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7: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
39: R1 Cover Page HTML 83K
83: R2 Consolidated Balance Sheets HTML 135K
57: R3 Consolidated Balance Sheets (Parenthetical) HTML 46K
28: R4 Consolidated Statements of Comprehensive Income HTML 151K
(Unaudited)
38: R5 Consolidated Statement of Equity (Unaudited) HTML 338K
82: R6 Consolidated Statements of Cash Flows (Unaudited) HTML 140K
56: R7 Summary of Significant Accounting Policies HTML 81K
27: R8 Real Estate HTML 66K
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Leases
79: R10 Fair Value of Financial Instruments HTML 73K
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78: R14 Debt HTML 130K
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21: R16 Equity of American Assets Trust, Inc. HTML 115K
54: R17 Income Taxes HTML 30K
77: R18 Commitments and Contingencies HTML 40K
70: R19 Leases HTML 109K
24: R20 Components of Rental Income and Expense HTML 85K
37: R21 Other (Expense) Income, Net HTML 44K
85: R22 Related Party Transactions HTML 33K
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20: R35 Components of Rental Income and Expense (Tables) HTML 83K
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53: R38 Summary of Significant Accounting Policies HTML 44K
(Details)
18: R39 Summary of Significant Accounting Policies - HTML 45K
Supplement Disclosures Related to Consolidated
Statements of Cash Flows (Details)
44: R40 Real Estate (Details) HTML 131K
33: R41 ACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET HTML 45K
LEASES Acquired Lease Intangibles and Leasing
Costs Included in Other Assets and Other
Liabilities and Deferred Credits (Details)
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86: R43 Fair Value of Financial Instruments - Financial HTML 41K
Liabilities Fair Value Measurement on a Recurring
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Amount and Fair Value of Financial Instruments
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61: R46 Other Assets (Details) HTML 63K
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46: R48 DEBT - Summary of Total Secured Notes Payable HTML 65K
Outstanding (Details)
32: R49 DEBT - Summary of Total Unsecured Notes Payable HTML 128K
Outstanding (Details)
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50: R51 Partners Capital of American Assets Trust, L.P. HTML 52K
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66: R53 Equity of American Assets Trust, Inc. - ATM Equity HTML 44K
Program (Details)
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Declare and Paid on Shares on Common Stock and
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Activity of Restricted Stock Awards (Details)
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Computation of Basic and Diluted EPS (Details)
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17: R58 Commitments and Contingencies (Details) HTML 92K
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Components of Rental Expenses (Details)
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Note Payable Balances (Details)
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(State or other jurisdiction of incorporation or organization)
(IRS
Employer Identification No.)
i1455
El Camino Real, Suite 200
i92130
iSan
Diego
iCalifornia
(Address of Principal Executive Offices)
(Zip Code)
(i858)
i350-2600
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(American
Assets Trust, L.P. became subject to filing requirements under Section 13 of the Securities Exchange Act of 1934, as amended, upon effectiveness of its Registration Statement on Form S-3 on February 6, 2015 and has filed all required reports subsequent to that date.)
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2019 of American Assets Trust, Inc., a Maryland corporation, and American Assets Trust, L.P., a Maryland limited partnership, of which American Assets Trust, Inc. is the parent company and sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,”“us,”“our” or “the company” refer to American
Assets Trust, Inc. together with its consolidated subsidiaries, including American Assets Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “our Operating Partnership” or “the Operating Partnership” refer to American Assets Trust, L.P. together with its consolidated subsidiaries.
American Assets Trust, Inc. operates as a real estate investment trust, or REIT, and is the sole general partner of the Operating Partnership. As of September 30, 2019, American Assets Trust, Inc. owned an approximate 78.4% partnership
interest in the Operating Partnership. The remaining 21.6% partnership interests are owned by non-affiliated investors and certain of our directors and executive officers. As the sole general partner of the Operating Partnership, American Assets Trust, Inc. has full, exclusive and complete authority and control over the Operating Partnership’s day-to-day management and business, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies.
The company believes that combining the quarterly reports on Form 10-Q of American
Assets Trust, Inc. and the Operating Partnership into a single report will result in the following benefits:
•
better reflects how management and the analyst community view the business as a single operating unit;
•
enhance investors' understanding of American Assets Trust, Inc. and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
•
greater
efficiency for American Assets Trust, Inc. and the Operating Partnership and resulting savings in time, effort and expense; and
•
greater efficiency for investors by reducing duplicative disclosure by providing a single document for their review.
There are a few differences between American Assets Trust, Inc. and the Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between American Assets Trust, Inc. and the Operating Partnership in the context of how American Assets Trust, Inc. and the Operating Partnership operate as an interrelated consolidated company. American Assets Trust, Inc.
is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, American Assets Trust, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain debt of the Operating Partnership. American Assets Trust, Inc. itself does not hold any indebtedness. The Operating Partnership holds substantially all the assets of the company, directly or indirectly holds the ownership interests in the company’s real estate ventures, conducts the operations of the business and is structured as a partnership with no publicly-traded equity. Except for net proceeds from public equity issuances by American
Assets Trust, Inc., which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of operating partnership units.
Noncontrolling interests and stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of American Assets Trust, Inc. and those of American Assets Trust, L.P. The partnership interests in the Operating Partnership that are not owned by American Assets
Trust, Inc. are accounted for as partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in American Assets Trust, Inc.’s financial statements. To help investors understand the significant differences between the company and the Operating Partnership, this report presents the following separate sections for each of American Assets Trust, Inc. and the Operating Partnership:
•
consolidated financial statements;
•
the
following notes to the consolidated financial statements:
◦
Debt;
◦
Equity/Partners' Capital; and
◦
Earnings Per Share/Unit; and
•
Liquidity
and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations.
This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of American Assets Trust, Inc. and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of American Assets Trust, Inc. have made the requisite certifications
and American Assets Trust, Inc. and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
Common stock, $0.01 par value, 490,000,000 shares authorized, 59,956,972 and 47,335,409 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
Adjustments
to reconcile net income to net cash provided by operating activities:
Deferred rent revenue and amortization of lease intangibles
(i3,652
)
i153
Depreciation
and amortization
i69,733
i86,033
Amortization
of debt issuance costs and debt fair value adjustments
i1,096
i1,165
Gain
on sale of real estate
(i633
)
i—
Stock-based
compensation expense
i3,359
i2,180
Settlement
of derivative instruments
i513
i—
Lease
termination income
(i4,518
)
i—
Other
noncash interest expense
(i972
)
(i959
)
Other,
net
i1,728
i4
Changes
in operating assets and liabilities
Change in accounts receivable
i732
i1,001
Change
in other assets
(i22
)
(i12
)
Change
in accounts payable and accrued expenses
i16,461
i8,292
Change
in security deposits payable
(i1,433
)
i2,178
Change
in other liabilities and deferred credits
(i3,983
)
i885
Net
cash provided by operating activities
i122,112
i118,913
INVESTING
ACTIVITIES
Acquisition of real estate
(i507,780
)
i—
Capital
expenditures
(i65,549
)
(i31,666
)
Proceeds
from sale of real estate, net of selling costs
i8,191
i—
Leasing
commissions
(i8,892
)
(i5,127
)
Net
cash used in investing activities
(i574,030
)
(i36,793
)
FINANCING
ACTIVITIES
Repayment of secured notes payable
(i20,468
)
(i74,843
)
Proceeds
from unsecured line of credit
i59,000
i35,000
Repayment
of unsecured line of credit
(i123,000
)
(i13,000
)
Proceeds
from unsecured notes payable
i150,000
i—
Debt
issuance costs
(i1,091
)
(i2,687
)
Proceeds
from issuance of common stock, net
i513,934
(i236
)
Dividends
paid to common stock and unitholders
(i57,667
)
(i52,164
)
Shares
withheld for employee taxes
i—
(i6
)
Net
cash provided by (used in) financing activities
i520,708
(i107,936
)
Net
increase (decrease) in cash and cash equivalents
i68,790
(i25,816
)
Cash,
cash equivalents and restricted cash, beginning of period
i57,272
i91,954
Cash,
cash equivalents and restricted cash, end of period
$
i126,062
$
i66,138
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:
Net
cash provided by (used in) financing activities
i520,708
(i107,936
)
Net
increase (decrease) in cash and cash equivalents
i68,790
(i25,816
)
Cash,
cash equivalents and restricted cash, beginning of period
i57,272
i91,954
Cash,
cash equivalents and restricted cash, end of period
$
i126,062
$
i66,138
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statement of cash flows:
NOTE
1. iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Business and Organization
American Assets Trust,
Inc. (which may be referred to in these financial statements as the “Company,”“we,”“us,” or “our”) is a Maryland corporation formed on July 16, 2010 that did not have any operating activity until the consummation of our initial public offering on January 19, 2011. The Company is the sole general partner of American Assets Trust, L.P., a Maryland limited partnership formed on July 16, 2010 (the “Operating Partnership”). The Company’s operations are carried on through our Operating Partnership and its subsidiaries, including our taxable real estate investment trust ("REIT") subsidiary ("TRS"). Since the formation of our Operating Partnership, the Company has controlled our Operating Partnership as its general partner and has consolidated its assets, liabilities and results
of operations.
We are a full service, vertically integrated, and self-administered REIT with approximately i202 employees providing substantial in-house expertise in asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment and financing.
As of September 30, 2019, we owned
or had a controlling interest in i28 office, retail, multifamily and mixed-use operating properties, the operations of which we consolidate. Additionally, as of September 30, 2019, we owned land at ithree
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:
Our consolidated financial statements
include the accounts of the Company, our Operating Partnership and our subsidiaries. The equity interests of other investors in our Operating Partnership are reflected as noncontrolling interests.
All significant intercompany transactions and balances are eliminated in consolidation.
The accompanying consolidated financial statements of the Company and the Operating Partnership have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (“GAAP”) for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the audited consolidated financial statements and notes therein included in the Company's and Operating Partnership's annual report on Form 10-K for the year ended December 31, 2018.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using our best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.
Any reference to the number of properties, number of units, square footage, employee numbers or percentages
of beneficial ownership of our shares are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
Consolidated Statements of Cash Flows—Supplemental Disclosures
i
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):
Cash
paid for interest, net of amounts capitalized
$
i39,375
$
i39,674
Cash
paid for income taxes
$
i601
$
i337
Supplemental
schedule of noncash investing and financing activities
Accounts payable and accrued liabilities for construction in progress
$
i16,025
$
i14,677
Accrued
leasing commissions
$
i2,939
$
i2,560
Reduction
to capital for prepaid offering costs
$
i—
$
i236
/
i
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, 2018. Except for the adoption of the accounting standards during the first quarter of 2019 as discussed below, there have been no changes to our significant accounting policies during the nine months ended September 30, 2019.
i
Segment
Information
Segment information is prepared on the same basis that our chief operating decision maker reviews information for operational decision-making purposes. We operate in ifour 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 i369-room all-suite hotel.
i
Recent
Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. This ASU significantly changes the accounting for leases by requiring lessees to recognize assets and liabilities for leases greater than 12 months on their balance sheet. The lessor model stays substantially the same; however, there were modifications to conform lessor accounting with the lessee model, eliminate real estate specific guidance, further define certain lease and non-lease components, and change the definition of initial direct costs of leases.
