News Column

AMERICAN ASSETS TRUST, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 21, 2014

The following discussion should be read in conjunction with the audited historical consolidated financial statements and notes thereto appearing in "Item 8. Financial Statements and Supplementary Data" of this report. As used in this section, unless the context otherwise requires, "we," "us," "our," and "our company" mean American Assets Trust, Inc., a Maryland corporation and its consolidated subsidiaries. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth under "Item 1A. Risk Factors" or elsewhere in this document. See "Item 1A. Risk Factors" and "Forward-Looking Statements." Overview Our Company 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 December 31, 2013, our portfolio was comprised of eleven retail shopping centers; seven office properties; a mixed-use property consisting of a 369-room all-suite hotel and a retail shopping center; and four multifamily properties. Additionally, as of December 31, 2013, we owned land at five of our properties that we classified as held for development and 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 Rady Trust, and did not have any operating activity until the consummation of our initial public offering and the related acquisition of our Predecessor on January 19, 2011. After the completion of our initial public offering and the Formation Transactions on January 19, 2011, our operations have been carried on through our Operating Partnership. Our company, as the sole general partner of our Operating Partnership, has control of our Operating Partnership and owned 69.0% of our Operating Partnership as of December 31, 2013. Accordingly, we consolidate the assets, liabilities and results of operations of our Operating Partnership. Taxable REIT Subsidiary As part of the Formation Transactions, on November 5, 2010, we formed American Assets Services, Inc., a Delaware corporation that is wholly owned by our Operating Partnership and which we refer to as our services company. We have elected, together with our services company, to treat our services company as a taxable REIT subsidiary for federal income tax purposes. A taxable REIT subsidiary generally may provide non-customary and other services to our tenants and engage in activities that we may not engage in directly without adversely affecting our qualification as a REIT, provided a taxable REIT subsidiary may not operate or manage a lodging facility or provide rights to any brand name under which any lodging facility is operated. We may form additional taxable REIT subsidiaries in the future, and our Operating Partnership may contribute some or all of its interests in certain wholly owned subsidiaries or their assets to our services company. Any income earned by our taxable REIT subsidiaries will not be included in our taxable income for purposes of the 75% or 95% gross income tests, except to the extent such income is distributed to us as a dividend, in which case such dividend income will qualify under the 95%, but not the 75%, gross income test. Because a taxable REIT subsidiary is subject to federal income tax, and state and local income tax (where applicable) as a regular corporation, the income earned by our taxable REIT subsidiaries generally will be subject to an additional level of tax as compared to the income earned by our other subsidiaries.



Outlook

We seek growth in earnings, funds from operations, and cash flows primarily through a combination of the following: growth in our same-store portfolio, growth in our portfolio from property development and redevelopments and expansion of our portfolio through property acquisitions. Our properties are located in some of the nation's most dynamic, high-barrier-to-entry markets primarily in Southern California, Northern California, Oregon, Washington and Hawaii, which we believe 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. In the third quarter of 2013, we broke ground at our Lloyd District Portfolio redevelopment project. We expect that the project will be LEED Certified and has been defined to include approximately 47,000 square feet of retail space and 657 multi-family units in addition to the existing 581,000 square feet of office space. Construction of the project is expected to be complete in 2015, with an anticipated stabilization date in 2017. Projected costs of the development are approximately $192 million, of which approximately $31 million has been incurred to date. We expect to incur the remaining costs for the redevelopment of our Lloyd District Portfolio in 2014 and 2015. Additionally, we continue our ongoing redevelopment efforts at Torrey Reserve Campus and are currently under construction to increase rentable office space by approximately 81,500 square feet, which we expect to stabilize in 2015. Projected costs of the redevelopment are approximately $34 million, of which approximately $20 million has been incurred to date. We expect to incur the remaining costs for this redevelopment project in 2014. 37 -------------------------------------------------------------------------------- We intend to opportunistically pursue the development of future phases of Lloyd District Portfolio and Torrey Reserve Campus 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 on 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 credit facility, which may be repaid later with funds raised through the issuance of new equity or new long-term debt.



Same-store

We have provided certain information on a total portfolio, same-store and redevelopment same-store basis. Information provided on a same-store basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared, properties under development, properties classified as held for development and properties classified as discontinued operations. Information provided on a redevelopment same-store basis includes the results of properties undergoing significant redevelopment for the entirety or portion of both periods being compared. Same-store and redevelopment same-store is considered by management to be an important measure because it assists 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 to 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. Acquired properties are classified to 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. In our determination of same-store and redevelopment same-store properties, Lloyd District Portfolio and Torrey Reserve Campus have been identified as same-store redevelopment properties due to the significant construction activity noted above. Office same-store net operating income decreased approximately 0.9% and increased 1.2%, respectively, for the three months and year ended December 31, 2013 compared to the same periods in 2012. Office redevelopment same-store net operating income decreased approximately 1.7% and 0.6%, respectively, for the three months and year ended December 31, 2013 compared to the same periods in 2012. Below is a summary of our same-store composition for the years ended December 31, 2013, 2012 and 2011. For the year ended December 31, 2013, four acquired properties were classified into same-store properties and one property with significant redevelopment activity was removed from same-store properties when compared to the designations for the year ended December 31, 2012. Same-store properties for the year ended December 31, 2012 were consistent with same-store property designations for the year ended December 31, 2011. December 31, 2013 2012 2011 Same-Store 18 15 15 Non-Same Store 5 8 6 Total Properties 23 23 21 Redevelopment Same-Store 20 N/A N/A



