services have been provided. Food and beverage sales are recognized when the customer has been served or at the time the transaction occurs. Revenue from room rental is included in rental revenue on the statement of operations. Revenue from other sales and services provided is included in other property income on the statement of operations.

We make estimates of the collectibility of our accounts receivable related to minimum rents, straight-line rents, expense reimbursements and other revenue. Accounts receivable and deferred rent receivable are carried net of this allowance for doubtful accounts. We generally do not require collateral or other security from our tenants, other than letters of credit or security deposits. Our determination as to the collectibility of accounts receivable and correspondingly, the adequacy of this allowance, is based primarily upon evaluations of individual receivables, current economic conditions, historical experience and other relevant factors. The allowance for doubtful accounts is increased or decreased through bad debt expense. In some cases, primarily relating to straight-line rents, the collection of these amounts extends beyond one year. Our experience relative to unbilled straight-line rents is that a portion of the amounts otherwise recognizable as revenue is never billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and other factors. Accordingly, the extended collection period for straight-line rents along with our evaluation of tenant credit risk may result in the nonrecognition of a portion of straight-line rental income until the collection of such income is reasonably assured. If our evaluation of tenant credit risk changes indicating more straight-line revenue is reasonably collectible than previously estimated and realized, the additional straight-line rental income is recognized as revenue. If our evaluation of tenant credit risk changes indicating a portion of realized straight-line rental income is no longer collectible, a reserve and bad debt expense is recorded. At September 30, 2011 and December 31, 2010, our allowance for doubtful accounts was $1.8 million and $1.0 million, respectively.

We recognize gains on sales of properties upon the closing of the transaction with the purchaser. Gains on properties sold are recognized using the full accrual method when (1) the collectibility of the sales price is reasonably assured, (2) we are not obligated to perform significant activities after the sale, (3) the initial investment from the buyer is sufficient and (4) other profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in part until the requirements for gain recognition have been met.

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

We receive various fee income from unconsolidated real estate joint ventures including property management fees, construction management fees, acquisition and disposition fees, leasing fees, asset management fees and financing fees. Fee income is recorded as earned in accordance with the respective fee agreement. Profit from these fees, if any, is eliminated to the extent of our ownership interest in these entities. Subsequent to the Formations Transactions and the acquisition of the outside interests in unconsolidated joint ventures, we no longer earn fee revenue (Note 15).

Real Estate

Land, buildings and improvements are recorded at cost. Depreciation is computed using the straight-line method. Estimated useful lives range generally from 30 years to a maximum of 40 years on buildings and major improvements. Minor improvements, furniture and equipment are capitalized and depreciated over useful lives ranging from 3 years to 15 years. Maintenance and repairs that do not improve or extend the useful lives of the related assets are charged to operations as incurred. Tenant improvements are capitalized and depreciated over the life of the related lease or their estimated useful life, whichever is shorter. If a tenant vacates its space prior to the contractual termination of its lease, the undepreciated balance of any tenant improvements are written off if they are replaced or have no future value. For the nine months ended September 30, 2011 and 2010, real estate depreciation expense was $30.4 million and $22.8 million, respectively.

Acquisitions of properties are accounted for in accordance with the authoritative accounting guidance on acquisitions and business combinations. Our methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is based on estimated fair values, replacement cost and appraised values. When we acquire operating real estate properties, the purchase price is allocated to land and buildings, intangibles such as in-place leases, and to current assets and liabilities acquired, if any. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below market renewal options are determined based on a review of several qualitative and quantitative factors on a lease-by-lease basis at acquisition to determine whether it is probable that the tenant would exercise its option to renew the lease agreement. These factors include: (1) the type of tenant in relation to the property it occupies, (2) the quality of the tenant, including the tenant’s long term business prospects and (3) whether the fixed rate renewal option was sufficiently lower than the fair rental of the property at the date the option becomes exercisable such that it would appear to be reasonably assured that the tenant would exercise the option to renew. The value allocated to in-place leases is amortized over the related lease term and reflected as depreciation and amortization in the statement of operations. The value of above and below market leases associated with the original noncancelable lease terms are amortized to rental income over the terms of the respective non-cancelable lease periods and are reflected as either an increase (for below market leases) or a decrease (for above market leases) to rental income in the statement of operations. The value of the leases associated with below market lease renewal options that are likely to be exercised are amortized to rental income over the respective renewal periods. If a tenant vacates its space prior to contractual termination of its lease or the lease is not renewed, the unamortized balance of any in-place lease value is written off to rental income and amortization expense. Acquisition-related expenses are expensed in the period incurred.

We capitalize certain costs related to the development and redevelopment of real estate including pre-construction costs, real estate taxes, insurance and construction costs and salaries and related costs of personnel directly involved. Additionally, we capitalize interest costs related to development and significant redevelopment activities. Capitalization of these costs begins when the activities and related expenditures commence and cease when the project is substantially complete and ready for its intended use, at which time the project is placed in service and depreciation commences. Additionally, we make estimates as to the probability of certain development and redevelopment projects being completed. If we determine that the completion of development or redevelopment is no longer probable, we expense all capitalized costs which are not recoverable.

Impairment of Long Lived Assets

We review for impairment on a property by property basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. The sale or disposal of a “component of an entity” is treated as discontinued operations. The operating properties sold by us typically meet the definition of a component of an entity and as such the revenues and expenses associated with sold properties are reclassified to discontinued operations for all periods presented.

Financial Instruments

The estimated fair values of financial instruments are determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair values. The use of different market

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

assumptions or estimation methods may have a material effect on the estimated fair value amounts. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.

Cash and Cash Equivalents

We define cash and cash equivalents as cash on hand, demand deposits with financial institutions and short term liquid investments with an initial maturity of less than three months. Cash balances in individual banks may exceed the federally insured limit of $250,000 by the Federal Deposit Insurance Corporation. No losses have been experienced related to such accounts.

Restricted Cash

Restricted cash consists of amounts held by lenders to provide for future real estate tax expenditures, insurance expenditures and reserves for capital improvements. Activity for accounts related to real estate tax and insurance expenditures is classified as operating activities in the statement of cash flows. Changes in reserves for capital improvements are classified as investing activities in the statement of cash flows.

Marketable Securities

Our portfolio of marketable securities is comprised of debt securities that are classified as trading. Trading securities are presented on our consolidated balance sheets at fair value at the end of each reporting period. Gains and losses resulting from the mark-to-market of these securities are recognized as unrealized gains or losses in income.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist primarily of lease costs, lease incentives, acquired in-place leases, acquired above market leases and debt issuance costs. Capitalized lease costs are direct costs incurred which were essential to originate a lease and would not have been incurred had the leasing transaction not taken place and include third party commissions and internal salaries and personnel costs related to obtaining a lease. Capitalized lease costs are amortized over the life of the related lease and included in depreciation and amortization expense on the statement of operations. If a tenant vacates its space prior to the contractual termination of its lease, the unamortized balance of any lease costs are written off. We view these lease costs as part of the up-front initial investment we made in order to generate a long-term cash inflow. Therefore, we classify cash outflows for lease costs as an investing activity in our consolidated statements of cash flows.

Costs related to the issuance of debt instruments are capitalized and are amortized as interest expense over the estimated life of the related issue using the straight-line method which approximates the effective interest method. If a debt instrument is paid off prior to its original maturity date, the unamortized balance of debt issuance costs are written off to interest expense or, if significant, included in “early extinguishment of debt.” For the nine months ended September 30, 2011, $0.6 million in debt issuance costs were written off and included in early extinguishment of debt.

Variable Interest Entities

Certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest qualify as variable interest entities (“VIEs”). VIEs are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is the party that has a controlling interest in the VIE. Identifying the party with the controlling interest requires a focus on which entity has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (1) the obligation to absorb the expected losses of the VIE or (2) the right to receive the benefits from the VIE. We have evaluated our investments in certain joint ventures and determined that these joint ventures do not meet the requirements of a VIE and, therefore, consolidation of these ventures is not required. These investments are accounted for using the equity method. Our investment balances in our real estate joint ventures are presented separately in our consolidated balance sheets.

Investments in Real Estate Joint Ventures

We analyze our investments in real estate joint ventures under applicable guidance to determine if the venture is considered a VIE and would require consolidation. To the extent that the ventures do not qualify as VIEs, we further assess the venture to determine whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights in order to determine whether consolidation is required.

We consolidate those ventures that are considered to be VIEs where we are the primary beneficiary. For non-VIEs, the Predecessor combined those ventures that Ernest Rady or the Rady Trust controlled through majority ownership interests or where the

 

12


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

Predecessor was the managing member and the partner did not have substantive participating rights. Control is further demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the venture without the consent of the limited partner and inability of the limited partner to replace the general partner. We use the equity method of accounting for those ventures where we do not have control over operating and financial policies. Under the equity method of accounting, the investment in each venture is included on our balance sheet; however, the assets and liabilities of the ventures for which we use the equity method are not included in the balance sheet. The investment is adjusted for contributions, distributions and our proportionate share of the net earnings or losses of each respective venture.