We
adopted the provisions of ASU No. 2016-02 effective January 1, 2019 using the modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows lessors to elect a practical expedient by class of underlying assets to not separate non-lease components from the lease component if certain conditions are met. The lessor’s practical expedient election would be limited to circumstances in which the non-lease components otherwise would be accounted for under the new revenue guidance and both (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the lease component would be classified as an operating lease. The Company elected the practical expedient, which allows the Company the ability to combine the lease and non-lease components if the underlying
asset meets the criteria above. Due to our election of the practical expedient approach, for the three and nine months ended September 30, 2019, approximately $i10.6 million and $i27.0
million of non-lease components are combined with lease rental income, respectively. ASU 2018-11 also includes an optional transition method in addition to the existing requirements for transition to the new standard by recognizing a cumulative effect adjustment to the opening balance sheet of retained earnings in the period of adoption. Consequently, a company’s reporting for the comparative periods presented in the financial statements would continue to be in accordance with previous GAAP (Topic 840). The Company elected this practical expedient as well. Further, bad debt expense, which has previously been recorded in rental expenses, has now been classified as a contra-revenue account in rental income in the Company’s consolidated statements of comprehensive income.
We evaluated all leases within this scope under existing accounting standards
and under the new ASU lease standard recognized approximately $i7.7 million of right-of-use assets and lease liabilities. Effective January 1, 2019, approximately $i0.8
million of deferred rent expense was reclassified to lease liability within the other liabilities and deferred credits, net.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards. The pronouncement is effective for reporting periods beginning after December 15, 2017. We adopted the provisions of the ASU effective January 1, 2018 using the modified retrospective approach. As discussed above, leases are specifically excluded from this and are governed by the applicable
lease codification.
We evaluated the revenue recognition for all contracts within this scope under existing accounting standards and under the new revenue recognition ASU and confirmed that there were no differences in the amounts recognized or the pattern of recognition. This evaluation included revenues from the hotel portion of our mixed-use property, parking income and excise taxes charged to customers. Therefore, the adoption of this ASU did not result in an adjustment to our retained earnings on January 1, 2018.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Topics. The pronouncement requires companies to adopt a new approach to estimating credit losses
on certain types of financial instruments, such as trade and other receivables and loans. The standard requires entities to estimate a lifetime expected credit loss for most financial instruments, including trade receivables. The pronouncement is effective for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of the pronouncement. We continue to evaluate the impact this pronouncement will have on our consolidated financial statements; however, the majority of our receivables are derived from operating leases and are excluded from this standard.
On
May 22, 2019, we sold Solana Beach – Highway 101. The property is located in Solana Beach, California and was previously included in our retail segment. The sales price of this property was approximately $i9.4 million, less costs to sell, and resulted in net proceeds to us of approximately $i9.4
million. Accordingly, we recorded a gain on sale of approximately nil and $i0.6 million for the three and nine months ended September 30, 2019, respectively.
Property Asset Acquisitions
On
June 20, 2019, we acquired La Jolla Commons, consisting of two office towers totaling approximately i724,000 square feet, an entitled development parcel and two parking structures, located in San Diego, California. The purchase price was approximately $i525
million, less seller credits of (i) approximately $i11.5 million for speculative lease-up, (ii) approximately $i4.2
million for assumed contractual liabilities (iii) and approximately $i1.7 million for closing prorations, excluding closing costs of approximately $i0.2
million. The property was acquired with proceeds from an underwritten public offering and borrowings under the Company's Second Amended and Restated Credit Facility (defined herein).
i
The financial information set forth below summarizes the Company’s purchase price allocation for La Jolla Commons during the nine months ended September 30, 2019 (in thousands):
La
Jolla Commons
Land
$
i82,759
Building
i361,471
Land
improvements
i1,359
Furniture, fixtures, and equipment
i30,822
Total
real estate
i476,411
Lease intangibles
i40,082
Prepaid
expenses and other assets
i13
Assets acquired
$
i516,506
Accounts
payable and accrued expenses
$
i3,578
Security deposits payable
i443
Other
liabilities and deferred credits
i3,817
Liabilities assumed
$
i7,838
/
The
value allocated to lease intangibles is amortized over the related lease term as depreciation and amortization expense in the statement of comprehensive income. The remaining weighted average amortization period as of September 30, 2019, is i8.4 years.
Pro Forma Financial Information
i
The
pro forma financial information set forth below is based upon the Company’s historical consolidated statements of
operations for the nine months ended September 30, 2019 and 2018, adjusted to give effect to the acquisition of La Jolla Commons, described above, as if such transaction had been completed on January 1, 2018. The pro forma financial information set forth below is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2018, nor does it purport to represent the results of future operations (in thousands):
The
following table summarizes the operating results for La Jolla Commons included in the Company’s historical consolidated statement of comprehensive income and in the Office segment for the period of acquisition through September 30, 2019 (in thousands):
NOTE
3. iACQUIRED IN-PLACE LEASES AND ABOVE/BELOW MARKET LEASES
i
The following summarizes our acquired lease intangibles and leasing costs, which
are included in other assets and other liabilities and deferred credits, as of September 30, 2019 and December 31, 2018 (in thousands):
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy for inputs used in measuring fair value is as follows:
1.
Level
1 Inputs—quoted prices in active markets for identical assets or liabilities
2.
Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities
3.
Level 3 Inputs—unobservable inputs
Except as disclosed below, the carrying amounts of our financial instruments approximate their fair value. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases,
for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
We measure the fair value of our deferred compensation liability, which is included in other liabilities and deferred credits on the consolidated balance sheet, on a recurring basis using Level 2 inputs. We measure the fair value of this liability
based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.
The fair value of the interest rate swap agreements are based on the estimated amounts we would receive or pay to terminate the contract at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in accumulated other comprehensive
income (loss) and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level
3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2019 we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivative. As a result, we have determined that our derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
i
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):
The
fair value of our secured notes payable and unsecured senior guaranteed notes are sensitive to fluctuations in interest rates. Discounted cash flow analysis using observable market interest rates (Level 2) is generally used to estimate the fair value of our secured notes payable, using rates ranging from i2.9% to i3.8%.
Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The carrying values of our revolving line of credit and term loan set forth below are deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts. iA
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):
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
On June 20, 2019, we entered into a treasury lock contract (the "June 2019 Treasury Lock") with Wells Fargo Bank, N.A., to reduce the interest rate variability exposure of the projected interest
cash flows of our then prospective eleven-year private placement. The treasury lock contract has a notional amount of $i100 million, termination date of iJuly
31, 2019, a fixed pay rate of i1.9925%, and a receive rate equal to the iten
years treasury rate on the settlement date.
On July 17, 2019, we settled the June 2019 Treasury Lock, resulting in a gain of approximately $i0.5 million, which will be included in accumulated other comprehensive income and will be
amortized to interest expense over iten years. The treasury lock contract has been deemed to be a highly effective cash flow hedge and we elected to designate
the treasury lock contract as an accounting hedge.
i
The following is a summary of the terms of our outstanding interest rate swaps as of September 30, 2019 (dollars in thousands):
Swap
Counterparty
Notional Amount
Effective Date
Maturity Date
Fair Value
Bank of America, N.A.
$
i100,000
i1/9/2019
i1/9/2021
$
(i1,674
)
U.S.
Bank N.A.
$
i100,000
i3/1/2016
i3/1/2023
$
(i180
)
Wells
Fargo Bank, N.A.
$
i50,000
i5/2/2016
i3/1/2023
$
(i62
)
/
The
effective portion of changes in the fair value of the derivatives that are designated as cash flow hedges are being recorded in accumulated other comprehensive income and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings for as long as hedged cash flows remain probable. During the next twelve months, we estimate that $i1.3 million will be reclassified as a decrease to interest expense.
The
valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, counter party credit risk and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
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.
American
Assets Trust, Inc. does not hold any indebtedness. All debt is held directly or indirectly by the Operating Partnership; however, American Assets Trust, Inc. has guaranteed the Operating Partnership's obligations under the (i) amended and restated credit facility, (ii) term loans, and (iii) senior guaranteed notes. Additionally, American Assets Trust, Inc. has provided carve-out guarantees on certain property-level mortgage debt.
Debt
issuance costs, net of accumulated amortization of $435 and $671, respectively
(i139
)
(i193
)
Total
Secured Notes Payable Outstanding
$
i162,159
$
i182,572
(1)
Loan
repaid in full, without premium or penalty, on March 1, 2019.
(2)
Principal payments based on a i30-year amortization schedule.
(3)
Interest
only.
Certain loans require us to comply with various financial covenants. As of September 30, 2019, the Operating Partnership was in compliance with these financial covenants.
The following is a summary of the Operating Partnership's total unsecured notes payable outstanding as of September 30, 2019 and December 31, 2018 (in thousands):
Debt
issuance costs, net of accumulated amortization of $7,579 and $6,844, respectively
(i4,475
)
(i4,137
)
Total
Unsecured Notes Payable
$
i1,195,525
$
i1,045,863
(1)
The
Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan A at approximately i4.13% through its stated maturity date, subject to adjustments based on our consolidated leverage ratio.
(2)
The
Operating Partnership entered into a one-month forward-starting iseven years swap contract on August 19, 2014, which was settled on September 19, 2014 at a gain of approximately $i1.6
million. The forward-starting seven-year swap contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately i3.88% per annum.
(3)
The
Operating Partnership has entered into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan B at approximately i3.15% through its maturity date, subject to adjustments based on our consolidated leverage ratio. Effective March 1, 2018, the effective interest rate associated with
Term Loan B is approximately i2.75%, subject to adjustments based on our consolidated leverage ratio.
(4)
The Operating Partnership has entered
into an interest rate swap agreement that is intended to fix the interest rate associated with Term Loan C at approximately i3.14% through its maturity date, subject to adjustments based on our consolidated leverage ratio. Effective March 1, 2018, the effective interest rate associated with Term Loan C is approximately i2.74%,
subject to adjustments based on our consolidated leverage ratio.
(5)
The Operating Partnership entered into a treasury lock contract on May 31, 2017, which was settled on June 23, 2017 at a loss of approximately $i0.5
million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately i3.85% per annum.
(6)
The
Operating Partnership entered into forward-starting interest rate swap contracts on March 29, 2016 and April 7, 2016, which were settled on January 18, 2017 at a gain of approximately $i10.4 million. The forward-starting interest swap rate contracts were deemed to
be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately i3.87% per annum.
(7)
The
Operating Partnership entered into a treasury lock contract on April 25, 2017, which was settled on May 11, 2017 at a gain of approximately $i0.7 million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately i4.18%
per annum.
(8)
The Operating Partnership entered into a treasury lock contract on June 20, 2019, which was settled on July 17, 2019 at a gain of approximately $i0.5
million. The treasury lock contract was deemed to be a highly effective cash flow hedge, accordingly, the effective interest rate is approximately i3.88% per annum.
/
On
July 30, 2019, the Operating Partnership entered into a Note Purchase Agreement for the private placement of $i150 million of i3.91%
Senior Guaranteed Notes, Series G, due iJuly 30, 2030 (the "Series G Notes"). The Series G Notes were issued on July 30, 2019 and will pay interest semi-annually on the 30th of July and January until their maturity.
The
Operating Partnership may prepay at any time all, or from time to time any part of, the Series G Notes, in an amount not less than 5% of the aggregate principal amount of any series of the Series G Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid plus a Make-Whole Amount (as defined in the Note Purchase Agreement for the Series G Notes).
The Note Purchase Agreement for the Series G Notes contains a number of customary financial covenants, including, without limitation, secured and unsecured leverage ratios and fixed charge coverage ratios. Subject to the terms of the Note Purchase Agreement for the Series G Notes, upon certain events of default, including, but not limited to, (i) a default in the payment of any principal, Make-Whole Amount or interest under the Series G Notes, and (ii) a default in the payment of certain other indebtedness of the Operating Partnership, the Company or their subsidiaries, the principal and accrued and unpaid interest and the Make-Whole Amount on the outstanding Series
G Notes will become due and payable at the option of the Purchasers (as defined in the Note Purchase Agreement for the Series G Notes).