Total Development Properties 5 5 5

38 -------------------------------------------------------------------------------- Revenue Base Rental income consists of scheduled rent charges, straight-line rent adjustments and the amortization of above market and below market rents acquired. We also derive revenue from tenant recoveries and other property revenues, including parking income, lease termination fees, late fees, storage rents and other miscellaneous property revenues. Retail Leases. Our retail portfolio included eleven properties with a total of approximately 3.1 million rentable square feet available for lease as of December 31, 2013. As of December 31, 2013, these properties were 97.0% leased. For the year ended December 31, 2013, the retail segment contributed 36.6%, of our total revenue. Historically, we have leased retail properties to tenants primarily on a triple-net lease basis, and we expect to continue to do so in the future. In a triple-net lease, the tenant is responsible for all property taxes and operating expenses. As such, the base rent payment does not include any operating expense, but rather all such expenses, to the extent they are paid by the landlord, are billed to the tenant. The full amount of the expenses for this lease type, to the extent they are paid by the landlord, is reflected in operating expenses, and the reimbursement is reflected in tenant recoveries. During the year ended December 31, 2013, we signed 77 retail leases for 285,184 square feet with an average rent of $30.72 per square foot during the initial year of the lease term. Of the leases, 59 represent comparable leases where there was a prior tenant, with an increase of 1.9% in cash basis rent and an increase of 8.1% in straight-line rent compared to the prior leases. Office Leases. Our office portfolio included seven properties with a total of approximately 2.6 million rentable square feet available for lease as of December 31, 2013. As of December 31, 2013, these properties were 89.8% leased. For the year ended December 31, 2013, the office segment contributed 35.5% of our total revenue. Historically, we have leased office properties to tenants primarily on a full service gross or a modified gross basis and to a limited extent on a triple-net lease basis. We expect to continue to do so in the future. A full-service gross or modified gross lease has a base year expense stop, whereby the tenant pays a stated amount of certain expenses as part of the rent payment, while future increases in property operating expenses (above the base year stop) are billed to the tenant based on such tenant's proportionate square footage of the property. The increased property operating expenses billed are reflected as operating expenses and amounts recovered from tenants are reflected as rental income in the statements of operations. During the year ended December 31, 2013, we signed 77 office leases for 459,290 square feet with an average rent of $30.63 per square foot during the initial year of the lease term. Of the leases, 53 represent comparable leases where there was a prior tenant, with an increase of 0.1% in cash basis rent and an increase of 10.8% in straight-line rent compared to the prior leases. Multifamily Leases. Our multifamily portfolio included three apartment properties, as well as an RV resort, with a total of 922 units (including 122 RV spaces) available for lease as of December 31, 2013. As of December 31, 2013, these properties were 96.4% leased. For the year ended December 31, 2013, the multifamily segment contributed 6.3% of our total revenue. Our multifamily leases, other than at our RV Resort, generally have lease terms ranging from 7 to 15 months, with a majority having 12-month lease terms. Tenants normally pay a base rental amount, usually quoted in terms of a monthly rate for the respective unit. Spaces at the RV Resort can be rented at a daily, weekly, or monthly rate. The average monthly base rent per leased unit as of December 31, 2013 was $1,422 compared to $1,399 at December 31, 2012. Mixed-Use Property Revenue. Our mixed-use property consists of approximately 97,000 rentable square feet of retail space and a 369-room all-suite hotel. Revenue from the mixed-use property consists of revenue earned from retail leases, and revenue earned from the hotel, which consists of room revenue, food and beverage services, parking and other guest services. As of December 31, 2013, the retail portion of the property was 97.8% leased, and for the year ended December 31, 2013, the hotel had an average occupancy of 87.2%. For the year ended December 31, 2013, the mixed-use segment contributed 21.5%, of our total revenue. We have leased the retail portion of such property to tenants primarily on a triple-net lease basis, and we expect to continue to do so in the future. As such, the base rent payment under such leases does not include any operating expenses, but rather all such expenses, to the extent they are paid by the landlord, are billed to the tenant. Rooms at the hotel portion of our mixed-use property are rented on a nightly basis. 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 39 -------------------------------------------------------------------------------- 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 December 31, 2013, we signed 21 retail leases for a total of 128,422 square feet of retail space including 79,122 square feet of comparable space leases (leases for which there was a prior tenant) at no change in rental rates on a cash basis and an increase of 6.4% on a straight-line basis. New retail leases for comparable spaces were signed for 12,377 square feet at an average rental rate increase of 32.1% on a cash basis and 36.3% on a straight-line basis. Renewals for comparable retail spaces were signed for 66,745 square feet at an average rental rate decrease of 10.7% on a cash basis and decrease of 4.4% on a straight-line basis. Tenant improvements and incentives were $19.40 per square foot of retail space for comparable new leases for the three months ended December 31, 2013. During the three months ended December 31, 2013, we signed 23 office leases for a total of 198,307 square feet of office space including 163,157 square feet of comparable space leases, at an average rental rate decrease of 0.4% on a cash basis and average rental increase of 12.3% on a straight-line basis. New office leases for comparable spaces were signed for 68,796 square feet at an average rental rate decrease of 6.4% on a cash basis and average rental rate increase of 12.3% on a straight-line basis. Renewals for comparable office spaces were signed for 94,361 square feet at an average rental rate increase of 3.5% on a cash basis and increase of 12.3% on a straight-line basis. Tenant improvements and incentives were $28.80 and $7.55 per square foot of office space for comparable new leases and comparable renewals, respectively, for the three months ended December 31, 2013. 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 2013 generally become effective over the following year, though some may not become effective until 2015. 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. In 2014, we believe our leasing volume will be in-line with our historical averages with 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. Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires management 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 management's best judgment, after considering past and current events and economic conditions. In addition, information relied upon by management in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third party experts. Actual results could differ from these estimates. A discussion of possible risks which may affect these estimates is included in the section above entitled "Item 1A. Risk Factors." Management considers an accounting estimate to be critical if changes in the estimate could have a material impact on our consolidated results of operations or financial condition. 40 -------------------------------------------------------------------------------- Our significant accounting policies are more fully described in the notes to the consolidated financial statements included elsewhere in this report; however, the most critical accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows: Revenue Recognition and Accounts Receivable Our leases with tenants are classified as operating leases. Substantially all such leases contain fixed rent escalations which occur at specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the tenant controls the space through the term of the related lease, net of valuation adjustments, based on management's assessment of credit, collection and other business risks. In instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence revenue recognition and lease incentive amortization when possession or control of the space is turned over to the tenant for tenant work to begin. Percentage rents, which represent additional rents based upon the level of sales achieved by certain tenants, are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved and the percentage rents are collectible. Real estate tax and other cost reimbursements are recognized on an accrual basis over the periods in which the related expenditures are incurred. We recognize revenue on the hotel portion of our mixed-use property from the rental of hotel rooms and guest services when the rooms are occupied and services have been provided. Other property income includes parking income, general excise tax billed to tenants, fees charged to tenants at our multifamily properties and food and beverage sales at the hotel. Other property income is recognized when earned. For a tenant to terminate its lease agreement prior to the end of the agreed term, we may require that they pay a fee to cancel the lease agreement. Lease termination fees for which the tenant has relinquished control of the space are generally recognized on the termination date. When a lease is terminated early but the tenant continues to control the space under a modified lease agreement, the lease termination fee is generally recognized evenly over the remaining term of the modified lease agreement. Current accounts receivable from tenants primarily relate to contractual minimum rent and percentage rent as well as real estate tax and other cost reimbursements. Accounts receivable from straight-line rent is typically longer term in nature and relates to the cumulative amount by which straight-line rental income recorded to date exceeds cash rents billed to date under the contractual lease agreement. We make estimates of the collectability of our current accounts receivable and straight-line rents receivable which requires significant judgment by management. The collectability of receivables is affected by numerous different factors including current economic conditions, tenant bankruptcies, the status of collectability of current cash rents receivable, tenants' recent and historical financial and operating results, changes in our tenants' credit ratings, communications between our operating personnel and tenants, the extent of security deposits and letters of credits held with respect to tenants, and the ability of the tenant to perform under the terms of their lease agreement. While we make estimates of potentially uncollectible amounts and provide an allowance for them through bad debt expense, actual collectability could differ from those estimates which could affect our net income. With respect to the allowance for current uncollectible tenant receivables, we assess the collectability of outstanding receivables by evaluating such factors as nature and age of the receivable, past history and current financial condition of the specific tenant including our assessment of the tenant's ability to meet its contractual lease obligations, and the status of any pending disputes or lease negotiations with the tenant. A change in the estimate of collectability of a receivable would result in a change to our allowance for doubtful accounts and corresponding bad debt expense and net income. Additionally, our assessment of our tenants' abilities to meet their contractual lease obligations includes consideration of the status of collectability of current cash rents receivable, tenants' recent and historical financial and operating results, changes in our tenants' credit ratings, communications between our operating personnel and tenants and the extent of security deposits and letters of credits held with respect to tenants. 41 -------------------------------------------------------------------------------- Due to the nature of the accounts receivable from straight-line rents, the collection period of these amounts typically extends beyond one year. Our experience relative to unbilled straight-line rents is that a portion of the amounts otherwise recognizable as revenue is never billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and other factors. Accordingly, the extended collection period for straight-line rents along with our evaluation of tenant credit risk may result in the nonrecognition of a portion of straight-line rental income until the collection of such income is reasonably assured. If our evaluation of tenant credit risk changes indicating more straight-line revenue is reasonably collectible than previously estimated and realized, the additional straight-line rental income is recognized as revenue. If our evaluation of tenant credit risk changes indicating a portion of realized straight-line rental income is no longer collectible, a reserve and bad debt expense is recorded. Correspondingly, these estimates of collectability have a direct impact on our net income. Real Estate Depreciation and maintenance costs relating to our properties constitute substantial costs for us. Land, buildings and improvements are recorded at cost. Depreciation is computed using the straight-line method. Estimated useful lives range generally from 30 years to a maximum of 40 years on buildings and major improvements. Minor improvements, furniture and equipment are capitalized and depreciated over useful lives ranging from 3 to 15 years. Maintenance and repairs that do not improve or extend the useful lives of the related assets are charged to operations as incurred. Tenant improvements are capitalized and depreciated over the life of the related lease or their estimated useful life, whichever is shorter. If a tenant vacates its space prior to contractual termination of its lease, the undepreciated balance of any tenant improvements are written off if they are replaced or have no future value. Our estimates of useful lives have a direct impact on our net income. If expected useful lives of our real estate assets were shortened, we would depreciate the assets over a shorter time period, resulting in an increase to depreciation expense and a corresponding decrease to net income on an annual basis. Acquisitions of properties are accounted for in accordance with the authoritative accounting guidance on acquisitions and business combinations. Our methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is based on estimated fair values, replacement cost and appraised values. When we acquire operating real estate properties, the purchase price is allocated to land and buildings, intangibles such as in-place leases, and to current assets and liabilities acquired, if any. Such valuations include a consideration of the noncancelable terms of the respective leases as well as any applicable renewal period(s). The fair values associated with below market renewal options are determined based on a review of several qualitative and quantitative factors on a lease-by-lease basis at acquisition to determine whether it is probable that the tenant would exercise its option to renew the lease agreement. These factors include: (1) the type of tenant in relation to the property it occupies, (2) the quality of the tenant, including the tenant's long term business prospects, and (3) whether the fixed rate renewal option was sufficiently lower than the fair rental of the property at the date the option becomes exercisable such that it would appear to be reasonably assured that the tenant would exercise the option to renew. Each of these estimates requires a great deal of judgment, and some of the estimates involve complex calculations. These allocation assessments have a direct impact on our results of operations because if we were to allocate more value to land, there would be no depreciation with respect to such amount. If we were to allocate more value to the buildings, as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the remaining terms of the leases. The value allocated to in-place leases is amortized over the related lease term and reflected as depreciation and amortization in the statement of operations. The value of above and below market leases associated with the original noncancelable lease terms are amortized to rental income over the terms of the respective noncancelable lease periods and are reflected as either an increase (for below market leases) or a decrease (for above market leases) to rental income in the statement of operations. If a tenant vacates its space prior to contractual termination of its lease or the lease is not renewed, the unamortized balance of any in-place lease value is written off to rental income and amortization expense. The value of the leases associated with below market lease renewal options that are likely to be exercised are amortized to rental income over the respective renewal periods. We make assumptions and estimates related to below market lease renewal options, which impact revenue in the period in which the renewal options are exercised and could result in significant increases to revenue if the renewal options are not exercised at which time the related below market lease liabilities would be written off as an increase to revenue. 42 --------------------------------------------------------------------------------



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 $43.2 million and $13.8 million for the years ended December 31, 2013 and 2012, respectively.

We capitalized external and internal costs related to other property improvements combined of $17.5 million and $27.0 million for the years ended December 31, 2013 and 2012, respectively.

