American Assets Trust, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Currently, one of the most significant risk factors, is the potential adverse effect of the current COVID-19 pandemic on our financial condition, results of operations, cash flows and performance or that of, our tenants and guests, the real estate market and the global economy and financial markets. The extent to which the COVID-19 pandemic impacts us, our tenants and guests will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: • the impact of epidemics, pandemics, or other outbreaks of illness, disease or virus (such as the COVID-19 pandemic) and the actions taken by government authorities and others related thereto, including the ability of our company, our properties and our tenants to operate; • adverse economic or real estate developments in our markets; • our failure to generate sufficient cash flows to service our outstanding indebtedness; • defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants; • difficulties in identifying properties to acquire and completing acquisitions; • difficulties in completing dispositions; • our failure to successfully operate acquired properties and operations; • our inability to develop or redevelop our properties due to market conditions; • fluctuations in interest rates and increased operating costs; • risks related to joint venture arrangements; • our failure to obtain necessary outside financing; • on-going litigation; • general economic conditions; • financial market fluctuations; • risks that affect the general retail, office, multifamily and mixed-use environment; • the competitive environment in which we operate; • decreased rental rates or increased vacancy rates; • conflicts of interests with our officers or directors; • lack or insufficient amounts of insurance; • environmental uncertainties and risks related to adverse weather conditions and natural disasters; 32 Table of Contents • other factors affecting the real estate industry generally; • limitations imposed on our business and our ability to satisfy complex rules in order for us to continue to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes; and • changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes. For a further discussion of these and other factors, see the section entitled “Item 1A. Risk Factors” contained herein and in our annual report on Form 10-K for the year ended December 31, 2020. Overview References to “we,” “our,” “us” and “our company” refer to American Assets Trust, Inc., a Maryland corporation, together with our consolidated subsidiaries, including American Assets Trust, L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this report as our Operating Partnership. We are a full service, vertically integrated and self-administered REIT that owns, operates, acquires and develops high quality retail, office, multifamily and mixed-use properties in attractive, high-barrier-to-entry markets in Southern California, Northern California, Oregon, Washington, Texas and Hawaii. As of September 30, 2021, our portfolio was comprised of twelve retail shopping centers; eleven office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and six multifamily properties. Additionally, as of September 30, 2021, we owned land at three of our properties that we classified as held for development and/or construction in progress. Our core markets include San Diego, California; the San Francisco Bay Area, California; Portland, Oregon; Bellevue, Washington; and Oahu, Hawaii. We are a Maryland corporation formed on July 16, 2010 to acquire the entities owning various controlling and noncontrolling interests in real estate assets owned and/or managed by Ernest S. Rady or his affiliates, including the Ernest Rady Trust U/D/T March 13, 1983, or the Rady Trust, and did not have any operating activity until the consummation of our initial public offering on January 19, 2011. Our Company, as the sole general partner of our Operating Partnership, has control of our Operating Partnership and owned 78.8% of our Operating Partnership as of September 30, 2021. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership. Acquisitions On July 7, 2021, we acquired Eastgate Office Park, consisting of an approximately 280,000 square foot, multi-tenant office campus in the premier I-90 corridor submarket of Bellevue, Washington. The purchase price was approximately $125 million, excluding closing costs and prorations. On September 10, 2021, we acquired Corporate Campus East III, consisting of approximately 161,000 square foot, multi-tenant office campus, less than five minutes away from downtown Bellevue, Washington. The purchase price was approximately $84 million, excluding closing costs and prorations. We acquired Eastgate Office Park and Corporate Campus East III with cash on hand. Critical Accounting Policies We identified certain critical accounting policies that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2020. We have not made any material changes to these policies during the periods covered by this report, other than those described in Footnote 1. 33 Table of Contents Same-store We have provided certain information on a total portfolio, same-store and redevelopment same-store basis. Information provided on a same-store basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared, properties under development, properties classified as held for development and properties classified as discontinued operations. Information provided on a redevelopment same-store basis includes the results of properties undergoing significant redevelopment for the entirety or portion of both periods being compared. Same-store and redevelopment same-store are considered by management to be important measures because they assist in eliminating disparities due to the development, acquisition or disposition of properties during the particular period presented, and thus provides a more consistent performance measure for the comparison of the Company's stabilized and redevelopment properties, as applicable. Additionally, redevelopment same-store is considered by management to be an important measure because it assists in evaluating the timing of the start and stabilization of our redevelopment opportunities and the impact that these redevelopments have in enhancing our operating performance. While there is judgment surrounding changes in designations, we typically reclassify significant development, redevelopment or expansion properties into same-store properties once they are stabilized. Properties are deemed stabilized typically at the earlier of (i) reaching 90% occupancy or (ii) four quarters following a property's inclusion in operating real estate. We typically remove properties from same-store properties when the development, redevelopment or expansion has or is expected to have a significant impact on the property's annualized base rent, occupancy and operating income within the calendar year. Our evaluation of significant impact related to development, redevelopment or expansion activity is based on quantitative and qualitative measures including, but not limited to, the following: the total budgeted cost of planned construction activity compared to the property’s annualized base rent, occupancy and property operating income within the calendar year; percentage of development, redevelopment or expansion square footage to total property square footage; and the ability to maintain historic occupancy and rental rates. In consideration of these measures, we generally remove properties from same-store properties when we see a decline in a property's annualized base rent, occupancy and operating income within the calendar year as a direct result of ongoing redevelopment, development or expansion activity. Acquired properties are classified into same-store properties once we have owned such properties for the entirety of comparable period(s) and the properties are not under significant development or expansion. Below is a summary of our same-store composition for the three and nine months ended September 30, 2021 and 2020. For the three months ended September 30, 2021, Waikele Center was reclassified to same-store properties when compared to the designation for the three months ended September 30, 2020 as redevelopment activity at the property is on hold for the near future and is comparable for the three months ended September 30, 2021. One Beach Street is classified as a non-same-store property due to redevelopment activity to renovate the property. Waikiki Beach Walk Retail and Embassy Suites™ Hotel is classified as a non-same-store property due to spalling repair activity previously disrupting the hotel portion of the property's operations. Eastgate Office Park is classified as a non-same-store property, as it was acquired on July 7, 2021. Corporate Campus East III is also classified as a non-same-store property, as it was acquired on September 10, 2021. For the nine months ended September 30, 2021, One Beach Street was reclassified to non-same-store properties when compared to the designation for the nine months ended September 30, 2020 due to redevelopment activity to renovate the property. Waikele Center was reclassified to same-store properties as redevelopment activity is on hold for the near future. Waikiki Beach Walk Retail and Embassy Suites™ Hotel is classified as a non-same-store property due to spalling repair activity disrupting the hotel portion of the properties operations. Eastgate Office Park is classified as a non-same-store property, as it was acquired on July 7, 2021. Corporate Campus East III is also classified as a non-same-store property, as it was acquired on September 10, 2021. In our determination of same-store and redevelopment same-store properties for the nine months ended September 30, 2021, One Beach Street have been identified as same-store redevelopment properties due to significant redevelopment activity. Retail same-store net operating income increased approximately 3.1% for the nine months ended September 30, 2021 compared to the same period in 2020. Office same-store net operating income increased 0.7% for the nine months ended September 30, 2021 compared to the same period in 2020. Office redevelopment same-store net operating income increased 0.1% for the nine months ended September 30, 2021 compared to the same period in 2020. 