American Assets Trust, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS American Assets Trust, Inc. Consolidated Balance Sheets (In Thousands, Except Share Data) September 30, December 31, 2021 2020 (unaudited) ASSETS Real estate, at cost Operating real estate $ 3,386,539 $ 3,155,280 Construction in progress 117,069 91,047 Held for development 547 547 3,504,155 3,246,874 Accumulated depreciation ( 823,198 ) ( 754,140 ) Real estate, net 2,680,957 2,492,734 Cash and cash equivalents 171,923 137,333 Restricted cash 1,716 1,716 Accounts receivable, net 7,421 6,938 Deferred rent receivables, net 80,369 72,476 Other assets, net 108,684 106,112 TOTAL ASSETS $ 3,051,070 $ 2,817,309 LIABILITIES AND EQUITY LIABILITIES: Secured notes payable, net $ 110,955 $ 110,923 Unsecured notes payable, net 1,537,772 1,196,677 Unsecured line of credit, net — 99,151 Accounts payable and accrued expenses 88,851 59,262 Security deposits payable 7,996 6,590 Other liabilities and deferred credits, net 86,805 91,300 Total liabilities 1,832,379 1,563,903 Commitments and contingencies (Note 11) EQUITY: American Assets Trust, Inc. stockholders’ equity Common stock, $ 0.01 par value, 490,000,000 shares authorized, 60,472,065 and 60,476,292 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 605 605 Additional paid-in capital 1,450,096 1,445,644 Accumulated dividends in excess of net income ( 207,910 ) ( 176,560 ) Accumulated other comprehensive income 2,248 1,753 Total American Assets Trust, Inc. stockholders’ equity 1,245,039 1,271,442 Noncontrolling interests ( 26,348 ) ( 18,036 ) Total equity 1,218,691 1,253,406 TOTAL LIABILITIES AND EQUITY $ 3,051,070 $ 2,817,309 The accompanying notes are an integral part of these consolidated financial statements. 1 Table of Contents American Assets Trust, Inc. Consolidated Statements of Comprehensive Income (Unaudited) (In Thousands, Except Shares and Per Share Data) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 REVENUE: Rental income $ 93,804 $ 80,759 $ 262,573 $ 252,059 Other property income 4,482 3,615 11,508 11,167 Total revenue 98,286 84,374 274,081 263,226 EXPENSES: Rental expenses 23,466 19,208 61,916 58,757 Real estate taxes 9,644 11,491 31,610 31,497 General and administrative 6,827 6,438 20,574 19,937 Depreciation and amortization 30,680 26,914 85,827 80,869 Total operating expenses 70,617 64,051 199,927 191,060 OPERATING INCOME 27,669 20,323 74,154 72,166 Interest expense ( 14,722 ) ( 13,302 ) ( 43,589 ) ( 40,105 ) Early extinguishment of debt — — ( 4,271 ) — Other (expense) income, net ( 52 ) ( 531 ) ( 179 ) ( 261 ) NET INCOME 12,895 6,490 26,115 31,800 Net income attributable to restricted shares ( 145 ) ( 87 ) ( 417 ) ( 260 ) Net income attributable to unitholders in the Operating Partnership ( 2,709 ) ( 1,365 ) ( 5,459 ) ( 6,778 ) NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS $ 10,041 $ 5,038 $ 20,239 $ 24,762 EARNINGS PER COMMON SHARE Earnings per common share, basic $ 0.17 $ 0.08 $ 0.34 $ 0.41 Weighted average shares of common stock outstanding - basic 59,990,343 59,825,174 59,986,844 59,757,709 Earnings per common share, diluted $ 0.17 $ 0.08 $ 0.34 $ 0.41 Weighted average shares of common stock outstanding - diluted 76,171,880 76,118,032 76,168,381 76,115,456 DIVIDENDS DECLARED PER COMMON SHARE $ 0.30 $ 0.25 $ 0.86 $ 0.75 COMPREHENSIVE INCOME Net income $ 12,895 $ 6,490 $ 26,115 $ 31,800 Other comprehensive income (loss) - unrealized income (loss) on swap derivatives during the period 435 1,201 1,657 ( 4,900 ) Reclassification of amortization of forward-starting swap realized gains included in interest expense ( 274 ) ( 332 ) ( 824 ) ( 997 ) Reclassification of amortization of forward-starting swap realized gain included in early extinguishment of debt — — ( 193 ) — Comprehensive income 13,056 7,359 26,755 25,903 Comprehensive income attributable to non-controlling interests ( 2,744 ) ( 1,555 ) ( 5,604 ) ( 5,530 ) Comprehensive income attributable to American Assets Trust, Inc. $ 10,312 $ 5,804 $ 21,151 $ 20,373 The accompanying notes are an integral part of these consolidated financial statements. 2 Table of Contents 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, 2020 60,476,292 $ 605 $ 1,445,644 $ ( 176,560 ) $ 1,753 $ ( 18,036 ) $ 1,253,406 Net income — — — 1,394 — 339 1,733 Forfeiture of restricted stock ( 4,006 ) — — — — — — Dividends declared and paid — — — ( 16,932 ) — ( 4,531 ) ( 21,463 ) Stock-based compensation — — 1,484 — — — 1,484 Other comprehensive gain - change in value of interest rate swaps — — — — 579 168 747 Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 216 ) ( 59 ) ( 275 ) Reclassification of amortization of forward-starting swap realized gain included in early extinguishment of debt — $ — $ — $ — $ ( 152 ) $ ( 41 ) ( 193 ) Balance at March 31, 2021 60,472,286 $ 605 $ 1,447,128 $ ( 192,098 ) $ 1,964 $ ( 22,160 ) $ 1,235,439 Net income — — — 9,076 2,411 11,487 Issuance of restricted stock 5,184 — — — — — — Forfeiture of restricted stock ( 2,604 ) — — — — — — Dividends declared and paid — — — ( 16,933 ) — ( 4,531 ) ( 21,464 ) Stock-based compensation — — 1,484 — — — 1,484 Other comprehensive income - change in value of interest rate swaps — — — — 374 101 475 Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 216 ) ( 59 ) ( 275 ) Balance at June 30, 2021 60,474,866 $ 605 $ 1,448,612 $ ( 199,955 ) $ 2,122 $ ( 24,238 ) $ 1,227,146 Net income — — 10,186 2,709 12,895 Forfeiture of restricted stock ( 2,801 ) — — — — — — Dividends declared and paid — — — ( 18,141 ) — ( 4,854 ) ( 22,995 ) Stock-based compensation — — 1,484 — — — 1,484 Other comprehensive income - change in value of interest rate swaps — — — — 342 93 435 Reclassification of amortization of forward-starting swap included in interest expense — — — — ( 216 ) ( 58 ) ( 274 ) Balance at September 30, 2021 60,472,065 $ 605 $ 1,450,096 $ ( 207,910 ) $ 2,248 $ ( 26,348 ) $ 1,218,691 3 Table of Contents Common Shares Additional Paid-in Capital Accumulated Dividends in Excess of Net Income Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests - Unitholders in the Operating Partnership Total Shares Amount Balance at December 31, 2019 60,068,228 $ 601 $ 1,452,014 $ ( 144,378 ) $ 5,680 $ ( 20,245 ) $ 1,293,672 Net income — — — 12,172 — 3,312 15,484 Dividends declared and paid — — — ( 18,020 ) — ( 4,917 ) ( 22,937 ) Stock-based compensation — — 1,250 — — — 1,250 Other comprehensive loss - change in value of interest rate swaps — — — — ( 4,816 ) ( 1,299 ) ( 6,115 ) Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 261 ) ( 72 ) ( 333 ) Balance at March 31, 2020 60,068,228 $ 601 $ 1,453,264 $ ( 150,226 ) $ 603 $ ( 23,221 ) $ 1,281,021 Net income — — — 7,725 $ — 2,101 9,826 Issuance of restricted stock 6,008 — — — — — — Forfeiture of restricted stock ( 318 ) — — — — — — Dividends declared and paid — — — ( 12,015 ) — ( 3,278 ) ( 15,293 ) Stock-based compensation — — 1,252 — — — 1,252 Other comprehensive loss - change in value of interest rate swaps — — — — 10 4 14 Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 261 ) ( 71 ) ( 332 ) Balance at June 30, 2020 60,073,918 $ 601 $ 1,454,516 $ ( 154,516 ) $ 352 $ ( 24,465 ) $ 1,276,488 Net income — — — 5,125 — 1,365 6,490 Conversion of operating partnership units 209,011 2 ( 12,003 ) — 3 11,998 — Dividends declared and paid — — — ( 15,071 ) — ( 4,045 ) ( 19,116 ) Stock-based compensation — — 1,251 — — — 1,251 Other comprehensive income - change in value of interest rate swaps — — — — 940 261 1,201 Reclassification of amortization of forward-starting swap included in interest expense — — — — ( 261 ) ( 71 ) ( 332 ) Balance at September 30, 2020 60,282,929 $ 603 $ 1,443,764 $ ( 164,462 ) $ 1,034 $ ( 14,957 ) $ 1,265,982 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents American Assets Trust, Inc. Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Nine Months Ended September 30, 2021 2020 OPERATING ACTIVITIES Net income $ 26,115 $ 31,800 Adjustments to reconcile net income to net cash provided by operating activities: Deferred rent revenue and amortization of lease intangibles ( 13,536 ) ( 20,025 ) Depreciation and amortization 85,827 80,869 Amortization of debt issuance costs and debt discounts 1,734 1,109 Early extinguishment of debt 4,271 — Provision for uncollectable rental income ( 934 ) 10,803 Stock-based compensation expense 4,452 3,753 Unrealized loss on hedging activities — 551 Other noncash interest expense ( 824 ) ( 997 ) Other, net ( 927 ) ( 3,208 ) Changes in operating assets and liabilities Change in accounts receivable 941 ( 7,502 ) Change in other assets 225 1,453 Change in accounts payable and accrued expenses 20,589 13,787 Change in security deposits payable 584 ( 1,787 ) Change in other liabilities and deferred credits 1,115 ( 1,457 ) Net cash provided by operating activities 129,632 109,149 INVESTING ACTIVITIES Acquisition of real estate ( 204,511 ) — Capital expenditures ( 56,772 ) ( 48,690 ) Leasing commissions ( 2,025 ) ( 4,884 ) Purchases of marketable securities ( 47,760 ) — Proceeds from the sale of marketable securities 47,723 — Net cash used in investing activities ( 263,345 ) ( 53,574 ) FINANCING ACTIVITIES Repayment of secured notes payable — ( 51,003 ) Proceeds from unsecured line of credit — 100,000 Repayment of unsecured line of credit ( 100,000 ) — Proceeds from unsecured notes payable 494,675 — Repayment of unsecured notes payable ( 155,375 ) — Debt issuance costs ( 5,075 ) — Proceeds from issuance of common stock, net — ( 119 ) Dividends paid to common stock and unitholders ( 65,922 ) ( 57,346 ) Net cash provided by (used in) financing activities 168,303 ( 8,468 ) Net increase in cash and cash equivalents 34,590 47,107 Cash, cash equivalents and restricted cash, beginning of period 139,049 109,451 Cash, cash equivalents and restricted cash, end of period $ 173,639 $ 156,558 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows: Nine Months Ended September 30, 2021 2020 Cash and cash equivalents 171,923 155,327 Restricted cash 1,716 1,231 Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows $ 173,639 $ 156,558 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents American Assets Trust, L.P. Consolidated Balance Sheets (In Thousands, Except Unit Data) September 30, December 31, 2021 2020 (unaudited) ASSETS Real estate, at cost Operating real estate $ 3,386,539 $ 3,155,280 Construction in progress 117,069 91,047 Held for development 547 547 3,504,155 3,246,874 Accumulated depreciation ( 823,198 ) ( 754,140 ) Real estate, net 2,680,957 2,492,734 Cash and cash equivalents 171,923 137,333 Restricted cash 1,716 1,716 Accounts receivable, net 7,421 6,938 Deferred rent receivables, net 80,369 72,476 Other assets, net 108,684 106,112 TOTAL ASSETS $ 3,051,070 $ 2,817,309 LIABILITIES AND CAPITAL LIABILITIES: Secured notes payable, net $ 110,955 $ 110,923 Unsecured notes payable, net 1,537,772 1,196,677 Unsecured line of credit, net — 99,151 Accounts payable and accrued expenses 88,851 59,262 Security deposits payable 7,996 6,590 Other liabilities and deferred credits, net 86,805 91,300 Total liabilities 1,832,379 1,563,903 Commitments and contingencies (Note 11) CAPITAL: Limited partners' capital, 16,181,537 and 16,181,537 units issued and outstanding as of September 30, 2021 and December 31, 2020, respectively ( 27,477 ) ( 19,020 ) General partner's capital, 60,472,065 and 60,476,292 units issued and outstanding as of September 30, 2021 and December 31, 2020, respectively 1,242,791 1,269,689 Accumulated other comprehensive income 3,377 2,737 Total capital 1,218,691 1,253,406 TOTAL LIABILITIES AND CAPITAL $ 3,051,070 $ 2,817,309 The accompanying notes are an integral part of these consolidated financial statements. 6 Table of Contents American Assets Trust, L.P. Consolidated Statements of Comprehensive Income (Unaudited) (In Thousands, Except Shares and Per Unit Data) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 REVENUE: Rental income $ 93,804 $ 80,759 $ 262,573 $ 252,059 Other property income 4,482 3,615 11,508 11,167 Total revenue 98,286 84,374 274,081 263,226 EXPENSES: Rental expenses 23,466 19,208 61,916 58,757 Real estate taxes 9,644 11,491 31,610 31,497 General and administrative 6,827 6,438 20,574 19,937 Depreciation and amortization 30,680 26,914 85,827 80,869 Total operating expenses 70,617 64,051 199,927 191,060 OPERATING INCOME 27,669 20,323 74,154 72,166 Interest expense ( 14,722 ) ( 13,302 ) ( 43,589 ) ( 40,105 ) Early extinguishment of debt — — ( 4,271 ) — Other (expense) income, net ( 52 ) ( 531 ) ( 179 ) ( 261 ) NET INCOME 12,895 6,490 26,115 31,800 Net income attributable to restricted shares ( 145 ) ( 87 ) ( 417 ) ( 260 ) NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, L.P. $ 12,750 $ 6,403 $ 25,698 $ 31,540 EARNINGS PER UNIT - BASIC Earnings per unit, basic $ 0.17 $ 0.08 $ 0.34 $ 0.41 Weighted average units outstanding - basic 76,171,880 76,118,032 76,168,381 76,115,456 EARNINGS PER UNIT - DILUTED Earnings per unit, diluted $ 0.17 $ 0.08 $ 0.34 $ 0.41 Weighted average units outstanding - diluted 76,171,880 76,118,032 76,168,381 76,115,456 DISTRIBUTIONS PER UNIT $ 0.30 $ 0.25 $ 0.86 $ 0.75 COMPREHENSIVE INCOME Net income $ 12,895 $ 6,490 $ 26,115 $ 31,800 Other comprehensive income (loss) - unrealized income (loss) on swap derivatives during the period 435 1,201 1,657 ( 4,900 ) Reclassification of amortization of forward-starting swap realized gains included in interest expense ( 274 ) ( 332 ) ( 824 ) ( 997 ) Reclassification of amortization of forward-starting swap realized gain included in early extinguishment of debt — — ( 193 ) — Comprehensive income 13,056 7,359 26,755 25,903 Comprehensive income attributable to Limited Partners ( 2,744 ) ( 1,555 ) ( 5,604 ) ( 5,530 ) Comprehensive income attributable to General Partner $ 10,312 $ 5,804 $ 21,151 $ 20,373 The accompanying notes are an integral part of these consolidated financial statements. 7 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, 2020 16,181,537 $ ( 19,020 ) 60,476,292 $ 1,269,689 $ 2,737 $ 1,253,406 Net income — 339 — 1,394 — 1,733 Forfeiture of restricted units — — ( 4,006 ) — — — Distributions — ( 4,531 ) — ( 16,932 ) — ( 21,463 ) Stock-based compensation — — — 1,484 — 1,484 Other comprehensive gain - change in value of interest rate swap — — — — 747 747 Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 275 ) ( 275 ) Reclassification of amortization of forward-starting swap included in early extinguishment of debt — — — — ( 193 ) ( 193 ) Balance at March 31, 2021 16,181,537 $ ( 23,212 ) 60,472,286 $ 1,255,635 $ 3,016 $ 1,235,439 Net income — 2,411 — 9,076 — 11,487 Issuance of restricted units — — 5,184 — — — Forfeiture of restricted units — — ( 2,604 ) — — — Distributions — ( 4,531 ) — ( 16,933 ) — ( 21,464 ) Stock-based compensation — — — 1,484 — 1,484 Other comprehensive income - change in value of interest rate swap — — — — 475 475 Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 275 ) ( 275 ) Balance at June 30, 2021 16,181,537 $ ( 25,332 ) 60,474,866 $ 1,249,262 $ 3,216 $ 1,227,146 Net income — 2,709 — 10,186 — 12,895 Forfeiture of restricted units — — ( 2,801 ) — — — Distributions — ( 4,854 ) — ( 18,141 ) — ( 22,995 ) Stock-based compensation — — — 1,484 — 1,484 Other comprehensive income - change in value of interest rate swap — — — — 435 435 Reclassification of amortization of forward-starting swap included in interest expense — — — — ( 274 ) ( 274 ) Balance at September 30, 2021 16,181,537 $ ( 27,477 ) 60,472,065 $ 1,242,791 $ 3,377 $ 1,218,691 8 Table of Contents Limited Partners' Capital (1) General Partner's Capital (2) Accumulated Other Comprehensive Income (Loss) Total Capital Units Amount Units Amount Balance at December 31, 2019 16,390,548 $ ( 22,281 ) 60,068,228 $ 1,308,237 $ 7,716 $ 1,293,672 Net income — 3,312 — 12,172 — 15,484 Distributions — ( 4,917 ) — ( 18,020 ) — ( 22,937 ) Stock-based compensation — — — 1,250 — 1,250 Other comprehensive loss - change in value of interest rate swap — — — — ( 6,115 ) ( 6,115 ) Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 333 ) ( 333 ) Balance at March 31, 2020 16,390,548 $ ( 23,886 ) 60,068,228 $ 1,303,639 $ 1,268 $ 1,281,021 Net income — 2,101 — 7,725 — 9,826 Issuance of restricted units — — 6,008 — — — Forfeiture of restricted units — — ( 318 ) — — — Distributions — ( 3,278 ) — ( 12,015 ) — ( 15,293 ) Stock-based compensation — — — 1,252 — 1,252 Other comprehensive loss - change in value of interest rate swap — — — — 14 14 Reclassification of amortization of forward-starting swap realized gains included in interest expense — — — — ( 332 ) ( 332 ) Balance at June 30, 2020 16,390,548 $ ( 25,063 ) 60,073,918 $ 1,300,601 $ 950 $ 1,276,488 Net income — 1,365 — 5,125 — 6,490 Conversion of operating partnership units ( 209,011 ) 12,001 209,011 ( 12,001 ) — — Distributions — ( 4,045 ) — ( 15,071 ) — ( 19,116 ) Stock-based compensation — — — 1,251 — 1,251 Other comprehensive income - change in value of interest rate swap — — — — 1,201 1,201 Reclassification of amortization of forward-starting swap included in interest expense — — — — ( 332 ) ( 332 ) Balance at September 30, 2020 16,181,537 $ ( 15,742 ) 60,282,929 $ 1,279,905 $ 1,819 $ 1,265,982 (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. 