We capitalized internal costs for salaries and related benefits for development and redevelopment activities and other property improvements of $0.1 million and $0.1 million for the years ended December 31, 2013 and 2012, respectively. Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet placed in service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use as noted above. We make judgments as to the time period over which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not subtracted in calculating net income. If the time period for capitalizing interest is extended, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period. We capitalized interest costs related to both development and redevelopment activities combined of $2.1 million and $0.7 million for the years ended December 31, 2013 and 2012, respectively. 43 --------------------------------------------------------------------------------



Segment capital expenditures for the years ended December 31, 2013 and 2012 are as follows (dollars in thousands):

Year Ended December 31, 2013 Total Tenant Improvements, Leasing Commissions and Tenant Improvements Maintenance and Leasing Maintenance Capital Capital Redevelopment and Total Capital Segment Commissions Expenditures Expenditures Expansions New Development Expenditures Retail Portfolio $ 2,987 $ 1,717 $ 4,704 $ 18 $ 127 $ 4,849 Office Portfolio 8,488 4,435 12,923 13,698 654 27,275 Multifamily Portfolio - 787 787 - 23,854 24,641 Mixed-Use Portfolio 109 1,833 1,942 - - 1,942 Total $ 11,584 $ 8,772 $ 20,356 $ 13,716 $ 24,635 $ 58,707 Year Ended December 31, 2012 Total Tenant Improvements, Leasing Commissions and Tenant Improvements Maintenance and Leasing Maintenance Capital Capital Redevelopment and Total Capital Segment Commissions Expenditures Expenditures Expansions New Development Expenditures Retail Portfolio $ 10,114 $ 1,962 $ 12,076 $ 1,905 $ 230 $ 14,211 Office Portfolio 13,882 3,249 17,131 1,993 3,012 22,136 Multifamily Portfolio - 964 964 - - 964 Mixed-Use Portfolio 36 691 727 - - 727 Total $ 24,032 $ 6,866 $ 30,898 $ 3,898 $ 3,242 $ 38,038 The decrease in tenant improvements and leasing commissions in our retail portfolio for the year ended December 31, 2013 compared to the year ended December 31, 2012 was primarily related to new leases entered into during the year ended 2012 with large tenants located at Carmel Mountain Plaza, Del Monte Center, Waikele Center and Alamo Quarry Market. The decrease in tenant improvements and leasing commissions in our office portfolio was primarily related to completion of significant tenant improvements during the year ended December 31, 2012 at The Landmark at One Market. The increase in maintenance capital expenditures in our office portfolio was primarily related to building remodeling and renovations at Torrey Reserve Campus, City Center Bellevue and Lloyd District Portfolio. The increase in maintenance capital expenditures in our mixed-use portfolio was related to scheduled hotel room renovations at the hotel. Redevelopment and expansion expenditures in our retail portfolio for the year ended December 31, 2012 reflect costs incurred in the development of Carmel Mountain Plaza. Redevelopment and expansion expenditures in our office portfolio for both the years ended December 31, 2013 and 2012 reflect costs incurred in the development of Torrey Reserve Campus. The increase in new development costs for the multifamily portfolio for the year ended December 31, 2013 is related to our redevelopment of the Lloyd District Portfolio to include multifamily units and retail leasing space, which began construction during the third quarter of 2013. 44 -------------------------------------------------------------------------------- Our capital expenditures during 2014 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of our development, held for development and construction in progress properties. While the amount of future expenditures will depend on numerous factors, we expect to incur higher amounts in 2014 compared to those incurred in 2013. We anticipate an increase in tenant improvements and leasing commissions noting lease expirations of approximately 7.1% in our total portfolio, assuming tenants do not exercise their options to extend their leases. Additionally, we expect capital expenditures for redevelopment and new development will increase year-over-year as construction activity continues at Torrey Reserve Campus and Lloyd District Portfolio. Impairment of Long-Lived Assets We review for impairment on a property by property basis. Impairment is recognized on properties held for use when the expected undiscounted cash flows for a property are less than its carrying amount at which time the property is written-down to fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows including revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over long periods. Since our properties typically have a long life, the assumptions used to estimate the future recoverability of book value requires significant management judgment. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income because recording an impairment charge results in a negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Properties held for sale are recorded at the lower of the carrying amount or the expected sales price less costs to sell. Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to fair value and such loss could be material. As of December 31, 2013 and 2012, none of our properties were impaired. Income Taxes We elected to be taxed as a REIT under the Code commencing with the taxable year ended December 31, 2011. To maintain our qualification as a REIT, we are required to distribute at least 90% of our net taxable income to our stockholders, excluding net capital gains, and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders. If we fail to maintain our qualification as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, our taxable income generally would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders.



We, together with one of our subsidiaries, have elected to treat such subsidiary as a taxable REIT subsidiary for federal income tax purposes. A taxable REIT subsidiary is subject to federal and state income taxes.

45 -------------------------------------------------------------------------------- Interest Rate Hedging We may use derivative instruments to manage exposure to variable interest rate risk. We may enter into interest rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the issuance of debt. Concurrent with the closing of the amended and restated credit facility on January 9, 2014, we entered into an interest rate swap agreement that is intended to fix the interest rate associated with the term loan at approximately 3.08% through its maturity date and extension options, subject to adjustments based on our consolidated leverage ratio. If and when we enter into derivative instruments, we ensure that such instruments qualify as cash flow hedges and would not enter into derivative instruments for speculative purposes. Any interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in other comprehensive income which is included in accumulated other comprehensive loss on our consolidated balance sheet and our consolidated statement of equity. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of the counterparty by monitoring the credit worthiness of the counterparty which includes reviewing debt ratings and financial performance. However, management does not anticipate non-performance by the counterparty. If a cash flow hedge is deemed ineffective, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected. Property Acquisitions and Dispositions 2013 Acquisitions and Dispositions During 2013, there were no acquisitions or dispositions. 2012 Acquisitions On January 24, 2012, we acquired One Beach Street, consisting of approximately 97,000 square feet in a three-story fully renovated historic office building located along the Embarcadero in San Francisco'sNorth Waterfront District. The purchase price was approximately $36.5 million, excluding closing costs of approximately $0.02 million, which are included in other income (expense), net on the statement of operations. On August 21, 2012, we acquired City Center Bellevue, a 27-story LEED-EB Gold certified office tower, consisting of approximately 497,000 square feet, located in Bellevue, Washington. The purchase price was approximately $228.8 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. Additionally, we received credits to our purchase price of approximately $6.9 million that primarily relate to outstanding tenant improvement obligations and rent abatements. On December 19, 2012, we acquired Geary Marketplace, a newly constructed, approximately 35,000 square foot, 100% leased, grocery-anchored shopping center in Walnut Creek, California. The purchase price was approximately $21.0 million, excluding closing costs of approximately $0.02 million, which are included in other income (expense), net on the statement of operations. 2012 Disposition On December 4, 2012, we sold 160 King Street located in San Francisco, California for a sales price of $93.8 million. The decision to sell 160 King Street reflects our strategy of taking advantage of market conditions to reallocate capital within our existing and future portfolio. The sale was completed as a reverse tax deferred exchange in conjunction with the acquisition of City Center Bellevue. As a result of the sale, 160 King Street no longer serves as a borrowing base property under our revolving credit facility. 2011 Acquisitions As part of the Formation Transactions, we acquired the controlling interests in the Waikiki Beach Walk entities and the Solana Beach Centre entities in exchange for common units of our Operating Partnership and shares of our common stock with a value of approximately $33.9 million. On March 11, 2011, we acquired First & Main, an approximately 361,000 square foot, 16-story, LEED Platinum certified office building located at 100 SW Main Street, in Portland, Oregon. The purchase price for First & Main was approximately $128.9 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. The purchase was structured to accommodate a reverse tax deferred exchange in conjunction with the sale of Valencia Corporate Center pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections. On July 1, 2011, we acquired the Lloyd District Portfolio, consisting of approximately 610,000 rentable square feet on more than 16 acres located in the Lloyd District of Portland, Oregon. The Lloyd District Portfolio is comprised of six office buildings within four contiguous blocks, including (i) a condominium interest in the 20-story Lloyd Tower, (ii) the 16-story Lloyd 700 Building and (iii) four low-rise landmark buildings within Oregon Square. The purchase price was approximately $91.6 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. We intend to evaluate further developing this property through the addition of retail, office and/or residential mixed-use development. However, we can offer no assurances that we will ultimately further develop this property. On September 20, 2011, we acquired the Solana Beach-Highway 101 property, consisting of approximately 1.7 acres located in Solana Beach, California. On December 14, 2011, we acquired an additional 0.2 acres adjacent to such location. The aggregate purchase price for this property was approximately $8.1 million, excluding closing costs of approximately $0.2 million, which are included in other income (expense), net on the statement of operations. We intend to evaluate developing this property into a retail, office and/or residential mixed-use site. However, we can offer no assurances that we will ultimately develop this property. The property currently includes approximately 2,800 rentable square feet, which we plan to lease until development begins, if at all. 2011 Disposition On August 30, 2011, we sold Valencia Corporate Center for a sales price of $31.0 million. The property is located in Santa Clarita, California. The decision to sell Valencia Corporate Center was a result of our desire to focus resources on our core, high-barrier-to-entry markets. The sale was completed as a reverse tax deferred exchange in conjunction with the acquisition of First & Main pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections. As a result of the sale, Valencia Corporate Center no longer serves as a borrowing base property under our revolving credit facility. Results of Operations For our discussion of results of operations, we have provided information on a total portfolio and same-store basis. Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012 The following summarizes our consolidated results of operations for the year ended December 31, 2013 compared to our consolidated results of operations for the year ended December 31, 2012. As of December 31, 2013 and 2012, our operating portfolio was comprised of 23 retail, office, multifamily and mixed-use properties with an aggregate of approximately 5.8 million rentable square feet of retail and office space (including mixed-use retail space), 922 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of December 31, 2013 and 2012, we owned land at five of our properties that we classified as held for development and construction in progress. 46 -------------------------------------------------------------------------------- The following table sets forth selected data from our consolidated statements of income for the years ended December 31, 2013 and 2012 (dollars in thousands): Year Ended December 31, 2013 2012 Change % Revenues Rental income $ 242,757$ 225,249$ 17,508 8 % Other property income 12,300 10,217 2,083 20 Total property revenues 255,057 235,466 19,591 8 Expenses Rental expenses 68,608 64,089 4,519 7 Real estate taxes 21,378 22,025 (647 ) (3 ) Total property expenses 89,986 86,114 3,872 4 Total property income 165,071 149,352 15,719 11 General and administrative (17,195 ) (15,593 ) (1,602 ) 10 Depreciation and amortization (66,775 ) (61,853 ) (4,922 ) 8 Interest expense (58,020 ) (57,328 ) (692 ) 1 Other (expense) income, net (487 ) (629 ) 142 (23 ) Total other, net (142,477 ) (135,403 ) (7,074 ) 5 Income from continuing operations 22,594 13,949 8,645 62 Discontinued operations Income from discontinued operations - 932 (932 ) (100 ) Gain on sale of real estate property - 36,720 (36,720 ) (100 ) Results from discontinued operations - 37,652 (37,652 ) (100 ) Net income 22,594 51,601 (29,007 ) (56 ) Net income attributable to restricted shares (536 ) (529 ) (7 ) 1 Net income attributable to unitholders in the Operating Partnership (6,838 ) (16,133 ) 9,295 (58 ) Net income attributable to American Assets Trust, Inc. stockholders $ 15,220$ 34,939$ (19,719 ) (56 )% Revenue Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased $19.6 million, or 8%, to $255.1 million for the year ended December 31, 2013 compared to $235.5 million for the year ended December 31, 2012. The percentage leased was as follows for each segment as of December 31, 2013 and 2012: Percentage Leased (1) Year Ended December 31, 2013 2012 Retail 97.0 % 97.0 % Office 89.8 % 93.3 % Multifamily 96.4 % 94.7 % Mixed-Use 97.8 % (2) 95.5 % (2)