34 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Same-Store 26 25 26 24 Non-Same-Store 4 3 4 4 Total Properties 30 28 30 28 Redevelopment Same-Store 27 27 27 26 Total Development Properties 3 3 3 3 Outlook We seek growth in earnings, funds from operations and cash flows primarily through a combination of the following: growth in our same-store portfolio, growth in our portfolio from property development and redevelopments and expansion of our portfolio through property acquisitions. Our properties are located in some of the nation's most dynamic, high-barrier-to-entry markets primarily in Southern California, Northern California, Oregon, Washington and Hawaii, which allow us to take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion, reconfiguration and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities. We intend to opportunistically pursue the development of future phases of Lloyd Portfolio and La Jolla Commons and the redevelopment of One Beach Street based on, among other things, market conditions and our evaluation of whether such opportunities would generate appropriate risk-adjusted financial returns. Our redevelopment and development opportunities are subject to various factors, including market conditions and may not ultimately come to fruition. We continue to review acquisition opportunities in our primary markets that would complement our portfolio and provide long-term growth opportunities. Some of our acquisitions do not initially contribute significantly to earnings growth; however, we believe they provide long-term re-leasing growth, redevelopment opportunities and other strategic opportunities. Any growth from acquisitions is contingent upon our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles. Changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting both the price that must be paid to acquire a property, as well as our ability to economically finance a property acquisition. Generally, our acquisitions are initially financed by available cash, mortgage loans and/or borrowings under our revolving line of credit, which may be repaid later with funds raised through the issuance of new equity or new long-term debt. COVID-19 We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it has and will impact our tenants and business partners. We are unable to predict the future impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic (including future mutations of the COVID-19 virus), the ongoing actions taken to contain the pandemic or mitigate its impact, the availability and adoption of COVID-19 vaccines and the direct and indirect economic effects of the pandemic and containment measures, among others. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the pandemic continues to rapidly evolve. Certain states and cities, including where we own properties, have development sites and where our principal place of business is located, have at various points in time, reacted by instituting quarantines, restrictions on travel, "stay-at-home" orders or “shelter in place” rules, social distancing measures, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. Though certain restrictions have expired in our markets, the Company cannot predict when remaining restrictions or social distancing measures currently in place will expire. Even after certain of such restrictions are lifted or reduced, it is unclear how lingering concerns of COVID-19 transmission and sensitivities to the transmission of other diseases will impact the willingness of customers to visit certain of our tenants' businesses. As a result, the COVID-19 pandemic has and continues to negatively impact almost every industry directly or indirectly, including industries in which the Company and our tenants operate. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. 35 Table of Contents In addition, we cannot predict the impact that COVID-19 will ultimately have on our tenants and other business partners; however, any material effect on these parties could adversely impact us. For the third quarter of 2021, we have collected to date approximately 99% of office rents, 94% of retail rents (including retail component of Waikiki Beach Walk) and 93% of multifamily rents that were due during the third quarter of 2021. Additionally, for the third quarter of 2021, we collected approximately $0.8 million or 96% of the deferred rent repayments due during the period. We believe the company's financial condition and liquidity are currently strong. Although there is uncertainty related to the anticipated impact of the COVID-19 outbreak on the Company's future results, we believe our efficient business model and ongoing steps we have taken to strengthen our balance sheet continues to position us to manage our business through this crisis as it continues to unfold. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our tenants, vendors, and other third-party relationships, and developing new opportunities for growth. Due to the COVID-19 pandemic, we cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity. We remain encouraged by our portfolio’s increasing rent collection percentages as well as the broader macroeconomic conditions related to the ongoing transition back to a fully opened economy. While we continue to monitor the COVID-19 vaccination response and economic initiatives undertaken by the Biden administration, we are hopeful that a continued reopening of the economy in the fourth quarter of 2021 and through 2022 will result in both job growth and an increase in gross domestic product as compared to 2020. Leasing Our same-store growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in portfolio occupancy. Over the long-term, we believe that the infill nature and strong demographics of our properties provide us with a strategic advantage, allowing us to maintain relatively high occupancy and increase rental rates. Furthermore, we believe the locations of our properties and diversified portfolio will mitigate some of the potentially negative impact of the current economic environment. However, in the short-term due to the COVID-19 pandemic, we have seen a meaningful negative impact on certain of our tenants operations and ability to pay rent, primarily in the retail sector; any reduction in our tenants' abilities to pay base rent, percentage rent or other charges, including as a result of the COVID-19 pandemic, will adversely affect our financial condition and results of operations. During the three months ended September 30, 2021, we signed 6 office leases for a total of 13,064 square feet of office space including 9,269 square feet of comparable renewal office space leases (leases for which there was a prior tenant), at an average rental rate increase on a cash and GAAP basis of 8.4% and 13.5%, respectively. New office leases for comparable spaces were signed for 6,451 square feet at an average rental rate increase on a cash and GAAP basis of 12.0% and 16.5%, respectively. Renewals for comparable office spaces were signed for 2,818 square feet at an average rental rate increase on a cash and GAAP basis of 2.7% and 8.1%, respectively. Tenant improvements and incentives were $39.17 per square foot of office space for comparable new leases for the three months ended September 30, 2021, mainly due to tenants at Lloyd Portfolio. During the three months ended September 30, 2021, we signed 30 retail leases for a total of 129,325 square feet of retail space including 116,877 square feet of comparable renewal retail space leases (leases for which there was a prior tenant), at an average rental rate decrease on a cash basis of (2.2)% and increase on a GAAP basis of 6.7%, respectively. New retail leases for comparable spaces were signed for 7,000 square feet at an average rental rate increase on a cash and GAAP basis of 34.6% and 74.6%, respectively. Renewals for comparable retail spaces were signed for 109,877 square feet at an average rental rate decrease on a cash basis of (3.6)% and increase on a GAAP basis of 3.4%, respectively. Tenant improvements and incentives were $215.00 per square foot of retail space for comparable new leases for the three months ended September 30, 2021, mainly due to tenants at Alamo Quarry Market. The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring leases and new leases is determined by including minimum rent and percentage rent paid on the expiring lease and minimum rent and, in some instances, projections of first lease year percentage rent, to be paid on the new lease. In some instances, management exercises judgment as to how to most effectively reflect the comparability of spaces reported in this calculation. The change in rental income on comparable space leases is impacted by numerous factors including current market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, capital investment made in the space and the specific lease structure. Tenant improvements and incentives include the total dollars 36 Table of Contents committed for the improvement of a space as it relates to a specific lease, but may also include base-building costs (i.e. expansion, escalators or new entrances) which are required to make the space leasable. Incentives include amounts paid to tenants as an inducement to sign a lease that do not represent building improvements. The leases signed in 2021 generally become effective over the following year, though some may not become effective until 2022 and beyond. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However, we believe that these increases do provide information about the tenant/landlord relationship and the potential fluctuations we may achieve in rental income over time. Through the remainder of 2021, we believe our leasing volume will be below our historical averages and result in overall decreases in rental income due to the COVID-19 pandemic. However, changes in rental income associated with individual signed leases on comparable spaces may be positive or negative. Capitalized Costs Certain external and internal costs directly related to the development and redevelopment of real estate, including pre-construction costs, real estate taxes, insurance, interest, construction costs and salaries and related costs of personnel directly involved, are capitalized. We capitalize costs under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. We consider a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but not later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with any remaining portion under construction. We capitalized external and internal costs related to both development and redevelopment activities combined of $14.8 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively. We capitalized external and internal costs related to both development and redevelopment activities combined of $34.6 million and $4.2 million for the nine months ended September 30, 2021 and 2020, respectively. We capitalized external and internal costs related to other property improvements combined of $8.8 million and $9.0 million for the three months ended September 30, 2021 and 2020, respectively. We capitalized external and internal costs related to other property improvements totaling $31.7 million and $42.3 million for the nine months ended September 30, 2021 and 2020, respectively. Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet placed in service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use as noted above. We make judgments as to the time period over which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not subtracted in calculating net income. If the time period for capitalizing interest is extended, however, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period. We capitalized interest costs related to development activities of $0.8 million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively. We capitalized interest costs related to development activities of $2.0 million and $0.8 million for the nine months ended September 30, 2021 and 2020, respectively. Results of Operations For our discussion of results of operations, we have provided information on a total portfolio and same-store basis. Comparison of the three months ended September 30, 2021 to the three months ended September 30, 2020 The following summarizes our consolidated results of operations for the three months ended September 30, 2021 compared to our consolidated results of operations for the three months ended September 30, 2020. As of September 30, 2021, our operating portfolio was comprised of 30 retail, office, multifamily and mixed-use properties with an aggregate of approximately 7.1 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, 2,112 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of September 30, 2021, we owned land at three of our properties that we classified as held for development and/or construction in progress. As of September 30, 2020, our operating portfolio was comprised of 28 retail, office, multifamily and mixed-use properties with an aggregate of approximately 6.6 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, 37 Table of Contents 2,112 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of September 30, 2020, we owned land at three of our properties that we classified as held for development and/or construction in progress. The following table sets forth selected data from our unaudited consolidated statements of comprehensive income for the three months ended September 30, 2021 and 2020 (dollars in thousands): Three Months Ended September 30, Change % 2021 2020 Revenues Rental income $ 93,804 $ 80,759 $ 13,045 16 % Other property income 4,482 3,615 867 24 Total property revenues 98,286 84,374 13,912 16 Expenses Rental expenses 23,466 19,208 4,258 22 Real estate taxes 9,644 11,491 (1,847) (16) Total property expenses 33,110 30,699 2,411 8 Total property income 65,176 53,675 11,501 21 General and administrative (6,827) (6,438) (389) 6 Depreciation and amortization (30,680) (26,914) (3,766) 14 Interest expense (14,722) (13,302) (1,420) 11 Other (expense) income, net (52) (531) 479 (90) Net income 12,895 6,490 6,405 99 Net income attributable to restricted shares (145) (87) (58) 67 Net income attributable to unitholders in the Operating Partnership (2,709) (1,365) (1,344) 98 Net income attributable to American Assets Trust, Inc. stockholders $ 10,041 $ 5,038 $ 5,003 99 % Revenue Total property revenues . Total property revenue consists of rental revenue and other property income. Total property revenue increased $13.9 million, or 16%, to $98.3 million for the three months ended September 30, 2021 compared to $84.4 million for the three months ended September 30, 2020. The percentage leased was as follows for each segment as of September 30, 2021 and 2020: Percentage Leased (1) September 30, 2021 2020 Office 90.2 % 93.8 % Retail 91.7 % 95.0 % Multifamily 97.1 % 87.5 % Mixed-Use (2) 86.6 % 87.8 % (1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of September 30, 2021 or 2020, as applicable. (2) Includes the retail portion of the mixed-use property only. 38 Table of Contents The increase in total property revenue was attributable primarily to the increase in collections, increase in occupancy at Waikiki Beach Walk Embassy Suites™ Hotel and factors discussed below. Rental revenues . Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased $13.0 million, or 16%, to $93.8 million for the three months ended September 30, 2021 compared to $80.8 million for the three months ended September 30, 2020. Rental revenue by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio (1) Three Months Ended September 30, Change % Three Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 46,174 $ 43,453 $ 2,721 6 $ 43,767 $ 43,165 $ 602 1 Retail 24,174 19,850 4,324 22 24,174 19,850 4,324 22 Multifamily 12,224 11,821 403 3 12,224 11,821 403 3 Mixed-Use 11,232 5,635 5,597 99 — — — — $ 93,804 $ 80,759 $ 13,045 16 % $ 80,165 $ 74,836 $ 5,329 7 % (1) For this table and tables following, the same-store portfolio excludes: (i) One Beach Street, due to significant redevelopment activity; (ii) Waikiki Beach Walk - Embassy Suites™ and Waikiki Beach Walk - Retail, due to significant spalling repair activity; (iii) Eastgate Office Park which was acquired on July 7, 2021; (iv) Corporate Campus East III which was acquired on September 10, 2021 and (iv) land held for development. Total office rental revenue increased $2.7 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the new acquisitions of Eastgate Office Park and Corporate Campus East III, which accounted for $2.8 million of the increase. The increase in total office rental revenue is partially offset by the decrease in rental revenue at One Beach Street due to expiration of leases to allow for the modernization of the property. Same store office rental revenue increased by $0.6 million due to higher annualized base rents at La Jolla Commons, City Center Bellevue and Torrey Point. Total retail rental revenue increased $4.3 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to approximately $4.6 million for tenants who were changed to alternate rent or to cash basis of revenue recognition during 2020 as the collectability was determined to be no longer probable for certain tenants at Alamo Quarry Market, Carmel Mountain Plaza, Del Monte Center and The Shops at Kalakaua. This increase was offset by a decrease in cost recoveries of $0.2 million as these same tenants changed to alternate rent or had lease modifications. Multifamily