The Operating Partnership’s obligations under the Series G Notes are fully and unconditionally guaranteed by the Company.
Certain loans require us to comply with various financial covenants. As of September 30, 2019, the Operating Partnership was in compliance with these financial covenants.
Amended Term Loan Agreement
On January 9, 2018, we entered into the Third Amendment
to the Term Loan Agreement (as so amended, the "Term Loan Agreement"), which maintains the iseven years$i150
million unsecured term loan (referred to herein as Term Loan B and Term Loan C) to the Operating Partnership that matures on March 1, 2023 (the “$150mm Term Loan”). Effective as of March 1, 2018, borrowings under the Term Loan Agreement with respect to the $150mm Term Loan bear interest at floating rates equal to, at the Operating Partnership’s option, either (1) iLIBOR,
plus a spread which ranges from i1.20% to i1.70%
based on the Operating Partnership’s consolidated leverage ratio, or (2) a base rate equal to the highest of (a) i0%, (b) the iprime
rate, (c) the ifederal funds rate plus 50 bps or (d) the iEurodollar
rate plus 100 bps, in each case plus a spread which ranges from i0.70% to i1.35%
based on the Operating Partnership’s consolidated leverage ratio. Additionally, the Operating Partnership may elect for borrowings to bear interest based on a ratings-based pricing grid as per the Operating Partnership’s then-applicable investment grade debt ratings under the terms set forth in the Term Loan Agreement.
Second Amended and Restated Credit Facility
On January 9, 2018, we entered into a second amended and restated credit agreement (the "Second Amended and Restated Credit Facility"). The Second Amended and Restated Credit Facility provides for aggregate, unsecured borrowing of $i450
million, consisting of a revolving line of credit of $i350 million (the "Revolver Loan") and a term loan of $i100
million (the "Term Loan A"). The Second Amended and Restated Credit Facility has an accordion feature that may allow us to increase the availability thereunder up to an additional $i350 million, subject to meeting specified requirements and obtaining additional commitments from lenders. At September 30,
2019, there were ino amounts outstanding under the Revolver Loan and we had incurred approximately $i1.4
million of debt issuance costs, net, which are recorded in other assets, net on the consolidated balance sheets.
Borrowings under the Second Amended and Restated Credit Agreement initially bear interest at floating rates equal to, at our option, either (1) iLIBOR,
plus a spread which ranges from (a) i1.05% to i1.50%
(with respect to the Revolver Loan) and (b) i1.30% to i1.90%
(with respect to Term Loan A), in each case based on our consolidated leverage ratio, or (2) a base rate equal to the highest of (a) the iprime rate, (b) the ifederal
funds rate plus 50 bps or (c) iLIBOR plus 100 bps, plus a spread which ranges from (i) i0.10%
to i0.50% (with respect to the Revolver Loan) and (ii) i0.30%
to i0.90% (with respect to Term Loan A), in each case based on our consolidated leverage ratio. For the nine months ended September 30, 2019, the weighted
average interest rate on the Revolver Loan was i3.55%.
The Revolver Loan initially matures on January 9, 2022, subject to our option to extend the Revolver Loan up to itwo
times, with each such extension for a isix months period. The extension options are exercisable by us subject to the satisfaction of certain conditions.
On January 9, 2019, we entered into the first amendment (“First Amendment”) to the Second Amended and Restated Credit Facility,
which extended the maturity date of Term Loan A to January 9, 2021, subject to ithree, ione
year extension options. Additionally, in connection with the First Amendment, borrowings under the Second Amended and Restated Credit Facility with respect to Term Loan A bear interest at floating rates equal to, at our option, either (1) iLIBOR, plus a spread which ranges from i1.20%
to i1.70% based on our consolidated total leverage ratio, or (2) a base rate equal to the highest of (a) the iprime
rate, (b) the ifederal funds rate plus 50 bps or (c) the iEurodollar
rate plus 100 bps, in each case plus a spread which ranges
from i0.20%
to i0.70% based on our consolidated total leverage ratio. The foregoing rates are intended to be more favorable than previously contained in the Second Amended and Restated Credit Facility (prior to entry into the First Amendment) with respect to Term Loan A.
Additionally, the Second
Amended and Restated Credit Facility includes a number of customary financial covenants, including:
•
A maximum leverage ratio (defined as total indebtedness net of certain cash and cash equivalents to total asset value) of i60%,
•
A
maximum secured leverage ratio (defined as total secured debt to secured total asset value) of i40%,
•
A minimum fixed charge coverage ratio (defined as consolidated earnings before interest, taxes,
depreciation and amortization to consolidated fixed charges) of 1.50x,
•
A minimum unsecured interest coverage ratio of 1.75x,
•
A maximum unsecured leverage ratio of i60%,
and
•
Recourse indebtedness at any time cannot exceed i15% of total asset value.
The Second Amended and Restated Credit Facility provides that our annual distributions
may not exceed the greater of (1) 95% of our funds from operation ("FFO") or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution, we may be precluded from making distributions other than those necessary to qualify and maintain our status as a REIT.
As of September 30, 2019, the Operating Partnership was in compliance with the financial covenants in the Second Amended and Restated Credit Facility.
NOTE 9. iPARTNERS'
CAPITAL OF AMERICAN ASSETS TRUST, L.P.
Noncontrolling interests in our Operating Partnership are interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of i16,390,548 common units (the “noncontrolling common units”), and represented approximately i21.6%
of the ownership interests in our Operating Partnership at September 30, 2019. Common units and shares of our common stock have essentially the same economic characteristics in that common units and shares of our common stock share equally in the total net income or loss distributions of our Operating Partnership. Investors who own common units have the right to cause our Operating Partnership to redeem any or all of their common units for cash equal to the then-current market value of one share of our common stock, or, at our election, shares of our common stock on a ione-for-one
basis.
During the three and nine months ended September 30, 2019, i0 and i787,060
common units were converted into shares of our common stock.
Earnings (Loss) Per Unit of the Operating Partnership
Basic earnings (loss) per unit (“EPU”) of the Operating Partnership is computed by dividing income applicable to unitholders by the weighted average Operating Partnership units outstanding, as adjusted for the effect of participating securities. Operating Partnership units granted in equity-based payment transactions that have non-forfeitable dividend equivalent rights are considered participating securities prior to vesting. The impact of unvested Operating Partnership unit awards on EPU has been calculated using the two-class method whereby earnings are allocated to the unvested Operating Partnership unit awards based on distributions and the unvested Operating Partnership units’ participation rights in undistributed earnings.
The
calculation of diluted EPU for the three months ended September 30, 2019 and 2018 does not include the weighted average of i329,652
and i262,605 unvested Operating Partnership units, as these equity securities are either considered contingently issuable or the effect of including these equity securities was anti-dilutive to income from continuing operations and net income attributable to the unitholders. The calculation of diluted
EPU for the nine months ended September 30, 2019 and 2018 does not include the weighted average of i331,245
and i265,762 unvested Operating Partnership units, respectively.
On May 27, 2015, we entered into an at-the-market ("ATM") equity program with ifive 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 $i250.0 million. On March 2, 2018, we amended certain of these equity programs, terminated one such program and entered into a new equity program with ione
new sales agent. The sales of shares of our common stock made through the ATM equity program, as amended, are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act of 1933, as amended. iDuring the three and nine months ended September 30, 2019, the following shares of common stock were sold through the ATM equity programs (in thousands, except per share data and share amounts):
Number of shares of common stock issued through ATM programs
i234,814
i916,727
Weighted
average price per share
$i47.23
$i45.99
Proceeds,
gross
$
i11,089
$
i42,161
Sales
agent compensation
(i111
)
(i422
)
Offering
costs
(i58
)
(i430
)
Proceeds,
net
$
i10,920
$
i41,309
We
intend to use the net proceeds from the ATM equity program to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving line of credit or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of September 30, 2019, we had the capacity to issue up to an additional $i134.0 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.
In June 2019, we issued and sold i10,925,000 shares of common stock in an underwritten public offering. The shares of common stock
that we issued and sold included the full exercise of the underwriters' option to purchase i1,425,000 additional shares. We received net proceeds of approximately $i472.6
million, after deducting underwriting discounts, commissions and offering expenses.
Dividends
i
The following table lists the dividends declared and paid on our shares of common stock and noncontrolling common units during the nine months ended September 30, 2019:
Earnings and profits, which determine the taxability of distributions to stockholders and holders of common units, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.
We follow the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer. The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
i
The
following table summarizes the activity of restricted stock awards during the nine months ended September 30, 2019:
We
recognize noncash compensation expense ratably over the vesting period, and accordingly, we recognized $i1.1 million and $i0.7 million in noncash
compensation expense for the three-month periods ended September 30, 2019 and 2018, respectively, which is included in general and administrative expense on the consolidated statements of comprehensive income. We recognized $i3.4 million and $i2.2
million in noncash compensation expense for the nine months ended September 30, 2019 and 2018, respectively. Unrecognized compensation expense was $i3.3
million at September 30, 2019.
Earnings Per Share
We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating security is calculated according to dividends declared and participation rights in undistributed earnings. The weighted average unvested shares outstanding, which are considered participating securities, were i329,652
and i262,605 for the three months ended September 30, 2019 and 2018, respectively and i331,245
and i265,762 for the nine months ended September 30, 2019 and 2018, respectively. Therefore, we have allocated
our earnings for basic and diluted EPS between common shares and unvested shares as these unvested shares have nonforfeitable dividend equivalent rights.
Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method. For the three and nine months ended September 30, 2019 and 2018, 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.
Plus:
Income from operations attributable to unitholders in the Operating Partnership
i3,565
i3,806
i10,553
i4,765
Net
income attributable to common stockholders—diluted
$
i16,427
$
i14,200
$
i43,426
$
i17,778
DENOMINATOR
Weighted
average common shares outstanding—basic
i59,441,887
i46,959,752
i52,239,668
i46,945,095
Effect
of dilutive securities—conversion of Operating Partnership units
i16,390,548
i17,177,608
i16,771,104
i17,188,489
Weighted
average common shares outstanding—diluted
i75,832,435
i64,137,360
i69,010,772
i64,133,584
Earnings
per common share, basic
$
i0.22
$
i0.22
$
i0.63
$
i0.28
Earnings
per common share, diluted
$
i0.22
$
i0.22
$
i0.63
$
i0.28
/
NOTE
11. iINCOME TAXES
We elected to be taxed as a REIT and operate in a manner that allows us to qualify as a REIT for federal income tax purposes commencing with our initial taxable year. As a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. Taxable income from non-REIT activities managed through our TRS is subject to federal and state income taxes.
We lease our hotel property to a wholly owned TRS
that is subject to federal and state income taxes. We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases. Additionally, we classify certain state taxes as income taxes for financial reporting purposes in accordance with ASC Topic 740, Income Taxes.
A deferred tax liability is included in our consolidated balance sheets of $i0.1
million as of September 30, 2019 and December 31, 2018, respectively, in relation to real estate asset basis differences of property subject to state taxes based on income and certain prepaid expenses of our TRS.
Income tax expense is recorded in other (expense) income, net on our consolidated statements of comprehensive income. For the three and nine months ended September 30, 2019, we recorded income tax expense of $i0.3
million and $i0.7 million, respectively. For the three and nine months ended September 30, 2018, we recorded income tax expense of $i0.2
million and $i0.3 million, respectively.