(1) The percentage leased includes the square footage under lease, including

leases which may not have commenced as of December 31, 2013 or December 31,

2012, 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.

47 -------------------------------------------------------------------------------- Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased $17.5 million, or 8%, to $242.8 million for the year ended December 31, 2013 compared to $225.2 million for the year ended December 31, 2012. Rental revenue by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio (1) Year Ended December 31, Year Ended December 31, 2013 2012 Change % 2013 2012 Change % Retail $ 92,101$ 90,475$ 1,626 2 % $ 90,199$ 90,386$ (187 ) - % Office 86,395 75,582 10,813 14 39,474 38,679 795 2 Multifamily 14,933 13,806 1,127 8 14,933 13,806 1,127 8 Mixed-Use 49,328 45,386 3,942 9 49,328 45,386 3,942 9 $ 242,757$ 225,249$ 17,508 8 % $ 193,934$ 188,257$ 5,677 3 %



(1) For this table and tables following, the same-store portfolio excludes (i)

One Beach Street acquired on January 24, 2012, City Center Bellevue acquired

on August 21, 2012 and Geary Marketplace acquired on December 19, 2012, (ii)

Torrey Reserve Campus and Lloyd District Portfolio due to significant

redevelopment activity during the period and (iii) land held for development.

Retail rental revenue increased $1.6 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the acquisition of Geary Marketplace on December 19, 2012, which contributed additional rental revenue of $1.8 million for the year ended December 31, 2013. This increase was offset by same-store retail rental revenue, which decreased $0.2 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to a decrease in cost reimbursements related to the decrease in real estate tax expense for Lomas Santa Fe Plaza and Alamo Quarry Market. The decrease in same-store retail rental revenues was also attributed to the expiration of the Ross Dress for Less lease at Lomas Santa Fe Plaza on January 31, 2013. Office rental revenue increased $10.8 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the acquisition of City Center Bellevue on August 21, 2012, which contributed additional rental revenue of $11.4 million for the year ended December 31, 2013. The increase was also attributed to same-store office rental revenues, which increased $0.8 million for the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily due to the expiration of above-market leases at The Landmark at One Market. The increase in office rental revenue was partially offset by a decrease in rental revenues and cost reimbursements of approximately $1.2 million from Torrey Reserve Campus and Lloyd District Portfolio due to significant redevelopment activity during the year. Multifamily rental revenue increased $1.1 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the higher percentage leased and higher average base rent per leased unit for 2013 compared to 2012. The rental revenue for our mixed-use segment represents rental revenue recognized for minimum base rent, cost reimbursements, percentage rents and other rents charged to retail tenants and rental of hotel rooms. Mixed-use rental revenue increased $3.9 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to an increase in average revenue per available room from $235 in 2012 to $261 in 2013, which was attributed to the increase in the average daily rate at the hotel from $264 in 2012 to $299 for 2013 . The increase in mixed-use rental revenue is also attributed to higher rental rates to retail tenants at our mixed-use property. Other property income. Other property income increased $2.1 million, or 20%, to $12.3 million for the year ended December 31, 2013, compared to $10.2 million for the year ended December 31, 2012. Other property income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2013 2012 Change % 2013 2012 Change % Retail $ 1,348$ 1,516$ (168 ) (11 )% $ 1,347$ 1,514$ (167 ) (11 )% Office 4,132 2,519 1,613 64 519 391 128 33 Multifamily 1,192 1,046 146 14 1,192 1,046 146 14 Mixed-Use 5,628 5,136 492 10 5,628 5,136 492 10 $ 12,300$ 10,217$ 2,083 20 % $ 8,686$ 8,087$ 599 7 % 48