revenue increased $0.4 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to an overall increase in occupancy of 94.7% for the three months ended September 30, 2021 compared to 87.2% for the three months ended September 30, 2020. This increase in rental revenue due to higher occupancy is offset by a decrease in average monthly base rent of $2,090 for the three months ended September 30, 2021 compared to $2,193 for the three months ended September 30, 2020, primarily due to decreases at Hassalo on Eighth - Residential. Total mixed-use rental revenue increased $5.6 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the lifting of COVID-19 travel restrictions late during the first quarter of 2021, which led to an increase in average occupancy and revenue per available room to 78% and $240 for the three months ended September 30, 2021, respectively, compared to 66% and $138 for three months ended September 30, 2020, respectively. We expect to see a steady increase in tourism and hotel occupancy in Oahu once the COVID-19 vaccine is available more globally and travel restrictions are lifted. The increase in total mixed-use rental revenue is also attributed to approximately $2.1 million for tenants who were changed to alternate rent or to cash basis of revenue recognition during 2020 as the collectability was determined to be no longer probable for certain tenants at the retail portion of our mixed-use property. 39 Table of Contents Other property income . Other property income increased $0.9 million, or 24%, to $4.5 million for the three months ended September 30, 2021 compared to $3.6 million for the three months ended September 30, 2020. Other property income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended September 30, Change % Three Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 1,259 $ 1,368 $ (109) (8) $ 1,086 $ 1,361 $ (275) (20) Retail 367 771 (404) (52) 367 771 (404) (52) Multifamily 861 743 118 16 861 743 118 16 Mixed-Use 1,995 733 1,262 172 — — — — $ 4,482 $ 3,615 $ 867 24 % $ 2,314 $ 2,875 $ (561) (20) % Office other property income decreased $0.1 million for the three months ended September 30, 2021 primarily due to a decrease in lease termination fees received at City Center Bellevue. This decrease was offset by an increase in parking garage income at First & Main and Lloyd Portfolio. Retail other property income decreased $0.4 million for the three months ended September 30, 2021 primarily due to a decrease in lease termination fees received at Carmel Country Plaza and Del Monte Center during 2020. Multifamily other property income increased by $0.1 million for the three months ended September 30, 2021 primarily due to an increase in parking garage income at Hassalo on Eighth - Residential, meter and laundry income at Loma Palisades and credit check fees at Pacific Ridge Apartments and Hassalo on Eighth - Residential. Mixed-use other property income increased $1.3 million for the three months ended September 30, 2021 primarily due an increase in room rental income and excise tax at the hotel portion and an increase in parking garage income at the retail portion of our mixed-use property. These increase are due to tourism and an increase in hotel occupancy as the COVID-19 vaccine has become more widely available and travel restrictions to Hawaii have been relaxed. Property Expenses Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased $2.4 million, or 8%, to $33.1 million, for the three months ended September 30, 2021 compared to $30.7 million for the three months ended September 30, 2020. Rental Expenses. Rental expenses increased $4.3 million, or 22%, to $23.5 million for the three months ended September 30, 2021 compared to $19.2 million for the three months ended September 30, 2020. Rental expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended September 30, Change % Three Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 7,959 $ 6,744 $ 1,215 18 $ 7,330 $ 6,527 $ 803 12 Retail 3,765 3,913 (148) (4) 3,765 3,913 (148) (4) Multifamily 4,469 3,897 572 15 4,470 3,897 573 15 Mixed-Use 7,273 4,654 2,619 56 — — — — $ 23,466 $ 19,208 $ 4,258 22 % $ 15,565 $ 14,337 $ 1,228 9 % Office rental expense increased $1.2 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to $0.4 million related to the acquisition of Eastgate Office Park and Corporate Campus East III. Same-store office rental expenses increased $0.8 million due to an increase in utilities, facility services, repairs and maintenance and insurance expenses as the "stay-at home" orders issued by state and local governments related to the COVID-19 pandemic were relaxed in early 2021 and our tenants' employees have started returning to the office in-person. Retail rental expense decreased $0.1 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to a decrease in repairs and maintenance and marketing expenses in the period, partially offset by an increase in insurance expense, and facilities services as restrictions on business operations from orders issued by state and local governments related to the COVID-19 pandemic were eased earlier in 2021. 40 Table of Contents Multifamily rental expense increased $0.6 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to an increase in repairs and maintenance, day porter and facilities services, utilities expenses and insurance expense. Mixed-use rental expense increased $2.6 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to an increase in hotel room expenses, personnel expenses, and general excise tax expenses at the hotel portion of our mixed-use property during the period. These increases are due to tourism and an increase in hotel occupancy as the COVID-19 vaccine has become more widely available and travel restrictions to Hawaii have been relaxed. Real Estate Taxes. Real estate taxes increased $1.8 million, or 16%, to $9.6 million for the three months ended September 30, 2021 compared to $11.5 million for the three months ended September 30, 2020. Real estate tax expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended September 30, Change % Three Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 5,057 $ 4,851 $ 206 4 $ 4,797 $ 4,672 $ 125 3 Retail 1,980 3,882 (1,902) (49) 1,980 3,882 (1,902) (49) Multifamily 1,744 1,706 38 2 1,743 1,706 37 2 Mixed-Use 863 1,052 (189) (18) — — — — $ 9,644 $ 11,491 $ (1,847) (16) % $ 8,520 $ 10,260 $ (1,740) (17) % Office real estate taxes increased $0.2 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the acquisition of Eastgate Office Park and Corporate Campus East III during the third quarter of 2021. Same-store office real estate taxes increased $0.1 million primarily due to higher tax assessments at City Center Bellevue, Landmark and First & Main during the period. Retail real estate taxes decreased $1.9 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to a real estate tax refund received during the third quarter of 2021 for approximately $1.6 million at Alamo Quarry Market for the tax assessments for 2019 through 2020. Additionally, there was a decrease in the overall tax bill of $0.4 million at Alamo Quary Market for the year 2021. These decreases were offset by $0.2 million in 2021 real estate tax consultant fees. Mixed-use real estate taxes decreased $0.2 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the COVID-19 pandemic and its financial burden on the hospitality industry, as a result of which the Honolulu County reduced the tax burden for hotels for 2021 through 2022. Property Operating Income Property operating income increased $11.5 million, or 21%, to $65.2 million for the three months ended September 30, 2021, compared to $53.7 million for the three months ended September 30, 2020. Property operating income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Three Months Ended September 30, Change % Three Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 34,417 $ 33,226 $ 1,191 4 $ 32,726 $ 33,327 $ (601) (2) Retail 18,796 12,826 5,970 47 18,796 12,826 5,970 47 Multifamily 6,872 6,961 (89) (1) 6,872 6,961 (89) (1) Mixed-Use 5,091 662 4,429 669 — — — — $ 65,176 $ 53,675 $ 11,501 21 % $ 58,394 $ 53,114 $ 5,280 10 % Total office property operating income increased $1.2 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the new acquisitions of Eastgate Office Park and Corporate Campus East III, offset by the decrease in rental revenue at One Beach Street due to expiration of leases to allow for the modernization of the property. Same-store office property operating income decreased by $0.6 million due to a decrease in lease termination fees, higher rental expenses as the stay-at-home orders issued by state and local governments related to the COVID-19 pandemic were relaxed in early 2021 and an increase in real estate taxes due to higher tax assessments. 