9 Table of Contents American Assets Trust, L.P. Consolidated Statements of Cash Flows (Unaudited, In Thousands) Nine Months Ended September 30, 2021 2020 OPERATING ACTIVITIES Net income $ 26,115 $ 31,800 Adjustments to reconcile net income to net cash provided by operating activities: Deferred rent revenue and amortization of lease intangibles ( 13,536 ) ( 20,025 ) Depreciation and amortization 85,827 80,869 Amortization of debt issuance costs and debt discounts 1,734 1,109 Early extinguishment of debt 4,271 — Provision for uncollectable rental income ( 934 ) 10,803 Stock-based compensation expense 4,452 3,753 Unrealized loss on hedging activities — 551 Other noncash interest expense ( 824 ) ( 997 ) Other, net ( 927 ) ( 3,208 ) Changes in operating assets and liabilities Change in accounts receivable 941 ( 7,502 ) Change in other assets 225 1,453 Change in accounts payable and accrued expenses 20,589 13,787 Change in security deposits payable 584 ( 1,787 ) Change in other liabilities and deferred credits 1,115 ( 1,457 ) Net cash provided by operating activities 129,632 109,149 INVESTING ACTIVITIES Acquisition of real estate ( 204,511 ) — Capital expenditures ( 56,772 ) ( 48,690 ) Leasing commissions ( 2,025 ) ( 4,884 ) Purchases of marketable securities ( 47,760 ) — Proceeds from the sale of marketable securities 47,723 — Net cash used in investing activities ( 263,345 ) ( 53,574 ) FINANCING ACTIVITIES Repayment of secured notes payable — ( 51,003 ) Proceeds from unsecured line of credit — 100,000 Repayment of unsecured line of credit ( 100,000 ) — Proceeds from unsecured notes payable 494,675 — Repayment of unsecured notes payable ( 155,375 ) — Debt issuance costs ( 5,075 ) — Contributions from American Assets Trust, Inc. — ( 119 ) Distributions ( 65,922 ) ( 57,346 ) Net cash provided by (used in) financing activities 168,303 ( 8,468 ) Net increase in cash and cash equivalents 34,590 47,107 Cash, cash equivalents and restricted cash, beginning of period 139,049 109,451 Cash, cash equivalents and restricted cash, end of period $ 173,639 $ 156,558 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows: Nine Months Ended September 30, 2021 2020 Cash and cash equivalents $ 171,923 $ 155,327 Restricted cash 1,716 1,231 Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows $ 173,639 $ 156,558 The accompanying notes are an integral part of these consolidated financial statements. 10 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements September 30, 2021 (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 203 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing. As of September 30, 2021, we owned or had a controlling interest in 30 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of September 30, 2021, we owned land at three of our properties that we classify as held for development and/or construction in progress. A summary of the properties owned by us is as follows: Retail Carmel Country Plaza Gateway Marketplace Alamo Quarry Market Carmel Mountain Plaza Del Monte Center Hassalo on Eighth - Retail South Bay Marketplace Geary Marketplace Lomas Santa Fe Plaza The Shops at Kalakaua Solana Beach Towne Centre Waikele Center Office La Jolla Commons One Beach Street Corporate Campus East III Torrey Reserve Campus First & Main Torrey Point Lloyd Portfolio Solana Crossing City Center Bellevue The Landmark at One Market Eastgate Office Park Multifamily Loma Palisades Hassalo on Eighth - Residential Imperial Beach Gardens Mariner's Point Santa Fe Park RV Resort Pacific Ridge Apartments Mixed-Use Waikiki Beach Walk Retail and Embassy Suites™ Hotel Held for Development and/or Construction in Progress La Jolla Commons – Land Solana Crossing – Land Lloyd Portfolio – Construction in Progress 11 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (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. The Company follows the Financial Accounting Standards Board (the "FASB") guidance for determining whether an entity is a variable interest entity (“VIE”) and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. American Assets Trust, Inc. has concluded that the Operating Partnership is a VIE, and because American Assets Trust, Inc. has both the power and the rights to control the Operating Partnership, American Assets Trust, Inc. is the primary beneficiary and is required to continue to consolidate the Operating Partnership. Substantially all of the assets and liabilities of the Company are related to the operating partnership VIE. All 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, 2020. 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): Nine Months Ended September 30, 2021 2020 Supplemental cash flow information Total interest costs incurred $ 45,618 $ 40,892 Interest capitalized $ 2,029 $ 787 Interest expense $ 43,589 $ 40,105 Cash paid for interest, net of amounts capitalized $ 42,311 $ 41,547 Cash paid for income taxes $ 289 $ 684 Supplemental schedule of noncash investing and financing activities Accounts payable and accrued liabilities for construction in progress $ 10,119 $ 14,421 Accrued leasing commissions $ 1,072 $ 989 12 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) 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, 2020. There have been no changes to our significant accounting policies during the nine months ended September 30, 2021. Segment Information Segment information is prepared on the same basis that our chief operating decision maker reviews information for operational decision-making purposes. We operate in four business segments: the acquisition, redevelopment, ownership and management of retail real estate, office real estate, multifamily real estate and mixed-use real estate. The products for our retail segment primarily include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our office segment primarily include rental of office space and other tenant services, including tenant reimbursements, parking and storage space rental. The products for our multifamily segment include rental of apartments and other tenant services. The products of our mixed-use segment include rental of retail space and other tenant services, including tenant reimbursements, parking and storage space rental and operation of a 369 -room all-suite hotel. 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. We make estimates of the collectability of our current accounts receivable and straight-line rents receivable which require significant judgment by management. The collectability of receivables is affected by numerous different factors including current economic conditions, including the impact of tenant bankruptcies, the status of collectability of current cash rents receivable, tenants' recent and historical financial and operating results, changes in our tenants' credit ratings, communications between our operating personnel and tenants, the extent of security deposits and letters of credit held with respect to tenants, and the ability of the tenant to perform under the terms of their lease agreement. The provision for doubtful accounts at September 30, 2021 and December 31, 2020 was approximately $ 6.2 million and $ 10.0 million, respectively. Rent Concessions – COVID-19 During the third quarter of 2021, we provided lease concessions to certain tenants, primarily within the retail segment, as a result of the COVID-19 pandemic, in the form of rent deferrals and abatements. These lease concessions generally included an increase in our rights as a lessor. We assess each lease concession and determine whether it represents a lease modifications under Accounting Standards Codification Topic 842, Leases ("ASC 842"). For the third quarter of 2021, we collected approximately $ 0.8 million or 96 % of the deferred rent repayments due during the period. Recent Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides companies with optional practical expedients to ease the accounting burden for contract modifications associated with transitioning away from LIBOR and other interbank offered rates that are expected to be discontinued as part of reference rate reform. For hedges, the guidance generally allows changes to the reference rate and other critical terms without having to de-designate the hedging relationship, as well as allows the shortcut method to continue to be applied. For contract modifications, changes in the reference rate or other critical terms will be treated as a continuation of the prior contract. This guidance can be applied immediately, however, is generally only available through December 31, 2022. We are still evaluating the impact of reference rate reform and whether we will apply any of these practical expedients. 