-------------------------------------------------------------------------------- Retail other property income decreased $0.2 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to a distribution of bankruptcy claim amounts from the liquidating trustee of our former Borders tenants, a lease termination fee paid by a tenant at Solana Beach Towne Center and a lease amendment fee paid by a tenant at Rancho Carmel Plaza during 2012. Office other property income increased $1.6 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the acquisition of City Center Bellevue on August 21, 2012, which contributed additional other property income of $1.8 million for the year ended December 31, 2013. Office other property income also increased approximately $0.2 million due to an increase in lease termination fees during 2013. These increases were partially offset by capitalized incidental operations at Lloyd District Portfolio and Sorrento Pointe in connection with development activities of approximately $0.4 million. Same-store office other property income increased $0.1 million for the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily due to an increase in parking revenue at First & Main and a lease termination fee received from a tenant at Solana Beach Corporate Center. Multifamily other property income increased $0.1 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to an increase in utility recoveries from residents, resulting from increases in utility expenses and average percentage leased at our multifamily properties. Mixed-use other property income increased $0.5 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to an increase in parking income, principally as a result of an increase occupancy at the hotel and an increase in the overnight hotel guest parking rate from $30/day to $35/day effective January 2013. Property Expenses Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $3.9 million, or 4%, to $90.0 million for the year ended December 31, 2013, compared to $86.1 million for the year ended December 31, 2012. This increase in total property expenses was attributable primarily to the factors discussed below. Rental Expenses. Rental expenses increased $4.5 million, or 7%, to $68.6 million for the year ended December 31, 2013, compared to $64.1 million for the year ended December 31, 2012. Rental expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2013 2012 Change % 2013 2012 Change % Retail $ 14,194$ 13,863$ 331 2 % $ 13,860$ 13,845$ 15 - % Office 18,468 16,407 2,061 13 7,917 7,595 322 4 Multifamily 4,339 4,159 180 4 4,339 4,159 180 4 Mixed-Use 31,607 29,660 1,947 7 31,607 29,660 1,947 7 $ 68,608$ 64,089$ 4,519 7 % $ 57,723$ 55,259$ 2,464 4 % Retail rental expenses increased $0.3 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 due to the acquisition of Geary Marketplace on December 19, 2012, which contributed additional rental expenses of $0.3 million for the year ended December 31, 2013. Office rental expenses increased $2.1 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the acquisition of City Center Bellevue on August 21, 2012, which had rental expenses of of $2.3 million for the year ended December 31, 2013. The increase was also attribute to same-store office rental expenses, which increased $0.3 million for the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily due to an increase in on-site personnel costs and increase in building expenses for our sublease of the Annex at the Landmark at One Market. The increase in office rental expenses was partially offset by a decrease in property management fees of approximately $0.5 million due to the fact that Langley Investment Properties, Inc. who managed and operated the Lloyd District Portfolio, stopped managing and operating the Lloyd District Portfolio in the first quarter of 2013. Multifamily rental expenses increased $0.2 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to an increase in utility expenses at our multifamily properties during the period. 49 -------------------------------------------------------------------------------- Mixed-use rental expenses increased $1.9 million or the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to an increase in advertising and management fees at both the hotel and retail portions of Waikiki Beach Walk. Additionally food and beverage expenses increased at the hotel portion of Waikiki Beach Walk during the year ended December 31, 2013 due to increased cost of supplies. Real Estate Taxes. Real estate tax expense decreased $0.6 million, or 3%, to $21.4 million for the year ended December 31, 2013, compared to $22.0 million for the year ended December 31, 2012. Real estate tax expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2013 2012 Change % 2013 2012 Change % Retail $ 9,706$ 11,092$ (1,386 ) (12 )% $ 9,375$ 10,992$ (1,617 ) (15 )% Office 8,220 7,373 847 11 4,260 3,986 274 7 Multifamily 1,578 1,755 (177 ) (10 ) 1,578 1,755 (177 ) (10 ) Mixed-Use 1,874 1,805 69 4 1,874 1,805 69 4 $ 21,378$ 22,025$ (647 ) (3 )% $ 17,087$ 18,538$ (1,451 ) (8 )% Retail real estate taxes decreased $1.4 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to lower property tax expense at same-store properties, mainly at Lomas Santa Fe Plaza and Alamo Quarry Market based on refunds received during 2013. The decrease was also related to additional taxes that were paid during 2012 as a result of supplemental tax bills from the California taxing authority for fiscal year 2011. These decreases were partially offset by the acquisition of Geary Marketplace on December 19, 2012, which contributed additional real estate tax expense of $0.3 million for the year ended December 31, 2013. Office real estate taxes increased $0.8 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the acquisition of City Center Bellevue on August 21, 2012, which contributed additional real estate taxes of $0.7 million for the year ended December 31, 2013. The increase was also related to higher assessments of our same-store office properties, which were partially offset by property tax exemptions to tenants at First & Main and One Beach Street. These increases were also partially offset by capitalization of property taxes at Sorrento Pointe, which development activity commenced during the third quarter of 2013. Multifamily real estate taxes decreased $0.2 million or the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to refunds received at the multifamily properties for successful appeals of property value reductions and additional taxes for fiscal year 2011 that were paid during 2012 as a result of supplemental tax bills from the California taxing authority for fiscal year 2011. Property Operating Income. Property operating income increased $15.7 million, or 11%, to $165.1 million for the year ended December 31, 2013, compared to $149.4 million for the year ended December 31, 2012. Property operating income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2013 2012 Change % 2013 2012 Change % Retail $ 69,549$ 67,036$ 2,513 4 % $ 68,311$ 67,063$ 1,248 2 % Office 63,839 54,321 9,518 18 27,816 27,489 327 1 Multifamily 10,208 8,938 1,270 14 10,208 8,938 1,270 14 Mixed-Use 21,475 19,057 2,418 13 21,475 19,057 2,418 13 $ 165,071$ 149,352$ 15,719 11 % $ 127,810$ 122,547$ 5,263 4 % Retail property operating income increased $2.5 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the acquisition of Geary Marketplace on December 19, 2012, which contributed additional retail property operating income of $1.2 million for the year ended December 31, 2013. The increase was also 50 -------------------------------------------------------------------------------- attributed to the decrease in property tax expense for same-store properties, mainly at Lomas Santa Fe Plaza and Alamo Quarry Market. Office property operating income increased $9.5 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the acquisition of City Center Bellevue on August 21, 2012, which contributed additional office operating income of $10.2 million for the year ended December 31, 2013. This increase was partially offset by a decrease in office operating income from Torrey Reserve Campus and Lloyd District Portfolio due to significant redevelopment activity during the quarter. On a same-store basis, office property operating income increased $0.3 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to the expiration of above-market leases at The Landmark at One Market. The increase was minimally offset by increases in rental expenses and real estate tax assessments for same-store properties. Multifamily property operating income increased $1.3 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to increases in the percentage leased and average base rent per leased unit for 2013 compared to 2012. The increase was also attributed to a decrease in real estate taxes during year ended December 31, 2013. Mixed-use property operating income increased $2.4 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to an increase in the average revenue per available room from $235 for 2012 to $261 for 2013, which was partially offset by an increase in rental expenses for the hotel. Other General and administrative. General and administrative expenses increased $1.6 million, or 10%, to $17.2 million for the year ended December 31, 2013, compared to $15.6 million for the year ended December 31, 2012. This increase was primarily due to higher personnel costs, including higher incentive compensation expense associated with the Company's Incentive Bonus Plan, effective October 16, 2013. Depreciation and amortization. Depreciation and amortization expense increased $4.9 million, or 8%, to $66.8 million for the year ended December 31, 2013, compared to $61.9 million for the year ended December 31, 2012. This increase was primarily due to depreciation and amortization attributable to properties acquired during 2012. Interest expense. Interest expense increased $0.7 million, or 1%, to $58.0 million for the year ended December 31, 2013 compared with $57.3 million for the year ended December 31, 2012. This increase was primarily due to interest expense on the mortgage loans issued with respect to One Beach Street on March 29, 2012 and City Center Bellevue on October 12, 2012, offset by amounts capitalized to construction. Discontinued Operations. Discontinued operations relates to our sale of 160 King Street on December 4, 2012. Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011 The following summarizes the historical results of operations for the year ended December 31, 2012 compared to our consolidated results of operations for the year ended December 31, 2011. As of December 31, 2012, our operating portfolio was comprised of 23 retail, office, multifamily and mixed-used properties with an aggregate of approximately 5.8 million rentable square feet of retail and office space (including mixed-use retail space), 922 residential units (including 122 RV spaces) and a 369-room hotel. Additionally, as of December 31, 2012, we owned land at five of our properties that we classified as held for development. As of December 31, 2011, our operating portfolio was comprised of 20 properties with an aggregate of approximately 5.2 million rentable square feet of retail and office space and 922 residential units (including 122 RV spaces) and a 369-room hotel. At December 31, 2011, we owned land at two of our properties that we classified as held for development. 51 -------------------------------------------------------------------------------- The following table sets forth selected data from our consolidated statements of income for the years ended December 31, 2012 and 2011 (dollars in thousands): Year Ended December 31, 2012 2011 Change % Revenues Rental income $ 225,249$ 194,168$ 31,081 16 % Other property income 10,217 8,617 1,600 19 Total property revenues 235,466 202,785 32,681 16 Expenses Rental expenses 64,089 58,133 5,956 10 Real estate taxes 22,025 18,746 3,279 17 Total property expenses 86,114 76,879 9,235 12 Total property income 149,352 125,906 23,446 19 General and administrative (15,593 ) (13,627 ) (1,966 ) 14 Depreciation and amortization (61,853 ) (55,936 ) (5,917 ) 11 Interest expense (57,328 ) (54,580 ) (2,748 ) 5 Early extinguishment of debt - (25,867 ) 25,867 (100 ) Loan transfer and consent fees - (8,808 ) 8,808 (100 ) Gain on acquisition - 46,371 (46,371 ) (100 ) Other (expense) income, net (629 ) 212 (841 ) (397 ) Total other, net (135,403 ) (112,235 ) (23,168 ) 21 Income from continuing operations 13,949 13,671 278 2 Discontinued operations Income from discontinued operations 932 1,672 (740 ) (44 ) Gain on sale of real estate property 36,720 3,981 32,739 822 Results from discontinued operations 37,652 5,653 31,999 566 Net income 51,601 19,324 32,277 167 Net income attributable to restricted shares (529 ) (482 ) (47 ) 10 Net loss attributable to Predecessor's noncontrolling interests in consolidated real estate entities - 2,458 (2,458 ) (100 ) Net income attributable to Predecessor's controlled owners' equity - (16,995 ) 16,995 (100 ) Net income attributable to unitholders in the Operating Partnership (16,133 ) (1,388 ) (14,745 ) 1,062 Net income attributable to American Assets Trust, Inc. stockholders $ 34,939$ 2,917$ 32,022 1,098 % 52

--------------------------------------------------------------------------------



Revenue

Total property revenues. Total property revenue consists of rental revenue and other property income. Total property revenue increased $32.7 million, or 16%, to $235.5 million for the year ended December 31, 2012 compared to $202.8 million for the year ended December 31, 2011. The percentage leased was as follows for each segment as of December 31, 2012 and 2011: Percentage Leased (1) Year Ended December 31, 2012 2011 Retail 97.0 % 95.0 % Office 93.3 % (2) 93.9 % (2) Multifamily 94.7 % 91.8 % Mixed-Use 95.5 % (3) 99.2 %



(1) The percentage leased includes the square footage under lease, including

leases which may not have commenced as of December 31, 2012 or December 31,

2011, as applicable.

(2) Excludes Valencia Corporate Center, which was sold on August 30, 2011 and 160

King Street, which was sold on December 4, 2012.