NOTE 12. iCOMMITMENTS
AND CONTINGENCIES
Legal
We are sometimes involved in various disputes, lawsuits, warranty claims, environmental, and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. We do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also, under our leases, tenants
are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us as owner of the properties due to certain matters relating to the operation of the properties by the tenant.
Commitments
See Footnote 13 for description of our leases, as a lessee.
We have management agreements with Outrigger Hotels & Resorts or an affiliate thereof (“Outrigger”) pursuant to which Outrigger manages each of the retail and hotel portions of the Waikiki Beach Walk property. Under the management agreement with Outrigger relating to the retail portion of Waikiki Beach Walk (the “retail management agreement”), we pay Outrigger a monthly management fee of i3.0%
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 itwo 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 i6.0% of the hotel's gross operating profit, as well as i3.0%
of the hotel's gross revenues; provided that the aggregate management fee payable to Outrigger for any year shall not exceed i3.5% 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 i12 months by (2) (a) ieight,
if the agreement is terminated in the first i11 years of its term, or (b) ifour,
ithree, itwo
or ione, 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 SuitesTM brand for i20 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 i4.0%
of the hotel's gross room revenue through December 2021 and i5.0% of the hotel's gross room revenue thereafter, as well as a monthly program fee equal to i4.0%
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 $i7.6 million based on operating performance through September 30, 2019.
Our Del Monte Center property has ongoing environmental remediation
related to ground water contamination. The environmental issue existed at purchase and remains in remediation. The final stages of the remediation will include routine, long term ground monitoring by the appropriate regulatory agency over the next ifive years to iseven
years. The work performed is financed through an escrow account funded by the seller upon purchase of the Del Monte Center. We believe the funds in the escrow account are sufficient for the remaining work to be performed. However, if further work is required costing more than the remaining escrow funds, we could be required to pay such overage, although we may have a contractual claim for such costs against the prior owner or our environmental remediation consultant.
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. iFourteen
of our consolidated properties are located in Southern California, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. Tenants in the retail industry accounted for i30.3% of total revenues for the nine months ended September 30, 2019. This makes us susceptible to demand
for retail rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the retail industry. Furthermore, tenants in the office industry accounted for i37.6% of total revenues for the nine months ended September 30, 2019. This makes us susceptible to demand for office
rental space and subject to the risks associated with an investment in real estate with a concentration of tenants in the office industry. For the nine months ended September 30, 2019 and 2018, no tenant accounted for more than i10% of our total rental revenue.
NOTE
13. iiLEASES/
Lessor Operating Leases
We
determine if an arrangement is a lease at inception. Our lease agreements are generally for real estate, and the determination of whether such agreements contain leases generally does not require significant estimates or judgments. We lease real estate under operating leases.
Our leases with office, retail, mixed-use and residential tenants are classified as operating leases. Leases at our office and retail properties and the retail portion of our mixed-use property generally range from ithree years to iten
years (certain leases with anchor tenants may be longer), and in addition to minimum rents, usually provide for cost recoveries for the tenant’s share of certain operating costs. Our leases may also include variable lease payments in the form of percentage rents based on the tenant’s level of sales achieved in excess of a breakpoint threshold. Leases on apartments generally range from i7 to i15
months, with a majority having i12-month lease terms. Rooms at the hotel portion of our mixed-use property are rented on a nightly basis.
Leases at our office and retail properties and the retail portion of our mixed-use property may contain lease extension options, at our lessee's discretion. The extension options are generally for i3
to i10 years and contain primarily rent at fixed rates or the prevailing market rent. The extension options are generally exercisable i6 to i12
months prior to the expiration of the lease and require the lessee to not be in default of the lease terms.
We attempt to maximize the amount we expect to derive from the underlying real estate property following the end of a lease, to the extent it is not extended. We maintain a proactive leasing and capital improvement program that, combined with the quality and locations of our properties, has made our properties attractive to tenants. However, the residual value of a real estate property is still subject to various market-specific, asset-specific, and tenant-specific risks and characteristics.
i
As
of September 30, 2019, 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):
The
above future minimum rentals exclude residential leases, which typically have a term of i12 months or less, and exclude the hotel, as rooms are rented on a nightly basis.
We determine if an arrangement is a lease at inception. Our lease agreements are generally for real estate, and the determination of whether such agreements contain leases generally does not require significant estimates or judgments. We lease real estate under operating leases.
At the Landmark at One Market, we lease, as lessee, a building adjacent to the Landmark at One Market
under an operating lease effective through June 30, 2021, which we have the option to extend until 2031 by way of itwoifive
years extension options (the "Annex Lease"). The lease payments under the extension options provided for under the Annex Lease will be equal to the fair rental value at the time the extension option is exercised. The extension options are not included in the calculation of the right-of-use asset or lease liability due to electing the practical expedient to not reassess the lease term of existing leases.
At Waikiki Beach Walk, we lease a portion of the building of which Quiksilver is currently in possession, under an operating lease effective through December 31, 2021.
Our lease agreements do not contain any residual value guarantees or material restrictive covenants. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement in determining the present value of lease payments.
i
Current annual payments under the operating leases are as follows, as of September 30, 2019 (in thousands):
Cash paid for amounts included in the measurement of lease liabilities
$
i2,501
Non-cash
activity:
Right-of-use assets obtained in exchange for operating lease obligations
$
i7,661
Subleases
At
the Landmark at One Market, we (as sublandlord) sublease the Annex Lease building under operating leases effective through December 31, 2029. The subleases contain extension options, subject to our ability to extend the Annex Lease, that can extend the subleases through December 31, 2039 at the fair rental value at the time the extension option is exercised.
At Waikiki Beach Walk, we (as sublandlord) sublease a portion of the building to Quiksilver under an operating lease effective through December 31, 2021.
NOTE 14. iCOMPONENTS
OF RENTAL INCOME AND EXPENSE
i
The principal components of rental income are as follows (in thousands):
Lease
rental income include $i5.2 million and $i1.2 million for the three months ended September 30,
2019 and 2018, respectively, and $i0.9 million and $(i2.4)
million for the nine months ended September 30, 2019 and 2018, respectively, to recognize lease rental income on a straight-line basis. In addition, net amortization of above and below market leases included in lease rental income were $i1.1 million and $i0.8
million for the three months ended September 30, 2019 and 2018, respectively, and $i2.8 million and $i2.2
million for the nine months ended September 30, 2019 and 2018, respectively.
Through July 1, 2018, we maintained a workers' compensation insurance policy with Insurance Company of the West, a California corporation ("ICW"), which is an insurance company majority owned and controlled by Ernest Rady, our Chief Executive Officer, President and Chairman of the Board. The workers' compensation policy
was renewed with ICW during the second quarter of 2017 and the premium was approximately $i0.2 million for the period from July 1, 2017 through July 1, 2018. We did not renew this policy with ICW during the second quarter of 2018 and commencing July 1, 2018, we entered
into a workers' compensation policy with an unaffiliated third-party insurer.
During the first quarter of 2019, we terminated the lease agreement with American Assets, Inc., an entity owned and controlled by Mr. Rady, and entered into a new lease agreement with American Assets, Inc. for office space at Torrey Reserve Campus. Rents commenced on March 1, 2019 for an initial lease term of ithree
years at an average annual rental rate of $i0.2 million. Rental revenue recognized on the leases of $i0.2
million for the nine months ended September 30, 2019, is included in rental income on the consolidated statements of comprehensive income.
At Torrey Reserve Plaza, we lease office space to EDisability, LLC, an entity majority owned and controlled by Mr. Rady. Rental revenue recognized on the lease of $i0.1
million for the nine months ended September 30, 2019, is included in rental income on the consolidated statements of comprehensive income.
On occasion, the company utilizes aircraft services provided by AAI Aviation, Inc. ("AAIA"), an entity owned and controlled by Mr. Rady. For the nine months ended September 30, 2019 and 2018, we incurred approximately $i0.2
million and $i0.0 million of expenses related to aircraft services of AAIA or reimbursement to Mr. Rady (or the Ernest Rady Trust U/D/T March 13, 1983) for use of the aircraft owned by AAIA. These expenses are recorded as general
and administrative expenses in our consolidated statements of comprehensive income.
The Waikiki Beach Walk entities have a i47.7% 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 $i0.9
million and $i0.8 million for the nine months ended September 30, 2019 and 2018, respectively, are included in rental expenses on the consolidated statements of comprehensive
income.
NOTE 17. iSEGMENT REPORTING
Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate in ifour
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 i369-room
all-suite hotel.
We evaluate the performance of our segments based on segment profit, which is defined as property revenue less property expenses. We do not use asset information as a measure to assess performance and make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses, interest expense, depreciation and amortization expense and other income and expense are not included in segment profit as our internal reporting addresses these items on a corporate level.
Segment profit is not a measure of operating income or cash flows from operating activities as measured by GAAP, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate segment profit in the same manner. We consider
segment profit to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of our properties.
i
The following table represents operating activity within our reportable segments (in thousands):
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 real estate investment trust, or REIT, for U.S. federal income tax purposes; and
•
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.
While forward-looking statements
reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors,
new information, data or methods, future events or other changes. For a further discussion of these and other factors, see the section entitled “Item 1A. Risk Factors” contained herein and in our annual report on Form 10-K for the year ended December 31, 2018.
Overview
References
to “we,”“our,”“us” and “our company” refer to American Assets Trust, Inc., a Maryland corporation, together with our consolidated subsidiaries, including American Assets Trust, L.P., a Maryland limited partnership, of which we are the sole general partner and which we refer to in this report as our Operating Partnership.
We are a full service, vertically integrated and self-administered REIT that owns, operates, acquires and develops high quality retail, office, multifamily and mixed-use properties in attractive, high-barrier-to-entry markets in Southern California, Northern California, Oregon, Washington, Texas and Hawaii. As of September 30, 2019, our portfolio was comprised of twelve
retail shopping centers; nine office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and six multifamily properties. Additionally, as of September 30, 2019, we owned land at three of our properties that we classified as held for development and/or construction in progress. Our core markets include San Diego; 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 78.4% of our Operating Partnership as of September 30, 2019. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership.
Acquisitions
On June 20, 2019, we acquired La Jolla Commons, consisting
of two office towers totaling approximately 724,000 square feet, an entitled development parcel and two parking structures, located in San Diego, California. The purchase price was approximately $525 million, less seller credits of (i) approximately $11.5 million for speculative lease-up, (ii) approximately $4.2 million for assumed contractual liabilities (iii) and approximately $1.7 million for closing prorations, excluding closing costs of approximately $0.2 million.
The property was acquired with proceeds from an underwritten public offering and borrowings under our Second Amended and Restated Credit Facility.
Dispositions
On May 22, 2019, we sold Solana Beach - Highway
101. The property is located in San Diego, California and was previously included in our retail segment. The sales price of this property of approximately $9.4 million, less costs to sell, resulted in net proceeds to the Company of approximately $9.4 million. Accordingly, we recorded a gain on sale of approximately nil and $0.6 million for the three and nine months ended September 30, 2019, respectively.
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, 2018. We have not made any material changes to these policies during the periods covered by this report, other than those described in Footnote 1.
We have provided certain information on a total portfolio, same-store and redevelopment same-store basis. Information provided on a same-store basis includes the results of properties that we owned and
operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared, properties under development, properties classified as held for development and properties classified as discontinued operations. Information provided on a redevelopment same-store basis includes the results of properties undergoing significant redevelopment for the entirety or portion of both periods being compared. Same-store and redevelopment same-store is considered by management to be important measures because they assist in eliminating disparities due to the development, acquisition or disposition of properties during the particular period presented, and thus provides a more consistent performance measure for the comparison of the Company's stabilized and redevelopment properties, as applicable. Additionally, redevelopment same-store is considered by management to be an important
measure because it assists in evaluating the timing of the start and stabilization of our redevelopment opportunities and the impact that these redevelopments have in enhancing our operating performance.
