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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 June 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             

 
AMERICAN ASSETS TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
Commission file number: 001-35030

AMERICAN ASSETS TRUST, L.P.
(Exact Name of Registrant as Specified in its Charter)
Commission file number: 333-202342-01
 
 
 
Maryland (American Assets Trust, Inc.)
27-3338708 (American Assets Trust, Inc.)
 
Maryland (American Assets Trust, L.P.)
27-3338894 (American Assets Trust, L.P.)
 
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
 
 
11455 El Camino Real, Suite 200,
San Diego, California
(Address of Principal Executive Offices)
92130
(Zip Code)
 
(858) 350-2600
(Registrant’s Telephone Number, Including Area Code)
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    

American Assets Trust, Inc.             x  Yes   o   No
American Assets Trust, L.P.            x  Yes   o  No
(American Assets Trust, L.P. became subject to filing requirements under Section 13 of the Securities Exchange Act of 1934, as amended, upon effectiveness of its Registration Statement on Form S-3 on February 6, 2015 and has filed all required reports subsequent to that date.)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    
    
American Assets Trust, Inc.             x  Yes   o   No
American Assets Trust, L.P.            x  Yes   o   No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
American Assets Trust, Inc.
Large Accelerated Filer
x
 
Accelerated Filer
o
Non-Accelerated Filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
o
 
 
 

American Assets Trust, L.P.
Large Accelerated Filer
o
 
Accelerated Filer
o
Non-Accelerated Filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
 
 
 
 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
    
American Assets Trust, Inc.             o  Yes    x  No
American Assets Trust, L.P.            o  Yes    x  No
American Assets Trust, Inc. had 47,130,063 shares of common stock, par value $0.01 per share, outstanding as of August 4, 2017.



Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2017 of American Assets Trust, Inc., a Maryland corporation, and American Assets Trust, L.P., a Maryland limited partnership, of which American Assets Trust, Inc. is the parent company and sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our” or “the company” refer to American Assets Trust, Inc. together with its consolidated subsidiaries, including American Assets Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “our Operating Partnership” or “the Operating Partnership” refer to American Assets Trust, L.P. together with its consolidated subsidiaries.

American Assets Trust, Inc. operates as a real estate investment trust, or REIT, and is the sole general partner of the Operating Partnership. As of June 30, 2017, American Assets Trust, Inc. owned an approximate 73.2% partnership interest in the Operating Partnership. The remaining 26.8% partnership interests are owned by non-affiliated investors and certain of our directors and executive officers. As the sole general partner of the Operating Partnership, American Assets Trust, Inc. has full, exclusive and complete authority and control over the Operating Partnership’s day-to-day management and business, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies.

The company believes that combining the quarterly reports on Form 10-Q of American Assets Trust, Inc. and the Operating Partnership into a single report will result in the following benefits:

better reflects how management and the analyst community view the business as a single operating unit;
enhance investors' understanding of American Assets Trust, Inc. and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
greater efficiency for American Assets Trust, Inc. and the Operating Partnership and resulting savings in time, effort and expense; and
greater efficiency for investors by reducing duplicative disclosure by providing a single document for their review.

Management operates American Assets Trust, Inc. and the Operating Partnership as one enterprise. The management of American Assets Trust, Inc. and the Operating Partnership are the same.

There are a few differences between American Assets Trust, Inc. and the Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between American Assets Trust, Inc. and the Operating Partnership in the context of how American Assets Trust, Inc. and the Operating Partnership operate as an interrelated consolidated company. American Assets Trust, Inc. is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, American Assets Trust, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain debt of the Operating Partnership. American Assets Trust, Inc. itself does not hold any indebtedness. The Operating Partnership holds substantially all the assets of the company, directly or indirectly holds the ownership interests in the company’s real estate ventures, conducts the operations of the business and is structured as a partnership with no publicly-traded equity. Except for net proceeds from public equity issuances by American Assets Trust, Inc., which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of operating partnership units.

Noncontrolling interests and stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of American Assets Trust, Inc. and those of American Assets Trust, L.P. The partnership interests in the Operating Partnership that are not owned by American Assets Trust, Inc. are accounted for as partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in American Assets Trust, Inc.’s financial statements. To help investors understand the significant differences between the company and the Operating Partnership, this report presents the following separate sections for each of American Assets Trust, Inc. and the Operating Partnership:

consolidated financial statements;
the following notes to the consolidated financial statements:
Debt;
Equity/Partners' Capital; and
Earnings Per Share/Unit; and
Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations.


Table of Contents


This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of American Assets Trust, Inc. and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of American Assets Trust, Inc. have made the requisite certifications and American Assets Trust, Inc. and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.




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AMERICAN ASSETS TRUST, INC. AND AMERICAN ASSETS TRUST, L.P.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2017
 
PART 1. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
Consolidated Financial Statements of American Assets Trust, Inc.:
 
 
 
 
 
 
 
 
 
 
Consolidated Financial Statements of American Assets Trust, L.P.:
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



American Assets Trust, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
 
 
June 30,
 
December 31,
 
2017
 
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate, at cost
 
 
 
Operating real estate
$
2,477,653

 
$
2,241,061

Construction in progress
61,415

 
50,498

Held for development
9,447

 
9,447

 
2,548,515

 
2,301,006

Accumulated depreciation
(502,551
)
 
(469,460
)
Net real estate
2,045,964

 
1,831,546

Cash and cash equivalents
31,380

 
44,801

Restricted cash
9,211

 
9,950

Accounts receivable, net
6,483

 
9,330

Deferred rent receivables, net
37,924

 
38,452

Other assets, net
40,214

 
52,854

TOTAL ASSETS
$
2,171,176

 
$
1,986,933

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured notes payable, net
$
280,170

 
$
445,180

Unsecured notes payable, net
944,816

 
596,350

Unsecured line of credit

 
20,000

Accounts payable and accrued expenses
40,884

 
32,401

Security deposits payable
6,779

 
6,114

Other liabilities and deferred credits, net
46,164

 
48,337

Total liabilities
1,318,813

 
1,148,382

Commitments and contingencies (Note 12)

 


EQUITY:
 
 
 
American Assets Trust, Inc. stockholders’ equity
 
 
 
Common stock, $0.01 par value, 490,000,000 shares authorized, 47,130,063 and 45,732,109 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
471

 
457

Additional paid-in capital
916,695

 
874,597

Accumulated dividends in excess of net income
(88,595
)
 
(77,296
)
Accumulated other comprehensive income
10,494

 
11,798

Total American Assets Trust, Inc. stockholders’ equity
839,065

 
809,556

Noncontrolling interests
13,298

 
28,995

Total equity
852,363

 
838,551

TOTAL LIABILITIES AND EQUITY
$
2,171,176

 
$
1,986,933

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

1

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American Assets Trust, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In Thousands, Except Shares and Per Share Data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
REVENUE:
 
 
 
 
 
 
 
Rental income
$
72,925

 
$
68,221

 
$
142,965

 
$
135,466

Other property income
4,181

 
3,598

 
7,933

 
7,084

Total revenue
77,106

 
71,819

 
150,898

 
142,550

EXPENSES:
 
 
 
 
 
 
 
Rental expenses
19,841

 
19,590

 
39,700

 
38,043

Real estate taxes
7,904

 
6,417

 
15,440

 
13,050

General and administrative
5,131

 
4,394

 
10,213

 
8,943

Depreciation and amortization
24,182

 
17,714

 
42,168

 
35,167

Total operating expenses
57,058

 
48,115

 
107,521

 
95,203

OPERATING INCOME
20,048

 
23,704

 
43,377

 
47,347

Interest expense
(12,652
)
 