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

The increase in total property revenue was attributable primarily to the factors discussed below. Rental revenues. Rental revenue includes minimum base rent, cost reimbursements, percentage rents and other rents. Rental revenue increased $31.0 million, or 16%, to $225.2 million for the year ended December 31, 2012 compared to $194.2 million for the year ended December 31, 2011. Rental revenue by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio (1) Year Ended December 31, Year Ended December 31, 2012 2011 Change % 2012 2011 Change % Retail $ 90,475$ 85,143$ 5,332 6 % $ 81,498$ 77,667$ 3,831 5 % Office 75,582 55,902 19,680 35 35,713 35,062 651 2 Multifamily 13,806 13,258 548 4 13,806 13,258 548 4 Mixed-Use 45,386 39,865 5,521 14 - - - - $ 225,249$ 194,168$ 31,081 16 % $ 131,017$ 125,987$ 5,030 4 %



(1) For this table and tables following, the same-store portfolio excludes:

Solana Beach Towne Centre, Solana Beach Corporate Centre and the Waikiki

Beach Walk entities acquired on January 19, 2011; First & Main acquired on

March 11, 2011; Lloyd District Portfolio acquired on July 1, 2011; One Beach

Street acquired on January 24, 2012; City Center Bellevue acquired on August

21, 2012; Geary Marketplace acquired on December 19, 2012; and land held for

development. Valencia Corporate Center and 160 King Street are excluded from

both the total portfolio and same-store portfolio, as they are classified as

discontinued operations for all periods presented.

On a same store basis, retail rental revenue increased $3.8 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. This increase was primarily due to the increase in the average percentage leased, which was primarily related to the re-leasing of our three former Borders spaces during 2012 with an average increased cash basis rent of 25.7% per square foot. The increase was also due to additional cost reimbursements, primarily related to supplemental tax billings received during 2012 for Carmel Mountain Plaza, Lomas Santa Fe Plaza, and Solana Beach Towne Center. The increase in office rental revenue was primarily caused by the acquisition of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had rental revenue of $3.9 million and $6.3 million, respectively, from acquisition through December 31, 2012. Additionally, our acquisitions of Solana Beach Corporate Center, First & Main and Lloyd District Portfolio in 2011 represented $8.9 million of the increase in rental revenue during 2012. Same-store office rental revenue increased $0.7 million for the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily due to higher base rents for new tenants and additional cost reimbursements. The increase in multifamily rental revenue was primarily due to a higher percentage leased for 2012 compared to 2011. The rental revenue for our mixed-use segment represents rental revenue recognized for minimum base rent, cost reimbursements, percentage rents and other rents charged to retail tenants and rental of hotel rooms. The increase in mixed-use 53 -------------------------------------------------------------------------------- rental revenue was due to increased tourist travel to Hawaii, which led to higher hotel revenue and an increase in the average occupancy from 88% in 2011 to 89% in 2012, and an increase in our average daily rate from $239 in 2011 to $264 in for 2012 . As a result, the average revenue per available room increased from $212 in 2011 to $235 in 2012. Other property income. Other property income increased $1.6 million, or 19%, to $10.2 million for the year ended December 31, 2012, compared to $8.6 million for the year ended December 31, 2011. Other property income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2012 2011 Change % 2012 2011 Change % Retail $ 1,516$ 1,368$ 148 11 % $ 1,457$ 1,367$ 90 7 % Office 2,519 1,417 1,102 78 287 331 (44 ) (13 ) Multifamily 1,046 1,063 (17 ) (2 ) 1,046 1,063 (17 ) (2 ) Mixed-Use 5,136 4,769 367 8 - - - - $ 10,217$ 8,617$ 1,600 19 % $ 2,790$ 2,761$ 29 1 % The increase in retail other property income was due to a distribution of bankruptcy claim amounts from the liquidating trustee of our former Borders tenants, a lease amendment fee paid by a tenant at Rancho Carmel Plaza and a lease termination fee paid by a tenant at Solana Beach Towne Center that were received during the fourth quarter of 2012, offset by a lease termination fee paid by a tenant at Del Monte Center during 2011. The increase in office other property income was caused by the acquisition of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had combined other property income of $0.7 million for the year ended December 31, 2012. Additionally, our 2011 acquisitions of First & Main and Lloyd District Portfolio contributed approximately $0.4 million of the increase in office other property income in 2012, of which $0.3 million is attributed to parking income generated from Lloyd District Portfolio. Other property income for our mixed-use segment represents Hawaii general excise tax reimbursements, parking income related to retail tenants and guests and sales of food and beverages and other services provided to hotel guests. The increase in mixed-use other property income was attributed to the increase in average occupancy at the hotel in 2012. Property Expenses Total Property Expenses. Total property expenses consist of rental expenses and real estate taxes. Total property expenses increased by $9.2 million, or 12%, to $86.1 million for the year ended December 31, 2012, compared to $76.9 million for the year ended December 31, 2011. This increase in total property expenses was attributable primarily to the factors discussed below. Rental Expenses. Rental expenses increased $6.0 million, or 10%, to $64.1 million for the year ended December 31, 2012, compared to $58.1 million for the year ended December 31, 2011. Rental expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31,