13 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) NOTE 2. REAL ESTATE Property Asset Acquisitions On July 7, 2021, we acquired E astgate Office Park, consisting of an approximately 280,000 square feet, multi-tenant office campus in Bellevue, Washington. The purchase price was approximately $ 125 million, excluding closing costs of approximately $ 0.2 million. On September 10, 2021, we acquired Corporate Campus East III in Bellevue, Washington, consisting of an approximately 161,000 square feet, multi-tenant office campus. The purchase price was approximately $ 84 million , less seller credits of (i) approximately $ 1.1 million of future rent abatement (ii) approximately $ 2.1 million of contractual tenant improvements and closing costs of approximately $ 0.1 million. The properties were acquired with cash on hand. The financial information set forth below summarizes the Company’s purchase price allocation for Eastgate Office Park and Corporate Campus East III during the nine months ended September 30, 2021 (in thousands): Eastgate Office Park Corporate Campus East III Land $ 35,822 $ 23,203 Building 76,692 52,234 Land improvements 1,740 667 Furniture, fixtures, and equipment 4,305 3,091 Total real estate 118,559 79,195 Lease intangibles 7,023 5,341 Prepaid expenses and other assets 8 13 Assets acquired $ 125,590 $ 84,549 Accounts payable and accrued expenses $ ( 31 ) $ ( 9 ) Security deposits payable ( 513 ) ( 310 ) Other liabilities and deferred credits ( 535 ) ( 3,844 ) Liabilities assumed $ ( 1,079 ) $ ( 4,163 ) The value allocated to lease intangibles is amortized over the related lease term as depreciation and amortization expense in the statement of income. The remaining weighted average amortization period as of September 30, 2021, is 3.5 years and 5.5 years for Eastgate Office Park and Corporate Campus East III, respectively. The following table summarizes the operating results for Eastgate Office Park and Corporate Campus East III included in the Company's historical consolidated statement of operations for the period of acquisition through September 30, 2021 (in thousands): Eastgate Office Park Corporate Campus East III Total Revenues $ 2,432 $ 364 $ 2,796 Operating expenses $ ( 2,572 ) $ ( 483 ) $ ( 3,055 ) Operating loss $ ( 140 ) $ ( 119 ) $ ( 259 ) Net loss attributable to American Assets Trust, Inc. $ ( 139 ) $ ( 119 ) $ ( 258 ) 14 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) NOTE 3. ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES The following summarizes our acquired lease intangibles and leasing costs, which are included in other assets and other liabilities and deferred credits, as of September 30, 2021 and December 31, 2020 (in thousands): September 30, 2021 December 31, 2020 In-place leases $ 67,215 $ 60,965 Accumulated amortization ( 35,711 ) ( 34,758 ) Above market leases 2,532 5,389 Accumulated amortization ( 2,373 ) ( 5,268 ) Acquired lease intangible assets, net $ 31,663 $ 26,328 Below market leases $ 58,655 $ 56,677 Accumulated accretion ( 35,357 ) ( 35,219 ) Acquired lease intangible liabilities, net $ 23,298 $ 21,458 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 The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities are reasonable estimates of fair value, using Level 1 inputs, because of the short-term nature of these instruments. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. We measure the fair value of our deferred compensation liability, which is included in other liabilities and deferred credits on the consolidated balance sheet, on a recurring basis using Level 2 inputs. We measure the fair value of this liability based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques. The fair value of the interest rate swap agreements are based on the estimated amounts we would receive or pay to terminate the contract at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The 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 contracts 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. 15 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2021 we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivative. As a result, we have determined that our derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy. A summary of our financial liabilities that are measured at fair value on a recurring basis, by level within the fair value hierarchy is as follows (in thousands): September 30, 2021 December 31, 2020 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Deferred compensation liability $ — $ 2,350 $ — $ 2,350 $ — $ 2,059 $ — $ 2,059 Interest rate swap liability $ — $ 2,874 $ — $ 2,874 $ — $ 4,531 $ — $ 4,531 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 1.9 % to 3.7 %. 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. The carrying values of our revolving line of credit and term loan set forth below are deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts. A summary of the carrying amount and fair value of our secured financial instruments, all of which are based on Level 2 inputs, is as follows (in thousands): September 30, 2021 December 31, 2020 Carrying Value Fair Value Carrying Value Fair Value Secured notes payable, net $ 110,955 $ 113,955 $ 110,923 $ 114,074 Unsecured term loans, net $ 249,549 $ 250,000 $ 249,233 $ 250,000 Unsecured senior guaranteed notes, net $ 797,850 $ 832,820 $ 947,444 $ 1,017,378 Senior unsecured notes, net $ 490,373 $ 514,500 $ — $ — Unsecured line of credit, net $ — $ — $ 99,151 $ 100,000 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. The following is a summary of the terms of our outstanding interest rate swaps as of September 30, 2021 (dollars in thousands): Swap Counterparty Notional Amount Effective Date Maturity Date Fair Value U.S. Bank N.A. $ 100,000 3/1/2016 3/1/2023 $ ( 1,925 ) Wells Fargo Bank, N.A. $ 50,000 5/2/2016 3/1/2023 $ ( 949 ) 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 as hedged cash flows remain probable. During the next twelve months, we estimate the cash flow hedges in place will reduce interest expense by approximately $ 1.1 million. 16 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (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, counter party credit risk and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. NOTE 6. OTHER ASSETS Other assets consist of the following (in thousands): September 30, 2021 December 31, 2020 Leasing commissions, net of accumulated amortization of $ 38,887 and $ 35,167 , respectively $ 37,709 $ 38,173 Acquired above market leases, net 159 121 Acquired in-place leases, net 31,504 26,207 Lease incentives, net of accumulated amortization of $ 914 and $ 802 , respectively 611 994 Other intangible assets, net of accumulated amortization of $ 1,288 and $ 1,213 , respectively 2,539 2,565 Debt issuance costs, net of accumulated amortization of $ 1,527 and $ 0 , respectively 543 — Right-of-use lease asset, net 26,824 29,350 Prepaid expenses and other 8,795 8,702 Total other assets $ 108,684 $ 106,112 NOTE 7. OTHER LIABILITIES AND DEFERRED CREDITS Other liabilities and deferred credits consist of the following (in thousands): September 30, 2021 December 31, 2020 Acquired below market leases, net $ 23,298 $ 21,458 Prepaid rent and deferred revenue 14,075 14,518 Interest rate swap liability 2,874 4,531 Deferred rent expense and lease intangible 6 16 Deferred compensation 2,350 2,059 Deferred tax liability 573 570 Straight-line rent liability 15,142 18,049 Lease liability 28,455 30,060 Other liabilities 32 39 Total other liabilities and deferred credits, net $ 86,805 $ 91,300 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. 