American Assets Trust, Inc. - Quarter Report: 2013 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2013


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

For the transition period from to

Commission file number: 001-35030

AMERICAN ASSETS TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)



	Maryland (State of Organization)	27-3338708 (IRS Employer Identification No.)


	11455 El Camino Real, Suite 200, San Diego, California (Address of Principal Executive Offices)	92130 (Zip Code)

(858) 350-2600

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

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

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



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

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

The number of Registrant’s common shares outstanding on August 2, 2013 was 40,445,578.

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AMERICAN ASSETS TRUST, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2013



PART 1. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012	3
	Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2013 and 2012	4
	Consolidated Statement of Equity (unaudited) for the six months ended June 30, 2013	5
	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2013 and 2012	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	40
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
SIGNATURES		42

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American Assets Trust, Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Data)



	June 30,			December 31,
	2013			2012
	(unaudited)
ASSETS
Real estate, at cost
Operating real estate	$	1,899,074		$	1,891,549
Construction in progress	49,378			32,183
Held for development	8,964			14,944
	1,957,416			1,938,676
Accumulated depreciation	(295,461		)	(270,494		)
Net real estate	1,661,955			1,668,182
Cash and cash equivalents	63,340			42,479
Restricted cash	9,206			7,421
Accounts receivable, net	7,338			6,440
Deferred rent receivables, net	30,918			29,395
Other assets, net	64,002			73,670
TOTAL ASSETS	$	1,836,759		$	1,827,587
LIABILITIES AND EQUITY
LIABILITIES:
Secured notes payable	$	1,044,299		$	1,044,682
Accounts payable and accrued expenses	31,285			29,509
Security deposits payable	5,093			4,856
Other liabilities and deferred credits	59,558			62,811
Total liabilities	1,140,235			1,141,858
Commitments and contingencies (Note 11)
EQUITY:
American Assets Trust, Inc. stockholders’ equity
Common stock $0.01 par value, 490,000,000 shares authorized, 40,445,578 and 39,664,212 shares outstanding at June 30, 2013 (unaudited) and December 31, 2012, respectively	405			397
Additional paid-in capital	690,507			663,589
Accumulated dividends in excess of net income	(35,868		)	(25,625		)
Total American Assets Trust, Inc. stockholders’ equity	655,044			638,361
Noncontrolling interests	41,480			47,368
Total equity	696,524			685,729
TOTAL LIABILITIES AND EQUITY	$	1,836,759		$	1,827,587

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

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American Assets Trust, Inc.

Consolidated Statements of Income

(Unaudited)

(In Thousands, Except Shares and Per Share Data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
REVENUE:
Rental income	$	59,705		$	53,740		$	118,927		$	106,748
Other property income	3,209			2,391			6,167			4,832
Total revenue	62,914			56,131			125,094			111,580
EXPENSES:
Rental expenses	16,686			15,506			32,972			30,324
Real estate taxes	5,476			5,743			10,276			10,984
General and administrative	4,426			3,911			8,627			7,636
Depreciation and amortization	16,953			14,329			33,966			29,183
Total operating expenses	43,541			39,489			85,841			78,127
OPERATING INCOME	19,373			16,642			39,253			33,453
Interest expense	(14,744		)	(14,028		)	(29,480		)	(27,929		)
Other income (expense), net	(65		)	(217		)	(344		)	(363		)
INCOME FROM CONTINUING OPERATIONS	4,564			2,397			9,429			5,161
DISCONTINUED OPERATIONS
Results from discontinued operations	—			227			—			334
NET INCOME	4,564			2,624			9,429			5,495
Net income attributable to restricted shares	(133		)	(131		)	(265		)	(263		)
Net income attributable to unitholders in the Operating Partnership	(1,354		)	(804		)	(2,849		)	(1,687		)
NET INCOME ATTRIBUTABLE TO AMERICAN ASSETS TRUST, INC. STOCKHOLDERS	$	3,077		$	1,689		$	6,315		$	3,545
EARNINGS PER COMMON SHARE, BASIC
Continuing operations	$	0.08		$	0.04		$	0.16		$	0.08
Discontinued operations	—			—			—			0.01
Basic net income attributable to common stockholders per share	$	0.08		$	0.04		$	0.16		$	0.09
Weighted average shares of common stock outstanding - basic	39,460,086			38,659,155			39,247,729			38,658,162
EARNINGS PER COMMON SHARE, DILUTED
Continuing operations	$	0.08		$	0.04		$	0.16		$	0.08
Discontinued operations	—			—			—			0.01
Diluted net income attributable to common stockholders per share	$	0.08		$	0.04		$	0.16		$	0.09
Weighted average shares of common stock outstanding - diluted	57,429,837			57,055,244			57,244,174			57,054,509
Dividends declared per common share	$	0.21		$	0.21		$	0.42		$	0.42

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

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American Assets Trust, Inc.

Consolidated Statement of Equity

(Unaudited)

(In Thousands, Except Share Data)



	American Assets Trust, Inc. Stockholders’ Equity									Noncontrolling Interests - Unitholders in the Operating Partnership			Total
	Common Shares				Additional Paid-in Capital		Accumulated dividends in excess of net income
	Shares		Amount		Additional Paid-in Capital		Accumulated dividends in excess of net income
Balance at December 31, 2012	39,664,212		$	397	$	663,589	$	(25,625	)	$	47,368		$	685,729
Net income	—		—		—		6,580			2,849			9,429
Common shares issued	718,714		7		24,346		—			—			24,353
Conversion of operating partnership units	61,511		1		1,179		—			(1,180		)	—
Issuance of restricted stock	5,004		—		—		—			—			—
Forfeiture of restricted stock	(3,863	)	—		—		—			—			—
Dividends declared	—		—		—		(16,823		)	(7,557		)	(24,380		)
Stock-based compensation	—		—		1,393		—			—			1,393
Balance at June 30, 2013	40,445,578		$	405	$	690,507	$	(35,868	)	$	41,480		$	696,524

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

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American Assets Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)



	Six Months Ended June 30,
	2013			2012
OPERATING ACTIVITIES
Net income	$	9,429		$	5,495
Results from discontinued operations	—			(334		)
Income from continuing operations	9,429			5,161
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles	(1,874		)	(3,071		)
Depreciation and amortization	33,966			29,183
Amortization of debt issuance costs and debt fair value adjustments	1,966			1,958
Stock-based compensation expense	1,393			1,406
Loss from real estate joint ventures	54			—
Other, net	(535		)	745
Changes in operating assets and liabilities
Change in restricted cash	(818		)	(1,244		)
Change in accounts receivable	(1,073		)	1,628
Change in other assets	(38		)	315
Change in accounts payable and accrued expenses	2,662			(1,010		)
Change in security deposits payable	238			(204		)
Change in other liabilities and deferred credits	303			223
Net cash provided by operating activities of continuing operations	45,673			35,090
Net cash provided by operating activities of discontinued operations	—			252
Net cash provided by operating activities	45,673			35,342
INVESTING ACTIVITIES
Acquisition of real estate, net of cash acquired	—			(32,918		)
Capital expenditures	(21,204		)	(11,951		)
Change in restricted cash	433			(495		)
Leasing commissions	(1,344		)	(1,312		)
Maturity of marketable securities	—			3,324
Net cash used in investing activities of continuing operations	(22,115		)	(43,352		)
Net cash used in investing activities of discontinued operations	—			(203		)
Net cash used in investing activities	(22,115		)	(43,555		)
FINANCING ACTIVITIES
Change in restricted cash	(1,400		)	—
Issuance of secured notes payable	—			21,900
Repayment of secured notes payable	(1,839		)	(2,315		)
Debt issuance costs	—			(924		)
Proceeds from issuance of common stock, net	24,922			—
Dividends paid to common stock and unitholders	(24,380		)	(24,226		)
Deferred offering costs	—			(361		)
Net cash used in financing activities	(2,697		)	(5,926		)
Net increase (decrease) in cash and cash equivalents	20,861			(14,139		)
Cash and cash equivalents, beginning of period	42,479			112,723
Cash and cash equivalents, end of period	$	63,340		$	98,584

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

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements

June 30, 2013

(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 vertically integrated and self-administered REIT with approximately 113 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.

As of June 30, 2013, we owned or had a controlling interest in 23 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of June 30, 2013, we owned land at five of our properties that we classify as held for development and/or construction in progress. A summary of the properties owned by us is as follows:

Retail



Carmel Country Plaza	Del Monte Center
Carmel Mountain Plaza	Geary Marketplace
South Bay Marketplace	The Shops at Kalakaua
Rancho Carmel Plaza	Waikele Center
Lomas Santa Fe Plaza	Alamo Quarry Market
Solana Beach Towne Centre

Office



Torrey Reserve Campus	Lloyd District Portfolio
Solana Beach Corporate Centre	City Center Bellevue
The Landmark at One Market
One Beach Street
First & Main

Multifamily



Loma Palisades
Imperial Beach Gardens
Mariner's Point
Santa Fe Park RV Resort

Mixed-Use



Waikiki Beach Walk Retail and Embassy Suites™ Hotel

Held for Development and Construction in Progress



Solana Beach Corporate Centre – Land
Solana Beach – Highway 101 – Land
Sorrento Pointe – Land
Torrey Reserve – Land
Lloyd District Portfolio – Land

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

Basis of Presentation

Our consolidated financial statements include the accounts of the Company, our Operating Partnership and our subsidiaries. The equity interests of other investors in our Operating Partnership are reflected as noncontrolling interests.