41 Table of Contents Total retail property operating income increased $6.0 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to an increase of $4.6 million for tenants who were changed to alternate rent or to cash basis of revenue recognition during 2020 as the collectability was determined to be no longer probable for certain tenants, and a decrease in real estate taxes of $1.9 million primarily due to a real estate tax refund received during the third quarter of 2021 at Alamo Quarry Market for the tax assessments for 2019 through 2020. Total mixed-use property operating income increased $4.4 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the lifting of COVID-19 travel restrictions late during the first quarter of 2021, which led to an increase in average occupancy and revenue per available room to 78% and $240 for the three months ended September 30, 2021, respectively, compared to 66% and $138 for three months ended September 30, 2020, respectively. The increase in total mixed-use rental revenue is also attributed to approximately $2.1 million for tenants who were changed to alternate rent or to cash basis of revenue recognition during 2020 as the collectability was determined to be no longer probable for certain tenants at the retail portion of our mixed-use property. These increases in mixed-use property operating income were partially offset by an increase in hotel room expenses, personnel expenses, and general excise tax expenses at the hotel portion of our mixed-use property during the period. These increases are due to tourism and an increase in hotel occupancy as the COVID-19 vaccine has become more widely available and travel restrictions to Hawaii have been relaxed. Other General and Administrative. General and administrative expenses increased to $6.8 million for the three months ended September 30, 2021, compared to $6.4 million for the three months ended September 30, 2020. This increase was primarily due to an increase in employee-related costs and corporate legal expenses. Depreciation and Amortization. Depreciation and amortization expense increased to $30.7 million for the three months ended September 30, 2021, compared to $26.9 million for the three months ended September 30, 2020. This increase was primarily due to $2.3 million related to the new acquisitions of Eastgate Office Park and Corporate Campus East III during the third quarter of 2021. Additionally, there was higher depreciation and amortization at Carmel Mountain Plaza, due to acceleration of depreciation on assets related to tenant vacating space, and The Landmark at One Market due new tenant improvements that were put into service in 2020 and 2021 Interest Expense. Interest expense increased $1.4 million, or 11%, to $14.7 million for the three months ended September 30, 2021, compared to $13.3 million for the three months ended September 30, 2020. This increase was primarily due to the closing of our 3.375% Senior Notes offering on January 26, 2021 partially offset by a decrease in interest expense related to our repayment of the Series A Notes on January 26, 2021, decrease in weighted average interest rate for our Term Loan A, which became an unhedged variable rate loan when the interest rate swap expired on January 9, 2021, decrease in the Revolver Loan interest expense and an increase in capitalized interest related to our development projects. Other (Expense) Income, Net. Other (expense) income, net decreased $0.5 million, or 90%, to other expense, net of $0.1 million for the three months ended September 30, 2021, compared to other expense, net of $0.5 million for the three months ended September 30, 2020 primarily due to the decrease in income tax benefit for our taxable REIT subsidiary. 42 Table of Contents Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020 The following summarizes our consolidated results of operations for the nine months ended September 30, 2021 compared to our consolidated results of operations for the nine months ended September 30, 2020. The following table sets forth selected data from our unaudited consolidated statements of income for the nine months ended September 30, 2021 and 2020 (dollars in thousands): Nine Months Ended September 30, Change % 2021 2020 Revenues Rental income $ 262,573 $ 252,059 $ 10,514 4 % Other property income 11,508 11,167 341 3 Total property revenues 274,081 263,226 10,855 4 Expenses Rental expenses 61,916 58,757 3,159 5 Real estate taxes 31,610 31,497 113 — Total property expenses 93,526 90,254 3,272 4 Total property income 180,555 172,972 7,583 4 General and administrative (20,574) (19,937) (637) 3 Depreciation and amortization (85,827) (80,869) (4,958) 6 Interest expense (43,589) (40,105) (3,484) 9 Early extinguishment of debt (4,271) — (4,271) 100 Other (expense) income, net (179) (261) 82 (31) Net income 26,115 31,800 (5,685) (18) Net income attributable to restricted shares (417) (260) (157) 60 Net income attributable to unitholders in the Operating Partnership (5,459) (6,778) 1,319 (19) Net income attributable to American Assets Trust, Inc. stockholders $ 20,239 $ 24,762 $ (4,523) (18) % Revenue Total property revenues . Total property revenue consists of rental revenue and other property income. Total property revenue increased $10.9 million, or 4%, to $274.1 million for the nine months ended September 30, 2021 compared to $263.2 million for the nine months ended September 30, 2020. The percentage leased was as follows for each segment as of September 30, 2021 and 2020: Percentage Leased (1) September 30, 2021 2020 Office 90.2 % 93.8 % Retail 91.7 % 95.0 % Multifamily 97.1 % 87.5 % Mixed-Use (2) 86.6 % 87.8 % (1) The percentage leased includes the square footage under lease, including leases which may not have commenced as of September 30, 2021 or September 30, 2020, as applicable. (2) Includes the retail portion of the mixed-use property only. 43 Table of Contents The increase in total property revenue was attributable primarily to the factors discussed below. Rental revenues . Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased $10.5 million, or 4%, to $262.6 million for the nine months ended September 30, 2021 compared to $252.1 million for the nine months ended September 30, 2020. Rental revenue by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio (1) Nine Months Ended September 30, Change % Nine Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 133,092 $ 128,714 $ 4,378 3 $ 130,681 $ 127,696 $ 2,985 2 Retail 68,183 66,226 1,957 3 68,183 66,226 1,957 3 Multifamily 35,864 35,525 339 1 35,864 35,525 339 1 Mixed-Use 25,434 21,594 3,840 18 — — — — $ 262,573 $ 252,059 $ 10,514 4 % $ 234,728 $ 229,447 $ 5,281 2 % (1) The same-store portfolio excludes: (i) One Beach Street, due to significant redevelopment activity; (ii) Waikiki Beach Walk - Embassy Suites™ and Waikiki Beach Walk - Retail, due to significant spalling repair activity; (iii) Eastgate Office Park which was acquired on July 7, 2021; (iv) Corporate Campus East III which was acquired on September 10, 2021 and (iv) land held for development. Total office rental revenue increased $4.4 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 due to the new acquisitions of Eastgate Office Park and Corporate Campus East III, which accounted for $2.8 million of the increase. This was offset by a decrease in rental revenue at One Beach Street due to expiration of leases to allow for modernization of the property. Same store office rental revenue increased by $3.0 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to higher annualized base rents at La Jolla Commons, City Center Bellevue, and Torrey Point, offset by a decrease at First & Main due to delay in timing of tenant possession of leased space. Retail rental revenue increased $2.0 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to approximately $2.4 million for tenants who were changed to alternate rent or to cash basis of revenue recognition during 2020 as the collectability was determined to be no longer probable for certain tenants at Carmel Mountain Plaza, Hassalo on Eighth - Retail, Solana Beach Towne Centre, Del Monte Center and Geary Marketplace, as the temporary store closures or restrictions on business operations from orders issued by state and local governments related to the COVID-19 pandemic caused the financial condition of certain tenants to deteriorate. This increase was offset by a decrease in cost recoveries of $0.4 million as these same tenants changed to alternate rent or had lease modifications. Multifamily revenue increased $0.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an overall increase in occupancy of 90.6% for the nine months ended September 30, 2021 compared to 89.4% for the nine months ended September 30, 2020 . Additionally, average monthly base rent increased to $2,149 for the nine months ended September 30, 2021 compared to $2,140 for the nine months ended September 30, 2020 , primarily due to increases at San Diego multifamily properties. Mixed-use rental revenue increased $3.8 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase of $3.7 million related to the Waikiki Beach Walk hotel portion of our mixed use property. This increase was due to the lifting of COVID-19 travel restrictions late during the first quarter of 2021, which led to an increase in average occupancy and revenue per available room to 64.3% and $175 for the nine months ended September 30, 2021, respectively, compared to 52.8% and $138 for the nine months ended September 30, 2020, respectively. Waikiki Beach Walk retail portion increased $0.2 million as tenants were changed to alternate rent or to cash basis of revenue recognition during 2020 as the collectability was determined to be no longer probable for certain tenants. 