17 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) NOTE 8. DEBT Debt of American Assets Trust, Inc. American Assets Trust, Inc. does not hold any indebtedness. All debt is held directly or indirectly by the Operating Partnership; however, American Assets Trust, Inc. has guaranteed the Operating Partnership's obligations under the (i) amended and restated credit facility, (ii) term loans, (iii) senior guaranteed notes, and (iv) senior unsecured notes. Additionally, American Assets Trust, Inc. has provided a carve-out guarantee on the property-level mortgage debt at City Center Bellevue. Debt of American Assets Trust, L.P. Secured notes payable The following table is a summary of our total secured notes payable outstanding as of September 30, 2021 and December 31, 2020 (in thousands): Principal Balance as of Stated Interest Rate Stated Maturity Date Description of Debt September 30, 2021 December 31, 2020 as of September 30, 2021 City Center Bellevue (1) 111,000 111,000 3.98 % November 1, 2022 111,000 111,000 Debt issuance costs, net of accumulated amortization of $ 376 and $ 345 , respectively ( 45 ) ( 77 ) Total Secured Notes Payable Outstanding $ 110,955 $ 110,923 (1) Interest only. Certain loans require us to comply with various financial covenants. As of September 30, 2021, the Operating Partnership was in compliance with these financial covenants. 18 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) Unsecured notes payable The following table is a summary of the Operating Partnership's total unsecured notes payable outstanding as of September 30, 2021 and December 31, 2020 (in thousands): Description of Debt Principal Balance as of Stated Interest Rate Stated Maturity Date September 30, 2021 December 31, 2020 as of September 30, 2021 Term Loan A $ 100,000 $ 100,000 Variable (1) January 9, 2022 Senior Guaranteed Notes, Series A (2) — 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 F 100,000 100,000 3.78 % (6) July 19, 2024 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 250,000 250,000 4.29 % (7) March 1, 2027 Senior Guaranteed Notes, Series E 100,000 100,000 4.24 % (8) May 23, 2029 Senior Guaranteed Notes, Series G 150,000 150,000 3.91 % (9) July 30, 2030 3.375% Senior Unsecured Notes 500,000 — 3.38 % February 1, 2031 1,550,000 1,200,000 Debt discount and issuance costs, net of accumulated amortization of $ 9,128 and $ 8,856 , respectively ( 12,228 ) ( 3,323 ) Total Unsecured Notes Payable $ 1,537,772 $ 1,196,677 (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 4.13 % through the interest rate swap maturity date of January 9, 2021, subject to adjustments based on our consolidated leverage ratio. Subsequent to January 9, 2021, the interest rate associated with Term Loan A will be variable as described below. (2) Notes prepaid in full, with make-whole penalty thereon of approximately $ 3.9 million, on January 26, 2021. (3) The Operating Partnership entered into a one-month forward-starting seven years swap contract on August 19, 2014, which was settled on September 19, 2014 at a gain of approximately $ 1.6 million. The forward-starting seven-year swap contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.88 % per annum. On January 26, 2021, we prepaid the entirety of the Senior Guaranteed Notes, Series A with make-whole premium thereon. (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. Effective March 1, 2018, the effective interest rate associated with Term Loan B is approximately 2.65 %, 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. Effective March 1, 2018, the effective interest rate associated with Term Loan C is approximately 2.64 %, subject to adjustments based on our consolidated leverage ratio. (6) The Operating Partnership entered into a treasury lock contract on May 31, 2017, which was settled on June 23, 2017 at a loss of approximately $ 0.5 million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.85 % per annum. (7) 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. Each of 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. (8) The Operating Partnership 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. (9) The Operating Partnership entered into a treasury lock contract on June 20, 2019, which was settled on July 17, 2019 at a gain of approximately $ 0.5 million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately 3.88 % per annum. 19 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) On January 26, 2021, the Operating Partnership issued $ 500 million of senior unsecured notes (the "3.375% Senior Notes") that mature February 1, 2031 and bear interest at 3.375 % per annum. The 3.375% Senior Notes were priced at 98.935 % of the principal amount with a yield to maturity of 3.502 %. The net proceeds of the 3.375% Senior Notes, after the issuance discount, underwriting fees, and other costs were approximately $ 489.7 million, which were primarily used to (i) prepay our $ 150 million Senior Guaranteed Notes, Series A, with a make-whole payment (as defined in the Note Purchase Agreement for the Series A Notes) thereon of approximately $ 3.9 million, on January 26, 2021, (ii) repay our $ 100 million then outstanding balance under our Revolver Loan on January 26, 2021, (iii) fund the development of the La Jolla Commons III office building and (iv) for general corporate purposes. Certain unsecured loans and notes require us to comply with various financial covenants. As of September 30, 2021, the Operating Partnership was in compliance with these financial covenants. Amended Term Loan Agreement On January 9, 2018, we entered into the Third Amendment to the Term Loan Agreement (as so amended, the "Term Loan Agreement"), which maintains the seven years $ 150 million unsecured term loan (referred to herein as Term Loan B and Term Loan C) to the Operating Partnership that matures on March 1, 2023 (the “$150mm Term Loan”). Effective as of March 1, 2018, borrowings under the Term Loan Agreement with respect to the $150mm Term Loan bear interest at floating rates equal to, at the Operating Partnership’s option, either (1) LIBOR , plus a spread which ranges from 1.20 % to 1.70 % based on the Operating Partnership’s consolidated leverage ratio, or (2) a base rate equal to the highest of (a) 0 %, (b) the prime rate , (c) the federal funds rate plus 50 bps or (d) the Eurodollar rate plus 100 bps, in each case plus a spread which ranges from 0.70 % to 1.35 % based on the Operating Partnership’s consolidated leverage ratio. Additionally, the Operating Partnership may elect for borrowings to bear interest based on a ratings-based pricing grid as per the Operating Partnership’s then-applicable investment grade debt ratings under the terms set forth in the Term Loan Agreement. Second Amended and Restated Credit Facility On January 9, 2018, we entered into a second amended and restated credit agreement (the "Second Amended and Restated Credit Facility"). The Second Amended and Restated Credit Facility provides for aggregate, unsecured borrowing of $ 450 million, consisting of a revolving line of credit of $ 350 million (the "Revolver Loan") and a term loan of $ 100 million (the "Term Loan A"). The Second Amended and Restated Credit Facility has an accordion feature that may allow us to increase the availability thereunder up to an additional $ 250 million, subject to meeting specified requirements and obtaining additional commitments from lenders. At September 30, 2021, there were no amounts outstanding under the Revolver Loan and we had incurred approximately $ 0.5 million of debt issuance costs, net, which are recorded in other assets, net on the consolidated balance sheets. Borrowings under the Second Amended and Restated Credit Agreement initially bear interest at floating rates equal to, at our option, either (1) LIBOR , plus a spread which ranges from (a) 1.05 % to 1.50 % (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) LIBOR plus 100 bps, plus a spread which ranges from (i) 0.10 % to 0.50 % (with respect to the Revolver Loan) and (ii) 0.30 % to 0.90 % (with respect to Term Loan A), in each case based on our consolidated leverage ratio. For the nine months ended September 30, 2021, the weighted average interest rate on the Revolver Loan was 1.19 %. The Revolver Loan initially