We assess whether there has been impairment in the value of our investments in real estate joint ventures periodically. An impairment charge is recorded when events or changes in circumstances indicate that a decline in the fair value below the carrying value has occurred and such decline is other-than-temporary. The ultimate realization of the investments in unconsolidated real estate joint ventures is dependent on a number of factors, including the performance of the investments and market conditions.

Notes Receivable from Affiliate

Certain entities made loans to affiliates in order to attain a higher return on excess cash balances, and these loans were classified as notes receivable from affiliate at December 31, 2010. The notes bore interest at LIBOR and were to be repaid upon demand. The notes were settled as part of the Formation Transactions.

Notes Payable to Affiliates

Owners of certain entities made loans to the entities, and these loans were classified as notes payable to affiliates at December 31, 2010. The notes bore interest at 10% and matured in 2013. The notes were repaid using proceeds from the Offering or were settled as part of the Formation Transactions.

Stock-Based Compensation

We grant stock-based compensation awards to our employees and directors typically in the form of restricted shares of common stock, options to purchase common stock and/or shares of common stock. We measure stock-based compensation expense based on the fair value of the award on the grant date and recognize the expense ratably over the vesting period.

Deferred Compensation

Our Operating Partnership has adopted the American Assets Trust Executive Deferral Plan V (“EDP V”) and the American Assets Trust Executive Deferral Plan VI (“EDP VI”). These plans were adopted by our Operating Partnership as successor plans to those deferred compensation plans maintained by AAI in which certain employees of AAI, who were transferred to us in connection with the Offering (the “Transferred Participants”), participated prior to the Offering. EDP V and EDP VI contain substantially the same terms and conditions as these predecessor plans. AAI transferred to our Operating Partnership the Transferred Participants’ account balances under the predecessor plans. These transferred account balances represent amounts deferred by the Transferred Participants prior to the Offering while they were employed by AAI.

At the time eligible participants defer compensation, we record compensation cost and a corresponding deferred compensation plan liability, which is included in other liabilities and deferred credits on our consolidated balance sheets. This liability is adjusted to fair value at the end of each accounting period based on the performance of the benchmark funds selected by each participant, and the impact of adjusting the liability to fair value is recorded as an increase or decrease to compensation cost.

Income Taxes

Prior to the Offering, we were comprised primarily of limited partnerships and limited liability companies. Under applicable federal and state income tax rules, the allocated share of net income or loss from the limited partnerships and limited liability companies was reportable in the income tax returns of the respective partners and members.

Subsequent to the Offering, we intend to elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with the taxable year ending December 31, 2011. To qualify as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

We, together with one of our subsidiaries, will elect to treat such subsidiary as a taxable REIT subsidiary (a “TRS”) for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to federal and state income taxes.

Segment Information

Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate in four business segments: (1) the acquisition, redevelopment, ownership and management of retail real estate, (2) the acquisition, redevelopment, ownership and management of office real estate, (3) the acquisition, redevelopment, ownership and management of multifamily real estate and (4) the acquisition, redevelopment, ownership and management of mixed-use real estate. The products for our retail segment primarily include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our office segment primarily include rental of office space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our multifamily segment include rental of apartments and other tenant services. The products of our mixed-use segment include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental and operation of a 369-room all-suite hotel.

Reclassifications

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

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which amended ASC Topic 805, Business Combinations (“ASC 805”). The objective of this guidance is to eliminate diversity in the interpretation of pro forma revenue and earnings disclosures requirements for business combinations. The guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance also expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings. ASU 2010-29 is effective for business combinations for which the acquisition date occurs following the first annual reporting period which commences after December 15, 2010. The guidance is required in interim and annual reporting periods. Our adoption of this guidance effective January 1, 2011 did not have a material effect on our consolidated financial statements.

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

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

NOTE 2. REAL ESTATE

Acquisitions

As noted above, as part of the Formation Transactions, we acquired the controlling interests in the Waikiki Beach Walk entities and the Solana Beach Centre entities for Operating Partnership units and common shares with a value of approximately $33.9 million. The contribution or acquisition by merger of interests in these entities was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of such contribution or acquisition. Prior to acquisition, our Predecessor had an 80% noncontrolling interest in the Waikiki Beach Walk entities and a 50% noncontrolling interest in the Solana Beach Centre entities. Upon acquisition, we remeasured the assets and liabilities at fair value and recorded gains of $4.8 million and $41.6 million on the Waikiki Beach Walk entities and the Solana Beach

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

Centre entities, respectively, which are classified as gain on acquisition in the accompanying statement of operations. These gains were calculated based on the difference between the fair value of our Predecessor’s ownership interests of $31.3 million and $26.0 million compared to the Predecessor’s historical cost interests of $26.5 million and $(15.6) million in the Waikiki Beach Walk entities and Solana Beach Centre entities, respectively.

The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by management. Using information available at the time the acquisition closed, we allocated the total consideration to tangible assets and liabilities and identified intangible assets and liabilities.

The allocation of the consideration paid for the acquired assets and liabilities was as follows (in thousands):

 

     Solana
Beach
Towne
Centre
     Solana
Beach
Corporate
Centre
    Waikiki
Beach Walk
Retail and
Hotel
    Total  

Land

   $ 40,980       $ 14,896      $ 76,635      $ 132,511   

Building

     35,605         42,094        122,985        200,684   

Land improvements

     1,750         974        2,276        5,000   

Tenant improvements

     1,487         1,919        1,801        5,207   

Furniture and fixtures

     —           —          7,910        7,910   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total real estate

     79,822         59,883        211,607        351,312   

Cash and cash equivalents

     957         718        13,547        15,222   

Restricted cash

     282         200        1,297        1,779   

Accounts receivable, net

     67         —          2,168        2,235   

Lease intangibles

     6,995         5,536        15,997        28,528   

Prepaid expenses and other assets

     22         45        266        333   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 88,145       $ 66,382      $ 244,882      $ 399,409   
  

 

 

    

 

 

   

 

 

   

 

 

 

Secured notes payable

   $ 39,738       $ 49,252      $ 198,618      $ 287,608   

Fair market favorable debt value

     —           (600     (19,000     (19,600

Notes payable to affiliates

     —           —          14,824        14,824   

Accounts payable and accrued expenses

     924         542        6,520        7,986   

Security deposits payable

     238         320        861        1,419   

Lease intangibles

     11,390         125        3,530        15,045   

Other liabilities and deferred credits

     192         331        442        965   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

   $ 52,482       $ 49,970      $ 205,795      $ 308,247   
  

 

 

    

 

 

   

 

 

   

 

 

 

We have included the results of operations for each of these acquired entities in our consolidated statements of operations from January 19, 2011, the date of acquisition. For the period January 19, 2011 through September 30, 2011, the acquired entities contributed $42.6 million to total revenue, $35.3 million to operating expenses, $7.3 million to operating income and $(5.3) million to net income (loss).

On March 11, 2011, we acquired an approximately 364,000 square foot, 16-story, LEED Platinum certified office building located at 100 SW Main Street, in Portland, Oregon (“First & Main”). The purchase price for First & Main was approximately $128.9 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. The purchase was funded using cash on hand and structured to accommodate a reverse tax deferred exchange in conjunction with the sale of Valencia Corporate Center pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections.

On July 1, 2011, we acquired the Lloyd District Portfolio, consisting of approximately 600,000 rentable square feet on more than 16 acres located in the Lloyd District of Portland, Oregon. The Lloyd District Portfolio is comprised of six office buildings within four contiguous blocks, including (i) a condominium interest in the 20-story Lloyd Tower, (ii) the 16-story Lloyd 700 Building and (iii) four low-rise landmark buildings within Oregon Square. The purchase price was approximately $91.6 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. The purchase was funded using cash on hand. The acquisition was structured to accommodate a possible tax deferred exchange pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections.

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

On September 20, 2011, we acquired the Solana Beach – Highway 101 property, consisting of approximately 1.7 acres located in Solana Beach, California. The property consists primarily of land held for future development. The purchase price was approximately $6.8 million, excluding closing costs of approximately $0.2 million, which are included in other income (expense), net on the statement of operations. The purchase was funded through cash on hand.