44 Table of Contents Other property income . Other property income increased $0.3 million, or 3%, to $11.5 million for the nine months ended September 30, 2021 compared to $11.2 million for the nine months ended September 30, 2020. Other property income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Nine Months Ended September 30, Change % Nine Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 3,375 $ 4,496 $ (1,121) (25) $ 3,030 $ 4,476 $ (1,446) (32) Retail 1,113 1,713 (600) (35) 1,113 1,713 (600) (35) Multifamily 2,512 2,327 185 8 2,512 2,327 185 8 Mixed-Use 4,508 2,631 1,877 71 — — — — $ 11,508 $ 11,167 $ 341 3 % $ 6,655 $ 8,516 $ (1,861) (22) % Office other property income decreased $1.1 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to decrease in parking garage income at Lloyd Portfolio and City Center Bellevue and a decrease in tenant improvement management fees received at La Jolla Commons and Lloyd Portfolio in 2020. Retail other property income decreased $0.6 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to the lease termination fees received at Alamo Quarry Market and Carmel Country Plaza during 2020. Multifamily other property income increased $0.2 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily to an increase in security deposits earned at Pacific Ridge Apartments and Loma Palisades, parking garage income at Hassalo on Eighth - Residential and credit check fees at Pacific Ridge Apartments and Hassalo on Eighth - Residential. Total mixed-use other property income increased $1.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in other room rental income and rent excise tax at the hotel portion and an increase in parking garage income at the retail portion of our mixed-use property. We expect to see a steady increase in tourism and hotel occupancy in Oahu once the COVID-19 vaccine is available more globally and travel restrictions are lifted. Property Expenses Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $3.3 million, or 4%, to $93.5 million for the nine months ended September 30, 2021, compared to $90.3 million for the nine months ended September 30, 2020. This increase in total property expenses was attributable primarily to the factors discussed below . Rental Expenses. Rental expenses increased $3.2 million, or 5%, to $61.9 million for the nine months ended September 30, 2021, compared to $58.8 million for the nine months ended September 30, 2020. Rental expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Nine Months Ended September 30, Change % Nine Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 21,457 $ 20,560 $ 897 4 $ 20,427 $ 19,896 $ 531 3 Retail 11,005 11,026 (21) — 11,005 11,026 (21) — Multifamily 12,043 11,386 657 6 12,044 11,386 658 6 Mixed-Use 17,411 15,785 1,626 10 — — — — $ 61,916 $ 58,757 $ 3,159 5 % $ 43,476 $ 42,308 $ 1,168 3 % Office rental expenses increased $0.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in sublease expense related to the Annex Lease extension option exercised in March 2020, property insurance expense, and utilities expenses as the "stay-at-home" orders issued by the state and local governments related to the COVID-19 pandemic were relaxed in early 2021 and our tenants' employees have started returning to the office in-person. 45 Table of Contents Multifamily rental expenses increased $0.7 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in day porter and facilities services, utilities expenses and insurance expense, as restrictions on business operations from orders issued by state and local governments related to the COVID-19 pandemic were eased during this period. Total mixed-use rental expenses increased $1.6 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in hotel room expenses and personnel expenses at the hotel portion of our mixed-use property during the period. These increases are due to tourism and an increase in hotel occupancy as the COVID-19 vaccine has become more widely available and travel restrictions to Hawaii have been relaxed. Real Estate Taxes. Real estate tax expense increased $0.1 million, or 0%, to $31.6 million for the nine months ended September 30, 2021 compared to $31.5 million for the nine months ended September 30, 2020. Real estate tax expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Nine Months Ended September 30, Change % Nine Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 14,572 $ 14,429 $ 143 1 $ 14,197 $ 13,899 $ 298 2 Retail 8,917 9,007 (90) (1) 8,917 9,007 (90) (1) Multifamily 5,154 5,040 114 2 5,153 5,040 113 2 Mixed-Use 2,967 3,021 (54) (2) — — — — $ 31,610 $ 31,497 $ 113 — % $ 28,267 $ 27,946 $ 321 1 % Same-store office real estate taxes increased $0.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in tax assessments at City Center Bellevue, Landmark and First & Main during the period. Multifamily real estate taxes increased $0.1 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase in tax assessments for Loma Palisades, Pacific Ridge Apartments, and Hassalo on Eighth - Residential. Property Operating Income Property operating income increased $7.6 million, or 4%, to $180.6 million for the nine months ended September 30, 2021, compared to $173.0 million for the nine months ended September 30, 2020. Property operating income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Nine Months Ended September 30, Change % Nine Months Ended September 30, Change % 2021 2020 2021 2020 Office $ 100,438 $ 98,221 $ 2,217 2 $ 99,087 $ 98,377 $ 710 1 Retail 49,374 47,906 1,468 3 49,374 47,906 1,468 3 Multifamily 21,179 21,426 (247) (1) 21,179 21,426 (247) (1) Mixed-Use 9,564 5,419 4,145 76 — — — — $ 180,555 $ 172,972 $ 7,583 4 % $ 169,640 $ 167,709 $ 1,931 1 % Total office property operating income increased $2.2 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to the new acquisitions of Eastgate Office Park and Corporate Campus East III, offset by the decrease in rental revenue at One Beach Street due to expiration of leases to allow for the modernization of the property. Same-store property operating income increased by $0.7 million due to higher annualized base rents at La Jolla Commons, City Center Bellevue and Torrey Point. These increases were offset by a decrease in parking garage income and higher rental expenses as the stay-at-home orders issued by state and local governments related to the COVID-19 pandemic were relaxed in early 2021 and an increase in real estate taxes due to higher tax assessments. Total retail property operating income increased $1.5 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to an increase of $2.4 million for tenants who were changed to alternate rent or to cash basis of revenue recognition during 2020 as the collectability was determined to be no longer probable for certain tenants, partially offset by a $0.7 million decrease in lease termination fees received in 2021 compared to 2020 and a $0.4 million decrease in expense recoveries. 46 Table of Contents Total mixed-use property operating income increased $4.1 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to the lifting of COVID-19 travel restrictions late during the first quarter of 2021, which led to an increase in average occupancy and revenue per available room to 64% and $175 for the nine months ended September 30, 2021, respectively, compared to 53% and $138 for the nine months ended September 30, 2020, respectively. Additionally, there was an increase of $1.9 million in other property income as related to other room rental income and rent excise tax at the hotel portion and an increase in parking garage income at the retail portion of our mixed-use property. These increases were offset by $1.6 million in higher rental expenses due to an increase in hotel room expenses and personnel expenses at the hotel portion of our mixed-use property during the period Other General and Administrative. General and administrative expenses increased $0.6 million, or 3%, to $20.6 million for the nine months ended September 30, 2021, compared to $19.9 million for the nine months ended September 30, 2020. This increase was primarily due to employee related costs. Depreciation and Amortization. Depreciation and amortization expense increased $5.0 million, or 6%, to $85.8 million for the nine months ended September 30, 2021, compared to $80.9 million for the nine months ended September 30, 2020. This increase was primarily due to a $2.3 million increase related to the new acquisitions of Eastgate Office Park and Corporate Campus East III during the third quarter of 2021. Additionally, there was an increase in depreciation and amortization at Embassy Suites TM Hotel and The Landmark at One Market due to building and tenant improvements that were put into service in 2020 and 2021. Additionally, higher depreciation and amortization at Carmel Mountain Plaza, due to acceleration of depreciation on assets related to tenant vacating space. These increases were offset by lower depreciation and amortization at First & Main due to decreased capital expenditures in 2020. Interest Expense. Interest expense increased $3.5 million, or 9%, to $43.6 million for the nine months ended September 30, 2021 compared to $40.1 million for the nine months ended September 30, 2020. This increase was primarily due to the closing of our 3.375% Senior Notes offering on