While there is judgment surrounding changes in designations, we typically reclassify significant development, redevelopment or expansion properties into same-store properties once they are stabilized. Properties are deemed stabilized typically at the earlier of (i) reaching 90% occupancy or (ii) four quarters following a property's inclusion in operating real estate. We typically remove properties from same-store properties when the development, redevelopment or expansion has or is expected to have a significant impact on the property's annualized base rent, occupancy and operating income within the calendar year. Our evaluation of significant impact related to development, redevelopment or expansion activity is based on
quantitative and qualitative measures including, but not limited to the following: the total budgeted cost of planned construction activity compared to the property’s annualized base rent, occupancy and property operating income within the calendar year; percentage of development, redevelopment or expansion square footage to total property square footage; and the ability to maintain historic occupancy and rental rates. In consideration of these measures, we generally remove properties from same-store properties when we see a decline in a property's annualized base rent, occupancy and operating income within the calendar year as a direct result of ongoing redevelopment, development or expansion activity. Acquired properties are classified into same-store properties once we have owned such properties for the entirety of comparable period(s) and the properties are not under significant development or expansion.
Below
is a summary of our same-store composition for the three and nine months ended September 30, 2019 and 2018. For the three months ended September 30, 2019, Gateway Marketplace was reclassified to same-store properties when compared to the designations for the three months ended September 30, 2018 as the entity was acquired on July 6, 2017 and is comparable for the three months ended September 30, 2019. For the three months ended September 30, 2019,
Waikiki Beach Walk Retail and Embassy Suites™ Hotel was reclassified to non-same-store properties when compared to the designation for the three months ended September 30, 2018 due to spalling repair activity disrupting the hotel portion of the properties operations. Waikele Center is classified as a non-same-store property due to significant redevelopment activity. Torrey Point was placed into operations and became available for occupancy in August 2018 and will be classified as a non-same-store property until it becomes stabilized and comparable. La Jolla Commons is classified as a non-same-store property, as it was acquired on June 20, 2019.
For the nine months ended September 30, 2019,
Pacific Ridge Apartments and Gateway Marketplace were reclassified to same-store properties when compared to the designations for the nine months ended September 30, 2018 as the entities were acquired on April 28, 2017 and July 6, 2017, respectively, and are comparable for the nine months ended September 30, 2019. For the nine months ended September 30, 2019, Waikiki Beach Walk Retail and Embassy Suites™ Hotel was reclassified to non-same-store properties when compared to the designation for the nine months ended September 30, 2018 due to
spalling repair activity disrupting the hotel portion of the properties operations. Waikele Center is classified as a non-same-store property due to significant redevelopment activity. Torrey Point was placed into operations and became available for occupancy in August 2018 and will be classified as a non-same-store property until it becomes stabilized and comparable. La Jolla Commons is classified as a non-same-store property, as it was acquired on June 20, 2019.
In our determination of same-store and redevelopment same-store properties for the nine months ended September 30, 2019, Waikele Center has been identified as a same-store redevelopment property due to significant construction activity. Retail same-store net operating income
increased approximately 7.0% for the nine months ended September 30, 2019 compared to the same period in 2018. Retail redevelopment same-store net operating income increased approximately 1.2% for the nine months ended September 30, 2019 compared to the same period in 2018.
We
seek growth in earnings, funds from operations and cash flows primarily through a combination of the following: growth in our same-store portfolio, growth in our portfolio from property development and redevelopments and expansion of our portfolio through property acquisitions. Our properties are located in some of the nation's most dynamic, high-barrier-to-entry markets primarily in Southern California, Northern California, Oregon, Washington and Hawaii, which allow us to take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion, reconfiguration and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities.
We intend to opportunistically pursue the development of future phases of Lloyd District Portfolio and La Jolla Commons based on, among other things, market conditions
and our evaluation of whether such opportunities would generate appropriate risk-adjusted financial returns. Our redevelopment and development opportunities are subject to various factors, including market conditions and may not ultimately come to fruition.
We continue to review acquisition opportunities in our primary markets that would complement our portfolio and provide long-term growth opportunities. Some of our acquisitions do not initially contribute significantly to earnings growth; however, we believe they provide long-term re-leasing growth, redevelopment opportunities and other strategic opportunities. Any growth from acquisitions is contingent upon our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles. Changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting
both the price that must be paid to acquire a property, as well as our ability to economically finance a property acquisition. Generally, our acquisitions are initially financed by available cash, mortgage loans and/or borrowings under our revolving line of credit, which may be repaid later with funds raised through the issuance of new equity or new long-term debt.
Leasing
Our same-store growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in portfolio occupancy. Over the long-term, we believe that the infill nature and strong demographics of our properties provide us with a strategic advantage, allowing us to maintain relatively high occupancy and increase rental rates.
We have continued to see signs of improvement for many of our tenants, as well as increased interest from prospective tenants for our spaces. While there can be no assurance that these positive signs will continue, we remain cautiously optimistic regarding the improved trends we have seen over the past few years. We believe the locations of our properties and diverse tenant base mitigate the potentially negative impact of the current economic environment. However, any reduction in our tenants' abilities to pay base rent, percentage rent or other charges will adversely affect our financial condition and results of operations.
During the three months ended September 30, 2019, we signed 22 retail leases for a total of 34,850
square feet of retail space including 30,019 square feet of comparable space leases (leases for which there was a prior tenant), at an average rental rate increase on a cash and GAAP basis of 2.8% and 9.3%, respectively. New retail leases for comparable spaces were signed for 4,094 square feet at an average rental rate increase on a cash and GAAP basis of 9.7% and 5.3%, respectively. Renewals for comparable retail spaces were signed for 25,925 square feet at an average rental rate increase on a cash and GAAP basis
of 1.2% and 10.2%, respectively. Tenant improvements and incentives were $23.57 per square foot of retail space for comparable new leases for the three months ended September 30, 2019, mainly due to tenants at Alamo Quarry Market.
During the three months ended September 30, 2019, we signed 21 office leases for a total of 98,410 square feet of office space including 70,907 square feet of comparable space leases,
at an average rental rate increase on a cash and GAAP basis of 12.0% and 29.2%, respectively. New office leases for comparable spaces were signed for 43,678 square feet at an average rental rate increase on a cash and GAAP basis of 16.6% and 33.8%, respectively. Renewals for comparable office spaces were
signed for 27,229
square feet at an average rental rate increase on a cash and GAAP basis of 3.7% and 20.4%, respectively. Tenant improvements and incentives were $55.43 per square foot of office space for comparable new leases for the three months ended September 30, 2019, mainly attributed to tenants at City Center Bellevue.
The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring leases and new leases is determined by including minimum
rent and percentage rent paid on the expiring lease and minimum rent and, in some instances, projections of first lease year percentage rent, to be paid on the new lease. In some instances, management exercises judgment as to how to most effectively reflect the comparability of spaces reported in this calculation. The change in rental income on comparable space leases is impacted by numerous factors including current market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, capital investment made in the space and the specific lease structure. Tenant improvements and incentives include the total dollars committed for the improvement of a space as it relates to a specific lease, but may also include base-building costs (i.e. expansion, escalators or new entrances) which are required to make the space leasable. Incentives include amounts paid to tenants as an inducement to sign a lease that do not represent
building improvements.
The leases signed in 2019 generally become effective over the following year, though some may not become effective until 2020 and beyond. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However, we believe that these increases do provide information about the tenant/landlord relationship and the potential fluctuations we may achieve in rental income over time.
Through the remainder of 2019, we believe our leasing volume will be in-line with our historical averages and result in overall
positive increases in rental income. However, changes in rental income associated with individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the rents on new leases will continue to increase at the above disclosed levels, if at all.
Capitalized Costs
Certain external and internal costs directly related to the development and redevelopment of real estate, including pre-construction costs, real estate taxes, insurance, interest, construction costs and salaries and related costs of personnel directly involved, are capitalized. We capitalize costs under development until construction is substantially complete and the property is held available for occupancy. The
determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. We consider a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but not later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with any remaining portion under construction.
We capitalized external and internal costs related to both development and redevelopment activities combined of $0.4 million and $5.7 million
for the three months ended September 30, 2019 and 2018, respectively. We capitalized external and internal costs related to both development and redevelopment activities combined of $3.0 million and $8.1 million for the nine months ended September 30, 2019 and 2018, respectively.
We capitalized external and internal costs related to other property improvements combined of $17.8 million
and $14.2 million for the three months ended September 30, 2019 and 2018, respectively. We capitalized external and internal costs related to other property improvements combined of $65.9 million and $30.9 million for the nine months ended September 30, 2019 and 2018, respectively.
Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet placed in
service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use as noted above. We make judgments as to the time period over which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not subtracted in calculating net income. If the time period for capitalizing interest is extended, however, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period. We capitalized interest costs related to development activities of $0.1 million and $0.3 million for the three months ended September 30, 2019 and 2018,
respectively. We capitalized interest costs related to development activities of $0.4 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively.
The following summarizes our consolidated results of operations for the three months ended September 30, 2019 compared to our consolidated results of operations for the three months ended September 30, 2018. As of September 30,
2019, our operating portfolio was comprised of 28 retail, office, multifamily and mixed-use properties with an aggregate of approximately 6.6 million rentable square feet of retail and office space, including the retail portion of our mixed-use property, 2,112 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of September 30, 2019, we owned land at three of our properties that we classified as held for development and/or construction in progress. As of September 30, 2018, our operating portfolio was comprised of 27 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, 2,112 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of September 30, 2018, we owned land at three of our properties that we classified as held for development and/or construction in progress.
The following table sets forth selected data from our unaudited consolidated statements of comprehensive income for the three months ended September 30, 2019 and 2018 (dollars in thousands):
Three
Months Ended September 30,
Change
%
2019
2018
Revenues
Rental
income
$
93,147
$
78,079
$
15,068
19
%
Other
property income
5,215
4,428
787
18
Total property revenues
98,362
82,507
15,855
19
Expenses
Rental
expenses
23,989
21,383
2,606
12
Real estate taxes
10,942
8,787
2,155
25
Total
property expenses
34,931
30,170
4,761
16
Total property income
63,431
52,337
11,094
21
General
and administrative
(6,479
)
(5,176
)
(1,303
)
25
Depreciation and amortization
(26,568
)
(19,886
)
(6,682
)
34
Interest
expense
(13,734
)
(12,879
)
(855
)
7
Other (expense) income, net
(131
)
(125
)
(6
)
5
Net
income
16,519
14,271
2,248
16
Net income attributable to restricted shares
(92
)
(71
)
(21
)
30
Net
income attributable to unitholders in the Operating Partnership
Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased$15.9 million, or 19%, to $98.4 million for the three months ended September 30, 2019 compared to $82.5 million for the three months ended September 30, 2018. The percentage leased was as follows for each segment as of September 30,
2019 and 2018:
The percentage leased includes the square footage under lease, including leases which may not have commenced as of September 30, 2019 or September 30,
2018, as applicable.
(2)
Includes the retail portion of the mixed-use property only.
The increase in total property revenue was attributable primarily to the decrease in lease termination fees and factors discussed below.
Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased$15.1 million, or 19%,
to $93.1 million for the three months ended September 30, 2019 compared to $78.1 million for the three months ended September 30, 2018. Rental revenue by segment was as follows (dollars in thousands):
Total
Portfolio
Same-Store Portfolio(1)
Three Months Ended September 30,
Change
%
Three Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
25,564
$
25,377
$
187
1
%
$
21,838
$
21,823
$
15
—
%
Office
40,451
25,887
14,564
56
30,609
25,811
4,798
19
Multifamily
11,764
11,907
(143
)
(1
)
11,764
11,907
(143
)
(1
)
Mixed-Use
15,368
14,908
460
3
—
—
—
—
$
93,147
$
78,079
$
15,068
19
%
$
64,211
$
59,541
$
4,670
8
%
(1)
For
this table and tables following, the same-store portfolio includes the 830 building at Lloyd District Portfolio which was placed into operations on August 1, 2019 after renovating the building. The same-store portfolio excludes: (i) Waikele Center due to significant redevelopment activity; (ii) Torrey Point, which was placed into operations and became available for occupancy in August 2018; (iii) La Jolla Commons as it was acquired on June 20, 2019; (iv) Waikiki Beach Walk Retail and Embassy SuitesTM Hotel due to significant spalling repair activity; and (v) land held for development.
Total retail rental revenue increased $0.2 million for the three months ended September
30, 2019 compared to the three months ended September 30, 2018 primarily due to higher straight-line rent at Waikele Center related to the Safeway lease.
Total office rental revenue increased $14.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the acquisition of La Jolla Commons on June 20, 2019, which had rental revenue of approximately $9.2 million during the period. The increase in total office rental revenue is also attributed to Torrey Point,
which was placed into operations in August 2018, and had incremental rental revenue of $0.6 million during the period. Same-store office rental revenue increased $4.8 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to higher annualized base rents at The Landmark at One Market, Lloyd District Portfolio, and City Center Bellevue.
Total multifamily rental revenue decreased $0.1 million for the three months ended September 30, 2019 compared to the three months
ended September 30, 2018 primarily due to a decrease in the average occupancy to 91.6% for the three months ended September 30, 2019 compared to 93.3% for the three months ended September 30, 2018. The decrease in average occupancy was partially offset by the increase in average base rent per unit to $2,073 for the three months ended September 30, 2019 compared to $2,053 for the three months ended September 30, 2018.
Total mixed-use rental revenue increased $0.5 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to higher revenue per available room of $332 for the three months ended September 30, 2019 compared to $323 for the three months ended September 30, 2018.
Other property income. Other property income increased$0.8 million, or 18%, to $5.2 million for the three months ended September 30, 2019 compared to $4.4 million for the three months ended September 30, 2018. Other property income by segment was as follows (dollars in thousands):
Total
Portfolio
Same-Store Portfolio
Three Months Ended September 30,
Change
%
Three Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
284
$
548
$
(264
)
(48
)%
$
95
$
394
$
(299
)
(76
)%
Office
2,359
1,364
995
73
2,223
1,444
779
54
Multifamily
891
941
(50
)
(5
)
891
941
(50
)
(5
)
Mixed-Use
1,681
1,575
106
7
—
—
—
—
$
5,215
$
4,428
$
787
18
%
$
3,209
$
2,779
$
430
15
%
Retail
other property income decreased $0.3 million for the three months ended September 30, 2019 primarily due to lease termination fees in the prior period for tenants at Solana Beach Towne Center and Del Monte Center received during the three months three months ended September 30, 2018.
Office other property income increased $1.0 million for the three months ended September 30, 2019 primarily due to the lease termination fees for tenants at City Center Bellevue received during the period and the acquisition of La Jolla Commons on June
20, 2019, which had parking income of $0.2 million during the period.
Mixed-use other property income increased $0.1 million for the three months ended September 30, 2019 primarily due to an increase in parking income at the retail portion of our mixed-use property and food & beverage revenue at the hotel portion of our mixed-use property.
Property Expenses
Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased $4.8 million, or 16%, to $34.9 million, for
the three months ended September 30, 2019 compared to $30.2 million for the three months ended September 30, 2018.
Rental Expenses. Rental expenses increased $2.6 million, or 12%, to $24.0 million for the three months ended September 30, 2019 compared to $21.4 million for the three months ended September 30, 2018. Rental
expense by segment was as follows (dollars in thousands):
Total Portfolio
Same-Store
Portfolio
Three Months Ended September 30,
Change
%
Three Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
4,108
$
3,654
$
454
12
%
$
3,252
$
2,921
$
331
11
%
Office
6,984
5,237
1,747
33
5,754
5,421
333
6
Multifamily
3,751
3,594
157
4
3,751
3,594
157
4
Mixed-Use
9,146
8,898
248
3
—
—
—
—
$
23,989
$
21,383
$
2,606
12
%
$
12,757
$
11,936
$
821
7
%
Retail
rental expenses increased $0.5 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to parking lot repairs, security services, repairs and maintenance, and personnel compensation expenses during the period.
Office rental expenses increased $1.7 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the acquisition of La
Jolla Commons on June 20, 2019, which had rental expenses of $1.2 million during the period. The increase in total office rental expenses is also attributed to Torrey Point, which was placed into operations in August 2018, and had incremental rental expenses of $0.3 million. Same-store office rental expenses increased $0.3 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to an increase in commercial rent tax at The Landmark at One Market and One Beach Street and higher janitorial services at City Center Bellevue during the period.
Multifamily rental expenses increased $0.2 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to an increase in repairs and maintenance and personnel compensation expenses during the period.
Mixed-use rental expense increased $0.2 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018
primarily due to an increase in hotel room expenses and marketing expenses at the hotel portion of our mixed-use property during the period.
Real Estate Taxes. Real estate taxes increased $2.2 million, or 25%, to $10.9 million for the three months ended September 30, 2019 compared to $8.8 million for the three months ended September 30, 2018. Real estate tax expense by segment was as follows (dollars in thousands):
Total
Portfolio
Same-Store Portfolio
Three Months Ended September 30,
Change
%
Three Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
3,698
$
3,408
$
290
9
%
$
2,976
$
2,760
$
216
8
%
Office
4,643
3,006
1,637
54
2,932
2,874
58
2
Multifamily
1,616
1,563
53
3
1,616
1,563
53
3
Mixed-Use
985
810
175
22
—
—
—
—
$
10,942
$
8,787
$
2,155
25
%
$
7,524
$
7,197
$
327
5
%
Retail
real estate taxes increased $0.3 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to an increase in tax assessments at Alamo Quarry Market, Waikele Center, and Gateway Marketplace.
Office real estate taxes increased $1.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the acquisition of La Jolla Commons on June
20, 2019, which had real estate taxes of $1.5 million.
Mixed-use real estate taxes increased $0.2 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to an increase in tax assessments at the hotel portion of our mixed-use property.
Property Operating Income
Property operating income increased$11.1 million, or 21%, to $63.4 million for the three
months ended September 30, 2019, compared to $52.3 million for the three months ended September 30, 2018. Property operating income by segment was as follows (dollars in thousands):
Total
Portfolio
Same-Store Portfolio
Three Months Ended September 30,
Change
%
Three Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
18,042
$
18,863
$
(821
)
(4
)%
$
15,705
$
16,536
$
(831
)
(5
)%
Office
31,183
19,008
12,175
64
24,146
18,960
5,186
27
Multifamily
7,288
7,691
(403
)
(5
)
7,288
7,691
(403
)
(5
)
Mixed-Use
6,918
6,775
143
2
—
—
—
—
$
63,431
$
52,337
$
11,094
21
%
$
47,139
$
43,187
$
3,952
9
%
Total
retail property operating income decreased $0.8 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the decrease in lease termination fees at Solana Beach Towne Center and Del Monte Center and an increase in rental expenses and real estate taxes during the period.
Total office property operating income increased $12.2 million for the three months ended September 30, 2019 compared to the three months ended September
30, 2018 primarily due to the acquisition of La Jolla Commons on June 20, 2019, which had property operating income of $6.8 million during the period. The increase in total office property operating income is also attributed to Torrey Point, which was placed into operations in August 2018, and had incremental property operating income of $0.2 million during the period. Same-store property operating income increased $5.2 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due higher annualized base rents at The
Landmark at One Market, Lloyd District Portfolio and City Center Bellevue and lease termination fees at City Center Bellevue during the period.
Total multifamily property operating income decreased $0.4 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to a decrease in average occupancy to 91.6% for the three months ended September 30, 2019 compared to 93.3% for the three months ended September
30, 2018 and an increase in repairs and maintenance and personnel compensation expenses during the period.
Total mixed-use property operating income increased $0.1 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to higher revenue per available room of $332 for the three months ended September 30, 2019 compared to $323 for the three months ended September 30, 2018 partially offset by an increase in hotel
room expenses, marketing expenses, and real estate tax assessments.
Other
General and Administrative. General and administrative expenses increased$1.3 million, or 25%, to $6.5 million for the three months ended September 30, 2019, compared to $5.2 million for the three months ended September 30, 2018. This increase was primarily due to an increase in employee-related costs and travel expenses.
Depreciation
and Amortization. Depreciation and amortization expense increased$6.7 million, or 34%, to $26.6 million for the three months ended September 30, 2019, compared to $19.9 million for the three months ended September 30, 2018. This increase was primarily due to the acquisition of La Jolla Commons on June 20, 2019, which had depreciation and amortization of $5.1 million during the period and higher depreciation and amortization at City Center
Bellevue due to tenant improvements that were put into service in 2019.
Interest Expense. Interest expense increased$0.9 million, or 7%, to $13.7 million for the three months ended September 30, 2019, compared to $12.9 million for the three months ended September 30, 2018. This increase was primarily due to the closing of our offering of Series G Notes on July 30, 2019, offset by the repayment of our line of credit during the period and
repayment of the mortgage loans at One Beach Street on November 30, 2018 and Torrey Reserve - North Court on March 1, 2019.
Other (Expense) Income, Net. Other (Expense) income, net increased $0.0 million, or 5%, to $0.1 million for the three months ended September 30, 2019, compared to $0.1 million for the three months ended September 30, 2018 primarily due to an increase in income tax expense related to higher taxable income for our
taxable REIT subsidiary offset by an increase in interest and investment income attributed to interest on the higher average cash balance during the period.
The following summarizes our consolidated
results of operations for the nine months ended September 30, 2019 compared to our consolidated results of operations for the nine months ended September 30, 2018.
The following table sets forth selected data from our unaudited consolidated statements of income for the nine months ended September 30, 2019 and 2018 (dollars in thousands):
Nine
Months Ended September 30,
Change
%
2019
2018
Revenues
Rental
income
$
249,634
$
231,172
$
18,462
8
%
Other
property income
18,160
17,090
1,070
6
Total property revenues
267,794
248,262
19,532
8
Expenses
Rental
expenses
66,611
62,685
3,926
6
Real estate taxes
29,263
25,961
3,302
13
Total
property expenses
95,874
88,646
7,228
8
Total property income
171,920
159,616
12,304
8
General
and administrative
(18,495
)
(16,139
)
(2,356
)
15
Depreciation and amortization
(69,733
)
(86,033
)
16,300
(19
)
Interest
expense
(40,212
)
(39,387
)
(825
)
2
Gain on sale of real estate
633
—
633
100
Other
income (expense), net
(410
)
(64
)
(346
)
(541
)
Net income
43,703
17,993
25,710
143
Net
income attributable to restricted shares
(277
)
(215
)
(62
)
29
Net income attributable to unitholders in the Operating Partnership
Total
property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased$19.5 million, or 8%, to $267.8 million for the nine months ended September 30, 2019 compared to $248.3 million for the nine months ended September 30, 2018. The percentage leased was as follows for each segment as of September 30, 2019 and 2018:
The percentage leased includes the square footage under lease, including leases which may not have commenced as of September 30, 2019 or September 30,
2018, as applicable.