(13,153
)
 
(25,983
)
 
(26,099
)
Other income, net
192

 
99

 
502

 
123

NET INCOME
7,588

 
10,650

 
17,896

 
21,371

Net income attributable to restricted shares
(61
)
 
(43
)
 
(121
)
 
(86
)
Net income attributable to unitholders in the Operating Partnership
(2,008
)
 
(3,008
)
 
(4,869
)
 
(6,035
)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS
$
5,519

 
$
7,599

 
$
12,906

 
$
15,250

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Earnings per common share, basic
$
0.12

 
$
0.17

 
$
0.28

 
$
0.34

Weighted average shares of common stock outstanding - basic
46,871,377

 
45,235,292

 
46,524,510

 
45,234,583

 
 
 
 
 
 
 
 
Earnings per common share, diluted
$
0.12

 
$
0.17

 
$
0.28

 
$
0.34

Weighted average shares of common stock outstanding - diluted
64,089,081

 
63,134,808

 
64,075,919

 
63,134,099

 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER COMMON SHARE
$
0.26

 
$
0.25

 
$
0.52

 
$
0.50

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net income
$
7,588

 
$
10,650

 
$
17,896

 
$
21,371

Other comprehensive (loss) - unrealized (loss) on swap derivative during the period
(518
)
 
(9,906
)
 
(1,514
)
 
(13,875
)
Reclassification of amortization of forward-starting swap included in interest expense
(330
)
 
(58
)
 
(475
)
 
(115
)
Comprehensive income
6,740

 
686

 
15,907

 
7,381

Comprehensive income attributable to non-controlling interest
(1,700
)
 
(182
)
 
(4,184
)
 
(2,068
)
Comprehensive income attributable to American Assets Trust, Inc.
$
5,040

 
$
504

 
$
11,723

 
$
5,313


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

2

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American Assets Trust, Inc.
Consolidated Statement of Equity
(Unaudited)
(In Thousands, Except Share Data)
 
 
American Assets Trust, Inc. Stockholders’ Equity
 
Noncontrolling Interests - Unitholders in the Operating Partnership
 
Total
 
Common Shares
 
Additional
Paid-in
Capital
 
Accumulated
Dividends in
Excess of Net
Income
 
Accumulated Other Comprehensive Income (Loss)
 
 
Shares
 
Amount
 
 
Balance at December 31, 2016
45,732,109

 
$
457

 
$
874,597

 
$
(77,296
)
 
$
11,798

 
$
28,995

 
$
838,551

Net income

 

 

 
13,027

 

 
4,869

 
17,896

Common shares issued
700,000

 
7

 
30,068

 

 

 

 
30,075

Issuance of restricted stock
4,880

 

 

 

 

 

 

Forfeiture of restricted stock
(768
)
 

 

 

 

 

 

Conversion of operating partnership units
693,842

 
7

 
10,752

 

 

 
(10,759
)
 

Dividends declared and paid

 

 

 
(24,326
)
 

 
(9,122
)
 
(33,448
)
Stock-based compensation

 

 
1,278

 

 

 

 
1,278

Other comprehensive loss - change in value of interest rate swaps

 

 

 

 
(8,704
)
 
(3,477
)
 
(12,181
)
Other comprehensive income - unrealized gain on forward-starting interest rate swaps

 

 

 

 
7,745

 
2,922

 
10,667

Reclassification of amortization of forward-starting swap included in interest expense

 

 

 

 
(345
)
 
(130
)
 
(475
)
Balance at June 30, 2017
47,130,063

 
$
471

 
$
916,695

 
$
(88,595
)
 
$
10,494

 
$
13,298

 
$
852,363

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

3

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American Assets Trust, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
 
Six Months Ended June 30,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
17,896

 
$
21,371

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred rent revenue and amortization of lease intangibles
(1,397
)
 
(1,787
)
Depreciation and amortization
42,168

 
35,167

Amortization of debt issuance costs and debt fair value adjustments
2,180

 
2,238

Stock-based compensation expense
1,278

 
1,255

Settlement of derivative instruments
10,667

 

Other noncash interest expense
(475
)
 
(115
)
Other, net
482

 
(828
)
Changes in operating assets and liabilities
 
 
 
Change in restricted cash
909

 
1,841

Change in accounts receivable
2,674

 
228

Change in other assets
468

 
41

Change in accounts payable and accrued expenses
5,869

 
2,881

Change in security deposits payable
665

 
115

Change in other liabilities and deferred credits
496

 
1,142

Net cash provided by operating activities
83,880

 
63,549

INVESTING ACTIVITIES
 
 
 
Acquisition of real estate
(232,061
)
 

Capital expenditures
(19,883
)
 
(31,852
)
Change in restricted cash
(1,570
)
 
331

Leasing commissions
(2,094
)
 
(1,386
)
Deposit on property acquisition
(1,000
)
 

Net cash used in investing activities
(256,608
)
 
(32,907
)
FINANCING ACTIVITIES
 
 
 
Change in restricted cash
1,400

 

Repayment of secured notes payable
(166,439
)
 
(113,073
)
Proceeds from unsecured term loan

 
150,000

Proceeds from unsecured line of credit
130,000


10,000

Repayment of unsecured line of credit
(150,000
)
 
(40,000
)
Proceeds from unsecured notes payable
350,000

 

Debt issuance costs
(2,281
)
 
(1,943
)
Proceeds from issuance of common stock, net
30,075

 

Dividends paid to common stock and unitholders
(33,448
)
 
(31,653
)
Shares withheld for employee taxes

 
(12
)
Net cash provided by (used in) financing activities
159,307

 
(26,681
)
Net increase in cash and cash equivalents
(13,421
)
 
3,961

Cash and cash equivalents, beginning of period
44,801

 
39,925

Cash and cash equivalents, end of period
$
31,380

 
$
43,886

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

4

Table of Contents

American Assets Trust, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit Data)
 
 
June 30,
 
December 31,
 
2017
 
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Real estate, at cost
 
 
 
Operating real estate
$
2,477,653

 
$
2,241,061

Construction in progress
61,415

 
50,498

Held for development
9,447

 
9,447

 
2,548,515

 
2,301,006

Accumulated depreciation
(502,551
)
 
(469,460
)
Net real estate
2,045,964

 
1,831,546

Cash and cash equivalents
31,380

 
44,801

Restricted cash
9,211

 
9,950

Accounts receivable, net
6,483

 
9,330

Deferred rent receivables, net
37,924

 
38,452

Other assets, net
40,214

 
52,854

TOTAL ASSETS
$
2,171,176

 
$
1,986,933

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured notes payable, net
$
280,170

 
$
445,180

Unsecured notes payable, net
944,816

 
596,350

Unsecured line of credit

 
20,000

Accounts payable and accrued expenses
40,884

 
32,401

Security deposits payable
6,779

 
6,114

Other liabilities and deferred credits
46,164

 
48,337

Total liabilities
1,318,813

 
1,148,382

Commitments and contingencies (Note 12)

 


CAPITAL:
 
 
 
Limited partners' capital, 17,194,980 and 17,888,822 units issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
9,303

 
24,315

General partner's capital, 47,130,063 and 45,732,109 units issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
828,571