All significant intercompany transactions and balances are eliminated in consolidation.

In December 2012, we sold 160 King Street. We have reclassified our financial statements for all periods prior to the sale to reflect 160 King Street as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

The accompanying consolidated financial statements of the Company have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (“GAAP”) for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and notes therein included in the Company's annual report on Form 10-K for the year ended December 31, 2012.

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 and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Consolidated Statements of Cash Flows—Supplemental Disclosures

The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):



	Six Months Ended June 30,
	2013			2012
Supplemental cash flow information
Total interest costs incurred	$	30,326		$	28,136
Interest capitalized	$	846		$	207
Interest expense	$	29,480		$	27,929
Cash paid for interest, net of amounts capitalized (including discontinued operations)	$	27,021		$	27,113
Cash paid for income taxes	$	585		$	954
Supplemental schedule of noncash investing and financing activities
Accounts payable and accrued liabilities for construction in progress	$	(1,407	)	$	3,203
Acquisition of working capital deficit, net of cash	$	—		$	(190	)
Reduction to capital for prepaid offering costs	$	437		$	—
Accrued leasing commissions	$	389		$	—

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, 2012. There have been no changes to our significant accounting policies during the six months ended June 30, 2013.

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

Segment Information

Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate in four business segments: 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.

Reclassifications

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

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued ASU 2013-2, Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-2 requires entities to disclose certain information relating to amounts reclassified out of accumulated other comprehensive income. This pronouncement became effective for us in the first quarter of 2013 and did not have a significant impact on our consolidated financial statements.

NOTE 2. ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES

The following summarizes our acquired lease intangibles and leasing costs, which are included in other assets and other liabilities and deferred credits, as of June 30, 2013 and December 31, 2012 (in thousands):



	June 30, 2013			December 31, 2012
In-place leases	$	70,336		$	72,598
Accumulated amortization	(41,445		)	(38,290		)
Above market leases	29,974			32,846
Accumulated amortization	(20,799		)	(21,363		)
Acquired lease intangible assets, net	$	38,066		$	45,791
Below market leases	$	79,706		$	80,071
Accumulated accretion	(28,360		)	(25,721		)
Acquired lease intangible liabilities, net	$	51,346		$	54,350

NOTE 3. MARKETABLE SECURITIES

Our portfolio of marketable securities was comprised of debt securities that were classified as trading securities. Our marketable securities consisted of investments in mortgage-backed securities issued by the Government National Mortgage Association (“GNMA securities”). We reported our trading securities at fair value, using prices provided by independent market participants that were based on observable inputs using market-based valuation techniques (Level 2 of the fair value hierarchy-see Note 4). On August 20, 2012, we sold all of our outstanding GNMA securities with a realized loss of $0.7 million for the year ended December 31, 2012. For the six months ended June 30, 2012, gains and losses resulting from the mark-to-market of these securities were recognized as unrealized gains in income. Unrealized loss in our statement of income for the six months ended June 30, 2012 was $0.6 million and is included in other income (expense), net on the accompanying consolidated statement of income.

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS

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


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


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


3.	Level 3 Inputs—unobservable inputs

Except as disclosed below, the carrying amounts of our financial instruments approximate their fair value. The financial liability whose fair value we measure on a recurring basis using Level 2 inputs is our deferred compensation liability included in other liabilities and deferred credits on the consolidated balance sheet. 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.

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.

A summary of our financial liabilities that are measured at fair value on a recurring basis, by level within the fair value hierarchy is as follows (in thousands):



	June 30, 2013								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Deferred compensation liability	$	—	$	689	$	—	$	689	$	—	$	637	$	—	$	637

The fair value of our secured notes payable is sensitive to fluctuations in interest rates. Discounted cash flow analysis using observable market interest rates (Level 2) is generally used to estimate the fair value of our secured notes payable, using rates ranging from 3.9% to 5.0%.

Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the carrying amount and fair value of our secured financial instruments, all of which are based on Level 2 inputs, is as follows (in thousands):



	June 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Secured notes payable	$	1,044,299	$	1,095,170	$	1,044,682	$	1,116,162

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

NOTE 5. OTHER ASSETS

Other assets consist of the following (in thousands):



	June 30, 2013		December 31, 2012
Leasing commissions, net of accumulated amortization of $18,767 and $16,829, respectively	$	17,710	$	18,329
Acquired above market leases, net	9,175		11,483
Acquired in-place leases, net	28,891		34,308
Lease incentives, net of accumulated amortization of $2,405 and $2,220, respectively	1,295		1,480
Other intangible assets, net of accumulated amortization of $1,846 and $4,239, respectively	785		960
Debt issuance costs, net of accumulated amortization of $2,884 and $2,374, respectively	3,142		3,651
Prepaid expenses and other	3,004		3,459
Total other assets	$	64,002	$	73,670

NOTE 6. OTHER LIABILITIES AND DEFERRED CREDITS

Other liabilities and deferred credits consist of the following (in thousands):



	June 30, 2013		December 31, 2012
Acquired below market leases, net	$	51,346	$	54,350
Prepaid rent and deferred revenue	5,972		6,383
Deferred rent expense and lease intangible	930		1,008
Deferred compensation	689		637
Deferred tax liability	320		320
Straight-line rent liability	249		63
Other liabilities	52		50
Total other liabilities and deferred credits	$	59,558	$	62,811

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.

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

NOTE 7. DEBT

The following is a summary of our total secured notes payable outstanding as of June 30, 2013 and December 31, 2012 (in thousands):



	Principal Balance as of						Stated Interest Rate as of June 30, 2013		Stated Maturity Date
Description of Debt	June 30, 2013			December 31, 2012			Stated Interest Rate as of June 30, 2013		Stated Maturity Date
Alamo Quarry Market ⁽¹⁾⁽²⁾	$	92,838		$	93,942		5.67	%	January 8, 2014
Waikele Center ⁽³⁾	140,700			140,700			5.15	%	November 1, 2014
The Shops at Kalakaua ⁽³⁾	19,000			19,000			5.45	%	May 1, 2015
The Landmark at One Market ⁽²⁾⁽³⁾	133,000			133,000			5.61	%	July 5, 2015
Del Monte Center ⁽³⁾	82,300			82,300			4.93	%	July 8, 2015
First & Main ⁽³⁾	84,500			84,500			3.97	%	July 1, 2016
Imperial Beach Gardens ⁽³⁾	20,000			20,000			6.16	%	September 1, 2016
Mariner’s Point ⁽³⁾	7,700			7,700			6.09	%	September 1, 2016
South Bay Marketplace ⁽³⁾	23,000			23,000			5.48	%	February 10, 2017
Waikiki Beach Walk—Retail ⁽³⁾	130,310			130,310			5.39	%	July 1, 2017
Solana Beach Corporate Centre III-IV ⁽⁴⁾	37,004			37,204			6.39	%	August 1, 2017
Loma Palisades ⁽³⁾	73,744			73,744			6.09	%	July 1, 2018
One Beach Street ⁽³⁾	21,900			21,900			3.94	%	April 1, 2019
Torrey Reserve—North Court ⁽¹⁾	21,521			21,659			7.22	%	June 1, 2019
Torrey Reserve—VCI, VCII, VCIII ⁽¹⁾	7,247			7,294			6.36	%	June 1, 2020
Solana Beach Corporate Centre I-II ⁽¹⁾	11,556			11,637			5.91	%	June 1, 2020
Solana Beach Towne Centre ⁽¹⁾	38,520			38,790			5.91	%	June 1, 2020
City Center Bellevue ⁽³⁾	111,000			111,000			3.98	%	November 1, 2022
	1,055,840			1,057,680
Unamortized fair value adjustment	(11,541		)	(12,998		)
Total Secured Notes Payable Outstanding	$	1,044,299		$	1,044,682


(1)	Principal payments based on a 30-year amortization schedule.


(2)	Maturity Date is the earlier of the loan maturity date under the loan agreement, or the “Anticipated Repayment Date” as specifically defined in the loan agreement, which is the date after which substantial economic penalties apply if the loan has not been paid off.


(3)	Interest only.


(4)	Loan was interest only through August 2012. Beginning in September 2012, principal payments are based on a 30-year amortization schedule.

Certain loans require us to comply with various financial covenants. As of June 30, 2013, we were in compliance with these financial covenants.

Credit Facility

On January 19, 2011, we entered into a credit facility pursuant to which a group of lenders provided commitments for a revolving credit facility allowing borrowings of up to $250.0 million. At June 30, 2013, our maximum allowable borrowing amount was $227.8 million. The credit facility has an accordion feature that may allow us to increase the availability thereunder up to a maximum of $400.0 million, subject to meeting specified requirements and obtaining additional commitments from lenders. The credit facility bears interest at the rate of either the applicable LIBOR or a base rate, in each case plus a margin that will vary depending on our leverage ratio. The amount available for us to borrow under the credit facility is subject to the net operating income of our properties that form the borrowing base of the facility and a minimum implied debt yield of such properties. At June 30, 2013, no amounts were outstanding on the credit facility.

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(Unaudited)

On March 7, 2011, the credit facility was amended to allow us or our Operating Partnership to purchase GNMA securities with maturities of up to 30 years. On January 10, 2012, the credit facility was amended a second time to (1) extend the maturity date to January 10, 2016 (with a one-year extension option), (2) decrease the applicable interest rates and (3) modify certain financial covenants contained therein. On September 7, 2012, the credit facility was amended a third time to allow our consolidated total secured indebtedness to be up to 55% of our secured total asset value for the period commencing upon the date that a material acquisition (generally, greater than $100 million) is consummated through and including the last day of the third fiscal quarter that follows such date.