(2)
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$18.5 million, or 8%, to $249.6 million for the nine months ended September 30, 2019 compared to $231.2 million for the nine months ended September 30, 2018. Rental revenue by segment was as follows (dollars in thousands):
Total
Portfolio
Same-Store Portfolio(1)
Nine Months Ended September 30,
Change
%
Nine Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
75,644
$
77,015
(1,371
)
(2
)%
$
64,766
$
64,277
$
489
1
%
Office
95,551
76,756
18,795
24
83,865
76,669
7,196
9
Multifamily
35,832
35,209
623
2
35,832
35,209
623
2
Mixed-Use
42,607
42,192
415
1
—
—
—
—
$
249,634
$
231,172
$
18,462
8
%
$
184,463
$
176,155
$
8,308
5
%
(1)
For
this table and tables following, the same-store portfolio includes the 830 building at Lloyd District Portfolio which was placed into operations on August 1, 2019 after renovating the building. The same-store portfolio excludes: (i) Waikele Center due to significant redevelopment activity; (ii) Torrey Point, which was placed into operations and became available for occupancy in August 2018; (iii) La Jolla Commons as it was acquired on June 20, 2019; (iv) Waikiki Beach Walk Retail and Embassy SuitesTM Hotel due to significant spalling repair activity; and (v) land held for development.
Total retail rental revenue decreased $1.4 million for the nine months ended September
30, 2019 compared to the nine months ended September 30, 2018 primarily due to the expiration of the Kmart lease at Waikele Center on June 30, 2018. Same-store retail rental revenue increased $0.5 million due to higher annualized base rents at Carmel Mountain Plaza and Del Monte Center and additional cost reimbursements at Alamo Quarry Market.
Total office rental revenue increased $18.8 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
due to the acquisition of La Jolla Commons on June 20, 2019, which had rental revenue of approximately $10.4 million during the period. The increase in total office rental revenue is also attributed to Torrey Point, which was placed into operations in August 2018, and had incremental rental revenue of $1.2 million during the period. Same-store office rental revenue increased $7.2 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to higher annualized base rents at The Landmark at One Market, City Center Bellevue, Lloyd District Portfolio and Torrey Reserve Campus.
Multifamily
rental revenue increased $0.6 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to higher average base rent per unit of $2,074 for the nine months ended September 30, 2019 compared to $2,026 for the nine months ended September 30, 2018.
Mixed-use rental revenue increased $0.4 million for the nine months ended September 30,
2019 compared to the nine months ended September 30, 2018 primarily due to higher annualized base rents for retail tenants at our mixed-use property.
Other property income. Other property income increased$1.1 million, or 6%, to $18.2 million for the nine months ended September 30, 2019 compared to $17.1 million for the nine months ended September 30, 2018. Other
property income by segment was as follows (dollars in thousands):
Total Portfolio
Same-Store
Portfolio
Nine Months Ended September 30,
Change
%
Nine Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
5,512
$
1,482
$
4,030
272
%
$
4,690
$
835
$
3,855
462
%
Office
5,265
8,317
(3,052
)
(37
)
5,034
6,976
(1,942
)
(28
)
Multifamily
2,619
2,685
(66
)
(2
)
2,619
2,685
(66
)
(2
)
Mixed-Use
4,764
4,606
158
3
—
—
—
—
$
18,160
$
17,090
$
1,070
6
%
$
12,343
$
10,496
$
1,847
18
%
Total
retail other property income increased $4.0 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in lease termination fees recognized in connection with the termination of a ground lease, and ground lessee's surrender of, the former Sears building at Carmel Mountain Plaza during the nine months ended September 30, 2019.
Total office other property income decreased $3.1 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to lease termination fees in the prior period for tenants at Lloyd District Portfolio and Torrey Point received during the nine months ended September 30, 2018.
Total mixed-use other property income increased $0.2 million for the nine months ended September
30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in parking revenue at the retail portion of our mixed-use property.
Property Expenses
Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $7.2 million, or 8%, to $95.9 million for the nine months ended September 30, 2019, compared to $88.6 million
for the nine months ended September 30, 2018. This increase in total property expenses was attributable primarily to the factors discussed below.
Rental Expenses. Rental expenses increased$3.9 million, or 6%, to $66.6 million for the nine months ended September 30, 2019, compared to $62.7 million for the nine months ended September 30, 2018.
Rental expense by segment was as follows (dollars in thousands):
Total Portfolio
Same-Store
Portfolio
Nine Months Ended September 30,
Change
%
Nine Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
11,575
$
10,702
$
873
8
%
$
9,082
$
8,827
$
255
3
%
Office
18,620
15,777
2,843
18
16,608
15,728
880
6
Multifamily
10,545
10,599
(54
)
(1
)
10,545
10,599
(54
)
(1
)
Mixed-Use
25,871
25,607
264
1
—
—
—
—
$
66,611
$
62,685
$
3,926
6
%
$
36,235
$
35,154
$
1,081
3
%
Total
retail rental expenses increased $0.9 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to the absence of contra-bad debt expense at Waikele Center. Same-store retail rental expenses increased $0.3 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to parking lot repairs, security services, and repairs and maintenance expense during the period.
Total
office rental expenses increased $2.8 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to the acquisition of La Jolla Commons on June 20, 2019, which had rental expenses of approximately $1.2 million during the period. The increase in total office rental expenses is also attributed to Torrey Point, which was placed into operations in August 2018, and had incremental rental expenses of $0.7 million during the period. Same-store office rental expenses increased $0.9 million for the nine months ended September
30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in commercial rent tax at The Landmark at One Market and One Beach Street. The increase in same-store office rental expense was also attributed to higher janitorial services and repairs at City Center Bellevue.
Total mixed-use rental expenses increased $0.3 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in hotel room expenses and marketing expenses at the hotel portion of our mixed-use property
during the period.
Real Estate Taxes. Real estate tax expense increased$3.3 million, or 13%, to $29.3 million for the nine months ended September 30, 2019 compared to $26.0 million for the nine months ended September 30, 2018. Real estate tax expense by segment was as follows (dollars in thousands):
Retail real estate taxes increased $0.8 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in tax assessments at Alamo Quarry Market and Carmel Mountain Plaza.
Total office real estate taxes increased $1.9 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
primarily due to the acquisition of La Jolla Commons on June 20, 2019, which had real estate taxes of approximately $1.7 million during the period. The increase in total office real estate taxes is also attributed to Torrey Point, which was placed into operations in August 2018, and had incremental real estate taxes of $0.2 million during the period.
Multifamily real estate taxes increased $0.2 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in tax assessments for Pacific Ridge Apartments and Hassalo on Eighth - Residential.
Mixed-use
real estate taxes increased $0.3 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in tax assessments for the hotel portion of our mixed-use property.
Property Operating Income
Property operating income increased$12.3 million, or 8%, to $171.9 million for the nine months ended September 30, 2019,
compared to $159.6 million for the nine months ended September 30, 2018. Property operating income by segment was as follows (dollars in thousands):
Total
Portfolio
Same-Store Portfolio
Nine Months Ended September 30,
Change
%
Nine Months Ended September 30,
Change
%
2019
2018
2019
2018
Retail
$
58,465
$
57,486
$
979
2
%
$
51,431
$
48,081
$
3,350
7
%
Office
71,431
60,475
10,956
18
63,675
59,344
4,331
7
Multifamily
23,128
22,720
408
2
23,128
22,720
408
2
Mixed-Use
18,896
18,935
(39
)
—
—
—
—
—
$
171,920
$
159,616
$
12,304
8
%
$
138,234
$
130,145
$
8,089
6
%
Total
retail property operating income increased $1.0 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in lease termination fees recognized in connection with the termination of a ground lease, and ground lessee's surrender of, the former Sears building at Carmel Mountain Plaza offset by the expiration of the Kmart lease at Waikele Center.
Total office property operating income increased $11.0 million during the nine months ended September 30, 2019 compared to the nine
months ended September 30, 2018 primarily due to the the acquisition of La Jolla Commons on June 20, 2019, which had property operating income of $7.7 million during the period. The increase in total office property operating income was partially offset by a decrease in lease termination fees in the prior period at Lloyd District Portfolio and Torrey Point received during the nine months ended September 30, 2018. Same-store property operating income increased $4.3 million for the nine months ended September 30, 2019 compared to the nine months ended September
30, 2018 primarily due to higher annualized base rents at City Center Bellevue, The Landmark at One Market, and Torrey Reserve Campus.
Multifamily property operating income increased $0.4 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in higher average base rent per unit of $2,074 for the nine months ended September 30, 2019 compared to $2,026 for the nine months ended September 30, 2018.
Other
General
and Administrative. General and administrative expenses increased$2.4 million, or 15%, to $18.5 million for the nine months ended September 30, 2019, compared to $16.1 million for the nine months ended September 30, 2018. This increase was primarily due to an increase in employee-related costs and travel expenses.
Depreciation and Amortization. Depreciation and amortization expense decreased$16.3 million, or 19%, to $69.7 million for the nine months ended September 30, 2019, compared to $86.0 million for the nine months ended September 30, 2018. This decrease was primarily due to higher depreciation and amortization expense in the prior period at Waikele Center attributed to the redevelopment of the Kmart space and Lloyd District Portfolio attributed to acceleration of depreciation related to lease
terminations. The decrease is offset by the acquisition of La Jolla Commons on June 20, 2019, which had amortization and depreciation of $6.9 million during the period and higher depreciation and amortization at City Center Bellevue due to tenant improvements that were put into service in 2019.
Interest Expense. Interest expense increased$0.8 million, or 2%, to $40.2 million for the nine months ended September 30, 2019 compared to $39.4 million for the
nine months ended September 30, 2018. This increase was primarily due to the closing of our offering of Series G Notes on July 30, 2019 and higher average outstanding balance on the line of credit during the first six months of 2019, offset by the repayment of our line of credit during the third quarter of 2019 and repayment of the property mortgages for Lomas Palisades during the first quarter of 2018, One Beach Street during the fourth quarter of 2018 and Torrey Reserve - North Court during the first quarter of 2019.
Gain on sale of real estate. Gain on sale of real estate of $0.6 million during the period relates to our sale of Solana Beach - Highway 101 on May
22, 2019.
Other Income (Expense), Net. Other (Expense) income, net increased $0.3 million, or 541%, to other expense, net of $0.4 million for the nine months ended September 30, 2019, compared to other expense, net of $0.1 million for the nine months ended September 30, 2018 primarily due to an increase in income tax expense related to higher taxable income for our taxable REIT subsidiary during the period.
In this “Liquidity and Capital Resources of American Assets Trust, Inc.” section, the term the “company” refers only to American Assets Trust, Inc. on an unconsolidated basis, and excludes the Operating Partnership and all other subsidiaries.
The company’s business is operated primarily through the Operating Partnership, of which the company is the parent company and sole general partner, and which it consolidates for financial reporting
purposes. Because the company operates on a consolidated basis with the Operating Partnership, the section entitled “Liquidity and Capital Resources of American Assets Trust, L.P.” should be read in conjunction with this section to understand the liquidity and capital resources of the company on a consolidated basis and how the company is operated as a whole.
The company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by the Operating Partnership. The company itself does not have any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. Therefore, the consolidated assets and liabilities and the consolidated revenues and expenses of the company
and the Operating Partnership are the same on their respective financial statements. However, all debt is held directly or indirectly by the Operating Partnership. The company’s principal funding requirement is the payment of dividends on its common stock. The company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.