 
797,758

Accumulated other comprehensive income
14,489

 
16,478

Total capital
852,363

 
838,551

TOTAL LIABILITIES AND CAPITAL
$
2,171,176

 
$
1,986,933


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


5

Table of Contents

American Assets Trust, L.P.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In Thousands, Except Shares and Per Unit Data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
REVENUE:
 
 
 
 
 
 
 
Rental income
$
72,925

 
$
68,221

 
$
142,965

 
$
135,466

Other property income
4,181

 
3,598

 
7,933

 
7,084

Total revenue
77,106

 
71,819

 
150,898

 
142,550

EXPENSES:
 
 
 
 
 
 
 
Rental expenses
19,841

 
19,590

 
39,700

 
38,043

Real estate taxes
7,904

 
6,417

 
15,440

 
13,050

General and administrative
5,131

 
4,394

 
10,213

 
8,943

Depreciation and amortization
24,182

 
17,714

 
42,168

 
35,167

Total operating expenses
57,058

 
48,115

 
107,521

 
95,203

OPERATING INCOME
20,048

 
23,704

 
43,377

 
47,347

Interest expense
(12,652
)
 
(13,153
)
 
(25,983
)
 
(26,099
)
Other income, net
192

 
99

 
502

 
123

NET INCOME
7,588

 
10,650

 
17,896

 
21,371

Net income attributable to restricted shares
(61
)
 
(43
)
 
(121
)
 
(86
)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, L.P.
$
7,527

 
$
10,607

 
$
17,775

 
$
21,285

 
 
 
 
 
 
 
 
EARNINGS PER UNIT - BASIC
 
 
 
 
 
 
 
Earnings per unit, basic
$
0.12

 
$
0.17

 
$
0.28

 
$
0.34

Weighted average units outstanding - basic
64,089,081

 
63,134,808

 
64,075,919

 
63,134,099

 
 
 
 
 
 
 
 
EARNINGS PER UNIT - DILUTED
 
 
 
 
 
 
 
Earnings per unit, diluted
$
0.12

 
$
0.17

 
$
0.28

 
$
0.34

Weighted average units outstanding - diluted
64,089,081

 
63,134,808

 
64,075,919

 
63,134,099

 
 
 
 
 
 
 
 
DISTRIBUTIONS PER UNIT
$
0.26

 
$
0.25

 
$
0.52

 
$
0.50

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net income
$
7,588

 
$
10,650

 
$
17,896

 
$
21,371

Other comprehensive (loss) - unrealized (loss) on swap derivative during the period
(518
)
 
(9,906
)
 
(1,514
)
 
(13,875
)
Reclassification of amortization of forward-starting swap included in interest expense
(330
)
 
(58
)
 
(475
)
 
(115
)
Comprehensive income
6,740

 
686

 
15,907

 
7,381

Comprehensive income attributable to Limited Partners
(1,700
)
 
(182
)
 
(4,184
)
 
(2,068
)
Comprehensive income attributable to General Partner
$
5,040

 
$
504

 
$
11,723

 
$
5,313


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


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Table of Contents

American Assets Trust, L.P.
Consolidated Statement of Partners' Capital
(Unaudited)
(In Thousands, Except Unit Data)
 
 
Limited Partners' Capital (1)
 
General Partner's Capital (2)
 
Accumulated Other Comprehensive Income (Loss)
 
Total Capital
 
Units
 
Amount
 
Units
 
Amount
 
Balance at December 31, 2016
17,888,822

 
$
24,315

 
45,732,109

 
$
797,758

 
$
16,478

 
$
838,551

Net income

 
4,869

 

 
13,027

 

 
17,896

Contributions from American Assets Trust, Inc.

 

 
700,000

 
30,075

 

 
30,075

Conversion of operating partnership units
(693,842
)
 
(10,759
)
 
693,842

 
10,759

 

 

Issuance of restricted units

 

 
4,880

 

 

 

Forfeiture of restricted units

 

 
(768
)
 

 

 

Distributions

 
(9,122
)
 

 
(24,326
)
 

 
(33,448
)
Stock-based compensation

 

 

 
1,278

 

 
1,278

Other comprehensive loss - change in value of interest rate swap

 

 

 

 
(12,181
)
 
(12,181
)
Other comprehensive income - unrealized gain on forward-starting interest rate swaps

 

 

 

 
10,667

 
10,667

Reclassification of amortization of forward-starting swap included in interest expense

 

 

 

 
(475
)
 
(475
)
Balance at June 30, 2017
17,194,980

 
$
9,303

 
47,130,063

 
$
828,571

 
$
14,489

 
$
852,363



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


7

Table of Contents

American Assets Trust, L.P.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 
Six Months Ended June 30,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
17,896

 
$
21,371

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred rent revenue and amortization of lease intangibles
(1,397
)
 
(1,787
)
Depreciation and amortization
42,168

 
35,167

Amortization of debt issuance costs and debt fair value adjustments
2,180

 
2,238

Stock-based compensation expense
1,278

 
1,255

Settlement of derivative instruments
10,667

 

Other noncash interest expense
(475
)
 
(115
)
Other, net
482

 
(828
)
Changes in operating assets and liabilities
 
 
 
Change in restricted cash
909

 
1,841

Change in accounts receivable
2,674

 
228

Change in other assets
468

 
41

Change in accounts payable and accrued expenses
5,869

 
2,881

Change in security deposits payable
665

 
115

Change in other liabilities and deferred credits
496

 
1,142

Net cash provided by operating activities
83,880

 
63,549

INVESTING ACTIVITIES
 
 
 
Acquisition of real estate
(232,061
)
 

Capital expenditures
(19,883
)
 
(31,852
)
Change in restricted cash
(1,570
)
 
331

Leasing commissions
(2,094
)
 
(1,386
)
Deposit on property acquisition
(1,000
)
 

Net cash used in investing activities
(256,608
)
 
(32,907
)
FINANCING ACTIVITIES
 
 
 
Change in restricted cash
1,400

 

Repayment of secured notes payable
(166,439
)
 
(113,073
)
Proceeds from unsecured term loan

 
150,000

Proceeds from unsecured line of credit
130,000

 
10,000

Repayment of unsecured line of credit
(150,000
)
 
(40,000
)
Proceeds from unsecured notes payable
350,000

 

Debt issuance costs
(2,281
)
 
(1,943
)
Contributions from American Assets Trust, Inc.
30,075

 

Distributions
(33,448
)
 
(31,653
)
Shares withheld for employee taxes

 
(12
)
Net cash provided by (used in) financing activities
159,307

 
(26,681
)
Net increase in cash and cash equivalents
(13,421
)
 
3,961

Cash and cash equivalents, beginning of period
44,801

 
39,925

Cash and cash equivalents, end of period
$
31,380

 
$
43,886

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


8

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements
June 30, 2017
(Unaudited)



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
American Assets Trust, Inc. (which may be referred to in these financial statements as the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed on July 16, 2010 that did not have any operating activity until the consummation of our initial public offering on January 19, 2011. The Company is the sole general partner of American Assets Trust, L.P., a Maryland limited partnership formed on July 16, 2010 (the “Operating Partnership”). The Company’s operations are carried on through our Operating Partnership and its subsidiaries, including our taxable real estate investment trust ("REIT") subsidiary ("TRS"). Since the formation of our Operating Partnership, the Company has controlled our Operating Partnership as its general partner and has consolidated its assets, liabilities and results of operations.
We are a full service vertically integrated and self-administered REIT with approximately 162 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.
As of June 30, 2017, we owned or had a controlling interest in 25 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of June 30, 2017, we owned land at four of our properties that we classify as held for development and/or construction in progress. A summary of the properties owned by us is as follows:
Retail
Carmel Country Plaza
Del Monte Center
Hassalo on Eighth
Carmel Mountain Plaza
Geary Marketplace
 