matures on January 9, 2022, subject to our option to extend the Revolver Loan up to two times, with each such extension for a six month period. The extension options are exercisable by us subject to the satisfaction of certain conditions. On January 9, 2019, we entered into the first amendment (“First Amendment”) to the Second Amended and Restated Credit Facility, which extended the maturity date of Term Loan A to January 9, 2021, subject to three , one year extension options. In October 2020, we exercised an option to extend the maturity date of Term Loan A to January 9, 2022, subject to certain conditions. Additionally, in connection with the First Amendment, borrowings under the Second Amended and Restated Credit Facility with respect to Term Loan A bear interest at floating rates equal to, at our option, either (1) LIBOR , plus a spread which ranges from 1.20 % to 1.70 % based on our consolidated total 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, in each case plus a spread which ranges from 0.20 % to 0.70 % based on our consolidated total leverage ratio. The foregoing rates are intended to be more 20 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) favorable than previously contained in the Second Amended and Restated Credit Facility (prior to entry into the First Amendment) with respect to Term Loan A. Additionally, the Second Amended and Restated Credit Facility includes a number of customary financial covenants, including: • A maximum leverage ratio (defined as total indebtedness net of certain cash and cash equivalents to total asset value) of 60 %, • A maximum secured leverage ratio (defined as total secured debt to secured total asset value) of 40 %, • A minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.50x, • A minimum unsecured interest coverage ratio of 1.75x, • A maximum unsecured leverage ratio of 60 %, and • Recourse indebtedness at any time cannot exceed 15 % of total asset value. The Second Amended and Restated Credit Facility provides that our annual distributions may not exceed the greater of (1) 95% of our funds from operation ("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. As of September 30, 2021, the Operating Partnership was in compliance with the financial covenants in the Second Amended and Restated Credit Facility. 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 16,181,537 common units (the “noncontrolling common units”), and represented approximately 21.2 % of the ownership interests in our Operating Partnership at September 30, 2021. Common units and shares of our common stock have essentially the same economic characteristics in that common units and shares of our common stock share equally in the total net income or loss distributions of our Operating Partnership. Investors who own common units have the right to cause our Operating Partnership to redeem any or all of their common units for cash equal to the then-current market value of one share of our common stock, or, at our election, shares of our common stock on a one -for-one basis. During the nine months ended September 30, 2021, no common units were converted into shares of our common stock. Earnings Per Unit of the Operating Partnership Basic earnings per unit (“EPU”) of the Operating Partnership is computed by dividing income applicable to unitholders by the weighted average Operating Partnership units outstanding, as adjusted for the effect of participating securities. Operating Partnership units granted in equity-based payment transactions that have non-forfeitable dividend equivalent rights are considered participating securities prior to vesting. The impact of unvested Operating Partnership unit awards on EPU has been calculated using the two-class method whereby earnings are allocated to the unvested Operating Partnership unit awards based on distributions and the unvested Operating Partnership units’ participation rights in undistributed earnings. The calculation of diluted EPU for the three months ended September 30, 2021 and 2020 does not include the weighted average of 481,966 and 346,434 unvested outstanding 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 EPU for the nine months ended September 30, 2021 and 2020 does not include the weighted average of 485,897 and 345,613 unvested Operating Partnership units, respectively. 21 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) 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. On March 2, 2018, we amended certain of these equity programs, terminated one such program and entered into a new equity program with one new sales agent. The sales of shares of our common stock made through the ATM equity program, as amended, are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended. During the nine months ended September 30, 2021, no shares of common stock were sold through the ATM equity program. We intend to use the net proceeds from the ATM equity program to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving line of credit or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of September 30, 2021, we had the capacity to issue up to an additional $ 132.6 million in shares of our common stock under our ATM equity program upon filing an updated prospectus supplement with the SEC. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program. Dividends The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units during the nine months ended September 30, 2021: Period Amount per Share/Unit Period Covered Dividend Paid Date First Quarter 2021 $ 0.28 January 1, 2021 to March 31, 2021 March 25, 2021 Second Quarter 2021 $ 0.28 April 1, 2021 to June 30, 2021 June 24, 2021 Third Quarter 2021 $ 0.30 July 1, 2021 to September 30, 2021 September 23, 2021 Taxability of Dividends Earnings and profits, which determine the taxability of distributions to stockholders and holders of common units, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation. Stock-Based Compensation We follow the FASB guidance related to stock-based 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. The guidance also defines a fair value-based method of accounting for an employee stock award or similar equity instrument. The following table summarizes the activity of restricted stock awards during the nine months ended September 30, 2021: Units Weighted Average Grant Date Fair Value Nonvested at January 1, 2021 491,957 $ 23.53 Granted 5,184 38.59 Vested ( 6,008 ) 33.29 Forfeited ( 9,411 ) 23.27 Nonvested at September 30, 2021 481,722 $ 23.58 We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $ 1.5 million and $ 1.3 million in noncash compensation expense for the three months ended September 30, 2021 and 2020, respectively, which is included in general and administrative expense on the consolidated statements of comprehensive income. 22 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) We recognized $ 4.5 million and $ 3.8 million in noncash compensation expense for the nine months ended September 30, 2021 and 2020, respectively. Unrecognized compensation expense was $ 4.2 million at September 30, 2021. 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 481,966 and 346,434 for the three months ended September 30, 2021 and 2020, respectively and 485,897 and 345,613 for the nine months ended September 30, 2021 and 2020, respectively. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares as these unvested shares have nonforfeitable dividend equivalent rights. Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method. For the three and nine months ended September 30, 2021 and 2020, 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. The computation of basic and diluted EPS is presented below (dollars in thousands, except share and per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 NUMERATOR Net income $ 12,895 $ 6,490 $ 26,115 $ 31,800 Less: Net income attributable to restricted shares ( 145 ) ( 87 ) ( 417 ) ( 260 ) Less: Income from operations attributable to unitholders in the Operating Partnership ( 2,709 ) ( 1,365 ) ( 5,459 ) ( 6,778 ) Net income attributable to common stockholders—basic $ 10,041 $ 5,038 $ 20,239 $ 24,762 Income from operations attributable to American Assets Trust, Inc. common stockholders—basic $ 10,041 $ 5,038 $ 20,239 $ 24,762 Plus: Income from operations attributable to unitholders in the Operating Partnership 2,709 1,365 5,459 6,778 Net income attributable to common stockholders—diluted $ 12,750 $ 6,403 $ 25,698 $ 31,540 DENOMINATOR Weighted average common shares outstanding—basic 59,990,343 59,825,174 59,986,844 59,757,709 Effect of dilutive securities—conversion of Operating Partnership units 16,181,537 16,292,858 16,181,537 16,357,747 Weighted average common shares outstanding—diluted 76,171,880 76,118,032 76,168,381 76,115,456 Earnings per common share, basic $ 0.17 $ 0.08 $ 0.34 $ 0.41 Earnings per common share, diluted $ 0.17 $ 0.08 $ 0.34 $ 0.41 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. 