As of September 30, 2019, the company owned an approximate 78.4% partnership interest in the Operating Partnership. The remaining 21.6% are owned by non-affiliated investors and certain of the company's directors and executive officers. As the sole general partner of the Operating Partnership, American
Assets Trust, Inc. has the full, exclusive and complete authority and control over the Operating Partnership’s day-to-day management and business, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies. The company causes the Operating Partnership to distribute such portion of its available cash as the company may in its discretion determine, in the manner provided in the Operating Partnership’s partnership agreement.
The liquidity of the company is dependent on the Operating Partnership’s ability to make sufficient distributions to the company. The primary cash requirement of the company is its payment of dividends to its stockholders. The company also guarantees some of the Operating Partnership’s debt, as discussed further in
Note 8 of the Notes to Consolidated Financial Statements included elsewhere herein. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger the company’s guarantee obligations, then the company will be required to fulfill its cash payment commitments under such guarantees. However, the company’s only significant asset is its investment in the Operating Partnership.
We believe the Operating Partnership’s sources of working capital, specifically its cash flow from operations, and borrowings available under its unsecured line of credit, are adequate for it to make its distribution payments to the company and, in turn, for the company to make its dividend payments to its stockholders. As of September 30, 2019, the company has determined that it has
adequate working capital to meet its dividend funding obligations for the next 12 months. However, we
cannot assure you that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distribution payments to the company. The unavailability of capital could adversely affect the Operating Partnership’s ability to pay its distributions to the company, which would in turn, adversely affect the company’s ability to pay cash dividends to its stockholders.
Our short-term
liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to the company’s stockholders, operating expenses and other expenditures directly associated with our properties, interest expense and scheduled principal payments on outstanding indebtedness, general and administrative expenses, funding construction projects, capital expenditures, tenant improvements and leasing commissions.
The company may from time to time seek to repurchase or redeem the Operating Partnership’s outstanding debt, the company’s shares of common stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
For
the company to maintain its qualification as a REIT, it must pay dividends to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. While historically the company has satisfied this distribution requirement by making cash distributions to American Assets Trust, Inc.'s stockholders or American Assets Trust, L.P.'s unitholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the company’s own stock. As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. The company may need to continue to raise capital in the equity markets to fund the operating partnership’s working capital needs,
acquisitions and developments. Although there is no intent at this time, if market conditions deteriorate, the company may also delay the timing of future development and redevelopment projects as well as limit future acquisitions, reduce the Operating Partnership’s operating expenditures, or re-evaluate its dividend policy.
The company is a well-known seasoned issuer. As circumstances warrant, the company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. When the company receives proceeds from preferred or common equity issuances, it is required by the Operating Partnership’s partnership agreement to contribute the proceeds from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership. The Operating Partnership may use the proceeds to repay debt, to develop
new or existing properties, to acquire properties or for general corporate purposes.
In February 2018, the company filed a universal shelf registration statement on Form S-3ASR with the SEC, which became effective upon filing and which replaced the prior Form S-3ASR that was filed with the SEC in February 2015. The universal shelf registration statement may permit the company from time to time to offer and sell equity securities of the company. However, there can be no assurance that the company will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include investor perception of our prospects and the general condition of the financial markets, among others.
In May 2015, we entered into an ATM equity program with five sales agents in which we may, from time to time,
offer and sell shares of our common stock having an aggregate offering price of up to $250.0 million. On March 2, 2018, we amended certain of these equity programs, terminated one such program and entered into a new equity program with one new sales agent. The sales of shares of the company's common stock made through the ATM equity program, as amended, are made in “at-the-market” offerings as defined in Rule 415 of the Securities Act. As of September 30, 2019, we had the capacity to issue up to an additional $134.0 million in shares of common stock under the ATM equity program. We intend to use the net proceeds to fund development or redevelopment activities, repay amounts outstanding from time to time under our amended and restated credit facility or other debt financing
obligations, fund potential acquisition opportunities and/or for general corporate purposes. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of the company's common stock and the company's capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program.
On June 14, 2019, we issued and sold 10,925,000 shares of common stock in an underwritten public offering at a price to the public of $44.75 per share. We received net proceeds of approximately $472.6 million, after deducting underwriting discounts, commissions and offering expenses.
Liquidity and Capital Resources of American Assets Trust, L.P.
In this “Liquidity and Capital Resources of American Assets Trust, L.P.” section, the terms “we,”“our” and “us” refer to the Operating Partnership together with its consolidated subsidiaries, or the Operating Partnership and American Assets Trust, Inc. together with their consolidated subsidiaries, as the context requires. American Assets Trust, Inc. is our sole general partner and consolidates our results of operations for financial reporting purposes. Because we operate on a consolidated basis with American
Assets Trust, Inc., the section entitled “Liquidity and Capital Resources of American Assets Trust, Inc.” should be read in conjunction with this section to understand our liquidity and capital resources on a consolidated basis.
Due to the nature of our business, we typically generate significant amounts of cash from operations. The cash generated from operations is used for the payment of operating expenses, capital expenditures, debt service and dividends to American Assets Trust, Inc.'s stockholders and our unitholders. As a REIT, American Assets Trust, Inc. must generally make annual distributions to its stockholders of at
least 90% of its net taxable income. As of September 30, 2019, we held $115.6 million in cash and cash equivalents.
Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements, dividend payments to American Assets Trust, Inc.'s stockholders required to maintain its REIT status, distributions to our unitholders, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash and, if necessary, borrowings available under our credit facility.
Our
long-term liquidity needs consist primarily of funds necessary to pay for the repayment of debt at maturity, property acquisitions, tenant improvements and capital improvements. We expect to meet our long-term liquidity requirements to pay scheduled debt maturities and to fund property acquisitions and capital improvements with net cash from operations, long-term secured and unsecured indebtedness and, if necessary, the issuance of equity and debt securities. We also may fund property acquisitions and capital improvements using our amended and restated credit facility pending permanent financing. We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot be assured that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our
unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our company.
Our overall capital requirements for the remainder of 2019 and first quarter 2020 will depend upon acquisition opportunities and the level of improvements and redevelopments on existing properties. Our capital investments will be funded on a short-term basis with cash on hand, cash flow from operations and/or our revolving line of credit. On a long-term basis, our capital investments may be funded with additional long-term debt. 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 capital investments may
also be funded by additional equity including shares issued by American Assets Trust, Inc. under its ATM equity program. Although there is no intent at this time, if market conditions deteriorate, we may also delay the timing of future development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy.
In February 2018, the Operating Partnership filed a universal shelf registration on Form S-3 ASR with the SEC which provided for the registration of an unspecified amount of debt securities by the Operating Partnership. However, there can be no assurance that the Operating Partnership will be able to complete any such offerings of debt securities. Factors influencing the availability of additional financing include investor perception of our prospects
and the general condition of the financial markets, among others.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Net cash provided by operating activities increased$3.2 million to $122.1 million for the nine
months ended September 30, 2019 compared to $118.9 million for the nine months ended September 30, 2018. The increase in cash from operations was primarily due to the increase in annualized base rents at The Landmark at One Market and City Center Bellevue and changes in operating assets and liabilities.
Net cash used in investing activities increased$537.2 million to $574.0 million for the nine months ended September 30, 2019 compared to $36.8 million
for the nine months ended September 30, 2018. The increase was primarily due to the acquisition of La Jolla Commons on June 20, 2019.
Net cash provided by financing activities increased $628.6 million to cash provided of $520.7 million for the nine months ended September 30, 2019 compared to cash used of $107.9 million for the nine months ended September 30, 2018. The increase in cash provided by financing activities was primarily due to the underwritten
public offering that settled on June 14, 2019 and the closing of Series G Notes issued on July 30, 2019.
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 the NOIs of 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 conjunction with net income computed in accordance with GAAP and discussions elsewhere in “Management's Discussion and Analysis of Financial Condition and Results of Operations” regarding the components of net income that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other
companies that do not define the measure exactly as we do.
The following is a reconciliation of our NOI to net income for the three and nine months ended September 30, 2019 and 2018 computed in accordance with GAAP (in thousands):
We calculate funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, impairment losses, real-estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures.
FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real-estate related depreciation and amortization and gains and losses from property dispositions, which do not relate to or are
not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such
other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.
The following table sets forth a reconciliation of our FFO for the three and nine months ended September 30, 2019 to net income, the nearest GAAP equivalent (in thousands, except per share and share data):
Less:
Nonforfeitable dividends on incentive restricted stock awards
(88
)
(273
)
FFO attributable to common stock and units
$
42,999
$
112,530
FFO
per diluted share/unit
$
0.57
$
1.63
Weighted average number of common shares and units, diluted (1)
75,833,650
69,012,122
(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. We manage our market risk by attempting to match anticipated inflow of cash from our operating, investing and financing activities with anticipated outflow of cash to fund debt payments, dividends to our stockholders and Operating Partnership unitholders, investments, capital expenditures and other cash requirements.
Interest Rate Risk
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
Our outstanding notes payable obligations (maturing at various times through July 2030) 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 September 30,
2019, we had $1.112 billion of fixed rate debt outstanding with an estimated fair value of $1.156 billion. The carrying values of our revolving line of credit and term loan are deemed to be at fair value since the outstanding debt is directly tied to monthly LIBOR contracts. Additionally, we consider our $250.0 million term loan outstanding as of September 30, 2019 to be fixed rate debt as the rate is effectively fixed by an interest rate swap agreement. If interest rates at September 30, 2019 had been 1.0% higher, the fair value of those debt instruments on that date would have decreased by approximately $4.1 million.
If interest rates at September 30, 2019 had been 1.0% lower, the fair value of those debt instruments on that date would have increased by approximately $21.8 million.
Variable Interest Rate Debt
At September 30, 2019, we had $250.0 million of variable rate debt outstanding. We have entered into forward starting interest rate swaps in order to economically hedge against the risk of rising interest rates that would affect our interest expense related to our future anticipated debt issuances as part of its overall borrowing program. See the discussion under Note 4 to the accompanying consolidated financial statements for certain quantitative details
related to the interest rate swaps and for a discussion on how we value derivative financial instruments. Based upon this amount of variable rate debt and the specific terms, if market interest rates increased 1.0%, our annual interest expense would increase by approximately $0.0 million with a corresponding decrease in our net income and cash flows for the year. Conversely, if market rates decreased 1.0%, our annual interest expense would decrease by approximately $0.0 million with a corresponding increase in our net income and cash flows for the year.
American Assets Trust, Inc. maintains 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 American Assets Trust, Inc.'s 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 American Assets Trust, Inc.'s 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.
American Assets Trust, Inc. has carried out an evaluation, under the supervision and with the participation of management, including American
Assets Trust, Inc.'s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of its disclosure controls and procedures as of September 30, 2019, the end of the period covered by this report. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer have concluded, as of September 30, 2019, that American Assets Trust, Inc.'s disclosure controls and procedures were effective in ensuring that information required to be disclosed by it 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 its management, including American Assets Trust, Inc.'s Chief Executive Officer and its Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
No changes to American Assets Trust, Inc.'s 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, American Assets Trust, Inc.'s internal control over financial reporting.
Controls and Procedures (American Assets Trust, L.P.)
The
Operating Partnership maintains 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 its 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 the Operating Partnership's 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.
The Operating Partnership has carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of its disclosure controls and procedures as of September 30, 2019, the end of the period covered by this report. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer have concluded, as of September 30, 2019, that the Operating Partnership's disclosure controls and procedures were effective in ensuring that information required to be disclosed by it 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 its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
No changes to the Operating Partnership's 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, the Operating Partnership's internal control over financial reporting.
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, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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.