South Bay Marketplace
The Shops at Kalakaua
 
Lomas Santa Fe Plaza
Waikele Center
 
Solana Beach Towne Centre
Alamo Quarry Market
 
Office
Torrey Reserve Campus
Lloyd District Portfolio
 
Solana Beach Corporate Centre
City Center Bellevue
 
The Landmark at One Market
 
 
One Beach Street
 
 
First & Main
 
 
Multifamily
Loma Palisades
 
 
Imperial Beach Gardens
 
 
Mariner's Point
 
 
Santa Fe Park RV Resort
 
 
Pacific Ridge Apartments
 
 
Hassalo on Eighth
 
 
Mixed-Use
 
 
Waikiki Beach Walk Retail and Embassy Suites™ Hotel
 
Held for Development and/or Construction in Progress
Solana Beach Corporate Centre – Land
 
 
Solana Beach – Highway 101 – Land
 
 
Torrey Point – Construction in Progress
 
Lloyd District Portfolio – Construction in Progress
 

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Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


Basis of Presentation
Our consolidated financial statements include the accounts of the Company, our Operating Partnership and our subsidiaries. The equity interests of other investors in our Operating Partnership are reflected as noncontrolling interests.
All significant intercompany transactions and balances are eliminated in consolidation.
The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (“GAAP”) for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and notes therein included in the Company's and Operating Partnership's annual report on Form 10-K for the year ended December 31, 2016.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using our best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.
Any reference to the number of properties, number of units, square footage, employee numbers or percentages of beneficial ownership of our shares are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
Consolidated Statements of Cash Flows—Supplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands): 
 
Six Months Ended June 30,
 
2017
 
2016
Supplemental cash flow information
 
 
 
Total interest costs incurred
$
26,730

 
$
26,977

Interest capitalized
$
747

 
$
878

Interest expense
$
25,983

 
$
26,099

Cash paid for interest, net of amounts capitalized
$
21,984

 
$
24,076

Cash paid for income taxes
$
296

 
$
459

Supplemental schedule of noncash investing and financing activities
 

 
 

Accounts payable and accrued liabilities for construction in progress
$
2,113

 
$
(1,539
)
Accrued leasing commissions
$
498

 
$
(7
)
Reduction to capital for prepaid offering costs
$
69

 
$
154


 Significant Accounting Policies

We describe our significant accounting policies in Note 1 to the consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016. Except for the adoption of the accounting standards during the first quarter of 2017 as discussed below, there have been no changes to our significant accounting policies during the six months ended June 30, 2017.
Segment Information
Segment information is prepared on the same basis that our chief operating decision maker reviews information for operational decision-making purposes. We operate in four business segments: the acquisition, redevelopment, ownership and management of retail real estate, office real estate, multifamily real estate and mixed-use real estate. The products for our retail segment primarily include rental of retail space and other tenant services, including tenant reimbursements, parking and storage

10

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


space rental. The products for our office segment primarily include rental of office space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our multifamily segment include rental of apartments and other tenant services. The products of our mixed-use segment include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental and operation of a 369-room all-suite hotel.
Recent Accounting Pronouncements
 
In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-1, Business Combinations: Clarifying the Definition of a Business. The pronouncement changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The pronouncement requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted the provisions of ASU 2017-01 effective January 1, 2017. For the period from January 1, 2017 through June 30, 2017, the Company acquired one property for which we concluded that substantially all of the fair value of the assets acquired were concentrated in a single identifiable asset and that the assets therefore did not meet the definition of a business under ASU 2017-01. Acquisition transaction costs associated with this property acquisition, approximately $0.1 million were capitalized to real estate investments.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash. This pronouncement will require companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The pronouncement will require a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. Entities with material restricted cash and restricted cash equivalents balances will be required to disclose the nature of the restrictions. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. As of June 30, 2017 and December 31, 2016 , we had $9.2 million and $10.0 million of restricted cash, respectively, on our consolidated balance sheets. Upon adoption of this ASU, restricted cash balances will be included along with cash and cash equivalents as of the end of period and beginning of period, respectively, on our consolidated statement of cash flows for all periods presented; separate line items showing changes in restricted cash balances will be eliminated from our consolidated statement of cash flows.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation – Stock Compensation.  This pronouncement simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016-09 in the first quarter of 2017 and the adoption did not have a material impact on our consolidated financial statements.
    
In February 2016, the FASB issued an ASU that establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. The accounting applied by lessors under this ASU is largely unchanged. Leases will be either classified as sales-type, finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU also requires significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are in the process of evaluating the impact this pronouncement will have on our consolidated financial statements.
    
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for fiscal years beginning after December 15, 2017. The Company will adopt ASU 2014-09 in the first quarter of 2018. We have begun our process for implementing this standard, including performing a preliminary review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. As of June 30, 2017, we have completed our assessment of the

11

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


impact of this pronouncement for revenue generated from our Multifamily segment. The majority of revenue from our Multifamily segment is generated from leases that are specifically excluded from ASC 606. Additionally, we do not believe that ASC 606 will impact the amount or timing of revenue recognition for other revenue types generated from the Multifamily segment. We are continuing to evaluate this standard for revenue streams for our other segments and the allowable methods of adoption; however, the majority of our revenue from these other segments also consists of rental income from leasing arrangements, which are excluded from this standard. As the Company progresses further in its analysis, the scope of this assessment could be expanded to include other contract elements that could have an accounting impact under the new standard. The Company is also continuing to assess the potential effect that this new standard is expected to have on our consolidated financial statements as it relates to our leasing arrangements with our tenants and in concert with our assessment and anticipated adoption of the new leasing guidance under ASU 2016-02, Leases (see above).  The ultimate impacts are currently unknown or not reasonably estimable at this time. The Company continues to evaluate other areas of the standard and is currently assessing the impact on its consolidated financial statements and notes to its consolidated financial statements and cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.  
NOTE 2. REAL ESTATE
Property Asset Acquisitions
On April 28, 2017, we acquired the Pacific Ridge Apartments, a 533 unit luxury apartment community located in San Diego, California. The purchase price was approximately $232 million, excluding closing costs of approximately $0.1 million. The property was acquired with available cash from operations and borrowings under the Company's Amended and Restated Credit Facility (as defined herein).
The financial information set forth below summarizes the Company’s purchase price allocation for the Pacific Ridge Apartments during the six months ended June 30, 2017 (in thousands):
 
 
Pacific Ridge Apartments
Land
$
47,972

Building
171,813

Land improvements
3,403

Furniture, fixtures, and equipment
3,281

Total real estate
226,469

Lease intangibles
5,592

Prepaid expenses and other assets
424

Assets acquired
$
232,485

Accounts payable and accrued expenses
$
74

Security deposits payable
673

Other liabilities and deferred credits
49

Liabilities assumed
$
796

Pro Forma Financial Information

The pro forma financial information set forth below is based upon the Company’s historical consolidated statements of operations for the three and six months ended June 30, 2017 and 2016, adjusted to give effect to the acquisition of the Pacific Ridge Apartments, described above, as if such transaction had been completed at the beginning of 2016. The pro forma financial information set forth below is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2016, nor does it purport to represent the results of future operations (in thousands). 