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


•	a maximum leverage ratio (defined as total indebtedness net of certain unrestricted cash and cash equivalents to total asset value) of 60%,


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


•	a maximum secured leverage ratio (defined as total secured indebtedness to secured total asset value) of up to 55% in certain circumstances,


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


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

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

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

As of June 30, 2013, we were in compliance with the credit facility financial covenants.

NOTE 8. EQUITY

Stockholders' Equity

On May 6, 2013, we entered into an at-the-market (“ATM”) equity program with four 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 $150.0 million. The sales of shares of our common stock made through the ATM equity program are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended. For the three months ended June 30, 2013, we issued 718,714 shares of common stock through the ATM equity program at a weighted average price per share of $35.09 for gross proceeds of $25.2 million and paid $0.3 million in sales agent compensation and $0.6 million in additional offering expenses related to the sales of these shares of common stock. We intend to use the net proceeds to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving credit facility or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of June 30, 2013, we had the capacity to issue up to an additional $124.8 million in shares of our common stock under our ATM equity program. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program.

Noncontrolling Interests

Noncontrolling interests in our Operating Partnership are interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of 17,961,924 common units (the “noncontrolling common units”), and represented approximately 31% of the ownership interests in our Operating Partnership at June 30, 2013. 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

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(Unaudited)

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 six months ended June 30, 2013, approximately 61,511 common units were converted into shares of our common stock.

Dividends

The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units during the six months ended June 30, 2013:



Period	Amount per Share/Unit		Period Covered	Dividend Paid Date
First Quarter 2013	$	0.21	January 1, 2013 to March 31, 2013	March 29, 2013
Second Quarter 2013	$	0.21	April 1, 2013 to June 30, 2013	June 28, 2013

Taxability of Dividends

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

Stock-Based Compensation

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

We granted each of our non-employee directors restricted shares of our common stock pursuant to the 2011 Plan, either concurrently with the closing of our initial public offering or at the time the director was formally appointed to our board of directors (the "Board"). In addition, on the date of each annual meeting of our stockholders, each non-employee director who continues to serve on the Board following such annual meeting will be granted restricted shares of our common stock pursuant to the 2011 Plan. These awards of restricted stock will vest ratably as to one-third of the shares granted on each of the first three anniversaries of the date of grant, subject to the director’s continued service on our Board pursuant to our independent director compensation policy.

We have also granted restricted shares of our common stock to certain other employees pursuant to the 2011 Plan. These shares are subject to performance-based vesting, with substantially the same terms described above.

For the performance-based stock awards, the fair value of the awards was estimated using a Monte Carlo Simulation model. Our stock price, along with the stock prices of a group of peer REITs, is assumed to follow the Multivariate Geometric Brownian Motion Process. Multivariate Geometric Brownian Motion is a common assumption when modeling in financial markets, as it allows the modeled quantity (in this case, the stock price) to vary randomly from its current value and take any value greater than zero. The volatilities of the returns on the stock price of the Company and the group of REITs were estimated based on a three year look-back period. The expected growth rate of the stock prices over the “derived service period” of the employee is determined with consideration of the risk free rate as of the grant date. For the restricted stock grants that are time-vesting, we estimate the stock compensation expense based on the fair value of the stock at the grant date.

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(Unaudited)

The following table summarizes the activity of restricted stock awards during the six months ended June 30, 2013:



	Units		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	633,222		$	15.64
Granted	5,004		31.97
Vested	(2,601	)	20.50
Forfeited	(3,863	)	20.39
Nonvested at June 30, 2013	631,762		$	15.61

We recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $1.4 million in noncash compensation expense for both the six months ended June 30, 2013 and 2012, which is included in general and administrative expense on the consolidated statements of income. Unrecognized compensation expense was $3.0 million at June 30, 2013.

Earnings Per Share

We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating security is calculated according to dividends declared and participation rights in undistributed earnings. For the three and six months ended June 30, 2013 and 2012, we had a weighted average of approximately 630,374, 630,784, 626,274 and 626,771 unvested shares outstanding, respectively, which are considered participating securities. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares.

Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method. For the three and six months ended June 30, 2013 and 2012, diluted shares exclude incentive restricted stock as these awards are considered contingently issuable. Additionally, the unvested restricted stock awards subject to time vesting are anti-dilutive for all periods presented and accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.

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Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

The computation of basic and diluted EPS is presented below (dollars in thousands, except share and per share amounts):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

NUMERATOR
Income from continuing operations	$	4,564		$	2,397		$	9,429		$	5,161
Less: Net income attributable to restricted shares	(133		)	(131		)	(265		)	(263		)
Less: Income from continuing operations attributable to unitholders in the Operating Partnership	(1,354		)	(804		)	(2,849		)	(1,687		)
Income from continuing operations attributable to American Assets Trust, Inc. common stockholders—basic	3,077			1,462			6,315			3,211
Plus: Results from discontinued operations attributable to American Assets Trust, Inc. common stockholders	—			154			—			226
Net income attributable to common stockholders—basic	$	3,077		$	1,616		$	6,315		$	3,437
Income from continuing operations attributable to American Assets Trust, Inc. common stockholders—basic	$	3,077		$	1,462		$	6,315		$	3,211
Plus: Income from continuing operations attributable to unitholders in the Operating Partnership	1,354			804			2,849			1,687
Income from continuing operations attributable to common stockholders—diluted	4,431			2,266			9,164			4,898
Plus: Results from discontinued operations attributable to American Assets Trust, Inc. common stockholders	—			154			—			226
Plus: Results from discontinued operations attributable to unitholders in the Operating Partnership	—			73			—			108
Net income attributable to common stockholders—diluted	$	4,431		$	2,493		$	9,164		$	5,232
DENOMINATOR
Weighted average common shares outstanding—basic	39,460,086			38,659,155			39,247,729			38,658,162
Effect of dilutive securities—conversion of Operating Partnership units	17,969,751			18,396,089			17,996,445			18,396,347
Weighted average common shares outstanding—diluted	57,429,837			57,055,244			57,244,174			57,054,509
EARNINGS PER COMMON SHARE-BASIC
Continuing operations	$	0.08		$	0.04		$	0.16		$	0.08
Discontinued operations	—			—			—			0.01
	$	0.08		$	0.04		$	0.16		$	0.09
EARNINGS PER COMMON SHARE-DILUTED
Continuing operations	$	0.08		$	0.04		$	0.16		$	0.08
Discontinued operations	—			—			—			0.01
	$	0.08		$	0.04		$	0.16		$	0.09

NOTE 9. DISCONTINUED OPERATIONS

On December 4, 2012, we sold 160 King Street for a sales price of approximately $93.8 million. The property is located in San Francisco, California and was previously included in our office segment. The decision to sell 160 King Street was a result of our desire to focus resources on our core, high-barrier-to-entry markets. The sale was completed as a reverse tax deferred exchange in conjunction with the acquisition of City Center Bellevue pursuant to the provisions of Section 1031 of the Internal Revenue Code of 1986, as amended, and applicable state revenue and taxation code sections. As a result of the sale, 160 King Street no longer serves as a borrowing base property under our revolving credit facility.

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June 30, 2013

(Unaudited)

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Net revenue from discontinued operations	—		$	1,678	$	—	$	3,267
Net property expenses from discontinued operations	—		647		—		1,275
Depreciation and amortization	—		342		—		741
Results from discontinued operations
Income from discontinued operations	—		227		—		334
Total income from discontinued operations	$	—	$	227	$	—	$	334

NOTE 10. INCOME TAXES

We elected to be taxed as a REIT and operate in a manner that allows us to qualify as a REIT for federal income tax purposes commencing with our initial taxable year. As a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. Taxable income from non-REIT activities managed through our TRS is subject to federal and state income taxes.

We lease our hotel property to a wholly owned TRS that is subject to federal and state income taxes. We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases. Additionally, we classify certain state taxes as income taxes for financial reporting purposes in accordance with ASC Topic 740, Income Taxes. We record the Portland Business Tax and Texas Margin Tax as income taxes in our financial statements.

A deferred tax liability of $0.3 million as of June 30, 2013 and December 31, 2012 is included in our consolidated balance sheets in relation to real estate asset basis differences for Alamo Quarry Market and certain elections made in our 2011 return for our TRS.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Legal

We are sometimes involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

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

Commitments

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

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

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June 30, 2013

(Unaudited)

Current minimum annual payments under the leases are as follows, as of June 30, 2013 (in thousands):



Year Ending December 31,
2013 (six months ending December 31, 2013)	$	1,264
2014	2,569
2015	2,636
2016	1,709
2017	736		⁽¹⁾
Thereafter	2,961
Total	$	11,875


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

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

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 $6.0 million based on operating performance through June 30, 2013.

We had a property management agreement with Langley Investment Properties, Inc. (“Langley”) pursuant to which Langley managed and operated Lloyd District Portfolio, and we paid Langley a monthly management fee of 3.5% of “gross receipts,” as defined in the property management agreement, as well as leasing commissions and construction oversight fees in certain situations. The property management agreement was terminated on February 1, 2013 by mutual consent of both parties. Langley continued to provide development consulting services to us until June 30, 2013 and will continue to provide leasing services to us through December 31, 2013 pursuant to a development, consulting, leasing and transition services and management termination agreement.