23 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) 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 is included in the other liabilities and deferred credits, net on our consolidated balance sheets of $ 0.6 million and $ 0.6 million as of September 30, 2021 and December 31, 2020, respectively, in relation to real estate asset basis differences of property subject to state taxes based on income and certain prepaid expenses of our TRS. Income tax expense is recorded in other (expense) income, net on our consolidated statements of comprehensive income. For the three and nine months ended September 30, 2021, we recorded income tax expense of $ 0.2 million and $ 0.5 million. For the three and nine months ended September 30, 2020, we recorded income tax expense of $ 0.0 million and $ 0.1 million. 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. 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 See Footnote 13 for description of our leases, as a lessee. 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 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. 24 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) A wholly owned subsidiary of our Operating Partnership, WBW Hotel Lessee LLC, entered into a franchise license agreement with Embassy Suites Franchise LLC, the franchisor of the brand “Embassy Suites™,” to obtain the non-exclusive right to operate the hotel under the Embassy Suites TM brand for 20 years. The franchise license agreement provides that WBW Hotel Lessee LLC must comply with certain management, operational, record keeping, accounting, reporting and marketing standards and procedures. In connection with this agreement, we are also subject to the terms of a product improvement plan pursuant to which we expect to undertake certain actions to ensure that our hotel's infrastructure is maintained in compliance with the franchisor's brand standards. In addition, we must pay to Embassy Suites Franchise LLC a monthly franchise royalty fee equal to 4.0 % of the hotel's gross room revenue through December 2021 and 5.0 % of the hotel's gross room revenue thereafter, as well as a monthly program fee equal to 4.0 % of the hotel's gross room revenue. If the franchise license is terminated due to our failure to make required improvements or to otherwise comply with its terms, we may be liable to the franchisor for a termination payment, which could be as high as $ 4.3 million based on operating performance through September 30, 2021. Our Del Monte Center property has ongoing environmental remediation related to ground water contamination. The environmental issue existed at purchase and remains in remediation. The final stages of the remediation will include routine, long term ground monitoring by the appropriate regulatory agency over the next five years to seven years . The work performed is financed through an escrow account funded by the seller upon purchase of the Del Monte Center. We believe the funds in the escrow account are sufficient for the remaining work to be performed. However, if further work is required costing more than the remaining escrow funds, we could be required to pay such overage, although we may have a contractual claim for such costs against the prior owner or our environmental remediation consultant. Concentrations of Credit Risk Our properties are located in Southern California, Northern California, Hawaii, Oregon, Texas, and Washington. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory, social, and health factors affecting the markets in which the tenants operate including, without limitation, the impact the COVID-19 pandemic has had on our tenants. Fifteen of our consolidated properties are located in Southern California, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. Tenants in the retail industry accounted for 25.3 % of total revenues for the nine months ended September 30, 2021. This makes us susceptible to demand for retail rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the retail industry. Furthermore, tenants in the office industry accounted for 49.8 % of total revenues for the nine months ended September 30, 2021. This makes us susceptible to demand for office rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the office industry. For the nine months ended September 30, 2021 and 2020, no tenant accounted for more than 10 % of our total rental revenue. NOTE 13. LEASES Lessor Operating Leases We determine if an arrangement is a lease at inception. Our lease agreements are generally for real estate, and the determination of whether such agreements contain leases generally does not require significant estimates or judgments. We lease real estate under 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 years 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. Our leases may also include variable lease payments in the form of percentage rents based on the tenant’s level of sales achieved in excess of a breakpoint threshold. 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. 25 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) Leases at our office and retail properties and the retail portion of our mixed-use property may contain lease extension options, at our lessee's discretion. The extension options are generally for 3 to 10 years and contain primarily rent at fixed rates or the prevailing market rent. The extension options are generally exercisable 6 to 12 months prior to the expiration of the lease and require the lessee to not be in default of the lease terms. We attempt to maximize the amount we expect to derive from the underlying real estate property following the end of a lease, to the extent it is not extended. We maintain a proactive leasing and capital improvement program that, combined with the quality and locations of our properties, has made our properties attractive to tenants. However, the residual value of a real estate property is still subject to various market-specific, asset-specific, and tenant-specific risks and characteristics. As of September 30, 2021, minimum future rentals from noncancelable operating leases, before any reserve for uncollectible amounts and assuming no early lease terminations, at our office and retail properties and the retail portion of our mixed-use property are as follows (in thousands): Year Ending December 31, 2021 (three months ending December 31, 2021) $ 55,108 2022 231,285 2023 215,130 2024 183,250 2025 161,934 Thereafter 489,326 Total $ 1,336,033 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. Lessee Operating Leases We determine if an arrangement is a lease at inception. Our lease agreements are generally for real estate, and the determination of whether such agreements contain leases generally does not require significant estimates or judgments. We lease real estate under operating leases. At the Landmark at One Market, we lease, as lessee, a building adjacent to the Landmark at One Market under an operating lease effective through June 30, 2026, which we have the option to extend until 2031 by way of the remaining five years extension option (the "Annex Lease"). The lease payments under the extension option provided for under the Annex Lease will be equal to the fair rental value at the time the extension option is exercised. The extension option is included in the calculation of the right-of-use asset and lease liability as we are reasonably certain of exercising the extension option. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement in determining the present value of lease payments. 