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Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
As Reported
 
ProForma
 
As Reported
 
ProForma
Total revenue
$
150,898

 
$
156,281

 
$
142,550

 
$
149,935

Total operating expenses
$
107,521

 
$
110,971

 
$
95,203

 
$
106,831

Operating income
$
43,377

 
$
45,310

 
$
47,347

 
$
43,104

Net income
$
17,896

 
$
19,010

 
$
21,371

 
$
16,251


The following table summarizes the operating results for the Pacific Ridge Apartments included in the Company’s historical consolidated statement of operations for the period of acquisition through June 30, 2017 (in thousands):
 
April 28, 2017 through June 30, 2017
Revenues
$
2,909

Operating expenses
$
6,877

Operating (loss)
$
(3,968
)
Net (loss) attributable to American Assets Trust, Inc.
$
(3,968
)
NOTE 3. ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES
The following summarizes our acquired lease intangibles and leasing costs, which are included in other assets and other liabilities and deferred credits, as of June 30, 2017 and December 31, 2016 (in thousands): 
 
June 30, 2017
 
December 31, 2016
In-place leases
$
54,291

 
$
48,741

Accumulated amortization
(44,782
)
 
(38,906
)
Above market leases
21,643

 
21,667

Accumulated amortization
(20,027
)
 
(19,579
)
Acquired lease intangible assets, net
$
11,125

 
$
11,923

Below market leases
$
66,521

 
$
66,521

Accumulated accretion
(35,254
)
 
(33,073
)
Acquired lease intangible liabilities, net
$
31,267

 
$
33,448

NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy for inputs used in measuring fair value is as follows:

1.
Level 1 Inputs—quoted prices in active markets for identical assets or liabilities
2.
Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities
3.
Level 3 Inputs—unobservable inputs
Except as disclosed below, the carrying amounts of our financial instruments approximate their fair value. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
We measure the fair value of our deferred compensation liability, which is included in other liabilities and deferred credits on the consolidated balance sheet, on a recurring basis using Level 2 inputs. We measure the fair value of this liability based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.


13

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


The fair value of the interest rate swap agreements are based on the estimated amounts we would receive or pay to terminate the contract at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in accumulated other comprehensive income (loss) and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.

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

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2017 we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivative. As a result, we have determined that our derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.

A summary of our financial liabilities that are measured at fair value on a recurring basis, by level within the fair value hierarchy is as follows (in thousands):
 
June 30, 2017
 
December 31, 2016
 
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
Deferred compensation liability
$

$
1,109

$

$
1,109

 
$

$
1,006

$

$
1,006

Interest rate swap asset
$

$
3,697

$

$
3,697

 
$

$
16,428

$

$
16,428

Interest rate swap liability
$

$
517

$

$
517

 
$

$
1,067

$

$
1,067

 The fair value of our secured notes payable and unsecured senior guaranteed notes are sensitive to fluctuations in interest rates. Discounted cash flow analysis using observable market interest rates (Level 2) is generally used to estimate the fair value of our secured notes payable, using rates ranging from 3.8% to 4.5%.
Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The carrying values of our revolving line of credit and term loan set forth below are deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts. A summary of the carrying amount and fair value of our secured financial instruments, all of which are based on Level 2 inputs, is as follows (in thousands):  
 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Secured notes payable, net
$
280,170

 
$
287,984

 
$
445,180

 
$
457,621

Unsecured term loans, net
$
248,270

 
$
250,000

 
$
247,883

 
$
250,000

Unsecured senior guaranteed notes, net
$
696,546

 
$
707,821

 
$
348,467

 
$
351,357

Unsecured line of credit
$

 
$

 
$
20,000

 
$
20,000

NOTE 5. DERIVATIVE AND HEDGING ACTIVITIES

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements.  To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 


14

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


On March 29, 2016, we entered into a forward-starting interest rate swap contract (the "March 2016 Swap") with Wells Fargo Bank, National Association, to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective new ten-year private placement.  The forward-starting ten-year swap contract had a notional amount of $150 million, a termination date of March 31, 2027, a fixed pay rate of 1.8800%, and a receive rate equal to the three-month LIBOR, with fixed rate payments due semi-annually commencing September 29, 2017, floating payments due semi-annually commencing September 29, 2017, and floating reset dates the first day of each quarterly period.  The forward-starting ten-year swap contract accrual period, March 31, 2017 to March 31, 2027, was designed to match the expected tenor of the then prospective new ten-year debt private placement.

On April 7, 2016, we entered into a forward-starting interest rate swap contract (the "April 2016 Swap") with Wells Fargo Bank, National Association, to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective new ten-year private placement. The forward-starting ten-year swap contract had a notional amount of $100 million, a termination date of March 31, 2027, a fixed pay rate of 1.7480%, and a receive rate equal to the three-month LIBOR, with fixed rate payments due semi-annually commencing September 29, 2017, floating payments due semi-annually commencing September 29, 2017, and floating reset dates the first day of each quarterly period. The forward-starting ten-year swap contract accrual period, March 31, 2017 to March 31, 2027, was designed to match the expected tenor of our then prospective new ten-year debt private placement.

On January 18, 2017, we settled the March 2016 Swap and April 2016 Swap, resulting in a gain of approximately $10.4 million. This gain is included in accumulated other comprehensive income and will be amortized to interest expense over the life of the Series D Notes (as defined below). The forward-starting interest rate swap contracts have been deemed to be highly effective cash flow hedges and we elected to designate all the forward-starting swap contracts as accounting hedges.

On April 25, 2017, we entered into a treasury lock contract (the "April 2017 Treasury Lock") with Bank of America, National Association, to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective new twelve-year private placement. The treasury lock contract had a notional amount of $100 million, termination date of May 18, 2017, a fixed pay rate of 2.313%, and a receive rate equal to the ten-year treasury rate on the settlement date.

On May 11, 2017, we settled the April 2017 Treasury Lock, resulting in a gain of approximately $0.7 million. This gain is included in accumulated other comprehensive income and will be amortized to interest expense over ten years. The treasury lock contract has been deemed to be a highly effective cash flow hedge and we elected to designate the treasury lock contract as an accounting hedge.

On May 31, 2017, we entered into a treasury lock contract (the "May 2017 Treasury Lock") with Bank of America, National Association, to reduce the interest rate variability exposure of the projected interest cash flows of our then prospective new seven-year private placement. The treasury lock contract had a notional amount of $100 million, termination date of July 26, 2017, a fixed pay rate of 2.064%, and a receive rate equal to the seven-year treasury rate on the settlement date.

On June 23, 2017, we settled the May 2017 Treasury Lock, resulting in a loss of approximately $0.5 million. This loss is included in accumulated other comprehensive income and will be amortized to interest expense over seven years. The treasury lock contract has been deemed to be a highly effective cash flow hedge and we elected to designate the treasury lock contract as an accounting hedge.
The following is a summary of the terms of our outstanding interest rate swaps as of June 30, 2017 (dollars in thousands):
Swap Counterparty
 
Notional Amount
 
Effective Date
 
Maturity Date
 
Fair Value
Bank of America, N.A.
 
$
100,000

 
1/9/2014
 
1/9/2019
 
$
(517
)
U.S. Bank N.A.
 