Year Ended December 31,

2012 2011 Change % 2012 2011 Change % Retail $ 13,863$ 14,825$ (962 ) (6 )% $ 13,057$ 13,991$ (934 ) (7 )% Office 16,407 12,005 4,402 37 6,958 7,290 (332 ) (5 ) Multifamily 4,159 4,243 (84 ) (2 ) 4,159 4,243 (84 ) (2 ) Mixed-Use 29,660 27,060 2,600 10 - - - - $ 64,089$ 58,133$ 5,956 10 % $ 24,174$ 25,524$ (1,350 ) (5 )% The decrease in retail rental expenses was primarily due to an allowance recorded for an outstanding deferred rent receivable from Kmart at one property during the fourth quarter of 2011, which was minimally offset by higher premiums on 54 -------------------------------------------------------------------------------- our insurance policies, additional maintenance expenditures and increased operating costs related to the increase in the average percentage leased for 2012. The increase in office rental expenses was caused by the acquisitions of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which had rental expense of $0.7 million and $1.3 million, respectively, for the year ended December 31, 2012. Our acquisitions of Solana Beach Corporate Center, First & Main and Lloyd District Portfolio in 2011 contributed $2.7 million to the increase in rental expenses during 2012. This increase was also caused by higher premiums on our insurance policies. The decrease in same-store office rental expenses for the year ended December 31, 2012 was primarily due to a decrease in maintenance performed at various properties. The increase in mixed-use rental expenses was attributed to the increase in average occupancy at our hotel in 2012. Real Estate Taxes. Real estate tax expense increased $3.3 million, or 17%, to $22.0 million for the year ended December 31, 2012, compared to $18.7 million for the year ended December 31, 2011. Real estate tax expense by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2012 2011 Change % 2012 2011 Change % Retail $ 11,092$ 9,687$ 1,405 15 % $ 9,793$ 9,005$ 788 9 % Office 7,373 6,010 1,363 23 4,124 4,058 66 2 Multifamily 1,755 1,335 420 31 1,755 1,335 420 31 Mixed-Use 1,805 1,714 91 5 - - - - $ 22,025$ 18,746$ 3,279 17 % $ 15,672$ 14,398$ 1,274 9 % The increase in retail real estate taxes was primarily due to additional taxes that were paid with respect to certain retail properties during 2012 as a result of supplemental tax bills from the California taxing authority for fiscal year 2011. These increases were primarily at Carmel Mountain Plaza, Lomas Santa Fe Plaza and Solana Beach Towne Center, each of which received higher property assessments that resulted in increased real estate taxes of $0.4 million, $0.3 million, and $0.5 million, respectively, for the year ended December 31, 2012. The increase in office real estate taxes was primarily caused by the acquisitions of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which each had real estate taxes of $0.3 million from acquisition through December 31, 2012. Additionally, our acquisitions of First & Main on March 11, 2011 and Lloyd District Portfolio on July 1, 2011 contributed an additional $0.3 million and $0.5 million, respectively, of real estate taxes for the year ended December 31, 2012. On a same-store basis, office real estate tax increased due to the receipt in 2012 of the supplemental tax bills from the California for fiscal year 2011. The increase in multifamily real estate taxes was primarily due to additional real estate tax accruals for all multifamily properties based on supplemental tax bills from the California taxing authority received during 2012, which are not reimbursable. 55 -------------------------------------------------------------------------------- Property Operating Income Property operating income increased $23.5 million, or 19%, to $149.4 million for the year ended December 31, 2012, compared to $125.9 million for the year ended December 31, 2011. Property operating income by segment was as follows (dollars in thousands): Total Portfolio Same-Store Portfolio Year Ended December 31, Year Ended December 31, 2012 2011 Change % 2012 2011 Change % Retail $ 67,036$ 61,999$ 5,037 8 % $ 60,105$ 56,038$ 4,067 7 % Office 54,321 39,304 15,017 38 24,918 24,045 873 4 Multifamily 8,938 8,743 195 2 8,938 8,743 195 2 Mixed-Use 19,057 15,860 3,197 20 - - - - $ 149,352$ 125,906$ 23,446 19 % $ 93,961$ 88,826$ 5,135 6 % The increase in retail property operating income was primarily due to increased rental revenue related to the increase in the average percentage leased during 2012 and a decrease in rental expenses specifically related to an allowance recorded for an outstanding deferred rent receivable from Kmart during the fourth quarter of 2011. The increase in office property operating income was primarily caused by the acquisitions of One Beach Street on January 24, 2012 and City Center Bellevue on August 21, 2012, which each had operating income of $2.9 million and $5.3 million, respectively, from acquisition through December 31, 2012. Additionally, our acquisitions of Solana Beach Corporate Centre on January 19, 2011, First & Main on March 11, 2011 and Lloyd District Portfolio on July 1, 2011, contributed additional property operating income of $0.7 million, $2.2 million and $3.2 million, respectively, for the year ended December 31, 2012. On a same-store basis, office property operating income increased $0.9 million for the year ended December 31, 2012 compared to the year ended December 31, 2011 primarily due to higher base rents for new tenants and additional cost reimbursements. The increase in multifamily property operating income was primarily due to a higher percentage leased for 2012 compared to 2011. Mixed-use property operating income primarily increased due to increased tourist travel to Hawaii with average occupancy for 2012 of 89% compared to 88% for 2011. Additionally, average revenue per available room was $235 and $212 for 2012 and 2011, respectively. Other General and administrative. General and administrative expenses increased $2.0 million, or 14%, to $15.6 million for the year ended December 31, 2012, compared to $13.6 million for the year ended December 31, 2011. This increase was primarily due to higher personnel costs and additional costs associated with properties acquired in 2011 and 2012. Depreciation and amortization. Depreciation and amortization expense increased $5.9 million, or 11%, to $61.9 million for the year ended December 31, 2012, compared to $55.9 million for the year ended December 31, 2011. This increase was primarily due to depreciation and amortization attributable to properties acquired in 2011 and 2012. Interest expense. Interest expense increased $2.7 million, or 5%, to $57.3 million for the year ended year ended December 31, 2012 compared with $54.6 million for the year ended December 31, 2011. This increase was primarily due to interest expense on the mortgage loans obtained on First & Main on June 1, 2011, One Beach Street on March 29, 2012 and City Center Bellevue on October 10, 2012. Additionally, the year ended December 31, 2012 includes interest expense on the properties acquired at the time of our initial public offering for the entire 12-month period compared to only the period from January 19, 2011 through December 31, 2011. This increase was partially offset by a decrease in utilization fees on our revolving line of credit resulting from the amendment to the line of credit in January 2012 and an increase in capitalized interest of $0.7 million. Early extinguishment of debt. Early extinguishment of debt includes $24.3 million in defeasance costs, $0.6 million of unamortized deferred loan fees and $0.9 million of unamortized debt fair value adjustments that were written off related to loans repaid at the time of our initial public offering. 56 -------------------------------------------------------------------------------- Loan transfer and consent fees. Loan transfer and consent fees relate to fees paid to lenders in order for the lenders to consent to the transfer of the existing loans at certain properties to the Operating Partnership as part of the Formation Transactions. Gain on acquisition. The gain on acquisition for the year ended December 31, 2011 relates to the gains recognized on the acquisition of the outside ownership interests in the Solana Beach Centre entities and the Waikiki Beach Walk entities. Other (expense) income, net. Other (expense) income, net decreased $0.8 million, or 397%, to net income of $0.6 million for the year ended December 31, 2012, compared to net expense of $0.2 million for the year ended December 31, 2011. Other income (expense), net is comprised of interest and investment income, acquisition related expenses, and income tax expense related to our taxable REIT subsidiary, which operates the hotel portion of our mixed-use property. The decrease was mainly due to a reduction in investment income related to the sale of our Government National Mortgage Association securities. Discontinued Operations. Discontinued operations relates to our sale of 160 King Street on December 4, 2012 and Valencia Corporate Center on August 30, 2011. Liquidity and Capital Resources Analysis of Liquidity and Capital Resources Due to the nature of our business, we typically generate significant amounts of cash from operations. The cash generated from operations is used for the payment of operating expenses, capital expenditures, debt service and dividends to our stockholders and Operating Partnership unitholders. As a REIT, we must generally make annual distributions to shareholders of at least 90% of our net taxable income. As of December 31, 2013, we held $49.0 million in cash and cash equivalents. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements, dividend payments to our stockholders required to maintain our REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash and, if necessary, borrowings available under the credit facility. Our long-term liquidity needs consist primarily of funds necessary to pay for the repayment of debt at maturity, property acquisitions, tenant improvements and capital improvements. We expect to meet our long-term liquidity requirements to pay scheduled debt maturities and to fund property acquisitions and capital improvements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We also may fund property acquisitions and capital improvements using our credit facility pending permanent financing. We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot be assured that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our company. Our overall capital requirements will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of Torrey Reserve Campus and Lloyd District Portfolio. While the amount of future expenditures will depend on numerous factors, we expect to continue to see higher levels of capital investments in our properties under development and redevelopment, partly as a result of an additional 81,500 square feet of office space under development at Torrey Reserve Campus, which we expect to complete during 2014 and invest an additional approximate $15 million. Additionally, construction at Lloyd District Portfolio is ongoing and is expected to be complete in 2015, which will result in approximately 47,000 additional square feet of retail space and 657 multi-family units. Over the next two years, we expect to invest approximately $161 million to complete the construction at Lloyd District Portfolio. Our capital investments will be funded on a short-term basis with cash on hand, cash flow from operations and/or our revolving credit facility. 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 under our ATM equity program (discussed below). Given our past ability to access the capital markets, we expect debt or equity to be available to us. 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. 57 -------------------------------------------------------------------------------- In February 2012, we filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective in February 2012. The universal shelf registration statement may permit us, from time to time, to offer and sell up to an additional approximately $500.0 million of equity securities. However, there can be no assurance that we will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include investor perception of our prospects and the general condition of the financial markets, among others. On May 6, 2013, we entered into an at-the-market, or ATM, equity program with four sales agents in which we may from time to time offer and sell shares of our common stock having an aggregate offering price of up to $150.0 million. The sales of shares of our common stock made through the ATM equity program are made in "at-the-market" offerings as defined in Rule 415 of the Securities Act. As of December 31, 2013, we have issued 741,452 shares of common stock at a weighted average price per share of $35.00 for gross cash proceeds of $26.0 million. We intend to use the net proceeds to fund our development or redevelopment activities, repay amounts outstanding from time to time under our revolving credit facility or other debt financing obligations, fund potential acquisition opportunities and/or for general corporate purposes. As of December 31, 2013, we had the capacity to issue up to an additional $124.0 million in shares of common stock under our ATM equity program. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under the ATM equity program. Contractual Obligations The following table outlines the timing of required payments related to our commitments as of December 31, 2013 (dollars in thousands): Payments by



Period

Within More than Contractual Obligations Total 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years Principal payments on long-term indebtedness $ 1,055,259$ 142,276$ 235,980$ 206,974$ 190,139$ 75,224$ 204,666 Interest payments 172,253 50,121 37,774



28,093 20,431 12,619 23,215 Operating lease (1) 10,611 2,569 2,636 1,709

736 740 2,221



Tenant-related

commitments 12,215 11,293 922 - - - -



Construction-related

commitments 38,213 35,151 3,062 - - - - Total $ 1,288,551$ 241,410$ 280,374$ 236,776$ 211,306$ 88,583$ 230,102



(1) Lease payments on the Waikiki Beach Walk lease will be equal to fair rental

value from March 2017 through the end of the lease term. In the table, we

have shown the lease payments for this period at the stated rate for February

2017 of $61,690. 58

-------------------------------------------------------------------------------- Indebtedness Outstanding The following table sets forth information as of December 31, 2013, with respect to our secured notes indebtedness (dollars in thousands): Principal Annual Balance at Debt Balance at Debt December 31, 2013 Interest Rate Service Maturity Date Maturity Waikele Center (1) $ 140,700 5.15 % $ 147,437 November 1, 2014 $ 140,700 The Shops at Kalakaua (1) 19,000 5.45 % 1,053 May 1, 2015 19,000 The Landmark at One Market (1)(2) 133,000 5.61 % 7,558 July 5, 2015 133,000 Del Monte Center (1) 82,300 4.93 % 4,121 July 8, 2015 82,300 First & Main (1) 84,500 3.97 % 3,397 July 1, 2016 84,500 Imperial Beach Gardens (1) 20,000 6.16 % 1,250 September 1, 2016 20,000 Mariner's Point (1) 7,700 6.09 % 476 September 1, 2016 7,700 South Bay Marketplace (1) 23,000 5.48 % 1,281 February 10, 2017 23,000 Waikiki Beach Walk-Retail (1) 130,310 5.39 % 7,020 July 1, 2017 130,310 Solana Beach Corporate Centre III-IV 36,804 6.39 % 2,798 August 1, 2017 35,136 Loma Palisades (1) 73,744 6.09 % 4,553 July 1, 2018 73,744 One Beach Street (1) 21,900 3.94 % 875 April 1, 2019 21,900 Torrey Reserve-North Court (3) 21,377 7.22 % 1,836 June 1, 2019 19,443 Torrey Reserve-VC1, VC2, VC3 (3) 7,200 6.36 % 560 June 1, 2020 6,439 Solana Beach Corporate Centre I-II (3) 11,475 5.91 % 855 June 1, 2020 10,169 Solana Beach Towne Centre (3) 38,249 5.91 % 2,849 June 1, 2020 33,898 City Center Bellevue (1) 111,000 3.98 % 4,479 November 1, 2022 111,000 Total/Weighted Average $ 962,259 5.22 % $ 192,398$ 952,239 Unamortized fair value adjustment (10,085 ) Debt Balance $ 952,174 (1) Interest only.