26 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) Current annual payments under the operating leases are as follows, as of September 30, 2021 (in thousands): Year Ending December 31, 2021 (three months ending December 31, 2021) $ 796 2022 3,232 2023 3,328 2024 3,428 2025 3,531 Thereafter 19,710 Total lease payments $ 34,025 Imputed interest ( 5,570 ) Present value of lease liability $ 28,455 Lease costs under the operating leases are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating lease cost $ 831 $ 999 $ 3,095 $ 2,788 Variable lease cost — — — — Sublease income ( 745 ) ( 1,182 ) ( 2,877 ) ( 3,123 ) Total lease (income) cost $ 86 $ ( 183 ) $ 218 $ ( 335 ) Weighted-average remaining lease term - operating leases (in years) 9.8 Weighted-average discount rate - operating leases 3.19 % Supplemental cash flow information and non-cash activity related to our operating leases are as follow (in thousands): Nine Months Ended September 30, 2021 2020 Operating cash flow information: Cash paid for amounts included in the measurement of lease liabilities $ 1,996 $ 2,557 Non-cash activity: Right-of-use assets obtained in exchange for operating lease obligations $ — $ 27,321 Subleases At the Landmark at One Market, we (as sublandlord) sublease the Annex Lease building under operating leases effective through December 31, 2029. The subleases contain extension options, subject to our ability to extend the Annex Lease, that can extend the subleases through December 31, 2039 at the fair rental value at the time the extension option is exercised. 27 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) NOTE 14. COMPONENTS OF RENTAL INCOME AND EXPENSE The principal components of rental income are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Lease rental income Office $ 45,855 $ 43,193 $ 132,229 $ 127,890 Retail 23,438 18,334 65,866 64,198 Multifamily 12,169 11,770 35,684 35,380 Mixed-use 2,618 902 6,851 7,338 Percentage rent 969 1,353 2,593 1,677 Hotel revenue 8,164 4,680 17,626 13,948 Other 591 527 1,724 1,628 Total rental income $ 93,804 $ 80,759 $ 262,573 $ 252,059 Lease rental income includes $ 3.8 million and $ 4.2 million for the three months ended September 30, 2021 and 2020, respectively, and $ 10.8 million and $ 14.0 million for the nine months ended September 30, 2021 and 2020, respectively, to recognize lease rental income on a straight-line basis. In addition, net amortization of above and below market leases included in lease rental income was $ 0.8 million and $ 0.9 million for the three months ended September 30, 2021 and 2020, respectively, and $ 2.4 million and $ 2.8 million for the nine months ended September 30, 2021 and 2020, respectively. The principal components of rental expenses are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Rental operating $ 11,014 $ 9,501 $ 30,165 $ 28,078 Hotel operating 5,429 3,153 12,287 10,893 Repairs and maintenance 4,492 4,199 12,263 12,816 Marketing 470 498 1,174 1,384 Rent 856 1,029 3,166 2,834 Hawaii excise tax 794 556 1,960 1,928 Management fees 411 272 901 824 Total rental expenses $ 23,466 $ 19,208 $ 61,916 $ 58,757 NOTE 15. OTHER (EXPENSE) INCOME, NET The principal components of other expense, net, are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Interest and investment income $ 98 $ 32 $ 272 $ 415 Income tax expense ( 150 ) ( 12 ) ( 451 ) ( 127 ) Other non-operating expense — ( 551 ) — ( 549 ) Total other (expense) income, net $ ( 52 ) $ ( 531 ) $ ( 179 ) $ ( 261 ) 28 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) NOTE 16. RELATED PARTY TRANSACTIONS During the first quarter of 2019, we terminated a lease agreement with American Assets, Inc. ("AAI"), an entity owned and controlled by Ernest Rady, our CEO, President, and Chairman of Board, and entered into a new lease agreement with AAI for office space at Torrey Reserve Campus. Rents commenced on March 1, 2019 for an initial lease term of three years at an average annual rental rate of $ 0.2 million. During the third quarter of 2020, we entered into a new lease with AAI for office space at Torrey Point to replace its existing lease at Torrey Reserve Campus. Rents commenced on March 1, 2021 for an initial lease term of ten years at an average annual rental rate of $ 0.2 million. Rental revenue recognized on the AAI leases of $ 0.2 million and $ 0.1 million for the nine months ended September 30, 2021 and 2020, respectively, is included in rental income on the statements of comprehensive income. On occasion, the company utilizes aircraft services provided by AAI Aviation, Inc. ("AAIA"), an entity owned and controlled by Mr. Rady. For the nine months ended September 30, 2021 and 2020, we incurred approximately $ 0.2 million and $ 0.0 million of expenses, respectively, related to aircraft services of AAIA or reimbursement to Mr. Rady or the Ernest Rady Trust U/D/T March 13, 1983) for use of the aircraft owned by AAIA. These expenses are recorded as general and administrative expenses in our consolidated statements of comprehensive income. The Waikiki Beach Walk entities have a 47.7 % investment in WBW CHP LLC, an entity that was formed to, among other things, 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, and reimbursements to WBW CHP LLC of $ 0.8 million and $ 0.8 million for the nine months ended September 30, 2021 and 2020, respectively, are included in rental expenses on the consolidated statements of comprehensive income. NOTE 17. 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. We evaluate the performance of our segments based on segment profit, which is defined as property revenue less property expenses. We do not use asset information as a 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. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) The following table represents operating activity within our reportable segments (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Total Office Property revenue $ 47,433 $ 44,821 $ 136,467 $ 133,210 Property expense ( 13,016 ) ( 11,595 ) ( 36,029 ) ( 34,989 ) Segment profit 34,417 33,226 100,438 98,221 Total Retail Property revenue 24,541 20,621 69,296 67,939 Property expense ( 5,745 ) ( 7,795 ) ( 19,922 ) ( 20,033 ) Segment profit 18,796 12,826 49,374 47,906 Total Multifamily Property revenue 13,085 12,564 38,376 37,852 Property expense ( 6,213 ) ( 5,603 ) ( 17,197 ) ( 16,426 ) Segment profit 6,872 6,961 21,179 21,426 Total Mixed-Use Property revenue 13,227 6,368 29,942 24,225 Property expense ( 8,136 ) ( 5,706 ) ( 20,378 ) ( 18,806 ) Segment profit 5,091 662 9,564 5,419 Total segments’ profit $ 65,176 $ 53,675 $ 180,555 $ 172,972 The following table is a reconciliation of segment profit to net income attributable to stockholders (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Total segments’ profit $ 65,176 $ 53,675 $ 180,555 $ 172,972 General and administrative ( 6,827 ) ( 6,438 ) ( 20,574 ) ( 19,937 ) Depreciation and amortization ( 30,680 ) ( 26,914 ) ( 85,827 ) ( 80,869 ) Interest expense ( 14,722 ) ( 13,302 ) ( 43,589 ) ( 40,105 ) Early extinguishment of debt — — ( 4,271 ) — Other income (expense), net ( 52 ) ( 531 ) ( 179 ) ( 261 ) Net income 12,895 6,490 26,115 31,800 Net income attributable to restricted shares ( 145 ) ( 87 ) ( 417 ) ( 260 ) Net income attributable to unitholders in the Operating Partnership ( 2,709 ) ( 1,365 ) ( 5,459 ) ( 6,778 ) Net income attributable to American Assets Trust, Inc. stockholders $ 10,041 $ 5,038 $ 20,239 $ 24,762 30 Table of Contents American Assets Trust, Inc. and American Assets Trust, L.P. Notes to Consolidated Financial Statements—(Continued) September 30, 2021 (Unaudited) The following table shows net real estate and secured note payable balances for each of the segments (in thousands): September 30, 2021 December 31, 2020 Net Real Estate Office $ 1,528,715 $ 1,317,107 Retail 594,491 607,918 Multifamily 383,095 389,804 Mixed-Use 174,656 177,905 $ 2,680,957 $ 2,492,734 Secured Notes Payable (1) Office $ 111,000 $ 111,000 $ 111,000 $ 111,000 (1) Excludes debt issuance costs of $ 0.0 million and $ 0.1 million for each of the periods ended September 30, 2021 and December 31, 2020, respectively. Capital expenditures for each segment for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Capital Expenditures (1) Office $ 17,601 $ 12,572 $ 48,471 $ 40,053 Retail 1,317 747 4,817 7,110 Multifamily 2,121 800 4,117 2,944 Mixed-Use 704 322 1,392 3,467 $ 21,743 $ 14,441 $ 58,797 $ 53,574 (1) Capital expenditures represent cash paid for capital expenditures during the period and include leasing commissions paid . 31 Table of Contents