$
100,000

 
3/1/2016
 
3/1/2023
 
$
2,440

Wells Fargo Bank, N.A.
 
$
50,000

 
5/2/2016
 
3/1/2023
 
$
1,257

The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in accumulated other comprehensive income and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings for as long hedged cash flows remain probable.

15

Table of Contents
American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative.  This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities.  The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. 
NOTE 6. OTHER ASSETS

Other assets consist of the following (in thousands): 
 
June 30, 2017
 
December 31, 2016
Leasing commissions, net of accumulated amortization of $26,913 and $25,194, respectively
$
18,547

 
$
18,131

Interest rate swap asset
3,697

 
16,428

Acquired above market leases, net
1,616

 
2,088

Acquired in-place leases, net
9,509

 
9,835

Lease incentives, net of accumulated amortization of $73 and $41, respectively
550

 
313

Other intangible assets, net of accumulated amortization of $1,156 and $1,128, respectively
171

 
206

Purchase deposit
1,000

 

Prepaid expenses and other
5,124

 
5,853

Total other assets
$
40,214

 
$
52,854

NOTE 7. OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits consist of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
Acquired below market leases, net
$
31,267

 
$
33,448

Prepaid rent and deferred revenue
8,188

 
7,720

Interest rate swap liability
517

 
1,067

Deferred rent expense and lease intangible
1,765

 
1,756

Deferred compensation
1,109

 
1,006

Deferred tax liability
265

 
265

Straight-line rent liability
3,010

 
3,028

Other liabilities
43

 
47

Total other liabilities and deferred credits, net
$
46,164

 
$
48,337

Straight-line rent liability relates to leases which have rental payments that decrease over time or one-time upfront payments for which the rental revenue is deferred and recognized on a straight-line basis.
NOTE 8. DEBT
Debt of American Assets Trust, Inc.
American Assets Trust, Inc. does not hold any indebtedness. All debt is held directly or indirectly by the Operating Partnership; however, American Assets Trust, Inc. and certain of its subsidiaries have guaranteed the Operating Partnership's obligations under the (i) amended and restated credit facility, (ii) term loan and (iii) senior guaranteed notes. Additionally, American Assets Trust, Inc. has provided carve-out guarantees on certain property-level debt.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


Debt of American Assets Trust, L.P.
Secured notes payable
The following is a summary of our total secured notes payable outstanding as of June 30, 2017 and December 31, 2016 (in thousands):
 
Principal Balance as of
 
Stated Interest Rate
 
Stated Maturity Date
Description of Debt
June 30, 2017
 
December 31, 2016
 
as of June 30, 2017
Waikiki Beach Walk—Retail (1)(2)
$

 
$
130,310

 
5.39
%
 
July 1, 2017
Solana Beach Corporate Centre III-IV (3)(4)

 
35,440

 
6.39
%
 
August 1, 2017
Loma Palisades (1)
73,744

 
73,744

 
6.09
%
 
July 1, 2018
One Beach Street (1)
21,900

 
21,900

 
3.94
%
 
April 1, 2019
Torrey Reserve—North Court (3)
20,215

 
20,399

 
7.22
%
 
June 1, 2019
Torrey Reserve—VCI, VCII, VCIII (3)
6,824

 
6,884

 
6.36
%
 
June 1, 2020
Solana Beach Corporate Centre I-II (3)
10,825

 
10,927

 
5.91
%
 
June 1, 2020
Solana Beach Towne Centre (3)
36,082

 
36,424

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

 
111,000

 
3.98
%
 
November 1, 2022
 
280,590

 
447,028

 
 
 
 
Unamortized fair value adjustment

 
(1,347
)
 
 
 
 
Debt issuance costs, net of accumulated amortization of $1,110 and $1,029, respectively
(420
)
 
(501
)
 
 
 
 
Total Secured Notes Payable Outstanding
$
280,170

 
$
445,180

 
 
 
 
(1)
Interest only.
(2)
Loan repaid in full, without premium or penalty, on March 1, 2017.
(3)
Principal payments based on a 30-year amortization schedule.
(4)
Loan repaid in full, without premium or penalty, on April 3, 2017.
Certain loans require us to comply with various financial covenants. As of June 30, 2017, the Operating Partnership was in compliance with these financial covenants.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


Unsecured notes payable
The following is a summary of the Operating Partnership's total unsecured notes payable outstanding as of June 30, 2017 and December 31, 2016 (in thousands):
Description of Debt
Principal Balance as of
 
Stated Interest Rate
 
Stated Maturity Date
June 30, 2017
 
December 31, 2016
 
as of June 30, 2017
 
Term Loan A
$
100,000

 
$
100,000

 
Variable

(1) 
 
January 9, 2019
(2) 
Senior Guaranteed Notes, Series A
150,000

 
150,000

 
4.04
%
(3) 
 
October 31, 2021
 
Term Loan B
100,000

 
100,000

 
Variable

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

 
50,000

 
Variable

(5) 
 
March 1, 2023
 
Senior Guaranteed Notes, Series B
100,000

 
100,000

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

 
100,000

 
4.50
%
 
 
April 1, 2025
 
Senior Guaranteed Notes, Series D
250,000

 

 
4.29
%
(6) 
 
March 1, 2027
 
Senior Guaranteed Notes, Series E
100,000

 

 
4.24
%
(7) 
 
May 23, 2029
 
 
950,000

 
600,000

 
 
 
 
 
 
Debt issuance costs, net of accumulated amortization of $5,068 and $4,317, respectively
(5,184
)
 
(3,650
)
 
 
 
 
 
 
Total Unsecured Notes Payable
$
944,816

 
$
596,350

 
 
 
 
 
 
 
(1)
The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan A at approximately 3.08% through its maturity date and extension options, subject to adjustments based on our consolidated leverage ratio.
(2)
The Operating Partnership has an option to extend the term loan up to one time, with such extension for a 12-month period. The foregoing extension option is exercisable by us subject to the satisfaction of certain conditions.
(3)
The Operating Partnership entered into a one-month forward-starting seven-year swap contract on August 19, 2014, which was settled on September 19, 2014 at a gain of approximately $1.6 million. The forward-starting seven-year swap contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.88% per annum.
(4)
The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan B at approximately 3.15% through its maturity date, subject to adjustments based on our consolidated leverage ratio.
(5)
The Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan C at approximately 3.14% through its maturity date, subject to adjustments based on our consolidated leverage ratio.
(6)
The Operating Partnership entered into forward-starting interest rate swap contracts on March 29, 2016 and April 7, 2016, which were settled on January 18, 2017 at a gain of approximately $10.4 million. The forward-starting interest swap rate contracts were deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.87% per annum.
(7)
The Operating Partnerships entered into a treasury lock contract on April 25, 2017, which was settled on May 11, 2017 at a gain of approximately $0.7 million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 4.18% per annum.

On March 1, 2017, the Operating Partnership entered into a Note Purchase Agreement for the private placement of $250 million of 4.29% Senior Guaranteed Notes, Series D, due March 1, 2027 (the "Series D Notes"). The Series D Notes were issued on March 1, 2017 and will pay interest quarterly on the last day of January, April, July and October until their respective maturities.

On May 23, 2017, the Operating Partnership entered into a Note Purchase Agreement for the private placement of $100 million of 4.24% Senior Guaranteed Notes, Series E, due May 23, 2029 (the "Series E Notes"). The Series E Notes were issued on May 23, 2017 and will pay interest semi-annually on the 23rd of May and November until their respective maturities.