Our Del Monte Center property has ongoing environmental remediation related to ground water contamination. The environmental issue existed at purchase and remediation is expected to conclude within the next two years. The work performed is financed through an escrow account funded by the seller upon purchase of the property. We believe the funds in

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(Unaudited)

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.

In connection with our initial public offering, we entered into tax protection agreements with certain limited partners of our Operating Partnership. These agreements provide that if we dispose of any interest with respect to Carmel Country Plaza, Carmel Mountain Plaza, Del Monte Center, Loma Palisades, Lomas Santa Fe Plaza, Waikele Center or the ICW Plaza portion of Torrey Reserve Campus, in a taxable transaction during the period from the closing of our initial public offering through January 19, 2018, we will indemnify such limited partners for their tax liabilities attributable to their share of the built-in gain that existed with respect to such property interest as of the time of our initial public offering and tax liabilities incurred as a result of the reimbursement payment. Subject to certain exceptions and limitations, the indemnification rights will terminate for any such protected partner that sells, exchanges or otherwise disposes of more than 50% of his or her common units. We have no present intention to sell or otherwise dispose of the properties or interest therein in taxable transactions during the restriction period. If we were to trigger the tax protection provisions under these agreements, we would be required to pay damages in the amount of the taxes owed by these limited partners (plus additional damages in the amount of the taxes incurred as a result of such payment).

As of June 30, 2013, the Company has accrued approximately $6.6 million for transfer taxes that the Company expected to incur on its California properties in connection with its initial public offering. The Company believes that it has filed all necessary forms with the requisite taxing authorities, but can offer no assurances that the taxing authorities will agree with the Company's estimate above.

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 and social factors affecting the markets in which the tenants operate. Twelve of our consolidated properties are located in Southern California, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. Further, tenants in the retail industry accounted for 36.5% of total revenues for the six months ended June 30, 2013. This makes us susceptible to demand for retail rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the retail industry. For the six months ended June 30, 2013 and 2012, no tenant accounted for more than 10% of our total rental revenue.

NOTE 12. OPERATING LEASES

Our leases with office, retail, mixed-use and residential tenants are classified as operating leases. Leases at our office and retail properties and the retail portion of our mixed-use property generally range from three to ten years (certain leases with anchor tenants may be longer), and in addition to minimum rents, usually provide for cost recoveries for the tenant’s share of certain operating costs and also may include percentage rents based on the tenant’s level of sales achieved. Leases on apartments generally range from 7 to 15 months, with a majority having 12-month lease terms. Rooms at the hotel portion of our mixed-use property are rented on a nightly basis.

As of June 30, 2013, 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,
2013 (six months ending December 31, 2013)	$	76,398
2014	143,328
2015	132,080
2016	112,365
2017	96,662
Thereafter	173,231
Total	$	734,064

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June 30, 2013

(Unaudited)

The above future minimum rentals exclude residential leases, which typically have a term of 12 months or less, and exclude the hotel, as rooms are rented on a nightly basis.

NOTE 13. COMPONENTS OF RENTAL INCOME AND EXPENSE

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Minimum rents
Retail	$	17,236	$	16,772	$	34,587	$	32,847
Office	20,298		16,508		40,798		32,755
Multifamily	3,687		3,252		7,270		6,527
Mixed-use	2,257		2,252		4,677		4,535
Cost reimbursement	7,242		6,688		12,913		13,421
Percentage rent	402		434		820		726
Hotel revenue	8,178		7,461		17,026		15,125
Other	405		373		836		812
Total rental income	$	59,705	$	53,740	$	118,927	$	106,748

Minimum rents include $0.5 million and $1.7 million for the three months ended June 30, 2013 and 2012, respectively, and $1.2 million and $3.6 million for the six months ended June 30, 2013 and 2012, respectively, to recognize minimum rents on a straight-line basis. In addition, net amortization of above and below market leases included in minimum rents were $0.2 million and $(0.2) million for the three months ended June 30, 2013 and 2012, respectively, and $0.7 million and $(0.5) million for the six months ended June 30, 2013 and 2012, respectively.

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Rental operating	$	6,430	$	5,799	$	12,744	$	11,382
Hotel operating	5,438		5,156		10,920		10,112
Repairs and maintenance	2,489		2,281		4,603		4,285
Marketing	344		264		696		570
Rent	611		625		1,224		1,236
Hawaii excise tax	952		895		1,891		1,757
Management fees	422		486		894		982
Total rental expenses	$	16,686	$	15,506	$	32,972	$	30,324

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(Unaudited)

NOTE 14. OTHER INCOME (EXPENSE), NET

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Interest and investment income	$	26		$	65		$	34		$	152
Income tax expense	(91		)	(282		)	(388		)	(500		)
Acquisition related expenses	—			—			—			(15		)
Other non-operating income	—			—			10			—
Total other income (expense), net	$	(65	)	$	(217	)	$	(344	)	$	(363	)

NOTE 15. RELATED PARTY TRANSACTIONS

At ICW Plaza, we lease space to Insurance Company of the West, which is under the indirect control of Ernest Rady, our Executive Chairman of the Board. Rental revenue recognized on the leases of $1.1 million and $1.1 million for the six months ended June 30, 2013 and 2012, respectively, is included in rental 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 $0.5 million were made for the six months ended June 30, 2013 and 2012, respectively, and are included in rental expenses on the statement of income.

NOTE 16. SEGMENT REPORTING

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.

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Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Total Retail
Property revenue	$	23,497		$	22,452		$	45,651		$	44,143
Property expense	(6,060		)	(6,094		)	(11,031		)	(11,820		)
Segment profit	17,437			16,358			34,620			32,323
Total Office
Property revenue	22,512			18,027			44,934			35,914
Property expense	(6,584		)	(5,858		)	(13,020		)	(11,376		)
Segment profit	15,928			12,169			31,914			24,538
Total Multifamily
Property revenue	3,974			3,509			7,849			7,051
Property expense	(1,416		)	(1,565		)	(2,858		)	(2,879		)
Segment profit	2,558			1,944			4,991			4,172
Total Mixed-Use
Property revenue	12,931			12,143			26,660			24,472
Property expense	(8,102		)	(7,732		)	(16,339		)	(15,233		)
Segment profit	4,829			4,411			10,321			9,239
Total segments’ profit	$	40,752		$	34,882		$	81,846		$	70,272

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Total segments’ profit	$	40,752		$	34,882		$	81,846		$	70,272
General and administrative	(4,426		)	(3,911		)	(8,627		)	(7,636		)
Depreciation and amortization	(16,953		)	(14,329		)	(33,966		)	(29,183		)
Interest expense	(14,744		)	(14,028		)	(29,480		)	(27,929		)
Other income (expense), net	(65		)	(217		)	(344		)	(363		)
Income from continuing operations	4,564			2,397			9,429			5,161
Discontinued operations
Results from discontinued operations	—			227			—			334
Net income	4,564			2,624			9,429			5,495
Net income attributable to restricted shares	(133		)	(131		)	(265		)	(263		)
Net income attributable to unitholders in the Operating Partnership	(1,354		)	(804		)	(2,849		)	(1,687		)
Net income attributable to American Assets Trust, Inc. stockholders	$	3,077		$	1,689		$	6,315		$	3,545

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American Assets Trust, Inc.

Notes to Consolidated Financial Statements—(Continued)

June 30, 2013

(Unaudited)

The following table shows net real estate and secured note payable balances for each of the segments (in thousands):



	June 30, 2013		December 31, 2012
Net Real Estate
Retail	$	659,496	$	669,177
Office	765,552		759,203
Multifamily	35,937		36,391
Mixed-Use	200,970		203,411
	$	1,661,955	$	1,668,182
Secured Notes Payable ⁽¹⁾
Retail	$	396,358	$	397,732
Office	427,728		428,194
Multifamily	101,444		101,444
Mixed-Use	130,310		130,310
	$	1,055,840	$	1,057,680


(1)	Excludes unamortized fair market value adjustments of $11.5 million and $13.0 million as of June 30, 2013 and December 31, 2012, respectively.

Capital expenditures for each segment for the three and six months ended June 30, 2013 and 2012 were as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Capital Expenditures ⁽¹⁾
Retail	$	580	$	4,012	$	2,527	$	7,442
Office	11,439		2,441		19,301		5,153
Multifamily	206		285		349		523
Mixed-Use	83		68		371		145
	$	12,308	$	6,806	$	22,548	$	13,263


(1)	Capital expenditures represent cash paid for capital expenditures during the period and include leasing commissions paid.

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

Forward-Looking Statements

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

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


•	adverse economic or real estate developments in our markets;


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


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


•	difficulties in identifying properties to acquire and completing acquisitions;


•	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;


•	other factors affecting the real estate industry generally;


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


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

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors,

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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, 2012.

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 real estate investment trust, or 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, Texas, Oregon, Washington and Hawaii. As of June 30, 2013, our portfolio is comprised of eleven retail shopping centers; seven office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and four multifamily properties. Additionally, as of June 30, 2013, we owned land at five of our properties that we classified as held for development and/or construction in progress. Our core markets include San Diego, the San Francisco Bay Area, 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 68.9% of our Operating Partnership as of June 30, 2013. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership.

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, 2012. We have not made any material changes to these policies during the periods covered by this report.