The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by management. Using information available at the time the acquisition closed, we allocated the total consideration to tangible assets and liabilities and identified intangible assets and liabilities. We may adjust the preliminary purchase price allocation after obtaining more information about asset valuations and liabilities assumed. The allocation of the purchase price for First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 was as follows (in thousands):

 

     First & Main      Lloyd District
Portfolio
     Solana Beach –
Highway 101
     Total  

Land

   $ 14,697       $ 18,660       $ 6,692       $ 40,049   

Building

     102,597         53,325         107         156,029   

Land improvements

     151         1,444         —           1,595   

Tenant improvements

     6,991         5,909         11         12,911   

Construction in progress

     —           723         —           723   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     124,436         80,061         6,810         211,307   

Accounts receivable, net

     153         —           —           153   

Lease intangibles

     9,578         13,164         40         22,782   

Prepaid expenses and other assets

     296         10         —           306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 134,463       $ 93,235       $ 6,850       $ 234,548   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accounts payable and accrued expenses

   $ 387       $ 188       $ 12       $ 587   

Security deposits payable

     —           426         6         432   

Other liabilities and deferred credits

     —           519         —           519   

Lease intangibles

     5,199         502         —           5,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 5,586       $ 1,635       $ 18       $ 7,239   
  

 

 

    

 

 

    

 

 

    

 

 

 

We have included the results of operations for First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 in our consolidated statements of operations from the date of acquisition. For the period of acquisition through September 30, 2011, First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 contributed $9.6 million to total revenue, $7.9 million to operating expenses, $1.7 million to operating income and $0.5 million to net income.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Waikiki Beach Walk entities, Solana Beach Centre entities, First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 with the historical results of operations of the Company/Predecessor on a pro forma basis, as though the entities had been acquired on January 1, 2010. The pro forma financial information for the nine months ended September 30, 2010, also includes the pro forma results of operations for The Landmark at One Market, which was acquired by the Predecessor on June 30, 2010, as though the entity had been acquired on January 1, 2010. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2010. The pro forma financial information includes adjustments to depreciation expense for acquired property and equipment, adjustments to amortization charges for acquired intangible assets and liabilities, adjustments to straight-line rent revenue and the removal of the gain on acquisition of the controlling interests of the Solana Beach Centre entities and Waikiki Beach Walk entities for the nine months ended September 30, 2011 and The Landmark at One Market for the nine months ended September 30, 2010.

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

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

     Nine months ended September 30,  
     2011     2010  

Total revenue

   $ 166,575      $ 158,003   

Total operating expenses

     120,689        109,312   

Operating income

     45,886        48,691   

Net loss

   $ (26,159 ) (1)    $ (993

 

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

Dispositions

On August 30, 2011, we sold Valencia Corporate Center for a sales price of $31.0 million. The property is located in Santa Clarita, California. The decision to sell Valencia Corporate Center was a result of our desire to focus resources on our core, high-barrier-to-entry markets. The sale was completed as a reverse tax deferred exchange in conjunction with the acquisition of First & Main pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections. As a result of the sale, Valencia Corporate Center no longer serves as a borrowing base property under our revolving credit facility.

We determined that Valencia Corporate Center became a discontinued operation in the third quarter of 2011. We have, therefore, classified Valencia Corporate Center’s net assets, liabilities and operating results as discontinued operations on our balance sheets and our statements of operations for all periods prior to the sale.

Net revenue and net income from the property’s discontinued operations were as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Net revenue from discontinued operations

   $ 767       $ 1,107       $ 3,099       $ 3,314   

Results from discontinued operations

           

Net income from discontinued operations

     327         44         1,119         232   

Gain on sale of real estate from discontinued operations

     3,981         —           3,981         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income from discontinued operations

   $ 4,308       $ 44       $ 5,100       $ 232   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 3. INVESTMENTS IN REAL ESTATE JOINT VENTURES

As of December 31, 2010, our Predecessor had four joint venture arrangements with unrelated third parties. We owned from 25% to 80% of each of these ventures. For two of these ventures, we were the general partner or managing member; however, the outside owners were either a co-general partner or had substantive participating rights, and we could not make significant decisions without the outside owners’ approval. Accordingly, we accounted for these investments under the equity method. We acted as the manager of the three properties owned by these two ventures and received fees in accordance with service contracts (Note 15).

For the joint venture that owned a mixed-use property in Honolulu, Hawaii, we had an effective 80% limited ownership interest in the property; however, the outside owner was the managing member and managed the day-to-day business of the property. In addition, we did not have “kick-out” rights relating to the outside owner’s managing membership interest. Accordingly, we accounted for these investments under the equity method of accounting.

The properties owned by these unconsolidated joint ventures at December 31, 2010 were as follows:

 

Property

  

Type

  

Location

Solana Beach Towne Centre

   Retail    Solana Beach, CA

Solana Beach Corporate Centre

   Office    Solana Beach, CA

Fireman’s Fund Headquarters

   Office    Novato, CA

Waikiki Beach Walk

   Mixed Use    Honolulu, HI

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

As noted above, as part of the Formation Transactions, we acquired the unrelated third party’s interest in Solana Beach Towne Centre, Solana Beach Corporate Centre and Waikiki Beach Walk. We consolidated the operations of these properties subsequent to the Formation Transactions. The Predecessor’s ownership interest in Fireman’s Fund Headquarters was not acquired, and rather the ownership interests in this entity were distributed to its owners as part of the Formation Transactions. In addition, we no longer receive fee income from these ventures.

The Waikiki Beach Walk property has a 47.7% investment in WBW CHP LLC, an entity that was formed to construct a chilled water plant to provide air conditioning to the property and other adjacent facilities. The operating expenses of WBW CHP LLC are recovered through reimbursements from its members. Annual contributions are made to fund maintenance reserves. Upon acquisition of the Waikiki Beach Walk property, the investment in WBW CHP LLC was recorded at its fair value of $0.

NOTE 4. ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES

The following summarizes our acquired lease intangibles, which are included in prepaid expenses and other assets and other liabilities and deferred credits, as of September 30, 2011 and December 31, 2010 (in thousands):

 

     September 30,
2011
    December 31,
2010
 

In-place leases

   $ 60,540      $ 41,108   

Accumulated amortization

     (29,038     (30,901

Above market leases

     43,064        33,557   

Accumulated amortization

     (24,344     (21,433
  

 

 

   

 

 

 

Acquired lease intangible assets, net

     50,222        22,331   
  

 

 

   

 

 

 

Below market leases

     70,332        54,576   

Accumulated accretion

     (20,618     (21,546
  

 

 

   

 

 

 

Acquired lease intangible liabilities, net

   $ 49,714      $ 33,030   
  

 

 

   

 

 

 

NOTE 5. MARKETABLE SECURITIES

Our portfolio of marketable securities is comprised of debt securities that are classified as trading securities. At September 30, 2011, our marketable securities consisted of investments in mortgage-backed securities issued by the Government National Mortgage Association (“GNMA securities”). We report our trading securities at fair value, based on quoted market prices (Level 1 of the fair value hierarchy—see Note 6). Gains and losses resulting from the mark-to-market of these securities are recognized as unrealized gains or losses in income. For the nine months ended September 30, 2011, unrealized losses in our statement of operations, which are included in other income (expense), were insignificant.

NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy for inputs used in measuring fair value is as follows:

 

  1. Level 1 Inputs—quoted prices in active markets for identical assets or liabilities

 

  2. Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities

 

  3. Level 3 Inputs—unobservable inputs

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

Except as disclosed below, the carrying amount of our financial instruments approximates their fair value. The fair value of our secured notes payable and unsecured notes payable is sensitive to fluctuations in interest rates. Discounted cash flow analysis (Level 2) is generally used to estimate the fair value of our mortgages and notes payable, using rates ranging from 3.7% to 8.7%. Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the carrying amount and fair value of our notes payable is as follows (in thousands):

 

     September 30, 2011      December 31, 2010  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Secured notes payable, including discontinued operations

   $ 943,900       $ 974,198       $ 851,547       $ 871,016   

Unsecured notes payable

     —           —         $ 38,013       $ 38,023   

Due to their related party nature, notes with affiliates outstanding at December 31, 2010 cannot be measured at fair value.

NOTE 7. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets consist of the following:

 

     September 30,
2011
     December 31,
2010
 
     (In thousands)  

Leasing commissions, net of accumulated amortization of $13,955 and $13,136, respectively

   $ 17,782       $ 10,724   

Acquired above market leases, net

     18,720         12,124   

Acquired in-place leases, net

     31,502         10,207   

Lease incentives, net of accumulated amortization of $1,757 and $1,480, respectively

     1,943         2,220   

Other intangible assets, net of accumulated amortization of $3,174 and $1,325, respectively

     1,732         364   

Debt issuance costs, net of accumulated amortization of $2,203 and $2,683, respectively

     3,698         2,209   

Prepaid expenses, deposits, and other

     1,744         5,870   
  

 

 

    

 

 

 

Total prepaid expenses and other assets

   $ 77,121       $ 43,718   
  

 

 

    

 

 

 

Lease incentives are amortized over the term of the related lease and included as a reduction of rental income in the statement of operations. Prepaid expenses and deposits included $5.3 million in costs related to the Offering at December 31, 2010, which were recorded as a reduction of capital at the time of the Offering.