The Operating Partnership may prepay at any time all, or from time to time any part of, the Series D Notes or Series E Notes (as applicable), in an amount not less than 5% of the aggregate principal amount of any series of the Series D Notes or Series E Notes (as applicable) then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid plus a Make-Whole Amount (as defined in the applicable Note Purchase Agreements).

Each Note Purchase Agreement contains a number of customary financial covenants, including, without limitation, tangible net worth thresholds, secured and unsecured leverage ratios and fixed charge coverage ratios. Subject to the terms of the applicable Note Purchase Agreement and either the Series D Notes or Series E Notes (as applicable), upon certain events of

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


default, including, but not limited to, (i) a default in the payment of any principal, Make-Whole Amount or interest under the Series D Notes and Series E Notes (as applicable), and (ii) a default in the payment of certain other indebtedness of the Operating Partnership, the Company or their subsidiaries, the principal and accrued and unpaid interest and the Make-Whole Amount on the outstanding Series D Notes and Series E Notes (as applicable) will become due and payable at the option of the Purchasers.

The Operating Partnership’s obligations under the Series D Notes and Series E Notes are fully and unconditionally guaranteed by the Company and certain of their subsidiaries.
Certain loans require us to comply with various financial covenants. As of June 30, 2017, the Operating Partnership was in compliance with these financial covenants.

Credit Facility
On January 9, 2014, the Operating Partnership entered into an amended and restated credit agreement (the "Amended and Restated Credit Facility") which amended and restated the then in-place credit facility. The Amended and Restated Credit Facility provides for aggregate, unsecured borrowing of $350 million, consisting of a revolving line of credit of $250 million ("Revolver Loan") and a term loan of $100 million ("Term Loan A"). The Amended and Restated Credit Facility has an accordion feature that may allow the Operating Partnership to increase the availability thereunder up to an additional $250 million, subject to meeting specified requirements and obtaining additional commitments from lenders. At June 30, 2017, there was no outstanding balance under the Revolver Loan.
Borrowings under the Amended and Restated Credit Facility initially bear interest at floating rates equal to, at our option, either (1) LIBOR, plus a spread which ranges from (a) 1.35%-1.95% (with respect to the Revolver Loan) and (b) 1.30% to 1.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio, or (2) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 50 bps or (c) the Eurodollar rate plus 100 bps, plus a spread which ranges from (i) 0.35%-0.95% (with respect to the Revolver Loan) and (ii) 0.30% to 0.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio.
The Revolver Loan initially matures on January 9, 2018, subject to the Operating Partnership's option to extend the Revolver Loan up to two times, with each such extension for a six-month period. Term Loan A initially matures on January 9, 2016, subject to the Operating Partnership's option to extend Term Loan A up to three times, with each such extension for a 12-month period. The foregoing extension options are exercisable by the Operating Partnership subject to the satisfaction of certain conditions. Effective as of January 9, 2017, the Operating Partnership exercised the second of three options to extend the maturity date of Term Loan A to January 9, 2018.
As of June 30, 2017, the Operating Partnership was in compliance with the Amended and Restated Credit Facility financial covenants.
NOTE 9. PARTNERS' CAPITAL OF AMERICAN ASSETS TRUST, L.P.
Noncontrolling interests in our Operating Partnership are interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of 17,194,980 common units (the “noncontrolling common units”), and represented approximately 26.8% of the ownership interests in our Operating Partnership at June 30, 2017. Common units and shares of our common stock have essentially the same economic characteristics in that common units and shares of our common stock share equally in the total net income or loss distributions of our Operating Partnership. Investors who own common units have the right to cause our Operating Partnership to redeem any or all of their common units for cash equal to the then-current market value of one share of our common stock, or, at our election, shares of our common stock on a one-for-one basis.
During the three months ended June 30, 2017, 693,842 common units were converted into shares of our common stock.
Earnings Per Unit of the Operating Partnership
Basic earnings (loss) per unit (“EPU”) of the Operating Partnership is computed by dividing income (loss) applicable to unitholders by the weighted average Operating Partnership units outstanding, as adjusted for the effect of participating securities. Operating Partnership units granted in equity-based payment transactions that have non-forfeitable dividend equivalent rights are considered participating securities prior to vesting. The impact of unvested Operating Partnership unit

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


awards on EPU has been calculated using the two-class method whereby earnings are allocated to the unvested Operating Partnership unit awards based on distributions and the unvested Operating Partnership units’ participation rights in undistributed earnings (losses).
The calculation of diluted earnings per unit for the three month periods ended June 30, 2017 and 2016 does not include the weighted average of 232,047 and 171,743 unvested Operating Partnership units, respectively, as these equity securities are either considered contingently issuable or the effect of including these equity securities was anti-dilutive to income from continuing operations and net income attributable to the unitholders. The calculation of diluted earnings per unit for the six months ended June 30, 2017 and 2016 does not include the weighted average of 232,073 and 172,669 unvested Operating Partnership units, respectively,
NOTE 10. EQUITY OF AMERICAN ASSETS TRUST, INC.
Stockholders' Equity
On May 27, 2015, we entered into an at-the-market ("ATM") equity program with five sales agents in which we may, from time to time, offer and sell shares of our common stock having an aggregate offering price of up to $250.0 million. The sales of shares of our common stock made through the ATM equity program are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended. During the three and six months ended June 30, 2017, the following shares of common stock were sold through the ATM equity programs (in thousands, except per share data and share amounts):
 
Three Months Ended June 30, 2017
Six Months Ended June 30, 2017
Number of shares of common stock issued through ATM programs

700,000
Weighted average price per share
N/A
$43.46
 
 
 
Proceeds, gross
$

$
30,425

Sales agent compensation

(304
)
Offering costs

(46
)
Proceeds, net
$

$
30,075

 
We intend to use the net proceeds from the ATM equity program to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving line of credit or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of June 30, 2017, we had the capacity to issue up to an additional $176.2 million in shares of our common stock under our ATM equity program. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program.
Dividends
The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units during the six months ended June 30, 2017: 
Period
 
Amount  per
Share/Unit
 
Period Covered
 
Dividend Paid Date
First Quarter 2017
 
$
0.26

 
January 1, 2017 to March 31, 2017
 
March 30, 2017
Second Quarter 2017
 
$
0.26

 
April 1, 2017 to June 30, 2017
 
June 29, 2017
Taxability of Dividends
Earnings and profits, which determine the taxability of distributions to stockholders and holders of common units, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


Stock-Based Compensation

We follow the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer's stock.  The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
The following table summarizes the activity of restricted stock awards during the six months ended June 30, 2017:
 
Units
 
Weighted Average Grant Date Fair Value
Nonvested at January 1, 2017
232,765

 
$31.24
Granted
4,880

 
$40.99
Vested
(4,900
)
 
$40.81
Forfeited
(768
)
 