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, 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 $6.1 million and $2.6 million for the three months ended June 30, 2013 and 2012, respectively. We capitalized external and internal costs related to both development and redevelopment activities combined of $13.6 million and $5.2 million for the six months ended June 30, 2013 and 2012, respectively

We capitalized external and internal costs related to other property improvements combined of $4.3 million and $7.0 million, for the three months ended June 30, 2013 and 2012, respectively. We capitalized external and internal costs related to other property improvements combined of $6.2 million and $10.1 million, for the six months ended June 30, 2013 and 2012, respectively.

We capitalized internal costs for salaries and related benefits for development and redevelopment activities and other property improvements of $0.03 million and $0.02 million for the three months ended June 30, 2013 and 2012, respectively. We capitalized internal costs for salaries and related benefits for development and redevelopment activities and other property improvements of $0.06 million and $0.02 million for the six months ended June 30, 2013 and 2012, 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

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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, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period. We capitalized interest costs related to both development and redevelopment activities combined of $0.5 million and $0.2 million for the three months ended June 30, 2013 and 2012, respectively. We capitalized interest costs related to both development and redevelopment activities combined of $0.8 million and $0.2 million for the six months ended June 30, 2013 and 2012, respectively.

Results of Operations

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

Comparison of the three months ended June 30, 2013 to the three months ended June 30, 2012

The following summarizes our consolidated results of operations for the three months ended June 30, 2013 compared to our consolidated results of operations for the three months ended June 30, 2012. As of June 30, 2013, our operating portfolio was comprised of 23 retail, office, multifamily and mixed-use properties with an aggregate of approximately 5.8 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, 922 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of June 30, 2013, we owned land at five of our properties that we classified as held for development and/or construction in progress. As of June 30, 2012, our operating portfolio was comprised of 21 properties with an aggregate of approximately 5.3 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, and 922 residential units (including 122 RV spaces) and a 369-room hotel; we also owned land at five of our properties that we classified as held for development.

The following table sets forth selected data from our unaudited consolidated statements of income for the three months ended June 30, 2013 and 2012 (dollars in thousands):



	Three Months Ended June 30,						Change			%
	2013			2012			Change			%
Revenues
Rental income	$	59,705		$	53,740		$	5,965		11	%
Other property income	3,209			2,391			818			34
Total property revenues	62,914			56,131			6,783			12
Expenses
Rental expenses	16,686			15,506			1,180			8
Real estate taxes	5,476			5,743			(267		)	(5	)
Total property expenses	22,162			21,249			913			4
Total property income	40,752			34,882			5,870			17
General and administrative	(4,426		)	(3,911		)	(515		)	13
Depreciation and amortization	(16,953		)	(14,329		)	(2,624		)	18
Interest expense	(14,744		)	(14,028		)	(716		)	5
Other income (expense), net	(65		)	(217		)	152			(70	)
Total other, net	(36,188		)	(32,485		)	(3,703		)	11
Income from continuing operations	4,564			2,397			2,167			90
Discontinued operations
Results from discontinued operations	—			227			(227		)	(100	)
Net income	4,564			2,624			1,940			74
Net income attributable to restricted shares	(133		)	(131		)	(2		)	2
Net income attributable to unitholders in the Operating Partnership	(1,354		)	(804		)	(550		)	68
Net income attributable to American Assets Trust, Inc. stockholders	$	3,077		$	1,689		$	1,388		82	%

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Revenue

Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased $6.8 million, or 12%, to $62.9 million for the three months ended June 30, 2013 compared to $56.1 million for the three months ended June 30, 2012. The percentage leased was as follows for each segment as of June 30, 2013 and 2012:



	Percentage Leased ⁽¹⁾ June 30,
	2013		2012
Retail	96.6	%	96.2	%
Office	92.9	%	94.7	%	⁽²⁾
Multifamily	97.7	%	97.7	%
Mixed-Use ⁽³⁾	93.8	%	93.9	%


(1)	The percentage leased includes the square footage under lease, including leases which may not have commenced as of June 30, 2013 or June 30, 2012, as applicable.


(2)	Excludes 160 King Street, which was sold on December 4, 2012.


(3)	Includes the retail portion of the mixed-use property only.

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 $6.0 million, or 11%, to $59.7 million for the three months ended June 30, 2013 compared to $53.7 million for the three months ended June 30, 2012. Rental revenue by segment was as follows (dollars in thousands):



	Total Portfolio								Same-Store Portfolio⁽¹⁾
	Three Months Ended June 30,				Change		%		Three Months Ended June 30,				Change			%
	2013		2012		Change		%		2013		2012		Change			%
Retail	$	23,073	$	22,135	$	938	4	%	$	22,593	$	22,121	$	472		2	%
Office	21,442		17,516		3,926		22		17,066		17,459		(393		)	(2	)
Multifamily	3,688		3,254		434		13		3,688		3,254		434			13
Mixed-Use	11,502		10,835		667		6		11,502		10,835		667			6
	$	59,705	$	53,740	$	5,965	11	%	$	54,849	$	53,669	$	1,180		2	%


(1)	For this table and tables following, the same-store portfolio excludes: City Center Bellevue acquired on August 21, 2012; Geary Marketplace acquired on December 19, 2012 and land held for development.

Retail rental revenue increased $0.9 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This increase was due to the acquisition of Geary Marketplace on December 19, 2012, which had rental revenue of $0.5 million for the three months ended June 30, 2013. Same-store retail rental revenue increased $0.5 million for the three months ended June 30, 2013 primarily related to the increase in percentage leased and additional cost reimbursements. These increases were partially offset by a decrease in occupancy at Lomas Santa Fe Plaza, mainly due to the expiration of the Ross Dress for Less lease on January 31, 2013.

Office rental revenue increased $3.9 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This increase was due to the acquisition of City Center Bellevue on August 21, 2012, which contributed additional rental revenue of $4.3 million for the three months ended June 30, 2013. Same-store office rental revenue decreased $0.4 million for the three months ended June 30, 2013 primarily due to a decrease in the percentage leased during the period, mainly at Torrey Reserve Campus and One Beach Street.

The increase in multifamily rental revenue was primarily due to an increase in average occupancy of 95.4% during the three months ended June 30, 2013 compared to 92.2% during the three months ended June 30, 2012. Additionally, there was an increase in average monthly base rent of $1,398 per leased unit during the three months ended June 30, 2013 compared to $1,328 per leased unit during the three months ended June 30, 2012.

The increase in mixed-use rental revenue was due to higher revenue per available room of $244 for the three months ended June 30, 2013 compared to $222 for the three months ended June 30, 2012.

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Other property income. Other property income increased $0.8 million, or 34%, to $3.2 million for the three months ended June 30, 2013, compared to $2.4 million for the three months ended June 30, 2012. Other property income by segment was as follows (dollars in thousands):



	Total Portfolio								Same-Store Portfolio
	Three Months Ended June 30,				Change		%		Three Months Ended June 30,				Change			%
	2013		2012		Change		%		2013		2012		Change			%
Retail	$	424	$	317	$	107	34	%	$	424	$	316	$	108		34	%
Office	1,070		511		559		109		388		393		(5		)	(1	)
Multifamily	286		255		31		12		286		255		31			12
Mixed-Use	1,429		1,308		121		9		1,429		1,308		121			9
	$	3,209	$	2,391	$	818	34	%	$	2,527	$	2,272	$	255		11	%

Retail other property income increased $0.1 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 primarily due to an additional distribution of bankruptcy claim amounts from the liquidating trustee of our former Borders tenants received during the second quarter of 2013.

Office other property income increased $0.6 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This increase was due to the acquisition of City Center Bellevue on August 21, 2012, which had additional other property income of $0.7 million for the three months ended June 30, 2013. This increase was offset by capitalized incidental operations at Lloyd District Portfolio and Sorrento Pointe in connection with development activities.

The increase in mixed-use other property income was due to an increase in parking income, principally as a result of an increase in the overnight hotel guest parking rate from $30/day to $35/day effective January 2013, and an increase in sales of food and beverages and other services provided to hotel guests during the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Property Expenses

Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $0.9 million, or 4%, to $22.2 million for the three months ended June 30, 2013, compared to $21.2 million for the three months ended June 30, 2012. This increase in total property expenses was attributable primarily to the factors discussed below.

Rental Expenses. Rental expenses increased $1.2 million, or 8%, to $16.7 million for the three months ended June 30, 2013, compared to $15.5 million for the three months ended June 30, 2012. Rental expense by segment was as follows (dollars in thousands):



	Total Portfolio									Same-Store Portfolio
	Three Months Ended June 30,				Change			%		Three Months Ended June 30,				Change			%
	2013		2012		Change			%		2013		2012		Change			%
Retail	$	3,401	$	3,298	$	103		3	%	$	3,301	$	3,298	$	3		—	%
Office	4,621		3,862		759			20		3,842		3,791		51			1
Multifamily	1,014		1,064		(50		)	(5	)	1,014		1,064		(50		)	(5	)
Mixed-Use	7,650		7,282		368			5		7,650		7,282		368			5
	$	16,686	$	15,506	$	1,180		8	%	$	15,807	$	15,435	$	372		2	%

The increase in retail rental expenses was primarily due to the acquisition of Geary Marketplace on December 19, 2012, which had rental expenses of $0.1 million for the three months ended June 30, 2013.

The increase in office rental expenses was primarily caused by the acquisition of City Center Bellevue on August 21, 2012, which had rental expenses of $0.8 million for the three months ended June 30, 2013.

The increase in mixed-use rental expenses was due to an increase in management fees and excise taxes at both the hotel and retail portions of Waikiki Beach Walk during the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Additionally, room, food and beverage and advertising expenses increased at the hotel portion of Waikiki Beach Walk during the second quarter of 2013.