NOTE 8. OTHER LIABILITIES AND DEFERRED CREDITS

Other liabilities and deferred credits consist of the following:

 

     September 30,
2011
     December 31,
2010
 
     (In thousands)  

Acquired below market leases, net

   $ 49,714       $ 33,030   

Prepaid rent and deferred revenue

     5,936         5,145   

Straight-line rent liability

     601         622   

Deferred rent expense and lease intangible

     1,139         —     

Deferred compensation

     485         —     

Other liabilities

     80         49   
  

 

 

    

 

 

 

Total other liabilities and deferred credits

   $ 57,955       $ 38,846   
  

 

 

    

 

 

 

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 9. DEBT

The following is a summary of our total debt outstanding as of September 30, 2011 and December 31, 2010 (in thousands):

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

     Principal Balance as of      Stated Interest
Rate as of
September 30, 2011
    Stated Maturity Date  
     September 30,
2011
    December 31,
2010
      

Description of Debt

                         

Secured Notes Payable

         

160 King Street (1)(2)(5)(10)

   $ —       $ 8,564         N/A        November 1, 2012   

Carmel Country Plaza (1)(4)

     —         10,145         N/A        January 2, 2013   

Santa Fe Park RV Resort (1)(4)

     —         1,856         N/A        January 2, 2013   

Lomas Santa Fe Plaza (1)(4)

     —         19,599         N/A        May 1, 2013   

Torrey Reserve—South Court (1)(4)

     —         12,892         N/A        May 1, 2013   

Carmel Mountain Plaza (1)(4)

     —         62,907         N/A        June 1, 2013   

Alamo Quarry Market (4)(6)

     96,538        98,011         5.670     January 8, 2014   

160 King Street (7)

     31,800        32,931         5.680     May 1, 2014   

Waikele Center (5)

     140,700        140,700         5.145     November 1, 2014   

The Shops at Kalakaua (5)

     19,000        19,000         5.449     May 1, 2015   

The Landmark at One Market (5)(6)

     133,000        133,000         5.605     July 5, 2015   

Del Monte Center (5)

     82,300        82,300         4.926     July 8, 2015   

Rancho Carmel Plaza (1)(4)

     —         8,049         N/A        January 1, 2016   

First & Main (5)

     84,500        —          3.965     July 1, 2016   

Imperial Beach Gardens (5)

     20,000        20,000         6.163     September 1, 2016   

Mariner’s Point (5)

     7,700        7,700         6.092     September 1, 2016   

Torrey Reserve—ICW Plaza (1)(5)

     —         43,000         N/A        February 1, 2017   

South Bay Marketplace (5)

     23,000        23,000         5.477     February 10, 2017   

Waikiki Beach Walk—Retail (5)

     130,310        —          5.390     July 1, 2017   

Solana Beach Corporate Centre III-IV (11)

     37,330        —          6.390     August 1, 2017   

Loma Palisades (5)

     73,744        73,744         6.090     July 1, 2018   

Torrey Reserve—North Court (4)

     21,984        22,165         7.220     June 1, 2019   

Torrey Reserve—Torrey Daycare (1)(8)

     —         1,660         N/A        June 1, 2019   

Torrey Reserve—VCI, VCII, VCIII (4)

     7,401        7,462         6.355     June 1, 2020   

Solana Beach Corporate Centre I-II (4)

     11,825        —          5.910     June 1, 2020   

Solana Beach Towne Centre (4)

     39,418        —          5.910     June 1, 2020   
  

 

 

   

 

 

      
     960,550        828,685        
  

 

 

   

 

 

      

Unamortized fair value adjustment

     (16,650     —         
  

 

 

   

 

 

      
     943,900        828,685        
  

 

 

   

 

 

      

Unsecured Notes Payable

         

Waikele Center Notes (1)(2)(5)

     —         5,813         N/A        February 15, 2011   

Landmark Note (1)(2)(5)

     —         19,000         N/A        July 1, 2013   

Carmel Mountain Note (1)(2)(5)

     —         13,200         N/A        August 1, 2013   
  

 

 

   

 

 

      
     —         38,013        
  

 

 

   

 

 

      

Notes Payable to Affiliates

         

Del Monte Center Affiliates (1)(9)

     —         5,266         N/A        March 1, 2013   

Debt of Discontinued Operations

         

Secured Notes Payable

         

Valencia Corporate Center (1)(2)(3)

     —         7,223         N/A        February 1, 2011   

Valencia Corporate Center (1)(4)

     —         15,639         N/A        October 1, 2012   
  

 

 

   

 

 

      
     —         22,862        
  

 

 

   

 

 

      

Total Debt Outstanding

   $ 943,900      $ 894,826        
  

 

 

   

 

 

      
(1) Note was voluntarily repaid in full as part of the Formation Transactions.
(2) Loan was fully or partially guaranteed by owners or affiliates.

 

20


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

(3) Interest rate has floor of 4.50%
(4) Principal payments based on a 30-year amortization schedule.
(5) Interest only.
(6) Maturity Date is the earlier of the loan maturity date under the loan agreement, or the “Anticipated Repayment Date” as specifically defined in the loan agreement, which is the date after which substantial economic penalties apply if the loan has not been paid off.
(7) Principal payments based on a 20-year amortization schedule.
(8) Principal payments based on a 25-year amortization schedule. The interest rate will be reset to the greater of 6.50% or LIBOR plus 4.00% on June 1, 2014.
(9) Principal payments based on a 5-year amortization schedule.
(10) Secured by the owners’ equity interests in the entity.
(11) Loan is interest only through August 2012. Beginning in September 2012, principal payments are based on a 30-year amortization schedule.

We used a portion of net proceeds received from the Offering to repay in full certain outstanding indebtedness, including applicable prepayment costs, exit fees and defeasance costs. The defeasance costs of $24.3 million are included in early extinguishment of debt, along with $0.6 million of unamortized deferred loan fees and $0.9 million of unamortized debt fair value adjustments that were written off related to loans repaid at the time of the Offering. Additionally, we paid $9.0 million in loan transfer and consent fees to lenders, which were expensed as incurred, in order for the lenders to consent to the transfer of the existing loans at certain properties to the Operating Partnership as part of the Formation Transactions.

On June 1, 2011, we, through a subsidiary, entered into a five-year non-recourse mortgage loan with PNC Bank, National Association with an original principal amount of $84.5 million. The loan is secured by a first-priority deed of trust on First & Main and an assignment of all leases, rents and security deposits relating to First & Main. The loan has a maturity date of July 1, 2016, bears interest at a fixed rate per annum of 3.965% and is interest only.

Certain loans require us to comply with various financial covenants, including the maintenance of minimum debt coverage ratios. As of September 30, 2011, we were in compliance with all loan covenants.

Revolving Credit Facility

On January 19, 2011, in connection with the Offering, we entered into a credit facility pursuant to which a group of lenders provided commitments for a revolving credit facility allowing borrowings of up to $250.0 million. At September 30, 2011, our maximum allowable borrowing amount was $197.5 million. The credit facility has an initial term of three years, and we have the option to extend the term for one additional year if we meet specified requirements. The credit facility has an accordion feature that may allow us to increase the availability thereunder up to $400.0 million, subject to meeting specified requirements and obtaining additional commitments from lenders. No amounts have been borrowed on the credit facility to date. The credit facility bears interest at the rate of either LIBOR or a base rate, in each case plus a margin that will vary depending on our leverage ratio. The amount available for us to borrow under the credit facility is subject to the net operating income of our properties that form the borrowing base of the facility and a minimum implied debt yield of such properties.

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

 

   

a maximum leverage ratio (defined as total indebtedness net of certain unrestricted cash and cash equivalents to total asset value) of 65% on or prior to December 31, 2011 and 60% thereafter,

 

   

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

 

   

a maximum secured leverage ratio (defined as total secured indebtedness to secured total asset value) of 57.5% on or prior to December 31, 2012 and 50% thereafter,

 

   

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

 

   

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

The credit facility provides that our annual distributions may not exceed the greater of (1) 95.0% of our funds from operations (“FFO”) or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution, we may be precluded from making distributions other than those necessary to qualify and maintain our status as a REIT.

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

 

21


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

On March 7, 2011, the credit facility was amended to allow us or our Operating Partnership to purchase GNMA securities with maturities of up to 30 years.

NOTE 10. EQUITY

Noncontrolling Interests

Noncontrolling interests in our Operating Partnership are interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of 18,396,089 common units (the “noncontrolling common units”), and represented approximately 32% of the ownership interests in our Operating Partnership at September 30, 2011. 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.

On February 14, 2011, we completed a private placement transaction of 251,050 common units for approximately $5.4 million.

Dividends

The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units for the nine months ended September 30, 2011:

 

Period

   Amount  per
Share/Unit
    

Period Covered

  

Dividend Paid Date

First Quarter 2011

   $ 0.17       January 19, 2011 to March 31, 2011    March 31, 2011

Second Quarter 2011

   $ 0.21       April 1, 2011 to June 30, 2011    June 30, 2011

Third Quarter 2011

   $ 0.21       July 1, 2011 to September 30, 2011    September 30, 2011

Taxability of Dividends

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

Stock-Based Compensation

Concurrently with the closing of the Offering, we made grants of restricted shares of our common stock to certain executive officers pursuant to the terms of their employment agreements. These awards were made pursuant to our 2011 Equity Incentive Award Plan (the “2011 Plan”). At such time, we granted to such executive officers a total of 198,000 shares that are subject to timing-based vesting and 297,000 shares that are subject to performance-based vesting, with fair market values of $4.1 million for the timing-based vesting awards and $3.9 million for the performance-based vesting awards. Those awards subject to time-based vesting will vest, subject to the recipient’s continued employment, in two substantially equal installments on each of the third and fourth anniversaries of the date of grant. The vesting of those restricted stock awards subject to performance-based vesting is based on the achievement of absolute and relative total shareholder return hurdles over a three-year performance period, commencing on January 19, 2011. Following the completion of the three-year performance period, our compensation committee will determine the number of shares to which the executive officer is entitled based on our performance relative to the performance hurdles set forth in the restricted stock award agreement he entered into in connection with his initial award grant. These shares will then vest in two substantially equal installments, with the first installment vesting on the third anniversary of the date of grant and the second installment vesting on the fourth anniversary of the date of grant, subject to the executive officer’s continued employment on those dates.