January 26, 2021, partially offset by a decrease in interest expense related to our repayment of the Series A Notes on January 26, 2021, decrease in weighted average interest rate for our Term Loan A, which became an unhedged variable rate loan when the interest rate swap expired on January 9, 2021, decrease in the Revolver Loan interest expense and an increase in capitalized interest related to our development projects. Early Extinguishment of Debt. Early extinguishment of debt expense increased $4.3 million for the nine months ended September 30, 2021 due to the repayment of the Senior Guaranteed Notes, Series A, with make-whole payments thereon, on January 26, 2021. Other (Expense) Income, Net. Other (expense) income, net decreased $0.1 million, or 31%, to other expense, net of $0.2 million for the nine months ended September 30, 2021, compared to other expense, net of $0.3 million for the nine months ended September 30, 2020 primarily due to the decrease in interest and investment income attributed to the lower yield on our average cash balance during the period and a decrease in income tax benefit related for our taxable REIT subsidiary. Liquidity and Capital Resources of American Assets Trust, Inc. In this “Liquidity and Capital Resources of American Assets Trust, Inc.” section, the term the “company” refers only to American Assets Trust, Inc. on an unconsolidated basis, and excludes the Operating Partnership and all other subsidiaries. The company’s business is operated primarily through the Operating Partnership, of which the company is the parent company and sole general partner, and which it consolidates for financial reporting purposes. Because the company operates on a consolidated basis with the Operating Partnership, the section entitled “Liquidity and Capital Resources of American Assets Trust, L.P.” should be read in conjunction with this section to understand the liquidity and capital resources of the company on a consolidated basis and how the company is operated as a whole. The company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by the Operating Partnership. The company itself does not have any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. Therefore, the consolidated assets and liabilities and the consolidated revenues and expenses of the company and the Operating Partnership are the same on their respective financial statements. However, all debt is held directly or indirectly by the Operating Partnership. The company’s principal funding requirement is the payment of dividends on its common stock. The company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership. 47 Table of Contents As of September 30, 2021, the company owned an approximate 78.8% partnership interest in the Operating Partnership. The remaining approximately 21.2% are owned by non-affiliated investors and certain of the company's directors and executive officers. As the sole general partner of the Operating Partnership, American Assets Trust, Inc. has the 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 causes the Operating Partnership to distribute such portion of its available cash as the company may in its discretion determine, in the manner provided in the Operating Partnership’s partnership agreement. The liquidity of the company is dependent on the Operating Partnership’s ability to make sufficient distributions to the company. The primary cash requirement of the company is its payment of dividends to its stockholders. The company also guarantees some of the Operating Partnership’s debt, as discussed further in Note 8 of the Notes to Consolidated Financial Statements included elsewhere herein. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger the company’s guarantee obligations, then the company will be required to fulfill its cash payment commitments under such guarantees. However, the company’s only significant asset is its investment in the Operating Partnership. We believe the Operating Partnership’s sources of working capital, specifically its cash flow from operations, and borrowings available under its unsecured line of credit, are adequate for it to make its distribution payments to the company and, in turn, for the company to make its dividend payments to its stockholders. As of September 30, 2021, the company has determined that it has adequate working capital to meet its dividend funding obligations for the next 12 months. However, we cannot assure you that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distribution payments to the company. The unavailability of capital could adversely affect the Operating Partnership’s ability to pay its distributions to the company, which would in turn, adversely affect the company’s ability to pay cash dividends to its stockholders. The COVID-19 pandemic has temporarily impacted, and is expected to continue to temporarily impact some of our tenants' ability or willingness to remit rent payments due to the tenants' operations being affected by state and local stay-at-home orders. During the nine months of 2021, we continued to receive rent deferment and other rent concession requests from some tenants and have been negotiating and executing lease modifications for the deferment of rent and other rent concessions. These rent deferments and other rent concessions will continue to adversely affect the Operating Partnership's cash flow from operations until the scheduled repayment period. Our short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to the company’s stockholders, operating expenses and other expenditures directly associated with our properties, interest expense and scheduled principal payments on outstanding indebtedness, general and administrative expenses, funding construction projects, capital expenditures, tenant improvements and leasing commissions. The company may from time to time seek to repurchase or redeem the Operating Partnership’s outstanding debt, the company’s shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. For the company to maintain its qualification as a REIT, it must pay dividends to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. While historically the company has satisfied this distribution requirement by making cash distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the company’s own stock. As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. The company may need to continue to raise capital in the equity markets to fund the operating partnership’s working capital needs, acquisitions and developments. Although there is no intent at this time, if market conditions deteriorate, the company may also delay the timing of future development and redevelopment projects as well as limit future acquisitions, reduce the Operating Partnership’s operating expenditures, or re-evaluate its dividend policy. The company is a well-known seasoned issuer. As circumstances warrant, the company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. When the company receives proceeds from preferred or common equity issuances, it is required by the Operating Partnership’s partnership agreement to contribute the proceeds from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership. The Operating Partnership may use the proceeds to repay debt, to develop new or existing properties, to acquire properties or for general corporate purposes. 48 Table of Contents In January 2021, the company filed a universal shelf registration statement on Form S-3ASR with the SEC, which became effective upon filing and which replaced the prior Form S-3ASR that was filed with the SEC in February 2018. The universal shelf registration statement permits the company from time to time to offer and sell equity securities of the company. However, there can be no assurance that the company will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include investor perception of our prospects and the general condition of the financial markets, among others. In May 2015, we entered into an 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 the company's 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. As of September 30, 2021, we had the capacity to issue up to an additional $132.6 million in shares of common stock under the ATM equity program upon filing an updated prospectus supplement with the SEC. We intend to use the net proceeds to fund development or redevelopment activities, repay amounts outstanding from time to time under our amended and restated credit facility or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of the company's common stock and the company's capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program. Liquidity and Capital Resources of American Assets Trust, L.P. In this “Liquidity and Capital Resources of American Assets Trust, L.P.” section, the terms “we,” “our” and “us” refer to the Operating Partnership together with its consolidated subsidiaries, or the Operating Partnership and American Assets Trust, Inc. together with their consolidated subsidiaries, as the context requires. American Assets Trust, Inc. is our sole general partner and consolidates our results of operations for financial reporting purposes. Because we operate on a consolidated basis with American Assets Trust, Inc., the section entitled “Liquidity and Capital Resources of American Assets Trust, Inc.” should be read in conjunction with this section to understand our liquidity and capital resources on a consolidated basis. Due to the nature of our business, we typically generate significant amounts of cash from operations. The cash generated from operations is used for the payment of operating expenses, capital expenditures, debt service and dividends to American Assets Trust, Inc.'s stockholders and our unitholders. As a REIT, American Assets Trust, Inc. must generally make annual distributions to its stockholders of at least 90% of its net taxable income. As of September 30, 2021, we held $171.9 million in cash and cash equivalents. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements, dividend payments to American Assets Trust, Inc.'s stockholders required to maintain its REIT status, distributions to our unitholders, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash and, if necessary, borrowings available under our credit facility. Our long-term liquidity needs consist primarily of funds necessary to pay for the repayment of debt at maturity, property acquisitions, tenant improvements and capital improvements. We expect to meet our long-term liquidity requirements to pay scheduled debt maturities and to fund property acquisitions and capital improvements with net cash from operations, long-term secured and unsecured indebtedness and, if necessary, the issuance of equity and debt securities. We also may fund property acquisitions and capital improvements using our amended and restated credit facility pending permanent financing. We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot be assured that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our company. 49 Table of Contents Our overall capital requirements for the remainder of 2021 and first quarter 2022 will depend upon acquisition opportunities and the level of improvements and redevelopments on existing properties. Our capital investments will be funded on a short-term basis with, among other sources of capital, cash on hand, cash flow from operations and/or our revolving line of credit. On a long-term basis, our capital investments may be funded with additional long-term debt, including, without limitation, mortgage debt and unsecured notes. Our ability to incur additional debt will be dependent on a number of factors, including, without limitation, our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our capital investments may also be funded by issuing additional equity including, without limitation, shares issued by American Assets Trust, Inc. under its ATM equity program or through an underwritten public offering. Although there is no intent at this time, if market conditions deteriorate or fail to improve, including as a result of the COVID-19 pandemic, we may also delay the timing of future development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy. The COVID-19 pandemic has impacted, and is expected to continue to impact, the timing of future development and redevelopment projects due to, among other things, capital requirements and permitting delays caused by local government shutdowns or reduced operations. In January 2021, the Operating Partnership filed a universal shelf registration on Form S-3 ASR with the SEC which provided for the registration of an unspecified amount of debt securities by the Operating Partnership. However, there can be no assurance that the Operating Partnership will be able to complete any such offerings of debt securities. Factors influencing the availability of additional financing include investor perception of our prospects and the general condition of the financial markets, among others. Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements. Cash Flows Comparison of the nine months ended September 30, 2021 to the nine months ended September 30, 2020 Cash, cash equivalents, and restricted cash were $173.6 million and $156.6 million at September 30, 2021 and 2020, respectively. Net cash provided by operating activities increased $20.5 million to $129.6 million for the nine months ended September 30, 2021 compared to $109.1 million for the nine months ended September 30, 2020. The increase in cash from operations was related to a change in accounts payable due to the timing of accruals and payables, primarily real estate taxes, an increase in depreciation and amortization from the acquisitions made in the quarter, and the early extinguishment of debt in January 2021. These increases were partially offset by a decrease in tenant receivable reserves during the year. Net cash used in investing activities increased $209.8 million to $263.3 million for the nine months ended September 30, 2021 compared to $53.6 million for the nine months ended September 30, 2020. The increase was primarily due to the acquisition of Eastgate Office Park on July 7, 2021 and Corporate Campus East III on September 10, 2021, and capital expenditures at La Jolla Commons III and One Beach Street. Net cash provided by financing activities increased $176.8 million to $168.3 million for the nine months ended September 30, 2021 compared to cash used in financing activities of $8.5 million for the nine months ended September 30, 2020. The increase in cash provided by financing activities was primarily due to the closing of our issuance of 3.375% Senior Notes on January 26, 2021, partially offset by the repayment of the outstanding balance on the revolving line of credit and the Senior Guaranteed Notes, Series A on January 26, 2021. Net Operating Income Net Operating Income, or NOI, is a non-GAAP financial measure of performance. We define NOI as operating revenues (rental income, tenant reimbursements, lease termination fees, ground lease rental income and other property income) less property and related expenses (property expenses, ground lease expense, property marketing costs, real estate taxes and insurance). NOI excludes general and administrative expenses, interest expense, depreciation and amortization, acquisition-related expense, other non-property income and losses, gains and losses from property dispositions, extraordinary items, tenant improvements, and leasing commissions. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to the NOIs of other REITs. 50 Table of Contents NOI is used by investors and our management to evaluate and compare the performance of our properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by (1) the cost of funds of the property owner, (2) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP or (3) general and administrative expenses and other gains and losses that are specific to the property owner. The cost of funds is eliminated from net income because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our retail, office, multifamily or mixed-use properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is intended to be captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest income and other expense, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income, which further limits its usefulness. NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in “Management's Discussion and Analysis of Financial Condition and Results of Operations” regarding the components of net income that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do. The following is a reconciliation of our NOI to net income for the three and nine months ended September 30, 2021 and 2020 computed in accordance with GAAP (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net operating income $ 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 (expense) income, net (52) (531) (179) (261) Net income $ 12,895 $ 6,490 $ 26,115 $ 31,800 Funds from Operations We calculate funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, impairment losses, real-estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. 51 Table of Contents FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real-estate related depreciation and amortization and gains and losses from property dispositions, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP. The following table sets forth a reconciliation of our FFO for the three and nine months ended September 30, 2021 to net income, the nearest GAAP equivalent (in thousands, except per share and share data): Three Months Ended September 30, Nine Months Ended September 30, 2021 2021 Funds from Operations (FFO) Net income $ 12,895 $ 26,115 Plus: Real estate depreciation and amortization 30,680 85,827 Funds from operations 43,575 111,942 Less: Nonforfeitable dividends on incentive restricted stock awards (143) (412) FFO attributable to common stock and units $ 43,432 $ 111,530 FFO per diluted share/unit $ 0.57 $ 1.46 Weighted average number of common shares and units, diluted (1) 76,173,444 76,169,626 (1) The weighted average common shares used to compute FFO per diluted share include unvested restricted stock awards that are subject to time vesting, which were excluded from the computation of diluted EPS, as the vesting of the restricted stock awards is dilutive in the computation of FFO per diluted share but is anti-dilutive for the computation of diluted EPS for the period. Diluted shares exclude incentive restricted stock as these awards are considered contingently issuable.