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Real Estate Taxes. Real estate taxes decreased $0.3 million, or 5%, to $5.5 million for the three months ended June 30, 2013 compared to $5.7 million for the three months ended June 30, 2012. Real estate tax expense by segment was as follows (dollars in thousands):



	Total Portfolio									Same-Store Portfolio
	Three Months Ended June 30,				Change			%		Three Months Ended June 30,				Change			%
	2013		2012		Change			%		2013		2012		Change			%
Retail	$	2,659	$	2,796	$	(137	)	(5	)%	$	2,570	$	2,773	$	(203	)	(7	)%
Office	1,963		1,996		(33		)	(2	)	1,682		1,926		(244		)	(13	)
Multifamily	402		501		(99		)	(20	)	402		501		(99		)	(20	)
Mixed-Use	452		450		2			—		452		450		2			—
	$	5,476	$	5,743	$	(267	)	(5	)%	$	5,106	$	5,650	$	(544	)	(10	)%

Retail real estate taxes decreased for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, primarily as a result of lower property tax expense at Lomas Santa Fe Plaza and Alamo Quarry Market based on refunds received subsequent to June 30, 2012. This decrease was partially offset by additional taxes incurred at Geary Marketplace, which was acquired on December 19, 2012.

Office real estate taxes decreased for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, in connection with capitalization of development activities at Torrey Reserve Campus, Lloyd District Portfolio and Sorrento Pointe. This decrease was partially offset by the acquisition of City Center Bellevue on August 21, 2012, which had real estate tax expense of $0.3 million for the three months ended June 30, 2013.

The decrease in multifamily real estate taxes for the three months ended June 30, 2013 was primarily due to the payment of additional real estate taxes for fiscal year 2011 during the second quarter of 2012 as a result of supplemental tax bills from the California taxing authority. Similar supplemental tax bills were not received during the three months ended June 30, 2013.

Property Operating Income

Property operating income increased $5.9 million, or 17%, to $40.8 million for the three months ended June 30, 2013, compared to $34.9 million for the three months ended June 30, 2012. Property operating income by segment was as follows (dollars in thousands):



	Total Portfolio								Same-Store Portfolio
	Three Months Ended June 30,				Change		%		Three Months Ended June 30,				Change			%
	2013		2012		Change		%		2013		2012		Change			%
Retail	$	17,437	$	16,358	$	1,079	7	%	$	17,146	$	16,366	$	780		5	%
Office	15,928		12,169		3,759		31		11,930		12,135		(205		)	(2	)
Multifamily	2,558		1,944		614		32		2,558		1,944		614			32
Mixed-Use	4,829		4,411		418		9		4,829		4,411		418			9
	$	40,752	$	34,882	$	5,870	17	%	$	36,463	$	34,856	$	1,607		5	%

The increase in retail property operating income was primarily due to the acquisition of Geary Marketplace on December 19, 2012 and an increase in the average percentage leased and additional cost reimbursements for the retail properties for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

The increase in office property operating income was primarily due to the acquisition of City Center Bellevue on August 21, 2012. The decrease in same-store office property operating income was primarily due to a decrease in percentage leased for the office properties for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

The increase in multifamily property operating income was primarily due to higher average monthly base rent for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

The increase in mixed-use property operating income was primarily due to higher revenue per available room throughout the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

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Other

Depreciation and Amortization. Depreciation and amortization expense increased $2.6 million, or 18%, to $17.0 million for the three months ended June 30, 2013, compared to $14.3 million for the three months ended June 30, 2012. This increase was primarily due to depreciation and amortization expense attributable properties acquired subsequent to June 30, 2012.

Interest Expense. Interest expense increased $0.7 million, or 5%, to $14.7 million for the three months ended June 30, 2013, compared to $14.0 million for the three months ended June 30, 2012. This increase was primarily due to interest expense on the senior mortgage loan issued with respect to City Center Bellevue on October 10, 2012.

Other Expense, Net. Other expense, net decreased $0.2 million, or 70%, to $0.1 million for the three months ended June 30, 2013, compared to other expense, net of $0.2 million for the three months ended June 30, 2012, primarily due to a decrease in investment income from our marketable securities, which were sold during the third quarter of 2012.

Discontinued Operations. Discontinued operations relates to our sale of 160 King Street on December 4, 2012.

Comparison of the Six Months Ended June 30, 2013 to the Six Months Ended June 30, 2012

The following summarizes our consolidated results of operations for the six months ended June 30, 2013 compared to our consolidated results of operations for the six months ended June 30, 2012.

The following table sets forth selected data from our unaudited consolidated statements of income for the six months ended June 30, 2013 and 2012 (dollars in thousands):



	Six Months Ended June 30,						Change			%
	2013			2012			Change			%
Revenues
Rental income	$	118,927		$	106,748		$	12,179		11	%
Other property income	6,167			4,832			1,335			28
Total property revenues	125,094			111,580			13,514			12
Expenses
Rental expenses	32,972			30,324			2,648			9
Real estate taxes	10,276			10,984			(708		)	(6	)
Total property expenses	43,248			41,308			1,940			5
Total property income	81,846			70,272			11,574			16
General and administrative	(8,627		)	(7,636		)	(991		)	13
Depreciation and amortization	(33,966		)	(29,183		)	(4,783		)	16
Interest expense	(29,480		)	(27,929		)	(1,551		)	6
Other income (expense), net	(344		)	(363		)	19			(5	)
Total other, net	(72,417		)	(65,111		)	(7,306		)	11
Income from continuing operations	9,429			5,161			4,268			83
Discontinued operations
Results from discontinued operations	—			334			(334		)	(100	)
Net income	9,429			5,495			3,934			72
Net income attributable to restricted shares	(265		)	(263		)	(2		)	1
Net income attributable to unitholders in the Operating Partnership	(2,849		)	(1,687		)	(1,162		)	69
Net income (loss) attributable to American Assets Trust, Inc. stockholders	$	6,315		$	3,545		$	2,770		78	%

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Revenue

Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased $13.5 million, or 12%, to $125.1 million for the six months ended June 30, 2013 compared to $111.6 million for the six months ended June 30, 2012. The percentage leased was as follows for each segment as of June 30, 2013 and 2012:



	Percentage Leased ⁽¹⁾ June 30,
	2013		2012
Retail	96.6	%	96.2	%
Office	92.9	%	94.7	%	⁽²⁾
Multifamily	97.7	%	97.7	%
Mixed-Use ⁽³⁾	93.8	%	93.9	%


(1)	The percentage leased includes the square footage under lease, including leases which may not have commenced as of June 30, 2013 or June 30, 2012, as applicable.


(2)	Excludes 160 King Street, which was sold on December 4, 2012.


(3)	Includes the retail portion of the mixed-use property only.

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 $12.2 million, or 11%, to $118.9 million for the six months ended June 30, 2013 compared to $106.7 million for the six months ended June 30, 2012. Rental revenue by segment was as follows (dollars in thousands):



	Total Portfolio								Same-Store Portfolio⁽¹⁾
	Six Months Ended June 30,				Change		%		Six Months Ended June 30,				Change			%
	2013		2012		Change		%		2013		2012		Change			%
Retail	$	44,932	$	43,519	$	1,413	3	%	$	43,982	$	43,490	$	492		1	%
Office	42,861		34,786		8,075		23		32,156		32,808		(652		)	(2	)
Multifamily	7,273		6,532		741		11		7,273		6,532		741			11
Mixed-Use	23,861		21,911		1,950		9		23,861		21,911		1,950			9
	$	118,927	$	106,748	$	12,179	11	%	$	107,272	$	104,741	$	2,531		2	%


(1)	For this table and tables following, the same-store portfolio excludes: One Beach Street acquired on January 24, 2012; City Center Bellevue acquired on August 21, 2012; Geary Marketplace acquired on December 19, 2012 and land held for development.

Retail rental revenue increased $1.4 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This increase was due to the acquisition of Geary Marketplace on December 19, 2012, which had rental revenue of $1.0 million for the six months ended June 30, 2013. Same-store retail rental revenue increased $0.5 million for the six months ended June 30, 2013 was primarily related to the increase in percentage leased and additional cost reimbursements. These increases were partially offset by a decrease in occupancy at Lomas Santa Fe Plaza, mainly due to the expiration of the Ross Dress for Less lease on January 31, 2013.

Office rental revenue increased $8.1 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This increase was due to the acquisition of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had additional rental revenues of $0.1 million and $8.6 million, respectively, for the six months ended June 30, 2013. Same-store office rental revenue decreased $0.7 million for the six months ended June 30, 2013 primarily due to a decrease in the percentage leased during the period, mainly at Torrey Reserve Campus.

The increase in multifamily rental revenue was primarily due to an increase in average occupancy of 94.5% during the six months ended June 30, 2013 compared to 90.4% during the six months ended June 30, 2012. Additionally, there was an increase in average monthly base rent of $1,393 per leased unit during the six months ended June 30, 2013 compared to $1,367 per leased unit during the six months ended June 30, 2012.

The increase in mixed-use rental revenue was primarily due to higher revenue per available room of $255 for the six months ended June 30, 2013 and $225 for the six months ended June 30, 2012.