Concurrently with the closing of the Offering, we also granted each of our non-employee directors 1,951 restricted shares of our common stock pursuant to the 2011 Plan, other than one who was granted 1,952 restricted shares. These awards of restricted stock will vest ratably as to one-third of the shares granted on each of the first three anniversaries of the date of grant, subject to the director’s continued service on our board of directors, and had an aggregate fair value of $0.2 million on the date of the grants. On June 29, 2011, one of our directors notified us of his resignation as a director of the Company and, as a result, immediately forfeited the 1,951 restricted shares of our common stock previously granted to him, none of which had vested. On August 5, 2011, we granted 1,957 restricted shares of our common stock to a new non-employee director, with a fair value of $0.04 million on the date of the grant. The restricted stock will vest ratably as to one-third of the shares granted on each of the first three anniversaries of the date of grant, subject to the director’s continued service on our board of directors.

 

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

On March 16, 2011 we granted a total of 123,950 restricted shares of our common stock to certain other employees pursuant to the 2011 Plan with a fair value of $1.6 million. These shares are subject to performance-based vesting, with the terms described above related to performance-based vesting.

For the performance-based stock awards, the fair value of the awards was estimated using a Monte Carlo Simulation model. The volatilities of the returns on the stock price of the Company and the group REITs were estimated based on a three year look-back period. The expected growth rate of the stock prices over the “derived service period” of the employee is determined with consideration of the risk free rate as of the grant date. For the restricted stock grants that are time-vesting, we estimate the stock compensation expense based on the fair value of the stock at the grant date.

None of the restricted shares were vested at September 30, 2011. We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $1.9 million in noncash compensation expense for the nine months ended September 30, 2011, which is included in general and administrative expense on the statement of operations. Unrecognized compensation expense was $7.8 million.

Earnings Per Share

We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating security is calculated according to dividends declared and participation rights in undistributed earnings. For the three and nine months ended September 30, 2011, we had a weighted average of approximately 627,967 and 561,564 unvested shares outstanding, respectively, which are considered participating securities. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares.

Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method. For the three and nine months ended September 30, 2011, 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.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(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, 2011
    Nine Months Ended
September 30, 2011
 

Numerator

    

Income from continuing operations

   $ 310      $ 13,569   

Less: Net income attributable to restricted shares

     (132     (350

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

     —          2,454   

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

     —          (17,009

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

     (57     427   
  

 

 

   

 

 

 

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

     121        (909

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

     2,931        3,482   
  

 

 

   

 

 

 

Net income attributable to common stockholders—basic

   $ 3,052      $ 2,573   
  

 

 

   

 

 

 

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

   $ 121      $ (909

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

     57        (427
  

 

 

   

 

 

 

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

     178        (1,336

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

     2,931        3,482   

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

     1,377        1,636   
  

 

 

   

 

 

 

Net income attributable to common stockholders—diluted

   $ 4,486      $ 3,782   
  

 

 

   

 

 

 

Denominator

    

Weighted average common shares outstanding—basic

     38,655,084        36,106,397   

Effect of dilutive securities—conversion of Operating Partnership units

     18,396,089        17,159,251   
  

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

     57,051,173        53,265,648   
  

 

 

   

 

 

 

Earnings (loss) per common share—basic

    

Continuing operations

   $ 0.00      $ (0.03

Discontinued operations

     0.08        0.10   
  

 

 

   

 

 

 
   $ 0.08      $ 0.07   
  

 

 

   

 

 

 

Earnings (loss) per common share—diluted

    

Continuing operations

   $ 0.00      $ (0.03

Discontinued operations

     0.08        0.10   
  

 

 

   

 

 

 
   $ 0.08      $ 0.07   
  

 

 

   

 

 

 

 

 

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Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

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.

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

Commitments

At The Landmark at One Market, we lease, as lessee, a building adjacent to The Landmark under an operating lease effective through June 30, 2016, which we have the option to extend until 2026 by way of two five-year extension options.

We acquired the Waikiki Beach Walk property as part of the Formation Transactions on January 19, 2011. At Waikiki Beach Walk, we sublease a portion of the building of which Quiksilver is currently in possession, under an operating lease effective through December 31, 2021, which we have the option to extend at fair rental value in the event the sublessor extends its lease for the space with the master landlord. The lease payments under the lease will increase by approximately 3.4% annually through 2017 and, thereafter, will be equal to fair rental value, as defined in the lease, through lease expiration.

Current minimum annual payments under the leases are as follows, as of September 30, 2011 (in thousands):

 

Year Ending December 31,

  

2011 (three months ending December 31, 2011)

   $ 599   

2012

     2,436   

2013

     2,502   

2014

     2,569   

2015

     2,636   

Thereafter

     5,411 (1) 
  

 

 

 
   $ 16,153   
  

 

 

 

 

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

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

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

A wholly owned subsidiary of our Operating Partnership, WBW Hotel Lessee LLC, entered into a franchise license agreement with Embassy Suites Franchise LLC, the franchisor of the brand “Embassy Suites™,” to obtain the non-exclusive right to operate the hotel under the Embassy Suites 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.

In connection with our acquisition of Lloyd District Portfolio, we have entered into a property management agreement with Ashforth Pacific, Inc. (“Ashforth”) pursuant to which Ashforth manages and operates Lloyd District Portfolio. Pursuant to the property management agreement, we pay Ashforth a monthly management fee of 3.5% of “gross receipts”, as defined in the property management agreement, as well as leasing commissions and construction oversight fees in certain situations. The property management agreement is for an initial term of two years, with three one-year renewal options, exercisable by us in our sole discretion. The property management agreement may not be terminated by us or by Ashforth without cause during the initial term. Since entering into the property management agreement, Ashforth has solicited our consent to assign their interest as “manager” in the property management agreement, to Langley Investment Properties, Inc. We consented to such assignment subject to certain conditions; however, the assignment has not yet closed.

Our Del Monte Center property has ongoing environmental remediation related to ground water contamination. The environmental issue existed at purchase and remediation is expected to conclude within the next three years. The work performed is financed through an escrow account funded by the seller upon purchase of the property. We believe the funds in the escrow account are sufficient for the remaining work to be performed. However, if further work is required costing more than the remaining escrow funds, we could be required to pay such overage, although we may have a contractual claim for such costs against the prior owner or our environmental remediation consultant.

Concentrations of Credit Risk

Our properties are located in Southern California, Northern California, Hawaii, Oregon and Texas. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate. Thirteen of our consolidated properties are located in Southern California, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. Further, tenants in the retail industry accounted for 42% of total revenues for the nine months ended September 30, 2011. This makes us susceptible to demand for retail rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the retail industry. For the nine months ended September 30, 2011 and 2010, no tenant accounted for more than 10% of our total rental revenue.

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, 2011, minimum future rentals from noncancelable operating leases before any reserve for uncollectible amounts and assuming no early lease terminations, at our office and retail properties and the retail portion of our mixed-use property are as follows for the years/period ending December 31 (in thousands):

 

2011 (three months ending December 31, 2011)

   $ 38,527   

2012

     134,606   

2013

     116,577   

2014

     93,330   

2015

     81,000   

Thereafter

     205,515   
  

 

 

 

Total

   $ 669,555   
  

 

 

 

 

26


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

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,
 
     2011      2010      2011      2010  

Minimum rents

           

Retail

   $ 15,847       $ 14,548       $ 48,062       $ 43,114   

Office

     16,423         9,708         41,324         18,792   

Multifamily

     3,501         3,327         9,789         9,899   

Mixed-use

     2,239         —           6,275         —     

Cost reimbursement

     6,406         5,774         18,963         14,980   

Percentage rent

     455         272         1,090         700   

Hotel revenue

     8,010         —           20,274         —     

Other

     397         274         1,083         728   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental income

   $ 53,278       $ 33,903       $ 146,860       $ 88,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Minimum rents include $2.0 million and $0.1 million for the three months ended September 30, 2011 and 2010, respectively, and $3.6 million and $0.7 million for the nine months ended September 30, 2011 and 2010, respectively, to recognize minimum rents on a straight-line basis. In addition, minimum rents include $(0.9) million and $(0.6) million for the three months ended September 30, 2011 and 2010, respectively, and $(1.6) million and $(1.5) million for the nine months ended September 30, 2011 and 2010, respectively, to recognize the amortization of above and below market leases.