$30.62
Nonvested at June 30, 2017
231,977

 
$31.25
We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $0.6 million in noncash compensation expense for both the three months ended June 30, 2017 and 2016, which is included in general and administrative expense on the consolidated statements of comprehensive income. We recognized $1.3 million in noncash compensation expenses for the six months ended June 30, 2017 and 2016. Unrecognized compensation expense was $2.6 million at June 30, 2017.
Earnings Per Share
We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating security is calculated according to dividends declared and participation rights in undistributed earnings. The weighted average unvested shares outstanding, which are considered participating securities, were 232,047 and 171,743 for the three months ended June 30, 2017 and 2016, respectively, and 232,073 and 172,669 for the six months ended June 30, 2017 and 2016, respectively. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares as these unvested shares have nonforfeitable dividend equivalent rights.
Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method. For the three and six months ended June 30, 2017 and 2016, diluted shares exclude incentive restricted stock as these awards are considered contingently issuable. Additionally, the unvested restricted stock awards subject to time vesting are anti-dilutive for all periods presented, and accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


The computation of basic and diluted EPS is presented below (dollars in thousands, except share and per share amounts): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
NUMERATOR
 
 
 
 
 
 
 
Net income from operations
$
7,588

 
$
10,650

 
$
17,896

 
$
21,371

Less: Net income attributable to restricted shares
(61
)
 
(43
)
 
(121
)
 
(86
)
Less: Income from operations attributable to unitholders in the Operating Partnership
(2,008
)
 
(3,008
)
 
(4,869
)
 
(6,035
)
Net income attributable to common stockholders—basic
$
5,519

 
$
7,599

 
$
12,906

 
$
15,250

Income from operations attributable to American Assets Trust, Inc. common stockholders—basic
$
5,519

 
$
7,599

 
$
12,906

 
$
15,250

Plus: Income from operations attributable to unitholders in the Operating Partnership
2,008

 
3,008

 
4,869

 
6,035

Net income attributable to common stockholders—diluted
$
7,527

 
$
10,607

 
$
17,775

 
$
21,285

DENOMINATOR
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
46,871,377

 
45,235,292

 
46,524,510

 
45,234,583

Effect of dilutive securities—conversion of Operating Partnership units
17,217,704

 
17,899,516

 
17,551,409

 
17,899,516

Weighted average common shares outstanding—diluted
64,089,081

 
63,134,808

 
64,075,919

 
63,134,099

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
0.12

 
$
0.17

 
$
0.28

 
$
0.34

Earnings per common share, diluted
$
0.12

 
$
0.17

 
$
0.28

 
$
0.34

NOTE 11. INCOME TAXES
We elected to be taxed as a REIT and operate in a manner that allows us to qualify as a REIT for federal income tax purposes commencing with our initial taxable year. As a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. Taxable income from non-REIT activities managed through our TRS is subject to federal and state income taxes.
We lease our hotel property to a wholly owned TRS that is subject to federal and state income taxes. We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases. Additionally, we classify certain state taxes as income taxes for financial reporting purposes in accordance with ASC Topic 740, Income Taxes.
A deferred tax liability of $0.3 million as of June 30, 2017 and December 31, 2016 is included on our consolidated balance sheets in relation to real estate asset basis differences of property subject to the Texas margin tax and certain prepaid expenses of our TRS.
Income tax expense is recorded in other income (expense), net on our consolidated statements of comprehensive income. For the three and six months ended June 30, 2017, we recorded income tax benefit of $0.1 million and $0.2 million, respectively. For the three and six months ended June 30, 2016, we recorded income tax benefit of $0.05 million and income tax expense of $0.04 million, respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal
We are sometimes involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. We do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also, under our leases, tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us as owner of the properties due to certain matters relating to the operation of the properties by the tenant.
Commitments
At The Landmark at One Market, we lease (the "Annex Lease"), as lessee, a building adjacent to The Landmark under an operating lease effective through June 30, 2021, which we have the option to extend until 2031 by way of two five-year extension options.
At Waikiki Beach Walk, we sublease (the "FHB Sublease") a portion of the building of which Quiksilver is currently in possession, under an operating lease effective through December 31, 2021.
Current minimum annual payments under the leases are as follows, as of June 30, 2017 (in thousands): 
Year Ending December 31,
 
 
2017 (six months ending December 31, 2017)
$
1,619

(1) 
2018
3,274

 
2019
3,347

 
2020
3,422

 
2021
3,460

(2) 
Thereafter
24,823

 
Total
$
39,945

 
(1)
Lease payments on the FHB Sublease are based on the stated lease rate of $70,578 through the end of the lease term, December 31, 2021.
(2)
Lease payments on the Annex Lease will be equal to fair rental value from July 2021 through the end of the options lease term. In the table, we have shown the option lease payments for this period based on the stated rate for the month of June 2021 of $217,744.

We have management agreements with Outrigger Hotels & Resorts or an affiliate thereof (“Outrigger”) pursuant to which Outrigger manages each of the retail and hotel portions of the Waikiki Beach Walk property. Under the management agreement with Outrigger relating to the retail portion of Waikiki Beach Walk (the “retail management agreement”), we pay Outrigger a monthly management fee of 3.0% of net revenues from the retail portion of Waikiki Beach Walk. Pursuant to the terms of the retail management agreement, if the agreement is terminated in certain instances, including our election not to repair damage or destruction at the property, a condemnation or our failure to make required working capital infusions, we would be obligated to pay Outrigger a termination fee equal to the sum of the management fees paid for the two calendar months immediately preceding the termination date. The retail management agreement may not be terminated by us or by Outrigger without cause. Under our management agreement with Outrigger relating to the hotel portion of Waikiki Beach Walk (the “hotel management agreement”), we pay Outrigger a monthly management fee of 6.0% of the hotel's gross operating profit, as well as 3.0% of the hotel's gross revenues; provided that the aggregate management fee payable to Outrigger for any year shall not exceed 3.5% of the hotel's gross revenues for such fiscal year. Pursuant to the terms of the hotel management agreement, if the agreement is terminated in certain instances, including upon a transfer by us of the hotel or upon a default by us under the hotel management agreement, we would be required to pay a cancellation fee calculated by multiplying (1) the management fees for the previous 12 months by (2) (a) eight, if the agreement is terminated in the first 11 years of its term, or (b) four, three, two or one, if the agreement is terminated in the twelfth, thirteenth, fourteenth or fifteenth year, respectively, of its term. The hotel management agreement may not be terminated by us or by Outrigger without cause.

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American Assets Trust, Inc. and American Assets Trust, L.P.
Notes to Consolidated Financial Statements—(Continued)
June 30, 2017
(Unaudited)


A wholly owned subsidiary of our Operating Partnership, WBW Hotel Lessee LLC, entered into a franchise license agreement with Embassy Suites Franchise LLC, the franchisor of the brand “Embassy Suites™,” to obtain the non-exclusive right to operate the hotel under the Embassy SuitesTM brand for 20 years. The franchise license agreement provides that WBW Hotel Lessee LLC must comply with certain management, operational, record keeping, accounting, reporting and marketing standards and procedures. In connection with this agreement, we are also subject to the terms of a product improvement plan pursuant to which we expect to undertake certain actions to ensure that our hotel's infrastructure is maintained in compliance with the franchisor's brand standards. In addition, we must pay to Embassy Suites Franchise LLC a monthly franchise royalty fee equal to 4.0% of the hotel's gross room revenue through December 2021 and 5.0% of the hotel's gross room revenue thereafter, as well as a monthly program fee equal to 4.0% of the hotel's gross room revenue. If the franchise license is terminated due to our failure to make required improvements or to otherwise comply with its terms, we may be liable to the franchisor for a termination payment, which could be as high as $7.5 million based on operating performance through June 30, 2017.
Our Del Monte Center property has ongoing environmental remediation related to ground water contaminatio