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Other property income. Other property income increased $1.3 million, or 28%, to $6.2 million for the six months ended June 30, 2013, compared to $4.8 million for the six months ended June 30, 2012. Other property income by segment was as follows (dollars in thousands):



	Total Portfolio								Same-Store Portfolio
	Six Months Ended June 30,				Change		%		Six Months Ended June 30,				Change		%
	2013		2012		Change		%		2013		2012		Change		%
Retail	$	719	$	624	$	95	15	%	$	719	$	622	$	97	16	%
Office	2,073		1,128		945		84		759		742		17		2
Multifamily	576		519		57		11		576		519		57		11
Mixed-Use	2,799		2,561		238		9		2,799		2,561		238		9
	$	6,167	$	4,832	$	1,335	28	%	$	4,853	$	4,444	$	409	9	%

The increase in retail other property income for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was primarily due to an additional distribution of bankruptcy claim amounts from the liquidating trustee of our former Borders tenants received during the second quarter of 2013.

The increase in office other property income was primarily caused by the acquisition of City Center Bellevue on August 21, 2012, which had other property income of $1.3 million for the six months ended June 30, 2013. This increase was partially offset by capitalized incidental operations at Lloyd District Portfolio and Sorrento Pointe in connection with development activities.

The increase in mixed-use other property income is due to an increase in parking income, principally resulting from an increase in the overnight hotel guest parking rate from $30/day to $35/day effective January 2013, and an increase in sales of food and beverages and other services provided to hotel guests during the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Property Expenses

Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $1.9 million, or 5%, to $43.2 million for the six months ended June 30, 2013, compared to $41.3 million for the six months ended June 30, 2012. This increase in total property expenses was attributable primarily to the factors discussed below.

Rental Expenses. Rental expenses increased $2.7 million, or 9%, to $33.0 million for the six months ended June 30, 2013, compared to $30.3 million for the six months ended June 30, 2012. Rental expense by segment was as follows (dollars in thousands):



	Total Portfolio								Same-Store Portfolio
	Six Months Ended June 30,				Change		%		Six Months Ended June 30,				Change			%
	2013		2012		Change		%		2013		2012		Change			%
Retail	$	6,488	$	6,447	$	41	1	%	$	6,281	$	6,444	$	(163	)	(3	)%
Office	8,996		7,520		1,476		20		6,986		7,036		(50		)	(1	)
Multifamily	2,054		2,024		30		1		2,054		2,024		30			1
Mixed-Use	15,434		14,333		1,101		8		15,434		14,333		1,101			8
	$	32,972	$	30,324	$	2,648	9	%	$	30,755	$	29,837	$	918		3	%

The decrease in same-store retail rental expenses was primarily due to expenses related to parking lot and landscaping repairs at Del Monte Center that were incurred during the six months ended June 30, 2012. This decrease was partially offset by an increase in retail rental expenses due to the acquisition of Geary Marketplace on December 19, 2012, which had rental expenses of $0.2 million for the six months ended June 30, 2013.

The increase in office rental expenses was primarily caused by the acquisition of City Center Bellevue on August 21, 2012, which had rental expenses of $1.6 million for the six months ended June 30, 2013.

The increase in mixed-use rental expenses is due to an increase in advertising and management fees at both the hotel and retail portions of Waikiki Beach Walk during the six months ended June 30, 2013 compared to the six months ended June 30,

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2012. Additionally, room and food and beverage expenses increased at the hotel portion of Waikiki Beach Walk during the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Real Estate Taxes. Real estate tax expense decreased $0.7 million, or 6%, to $10.3 million for the six months ended June 30, 2013 compared to $11.0 million for the six months ended June 30, 2012. Real estate tax expense by segment was as follows (dollars in thousands):



	Total Portfolio									Same-Store Portfolio
	Six Months Ended June 30,				Change			%		Six Months Ended June 30,				Change			%
	2013		2012		Change			%		2013		2012		Change			%
Retail	$	4,543	$	5,373	$	(830	)	(15	)%	$	4,372	$	5,324	$	(952	)	(18	)%
Office	4,024		3,856		168			4		3,353		3,600		(247		)	(7	)
Multifamily	804		855		(51		)	(6	)	804		855		(51		)	(6	)
Mixed-Use	905		900		5			1		905		900		5			1
	$	10,276	$	10,984	$	(708	)	(6	)%	$	9,434	$	10,679	$	(1,245	)	(12	)%

Retail real estate taxes decreased $0.8 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 primarily as a result of lower property tax expense at Lomas Santa Fe Plaza and Alamo Quarry Market based on refunds received subsequent to June 30, 2012. The decrease was partially offset by additional real estate tax accruals of $0.1 million at Geary Marketplace which was acquired on December 19, 2012.

Office real estate taxes increased $0.2 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 primarily due to the acquisition of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had real estate tax expenses of $0.1 million and $0.5 million, respectively, for the six months ended June 30, 2013. Same-store office real estate taxes decreased $0.2 million primarily due to the payment of additional real estate taxes for fiscal year 2011 during the second quarter of 2012 as a result of supplemental tax bills from the California taxing authority. Similar supplemental tax bills were not received during the six months ended June 30, 2013. Additionally, same-store office real estate taxes decreased at First & Main due to a tax exemption received by a tenant.

Property Operating Income

Property operating income increased $11.6 million, or 16%, to $81.8 million for the six months ended June 30, 2013, compared to $70.3 million for the six months ended June 30, 2012. Property operating income by segment was as follows (dollars in thousands):



	Total Portfolio								Same-Store Portfolio
	Six Months Ended June 30,				Change		%		Six Months Ended June 30,				Change			%
	2013		2012		Change		%		2013		2012		Change			%
Retail	$	34,620	$	32,323	$	2,297	7	%	$	34,048	$	32,344	$	1,704		5	%
Office	31,914		24,538		7,376		30		22,576		22,914		(338		)	(1	)
Multifamily	4,991		4,172		819		20		4,991		4,172		819			20
Mixed-Use	10,321		9,239		1,082		12		10,321		9,239		1,082			12
	$	81,846	$	70,272	$	11,574	16	%	$	71,936	$	68,669	$	3,267		5	%

The increase in retail property operating income was primarily due to the acquisition of Geary Marketplace on December 19, 2012 and an increase in the average percentage leased and additional cost reimbursements for the retail properties for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

The increase in office property operating income was primarily caused by the acquisitions of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012. This increase was partially offset by a decrease in the percentage leased during the period, mainly at Torrey Reserve Campus.

The increase in multifamily operating income was primarily caused by an increase in average monthly base rent per leased unit during the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

The increase in mixed-use property operating income was primarily due to higher revenue per available room throughout the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

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Other

General and Administrative. General and administrative expenses increased $1.0 million, or 13%, to $8.6 million for the six months ended June 30, 2013, compared to $7.6 million for the six months ended June 30, 2012. This increase was due primarily to additional costs for properties acquired subsequent to June 30, 2012.

Depreciation and Amortization. Depreciation and amortization expense increased $4.8 million, or 16%, to $34.0 million for the six months ended June 30, 2013, compared to $29.2 million for the six months ended June 30, 2012. This increase was due primarily to depreciation and amortization expense attributable to properties acquired subsequent to June 30, 2012.

Interest Expense. Interest expense increased $1.6 million, or 6%, to $29.5 million for the six months ended June 30, 2013 compared with $27.9 million for the six months ended June 30, 2012. This increase was primarily due to interest expense on the mortgage loans issued with respect to One Beach Street on March 29, 2012 and City Center Bellevue on October 12, 2012.

Discontinued Operations. Discontinued operations relates to 160 King Street, which was sold on December 4, 2012.

Liquidity and Capital Resources

Analysis of Liquidity and Capital Resources

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 our stockholders and Operating Partnership unitholders. As of June 30, 2013, we held $63.3 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 our stockholders required to maintain our REIT status, 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 the issuance of equity and debt securities. We also may fund property acquisitions and capital improvements using our 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.

On February 7, 2012, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, or the SEC, which was declared effective on February 17, 2012. The universal shelf registration statement may permit us, from time to time, to offer and sell up to an additional approximately $500.0 million of equity securities. However, there can be no assurance that we 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.

On May 6, 2013, we entered into an ATM equity program with four 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 $150.0 million. The sales of shares of our common stock made through the ATM equity program are made in “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended. As of June 30, 2013, we issued 718,714 shares of common stock at a weighted average price per share of $35.09 for gross cash proceeds of $25.2 million. We intend to use the net proceeds to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving credit facility or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of June 30, 2013, we had the capacity to issue up to an additional $124.8 million in shares of common stock under our ATM equity program. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program.