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Rental operating

   $ 6,031       $ 3,834       $ 15,747       $ 9,592   

Hotel operating

     5,168         —           13,819         —     

Repairs and maintenance

     2,497         1,069         6,073         3,861   

Marketing

     402         209         1,261         462   

Rent

     555         566         2,154         566   

Hawaii excise tax

     1,028         286         2,516         812   

Management fees

     506         13         1,150         65   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental expenses

   $ 16,187       $ 5,977       $ 42,720       $ 15,358   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 14. OTHER INCOME (EXPENSE)

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

 

27


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Income tax expense

   $ (309   $ —        $ (690   $ —     

Loss from real estate joint ventures

     —          (541     (188     (3,431

Acquisition related expenses

     (187     —          (431     —     

Fee income from real estate joint ventures

     —          258        44        2,201   

Interest and investment income

     388        32        1,086        63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (108   $ (251   $ (179   $ (1,167
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 15. RELATED PARTY TRANSACTIONS

Prior to the Offering and Formation Transactions, we acted as the manager for certain unconsolidated real estate joint ventures and earned fees for these services (excluding Waikiki Beach Walk). Each unconsolidated joint venture (excluding Waikiki Beach Walk) had a master management agreement with additional agreements covering property management, construction management, acquisition, disposition and leasing and asset management. These agreements provided for the following fees to be paid to us by these unconsolidated joint ventures:

 

   

Property Management Fees—Property management fees were incurred for the operation and management of the properties. Fees ranged from 1.25% to 5.5% of gross monthly cash collections each month, with minimum monthly fees ranging from $2,500 to $5,000.

 

   

Construction Management Fees—Construction management fees were incurred for the management and supervision of construction projects owned by the unconsolidated joint ventures. Fees ranged from 3.0% to 5.0% of construction and development costs on buildings and improvements for most properties although certain agreements provided for a flat fee. For tenant improvements, fees were 10.0% of costs for projects where we directly supervised construction subcontractors or 3.0% for projects where we managed a general contractor, plus hourly fees for employees directly working on the tenant improvements.

 

   

Acquisition and Disposition Fees—Acquisition and disposition fees were incurred for services provided in conjunction with acquisition and disposition of the properties owned by the unconsolidated real estate joint venture. Fees were either 0.5% or 1.0% of the total value of all the acquisition or disposition.

 

   

Leasing Fees—Leasing fees were incurred for services provided to procure tenants for the properties owned by the unconsolidated joint venture. Fees were 1.0% of the total value of all leases executed for the properties, including new leases, renewals, extensions or other modifications.

 

   

Asset Management Fees/Financing Fees—Asset management fees were incurred for evaluating property value, performance and/or condition, appealing property assessments or tax valuations, recommending ways to enhance value and procuring financing. The fees were charged at hourly rates ranging from $40 to $125 for asset management services. In addition, financing fees were paid for any permanent financing placed on the properties, with fees of either of 25 to 50 basis points of the financed amount or a flat fee of $50,000.

In addition to the fees noted above, certain unconsolidated joint ventures also reimbursed us for monthly maintenance and facilities management services provided to the properties owned by the unconsolidated joint ventures.

Fees earned by us from the unconsolidated joint ventures are as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Property management fees

   $ —         $ 222       $ 38       $ 1,013   

Leasing fees

     —           —           —           957   

Asset management fees/financing fees

     —           —           —           130   

Maintenance reimbursements

     —           30         6         90   

Construction management fees

     —           6         —           11   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 258       $ 44       $ 2,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

Subsequent to the Formation Transactions, we no longer earn fees from unconsolidated joint ventures.

At December 31, 2010, accounts payable and accrued expenses include $0.3 million related to amounts paid by AAI on behalf of the properties for loan transfer and consent fee and loan defeasance fee deposits, which was repaid upon completion of the Offering.

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

 

     As of and for the nine
months ended
September 30,
 
     2011      2010  

Notes receivable

   $ —         $ 21,769   

Interest income

   $ 3       $ 43   

We received unsecured loans on January 15, 2008, from certain of the entities that own Del Monte Center for $12.0 million, the proceeds of which were used to fund construction at the property. The notes bore interest at 10.0% and required monthly principal and interest payments until maturity on March 1, 2013. The notes were classified as notes payable to affiliates. The notes were repaid using proceeds from the Offering or were settled as part of the Formation Transactions. Interest expense related to the notes was $0.03 million and $0.5 million for the nine months ended September 30, 2011 and 2010, respectively.

At ICW Plaza, we lease space to Insurance Company of the West, which is under the indirect control of Ernest Rady, our Executive Chairman of the Board. Rental revenue recognized on the leases of $1.7 million and $1.9 million for the nine months ended September 30, 2011 and 2010, respectively, is included in rental income. In May, the lease agreement at ICW Plaza was amended to terminate the lease of approximately 12,000 square feet and reduce base rent on one suite in line with market rent. Additionally, we leased space to Insurance Company of the West at Valencia Corporate Center until the sale of Valencia Corporate Center on August 30, 2011, and rental revenue recognized on these leases of $1.2 million and $1.3 million for the nine months ended September 30, 2011 and 2010, respectively, is included in discontinued operations.

16. SEGMENT REPORTING

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

Asset information by segment is not reported because we do not use this measure to assess performance and make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses, interest expense, depreciation and amortization expense and other income and expense are not included in segment profit as our internal reporting addresses these items on a corporate level.

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

 

29


Table of Contents

American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Total Retail

        

Property revenue

   $ 21,494      $ 20,464      $ 64,923      $ 58,706   

Property expense

     (5,981     (4,855     (17,433     (14,855
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     15,513        15,609        47,490        43,851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Office

        

Property revenue

     18,335        10,898        45,767        21,577   

Property expense

     (6,209     (3,309     (15,029     (6,256
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     12,126        7,589        30,738        15,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Multifamily

        

Property revenue

     3,803        3,601        10,588        10,692   

Property expense

     (1,387     (1,255     (3,974     (3,455
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     2,416        2,346        6,614        7,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Mixed-Use

        

Property revenue

     12,661        —          32,998        —     

Property expense

     (8,000     —          (21,084     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment profit

     4,661        —          11,914        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
        
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segments’ profit

   $ 34,716      $ 25,544      $ 96,756      $ 66,409   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

September 30, 2011

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Total segments’ profit

   $ 34,716      $ 25,544      $ 96,756      $ 66,409   

General and administrative

     (3,733     (1,515     (10,786     (4,908

Depreciation and amortization

     (15,827     (12,599     (41,916     (26,714

Interest expense

     (14,738     (12,416     (41,791     (32,979

Early extinguishment of debt

     —          —          (25,867     —     

Loan transfer and consent fees

     —          —          (9,019     —     

Gain on acquisition

     —          —          46,371        4,297   

Other income (expense), net

     (108     (251     (179     (1,167
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     310        (1,237     13,569        4,938   

Discontinued operations

        

Income from discontinued operations

     327        44        1,119        232   

Gain on sale of real estate property

     3,981        —          3,981        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Results from discontinued operations

     4,308        44        5,100        232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     4,618        (1,193     18,669        5,170   

Net income attributable to restricted shares

     (132     —          (350     —     

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

     —          1,042        2,458        1,941   

Net (income) loss attributable to Predecessor’s controlled owners’ equity

     —          151        (16,995     (7,111

Net income attributable to unitholders in the Operating Partnership

     (1,434     —          (1,209     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American Assets Trust, Inc. stockholders

   $ 3,052      $ —        $ 2,573      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

   

adverse economic or real estate developments in our markets;

 

   

our failure to generate sufficient cash flows to service our outstanding indebtedness;

 

   

defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants;

 

   

difficulties in identifying properties to acquire and completing acquisitions;

 

   

our failure to successfully operate acquired properties and operations;

 

   

fluctuations in interest rates and increased operating costs;

 

   

risks related to joint venture arrangements;

 

   

our failure to obtain necessary outside financing;

 

   

on-going litigation;

 

   

general economic conditions;

 

   

financial market fluctuations;

 

   

risks that affect the general retail environment;

 

   

the competitive environment in which we operate;

 

   

decreased rental rates or increased vacancy rates;

 

   

conflicts of interests with our officers;

 

   

lack or insufficient amounts of insurance;

 

   

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

 

   

other factors affecting the real estate industry generally;

 

   

limitations imposed on our business and our ability to satisfy complex rules in order for us to continue to qualify as a REIT for U.S. federal income tax purposes; and

 

   

changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes. For a further discussion of these and other factors, see the section entitled “Item 1A. Risk Factors” contained herein, in our annual report on Form 10-K for the year ended December 31, 2010, and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.

 

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Overview

References to “we,” “our,” “us” and “our company” refer to American Assets Trust, Inc., a Maryland corporation, together with our consolidated subsidiaries, including American Assets Trust, L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this report as our Operating Partnership.

We are a full service, vertically integrated and self-administered REIT that owns, operates, acquires and develops high quality retail, office, multifamily and mixed-use properties in attractive, high-barrier-to-entry markets primarily in Southern California, Northern California, Oregon and Hawaii. As of September 30, 2011 our portfolio is comprised of ten retail shopping centers; six office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and four multifamily properties. Our core markets include San Diego, the San Francisco Bay Area, Portland, Oregon and Oahu, Hawaii. We are a Maryland corporation formed on July 16, 2010 to acquire the entities owning various controlling and noncontrolling interests in real estate assets owned and/or managed by Ernest S. Rady or his affiliates, including the Ernest Rady Trust U/D/T March 13, 1983, or the Rady Trust, and did not have any operating activity until the consummation of our initial public offering, or the Offering, and the related acquisition of our Predecessor (as defined below) on January 19, 2011. After the completion of the Offering and the Formation Transactions (as defined below) on January 19, 2011, our operations have been carried on through our Operating Partnership. Our company, as the sole general partner of our Operating Partnership, has control of our Operating Partnership and owned 68.0% of our operating partnership as of September 30, 2011. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership.