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Indebtedness Outstanding

The following table sets forth information as of June 30, 2013 with respect to our secured notes payable (dollars in thousands):



Debt	Principal Balance at June 30, 2013			Interest Rate		Annual Debt Service		Maturity Date	Balance at Maturity
Alamo Quarry Market ⁽¹⁾⁽²⁾	$	92,838		5.67	%	$	95,948	January 8, 2014	$	91,717
Waikele Center ⁽³⁾	140,700			5.15	%	7,360		November 1, 2014	140,700
The Shops at Kalakaua ⁽³⁾	19,000			5.45	%	1,053		May 1, 2015	19,000
The Landmark at One Market ⁽²⁾⁽³⁾	133,000			5.61	%	7,558		July 5, 2015	133,000
Del Monte Center ⁽³⁾	82,300			4.93	%	4,121		July 8, 2015	82,300
First & Main ⁽³⁾	84,500			3.97	%	3,397		July 1, 2016	84,500
Imperial Beach Gardens ⁽³⁾	20,000			6.16	%	1,250		September 1, 2016	20,000
Mariner’s Point ⁽³⁾	7,700			6.09	%	476		September 1, 2016	7,700
South Bay Marketplace ⁽³⁾	23,000			5.48	%	1,281		February 10, 2017	23,000
Waikiki Beach Walk—Retail ⁽³⁾	130,310			5.39	%	7,020		July 1, 2017	130,310
Solana Beach Corporate Centre III-IV ⁽⁴⁾	37,004			6.39	%	2,798		August 1, 2017	35,136
Loma Palisades ⁽³⁾	73,744			6.09	%	4,553		July 1, 2018	73,744
One Beach Street ⁽³⁾	21,900			3.94	%	875		April 1, 2019	21,900
Torrey Reserve—North Court ⁽¹⁾	21,521			7.22	%	1,836		June 1, 2019	19,443
Torrey Reserve—VCI, VCII, VCIII ⁽¹⁾	7,247			6.36	%	560		June 1, 2020	6,439
Solana Beach Corporate Centre I-II ⁽¹⁾	11,556			5.91	%	855		June 1, 2020	10,169
Solana Beach Towne Centre ⁽¹⁾	38,520			5.91	%	2,849		June 1, 2020	33,898
City Center Bellevue ⁽³⁾	111,000			3.98	%	4,479		November 1, 2022	111,000
Total	1,055,840					$	148,269		$	1,043,956
Unamortized fair value adjustment	(11,541		)
Total Secured Notes Payable Balance	$	1,044,299


(1)	Principal payments based on a 30-year amortization schedule.


(2)	Maturity date is the earlier of the loan maturity date under the loan agreement, or the “Anticipated Repayment Date” as specifically defined in the loan agreement, which is the date after which substantial economic penalties apply if the loan has not been paid off.


(3)	Interest only.


(4)	Loan was interest only through August 2012. Beginning in September 2012, principal payments are based on a 30-year amortization schedule. Annual debt service is for the period October 1, 2012 through September 30, 2013.

Certain loans require us to comply with various financial covenants. As of June 30, 2013, we were in compliance with these financial covenants.

Credit Facility

On January 19, 2011, upon completion of our initial public offering, we entered into a revolving credit facility, or the credit facility. A group of lenders for which an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as administrative agent and joint arranger, and an affiliate of Wells Fargo Securities, LLC acts as syndication agent and joint arranger, have provided commitments for a revolving credit facility allowing borrowings of up to $250 million. At June 30, 2013, our maximum allowable borrowing amount was $227.8 million. The credit facility also has an accordion feature that may allow us to increase the availability thereunder up to a maximum of $400 million, subject to meeting specified requirements and obtaining additional commitments from lenders. We expect to use the credit facility in the future for general corporate purposes, including working capital, the payment of capital expenses, acquisitions and development and redevelopment of properties in our portfolio. The amount available for us to borrow under the credit facility is subject to the net operating income of our properties that form the borrowing base of the credit facility and a minimum implied debt yield of such properties.

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

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On January 10, 2012, the credit facility was amended to, among other things, (1) extend the maturity date to January 10, 2016 (with a one-year extension option subject to payment of a 0.15% fee), (2) decrease the applicable interest rates and (3) modify certain financial covenants. This amendment provides for an interest rate based on, at our option, either (1) one-, two-, three- or six-month LIBOR, plus, in each case, a spread (ranging from 1.60%-2.20%) based on our consolidated leverage ratio, or (2) a base rate equal to the highest of the (a) prime rate, (b) federal funds rate plus 0.50% or (c) Eurodollar rate plus 1.00%. Such rates are more favorable than those previously contained in the revolving credit facility. In addition, the amendment reduces our secured debt ratio covenant under the credit facility to 50.0%.

On September 7, 2012, the credit facility was amended a third time to allow our consolidated total secured indebtedness to be up to 55% of our secured total asset value for the period commencing upon the date that a material acquisition (generally, greater than $100 million) is consummated through and including the last day of the third fiscal quarter that follows such date.

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


•	a maximum leverage ratio (defined as total indebtedness net of certain unrestricted cash and cash equivalents to total asset value) of 60.0%,


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


•	a maximum secured leverage ratio (defined as total secured indebtedness to secured total asset value) of up to 55% in certain circumstances,


•	a minimum tangible net worth equal to at least 75.0% of our tangible net worth at January, 19, 2011, the closing date of our initial public offering, plus 85.0% of the net proceeds of any additional equity issuances (other than additional equity issuances in connection with any dividend reinvestment program), and


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

The credit facility provides that our annual distributions may not exceed the greater of (1) 95.0% of our funds from operations, or 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 June 30, 2013, we were in compliance with all the credit facility financial covenants.

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Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Cash Flows

Comparison of the six months ended June 30, 2013 to the six months ended June 30, 2012

Cash and cash equivalents were $63.3 million and $98.6 million, at June 30, 2013 and 2012, respectively.

Net cash provided by operating activities increased $10.4 million to $45.7 million for the six months ended June 30, 2013 compared to $35.3 million for the six months ended June 30, 2012. The increase was due to the acquisitions of One Beach Street, City Center Bellevue and Geary Marketplace during the second half of 2012.

Net cash used in investing activities decreased $21.4 million to $22.1 million for the six months ended June 30, 2013 compared to $43.6 million for the six months ended June 30, 2012. The decrease was primarily due to the acquisition of One Beach Street during the first quarter of 2012.

Net cash used in financing activities decreased $3.2 million to $2.7 million for the six months ended June 30, 2013 compared to net cash used by financing activities of $5.9 million for the six months ended June 30, 2012. The decrease was primarily due to proceeds from the sale of shares of our common stock.

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 nonproperty 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 other REITs.

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

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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 six months ended June 30, 2013 and 2012 computed in accordance with GAAP (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net operating income	$	40,752		$	34,882		$	81,846		$	70,272
General and administrative	(4,426		)	(3,911		)	(8,627		)	(7,636		)
Depreciation and amortization	(16,953		)	(14,329		)	(33,966		)	(29,183		)
Interest expense	(14,744		)	(14,028		)	(29,480		)	(27,929		)
Other income (expense), net	(65		)	(217		)	(344		)	(363		)
Income from continuing operations	4,564			2,397			9,429			5,161
Discontinued operations:
Results from discontinued operations	—			227			—			334
Net income	$	4,564		$	2,624		$	9,429		$	5,495

Funds from Operations

We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents net income (loss) (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.

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.

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The following table sets forth a reconciliation of our FFO for the three and six months ended June 30, 2013 to net income, the nearest GAAP equivalent (in thousands, except per share and share data):



	Three Months Ended June 30,			Six Months Ended June 30,
	2013			2013
Funds from Operations (FFO)
Net income	$	4,564		$	9,429
Plus: Real estate depreciation and amortization	16,953			33,966
Funds from operations	21,517			43,395
Less: Nonforfeitable dividends on incentive restricted stock awards	(88		)	(176		)
FFO attributable to common stock and units	$	21,429		$	43,219
FFO per diluted share/unit	$	0.37		$	0.75
Weighted average number of common shares and units, diluted ⁽¹⁾	57,640,176			57,454,594

(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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. As of June 30, 2013, we do not hold any derivative financial instruments.

Interest Rate Risk

Marketable Securities

Our investments in marketable securities are subject to market risk due to changes in interest rates since interest rate movements affect the value of those investments. The market value of these securities tends to decline in value as interest rates rise. If interest rates decrease, the market value of these securities generally will tend to increase, along with the level of prepayments of the underlying mortgages.

Outstanding Debt

The following discusses the effect of hypothetical changes in market rates of interest on the fair value of our total outstanding debt. Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our debt. Discounted cash flow analysis is generally used to estimate the fair value of our mortgages payable. Considerable judgment is necessary to estimate the fair value of financial instruments. This analysis does not purport to take into account all of the factors that may affect our debt, such as the effect that a changing interest rate environment could have on the overall level of economic activity or the action that our management might take to reduce our exposure to the change. This analysis assumes no change in our financial structure.

Fixed Interest Rate Debt

All of our outstanding debt obligations (maturing at various times through June 2020) have fixed interest rates which limit the risk of fluctuating interest rates. However, interest rate fluctuations may affect the fair value of our fixed rate debt instruments. At June 30, 2013, we had $1,055.8 million of fixed rate debt outstanding with an estimated fair value of $1,095.2 million. If interest rates at June 30, 2013 had been 1.0% higher, the fair value of those debt instruments on that date would have decreased by approximately $31.0 million. If interest rates at June 30, 2013 had been 1.0% lower, the fair value of those debt instruments on that date would have increased by approximately $36.3 million.

Variable Interest Rate Debt

At June 30, 2013, our only variable interest rate debt is our credit facility, which had no balance outstanding at June 30, 2013.

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ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the rules and regulations of the SEC and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of June 30, 2013, the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded, as of June 30, 2013, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (1) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

No changes to our internal control over financial reporting were identified in connection with the evaluation referenced above that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operation if determined adversely to us. We may be subject to on-going litigation, relating to our portfolio and the properties comprising our portfolio, and we expect to otherwise be party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors included in Item 1A. “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Exhibit No.		Description

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*		The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statement of Equity, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements that have been detail tagged.


*	Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.



	American Assets Trust, Inc.

August 2, 2013	/s/ JOHN W. CHAMBERLAIN
	John W. Chamberlain
	President and Chief Executive Officer
	(Principal Executive Officer)

August 2, 2013	/s/ ROBERT F. BARTON
	Robert F. Barton
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)