Our “Predecessor” is not a legal entity but rather a combination of entities whose assets included entities owned and/or controlled by Ernest S. Rady and his affiliates, including the Rady Trust, which in turn owned (1) controlling interests in entities owning 17 properties and the property management business of American Assets, Inc. and (2) noncontrolling interests in entities owning four properties (the assets described at (1) and (2) are the “Acquired Assets,” and do not include our Predecessor’s noncontrolling 25% ownership interest in Novato FF Venture, LLC, the entity that owns the Fireman’s Fund Headquarters in Novato, California.). The “Formation Transactions” included the acquisition by our Operating Partnership of the (a) Acquired Assets, (b) the entities that own Waikiki Beach Walk (a mixed-used property consisting of a retail portion and a hotel portion), or the Waikiki Beach Walk entities, and (c) the entities that own Solana Beach Towne Centre and Solana Beach Corporate Centre, or the Solana Beach Centre entities (including our Predecessor’s ownership interest in these entities).

As noted above, since the Offering and the Formation Transactions occurred on January 19, 2011, the results of operations and financial condition for the entities acquired by us in connection with the Offering and related Formation Transactions are not included in certain historical financial statements. More specifically, our results of operations and financial condition for the nine months ended September 30, 2010 reflect the results of operations and financial condition for our Predecessor. Our results of operations for the nine months ended September 30, 2011 reflect the results of operation and financial condition for our Predecessor together with the entities we acquired at the time of the Offering, namely, the Waikiki Beach Walk entities and the Solana Beach Centre entities, as well as First & Main, Lloyd District Portfolio, and Solana Beach – Highway 101, each acquired subsequent to the Offering and discussed in more detail under “Acquisitions and Dispositions”. The results of operations for each of these acquisitions are included in our consolidated statements of operations only from the date of acquisition.

Acquisitions and Dispositions

Acquisitions

As part of the Formation Transactions, we acquired the controlling interests in the Waikiki Beach Walk entities and the Solana Beach Centre entities for Operating Partnership units and common shares with a value of approximately $33.9 million.

On March 11, 2011, we acquired an approximately 364,000 square foot, 16-story, LEED Platinum certified office building located at 100 SW Main Street, in Portland, Oregon, or First & Main. The purchase price for First & Main was approximately $128.9 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. The purchase was funded using cash on hand and structured to accommodate a reverse tax deferred exchange in conjunction with the sale of Valencia Corporate Center pursuant to the provisions of Section 1031 of the Internal Revenue Code of 1986, as amended, or the Code, and applicable state revenue and taxation code sections.

On July 1, 2011, we acquired the Lloyd District Portfolio, consisting of approximately 600,000 rentable square feet on more than 16 acres located in the Lloyd District of Portland, Oregon. The Lloyd District Portfolio is comprised of six office buildings within four contiguous blocks, including (i) a condominium interest in the 20-story Lloyd Tower, (ii) the 16-story Lloyd 700 Building and (iii) four low-rise landmark buildings within Oregon Square. The purchase price was approximately $91.6 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. The purchase was funded using cash on hand. The acquisition was structured to accommodate a possible tax deferred exchange pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections. We intend to evaluate further

 

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developing this property through the addition of retail, office and/or residential mixed-use development. However, we can offer no assurances that we will ultimately further develop this property.

On September 20, 2011, we acquired the Solana Beach – Highway 101 property, consisting of approximately 1.7 acres located in Solana Beach, California. The purchase price was approximately $6.8 million, excluding closing costs of approximately $0.2 million, which are included in other income (expense), net on the statement of operations. The purchase was funded through cash on hand. We intend to evaluate developing this property into a retail, office and/or residential mixed-use site. However, we can offer no assurances that we will ultimately develop this property. The property currently includes approximately 2,800 rentable square feet, which we plan to lease until development begins, if at all.

Dispositions

On August 30, 2011, we sold Valencia Corporate Center for a sales price of $31.0 million. The property is located in Santa Clarita, California. The decision to sell Valencia Corporate Center was a result of our desire to focus resources on our core, high-barrier-to-entry markets. The sale was completed as a reverse tax deferred exchange in conjunction with the acquisition of First & Main pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections. As a result of the sale, Valencia Corporate Center no longer serves as a borrowing base property under our revolving credit facility.

Critical Accounting Policies

We identified certain critical accounting policies that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2010. We have not made any material changes to these policies during the periods covered by this report.

Results of Operations

For our discussion of results of operations, we have provided information on a total portfolio and same-store basis. Information provided on a same-store basis includes the results of properties that we owned and operated for the entirety of both periods being compared, except for properties held for development and properties classified as discontinued operations, which are excluded for both periods.

Comparison of the three months ended September 30, 2011 to the three months ended September 30, 2010

The following table summarizes our consolidated results of operations for the three months ended September 30, 2011 compared to our Predecessor’s combined results of operations for the three months ended September 30, 2010. As of September 30, 2011, our operating portfolio was comprised of 21 retail, office, multifamily and mixed-use properties with an aggregate of approximately 5.2 million rentable square feet of retail and office space, 922 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of September 30, 2011, we owned land at five of our properties that we classified as held for development. As of September 30, 2010, our Predecessor’s operating portfolio was comprised of 17 properties with an aggregate of approximately 4.0 million rentable square feet of retail and office space and 922 residential units (including 122 RV spaces). The Predecessor also owned land at two of its properties that it classified as held for development. At September 30, 2010, our Predecessor had noncontrolling investments in four properties, which were accounted for under the equity method of accounting. The Landmark at One Market was acquired on June 30, 2010 by our Predecessor. Prior to June 30, 2010, our Predecessor had a noncontrolling interest in The Landmark at One Market and accounted for its investment under the equity method of accounting.

 

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The following table sets forth selected data from our consolidated/combined statements of operations for the three months ended September 30, 2011 and 2010 (dollars in thousands):

 

     Three Months Ended
September 30,
    Change     %  
     2011     2010      

Revenues

        

Rental income

   $ 53,278      $ 33,903      $ 19,375        57

Other property income

     3,015        1,060        1,955        184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property revenues

     56,293        34,963        21,330        61   

Expenses

        

Rental expenses

     16,187        5,977        10,210        171   

Real estate taxes

     5,390        3,442        1,948        57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property expenses

     21,577        9,419        12,158        129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property income

     34,716        25,544        9,172        36   
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative

     (3,733     (1,515     (2,218     146   

Depreciation and amortization

     (15,827     (12,599     (3,228     26   

Interest expense

     (14,738     (12,416     (2,322     19   

Other income (expense), net

     (108     (251     143        (57
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other, net

     (34,406     (26,781     (7,625     28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     310        (1,237     1,547        (125

Discontinued operations

        

Income from discontinued operations

     327        44        283        643   

Gain on sale of real estate property

     3,981        —          3,981        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Results from discontinued operations

     4,308        44        4,264        9,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     4,618        (1,193     5,811        (487

Net income attributable to restricted shares

     (132     —          (132     (100

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

     —          1,042        (1,042     (100

Net loss attributable to Predecessor’s controlled owners’ equity

     —          151        (151     (100

Net income attributable to unitholders in the Operating Partnership

     (1,434     —          (1,434     (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American Assets Trust, Inc. stockholders

   $ 3,052      $ —        $ 3,052        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased $21.3 million, or 61%, to $56.3 million for the three months ended September 30, 2011 compared to $35.0 million for the three months ended September 30, 2010. The percentage leased was as follows for each segment as of September 30, 2011 and 2010:

 

     Percentage Leased  (1)
September 30,
 
     2011     2010  

Retail

     92.6 %(2)      97.3

Office

     94.1        96.5  (4) 

Multifamily

     94.4        90.5   

Mixed-Use

     99.2      (3)      —     

 

(1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of September 30, 2011 or September 30, 2010, as applicable.
(2) The percentage leased includes the vacant building acquired at Carmel Mountain Plaza in November 2010. Excluding the acquired building, the percentage leased is 95.1%.
(3) Includes the retail portion of the mixed-use property only.
(4) Excludes Valencia Corporate Center, which was sold on August 30, 2011.

 

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The increase in total property revenue is attributable primarily to the factors discussed below.

Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased $19.4 million, or 57%, to $53.3 million for the three months ended September 30, 2011 compared to $33.9 million for the three months ended September 30, 2010. Rental revenue by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio (1)  
     Three Months Ended
September 30,
     Change      %     Three Months Ended
September 30,
     Change     %  
     2011      2010           2011      2010       

Retail

   $ 21,136       $ 20,069       $ 1,067         5   $ 19,214       $ 19,339       $ (125     (1 )% 

Office

     17,282         10,504         6,778         65        10,034         10,455         (421     (4

Multifamily

     3,504         3,330         174         5        3,504         3,330         174        5   

Mixed-Use

     11,356         —           11,356         100        —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 53,278       $ 33,903       $ 19,375         57   $ 32,752       $ 33,124       $ (372     (1 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) For this table and tables following, the same-store portfolio excludes: Solana Beach Towne Centre, Solana Beach Corporate Centre and the Waikiki Beach Walk entities acquired on January 19, 2011; First & Main acquired on March 11, 2011; Lloyd District Portfolio acquired on July 1, 2011; and land held for development. Valencia Corporate Center is excluded from both the total portfolio and same-store portfolio, as it is classified as discontinued operations for all periods presented.

The increase in retail rental revenue was primarily caused by the acquisition of Solana Beach Towne Centre on January 19, 2011. On a same-store basis, retail rental revenue decreased $0.1 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This decrease was primarily due to Borders closing (and the rejection of the leases in bankruptcy) at three of our properties, which resulted in a decrease in rental revenue of $0.3 million for the three months ended September 30, 2011 compared to 2010. This decrease was offset by increased rental revenue related to the increase in the average percentage leased.

The increase in office rental revenue was primarily caused by the acquisition of Solana Beach Corporate Centre on January 19, 2011, First & Main on March 11, 2011 and Lloyd District Portfolio on July 1, 2011, which had rental revenue of $1.4 million, $2.7 million and $3.1 million, respectively, for the three months ended September 30, 2011. Same-store office rental revenue decreased $0.4 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This decrease was primarily due a decrease in rental rates on new leases and renewals and a decrease in the percentage leased of the same-store portfolio.

The increase in multifamily rental revenue was primarily due to an increase in the percentage leased.

The rental revenue for our mixed-use segment represents rental revenue recognized for minimum base rent, cost reimbursements, percentage rents and other rents charged to retail tenants and rental of hotel rooms. The increase in mixed-use rental revenue was due to the acquisition of our mixed-use property, Waikiki Beach Walk, in our Formation Transactions on January 19, 2011.

Other property income. Other property income increased $1.9 million, or 184%, to $3.0 million for the three months ended September 30, 2011, compared to $1.1 million for the three months ended September 30, 2010. Other property income by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio  
     Three Months Ended
September 30,
     Change     %     Three Months Ended
September 30,
     Change     %  
     2011      2010          2011      2010       

Retail

   $ 358       $ 395       $ (37     (9 )%    $ 358       $ 395       $ (37     (9 )% 

Office

     1,053         394         659        167        558         394         164        42   

Multifamily

     299         271         28        10        299         271         28        10   

Mixed-Use

     1,305         —           1,305        100        —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,015       $ 1,060       $ 1,955        184   $ 1,215       $ 1,060       $ 155        15
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The increase in office other property income was primarily caused by the acquisition of Lloyd District Portfolio on July 1, 2011, which had parking income of $0.4 million for the three months ended September 30, 2011. Same-store office other property income increased due to an increase of $0.2 million in parking income at the 160 King Street property due to incremental use of the parking

 

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structure by the public during construction at a nearby office building, along with those attending San Francisco Giants games at AT&T Park across the street from the property.

The other property income for our mixed-use segment represents Hawaii general excise tax reimbursements, parking income related to retail tenants and guests and sales of food and beverages and other services provided to hotel guests. The increase in mixed-use other property income was due to the acquisition of our mixed-use property, Waikiki Beach Walk, in our Formation Transactions on January 19, 2011.

Property Expenses

Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $12.2 million, or 129%, to $21.6 million for the three months ended September 30, 2011, compared to $9.4 million for the three months ended September 30, 2010. This increase in total property expenses is attributable primarily to the factors discussed below.

Rental Expenses. Rental expenses increased $10.2 million, or 171%, to $16.2 million for the three months ended September 30, 2011, compared to $6.0 million for the three months ended September 30, 2010. Rental expense by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio  
     Three Months Ended
September 30,
     Change     %     Three Months Ended
September 30,
     Change     %  
     2011      2010          2011      2010       

Retail

   $ 3,541       $ 2,741       $ 800        29   $ 3,246       $ 2,741       $ 505        18

Office

     4,071         2,157         1,914        89        2,222         2,156         66        3   

Multifamily

     1,026         1,079         (53     (5     1,026         1,079         (53     (5

Mixed-Use

     7,549         —           7,549        100        —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 16,187       $ 5,977       $ 10,210        171   $ 6,494       $ 5,976       $ 518        9
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The increase in retail rental expenses was primarily caused by the acquisition of Solana Beach Towne Centre on January 19, 2011, which had rental expenses of $0.3 million for the three months ended September 30, 2011. On a same-store basis, rental expenses increased $0.5 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This increase was primarily due to additional maintenance performed, additional marketing costs and increased operating costs related to the increase in the average percentage leased for 2011.

The increase in office rental expenses was primarily caused by the acquisition of Solana Beach Corporate Centre on January 19, 2011, First & Main on March 11, 2011 and Lloyd District Portfolio on July 1, 2011, which had rental expenses of $0.2 million, $0.4 million and $1.2 million, respectively, for the three months ended September 30, 2011.

The mixed-use rental expenses increased as the result of our acquisition of the Waikiki Beach Walk mixed-use site on January 19, 2011.

Real Estate Taxes. Real estate tax expense increased $2.0 million, or 57%, to $5.4 million for the three months ended September 30, 2011, compared to $3.4 million for the three months ended September 30, 2010. Real estate tax expense by segment was as follows (dollars in thousands):

 

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     Total Portfolio     Same-Store Portfolio  
     Three Months Ended
September 30,
     Change      %     Three Months Ended
September 30,
     Change      %  
     2011      2010           2011      2010        

Retail

   $ 2,440       $ 2,114       $ 326         15   $ 2,260       $ 2,114       $ 146         7

Office

     2,138         1,152         986         86        1,227         1,140         87         8   

Multifamily

     361         176         185         105        361         176         185         105   

Mixed-Use

     451         —           451         100        —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,390       $ 3,442       $ 1,948         57   $ 3,848       $ 3,430       $ 418         12
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The increase in retail real estate taxes was primarily caused by additional real estate tax accruals of $0.2 million for expected supplemental billings once the properties in California are re-assessed by the taxing authority.

The increase in office real estate taxes was primarily caused by the acquisition of Solana Beach Corporate Centre on January 19, 2011, First & Main on March 11, 2011 and Lloyd District Portfolio on July 1, 2011, which had real estate taxes of $0.1 million, $0.4 million and $0.4 million, respectively, for the three months ended September 30, 2011.

The increase in multifamily real estate taxes was primarily caused by additional real estate tax accruals of $0.2 million for expected supplemental billings once the properties in California are re-assessed by the taxing authority.

The mixed-use rental expenses increased as the result of our acquisition of the Waikiki Beach Walk mixed-use site on January 19, 2011.

Property Operating Income

Property operating income increased $9.2 million, or 36%, to $34.7 million for the three months ended September 30, 2011, compared to $25.5 million for the three months ended September 30, 2010. Property operating income by segment was as follows (dollars in thousands):

 

     Total Portfolio     Same-Store Portfolio  
     Three Months Ended
September 30,
     Change     %     Three Months Ended
September 30,
     Change     %  
     2011      2010          2011      2010       

Retail

   $ 15,513       $ 15,609       $ (96     (1 )%    $ 14,066       $ 14,879       $ (813     (5 )% 

Office

     12,126         7,589         4,537        60        7,143         7,553         (410     (5

Multifamily

     2,416         2,346         70        3        2,416         2,346         70        3   

Mixed-Use

     4,661         —           4,661        100        —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 34,716       $ 25,544       $ 9,172        36   $ 23,625       $ 24,778       $ (1,153     (5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in retail property operating income was offset by the property operating income generated by Solana Beach Towne Centre, which was acquired on January 19, 2011. On a same-store basis, the retail property operating income decreased $0.8 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The same-store decrease was primarily due to decreased rental revenue as a result of the Borders closures, an increase in rental expenses, specifically related to repairs, maintenance and marketing and an increase in real estate taxes.

The increase in office property operating income was primarily caused by the acquisition of Solana Beach Corporate Centre on January 19, 2011, First & Main on March 11, 2011 and Lloyd District Portfolio on July 1, 2011, which had property operating income of $1.0 million, $2.0 million and $1.9 million, respectively, for the three months ended September 30, 2011. On a same-store basis, office property operating income decreased $0.4 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The decrease was primarily due to a decrease in rental rates on new leases and renewals, a decrease in the percentage leased of the same-store portfolio, and increased operating expenses, offset by additional parking income at 160 King Street.

 

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The increase in multifamily property operating income was primarily due to an increase in the percentage leased and reduction of repairs and maintenance expenses due to the timing of the related activities. This was offset by additional real estate tax accruals of $0.2 million for expected supplemental billings once the properties in California are re-assessed by the taxing authority.

The mixed-use property operating income increased as the result of our acquisition of the Waikiki Beach Walk mixed-use site on January 19, 2011.

Other

General and administrative. General and administrative expenses increased $2.2 million, or 146%, to $3.7 million for the three months ended September 30, 2011, compared to $1.5 million for the three