(2) Maturity date is the earlier of the loan maturity date under the loan

agreement, or the "Anticipated Repayment Date" as specifically defined in the

loan agreement, which is the date after which substantial economic penalties

apply if the loan has not been paid off.

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

Certain loans require us to comply with various financial covenants, including the maintenance of minimum debt coverage ratios. As of December 31, 2013, we were in compliance with all loan covenants. Description of Certain Debt The following is a summary of the material provisions of the loan agreements evidencing our material debt outstanding as of December 31, 2013. Mortgage Loan Secured by Waikele Center The Waikele Center is subject to senior mortgage debt with an original principal amount of $140.7 million, which is securitized debt that is currently held by Bank of America, N.A., as successor by merger to LaSalle Bank, N.A., as Trustee for Morgan Stanley Capital I, Inc., Commercial Mortgage Pass-Through Certificates, Series 2005-TOP17. Maturity and Interest. The loan has a maturity date of November 1, 2014 and bears interest at a fixed rate per annum of 5.15%. This is an interest only loan. Security. The loan was made to two borrower subsidiaries, and is secured by a first-priority deed of trust on the Waikele Center, a security interest in all personal property used in connection with the Waikele Center and an assignment of all leases, rents and security deposits relating to the property. 59 -------------------------------------------------------------------------------- Prepayment. The loan may be voluntarily defeased in whole or in part, subject to satisfaction of customary defeasance requirements in effect for a prepayment prior to November 1, 2014, at which time the loan may be voluntarily prepaid without penalty or premium. Events of Default. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. Mortgage Loan Secured by The Landmark at One Market The Landmark at One Market is subject to senior mortgage debt with an original principal amount of $133.0 million, which is securitized debt that is currently held by Bank of America, N.A., as successor by merger to LaSalle Bank, N.A., as Trustee for the Morgan Stanley Capital I, Inc. Commercial Mortgage Pass-Through Certificates; Series 2005-HQ6. Maturity and Interest. The loan has a maturity date of July 5, 2015 and bears interest at a fixed rate per annum of 5.61%. This is an interest only loan. Security. The loan was made to two borrower subsidiaries, and is secured by a first-priority deed of trust on The Landmark at One Market, a security interest in all personal property used in connection with The Landmark at One Market and an assignment of all leases, rents and security deposits relating to the property. Prepayment. The loan may be voluntarily defeased in whole or in part, subject to satisfaction of customary defeasance requirements in effect for a prepayment prior to July 5, 2015, at which time the loan may be voluntarily prepaid without penalty or premium. Events of Default. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan and bankruptcy or other insolvency events. Mortgage Loan Secured by Del Monte Center Del Monte Center is subject to senior mortgage debt with an original principal amount of $82.3 million, which is securitized debt that is currently held by Wells Fargo Bank, N.A., as Trustee for the registered Holders of Credit Suisse First Boston Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2005-C5 under that certain Pooling and Servicing Agreement, dated as of November 1, 2005. Maturity and Interest. The loan has a maturity date of July 8, 2015 and bears interest at a fixed rate per annum of 4.93%. This is an interest only loan. Security. The loan was made to four borrower subsidiaries, and is secured by a first-priority deed of trust on the Del Monte Center property, a security interest in all personal property used in connection with the Del Monte Center property and an assignment of all leases, rents and security deposits relating to the property. Prepayment. The loan may be voluntarily defeased in whole or in part, subject to satisfaction of customary defeasance requirements in effect for a prepayment prior to July 8, 2015, at which time the loan may be voluntarily prepaid without penalty or premium. Events of Default. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. Mortgage Loan Secured by First & Main First & Main is subject to senior mortgage debt with an original principal amount of $84.5 million from PNC Bank, National Association. Maturity and Interest. The loan has a maturity date of July 1, 2016 and bears interest at a fixed rate per annum of 3.97%. This is an interest only loan. 60 -------------------------------------------------------------------------------- Security. The loan was made to a single borrower subsidiary, and is secured by a first-priority deed of trust on First & Main, a security interest in all personal property used in connection with First & Main and an assignment of all leases, rents and security deposits relating to the property. Prepayment. The loan may be voluntarily prepaid in whole or in part, subject to satisfaction of customary yield maintenance requirements in effect for a prepayment prior to March 1, 2016. On or after March 1, 2016, the loan may be voluntarily prepaid without penalty or premium. Events of Default. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan and bankruptcy or other insolvency events. Mortgage Loan Secured by Waikiki Beach Walk-Retail The retail portion of Waikiki Beach Walk is subject to senior mortgage debt with an original principal amount of $130.3 million, which is securitized debt that is currently held by KeyCorp Real Estate Capital Markets, Inc. d/b/a Key Bank Real Estate Capital as Master Servicer in trust for Wells Fargo Bank, N.A., as trustee for the registered Holders of Credit Suisse First Boston Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2008-C1. Maturity and Interest. The loan has a maturity date of July 1, 2017 and bears interest at a fixed rate per annum of 5.39%. This is an interest only loan. Security. The loan was made to a single borrower subsidiary, and is secured by a first-priority deed of trust on the retail portion of Waikiki Beach Walk, a security interest in all personal property used in connection with therewith and an assignment of all leases, rents and security deposits relating to the retail portion of the property. Prepayment. The loan may be voluntarily defeased in whole or in part, subject to satisfaction of customary defeasance requirements in effect for a prepayment prior to July 1, 2017, after which time the loan may be voluntarily prepaid without penalty or premium. Events of Default. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. Mortgage Loan Secured by Loma Palisades Loma Palisades is subject to senior mortgage debt with an original principal amount of $73.7 million, which is securitized debt under the Federal Home Loan Mortgage Corporation program, or Freddie Mac, that is currently held by Wells Fargo Bank, N.A. Maturity and Interest. The loan has a maturity date of July 1, 2018 and bears interest at a rate per annum of 6.09%. This is an interest only loan. Security. The loan was made to a single borrower subsidiary, and is secured by a first-priority deed of trust lien on Loma Palisades, a security interest in all personal property used in connection with Loma Palisades and an assignment of all leases, rents and security deposits relating to the property. Prepayment. The loan may be voluntarily prepaid in whole or in part, subject to satisfaction of customary yield maintenance requirements in effect for a prepayment prior to April 1, 2018, at which time the loan may be voluntarily prepaid without penalty or premium. Events of Default. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan and bankruptcy or other insolvency events. Mortgage Loan Secured by City Center Bellevue City Center Bellevue is subject to senior mortgage debt with an original principal amount of $111.0 million from PNC Bank, National Association. Maturity and Interest. The loan has a maturity date of November 1, 2022 and bears interest at a fixed rate per annum of 3.98%. This is an interest only loan. 61 -------------------------------------------------------------------------------- Security. The loan was made to a single borrower subsidiary, and is secured by a first-priority deed of trust on City Center Bellevue, a security interest in all personal property used in connection with City Center Bellevue and an assignment of all leases, rents and security deposits relating to the property. Prepayment. The loan may be voluntarily prepaid in whole or in part commencing on or after November 1, 2015, subject to satisfaction of customary yield maintenance requirements in effect for a prepayment prior to May 1, 2022. On or after May 1, 2022, the loan may be voluntarily prepaid without penalty or premium. Events of Default. The loan agreement contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan and bankruptcy or other insolvency events. Credit Facility On January 19, 2011, upon completion of our initial public offering, we entered into a revolving credit facility, or the credit facility. A group of lenders for which an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as administrative agent and joint arranger, and an affiliate of Wells Fargo Securities, LLC acts as syndication agent and joint arranger, provided commitments for a revolving credit facility allowing borrowings of up to $250 million. We expect to use our credit facility in the future for general corporate purposes, including working capital, the payment of capital expenses, acquisitions and development and redevelopment of properties in our portfolio. At December 31, 2013, our maximum allowable borrowing amount was $222.3 million, of which $93.0 million was outstanding. The credit facility also had an accordion feature that allowed us to increase the availability thereunder up to a maximum of $400.0 million, subject to meeting specified requirements and obtaining additional commitments from lenders. The credit facility bore interest at the rate of either LIBOR or a base rate, plus a margin that varied depending on our leverage ratio. The amount available for us to borrow under the credit facility was subject to the net operating income of our properties that form the borrowing base of the credit facility and a minimum implied debt yield of such properties. On March 7, 2011, the credit facility was amended to allow us or our Operating Partnership to purchase GNMA securities with maturities of up to 30 years. On January 10, 2012, the credit facility was amended to, among other things, (1) extend the maturity date to January 10, 2016 (with a one-year extension option subject to payment of a 0.15% fee), (2) decrease the applicable interest rates and (3) modify certain financial covenants. The second amendment provided for an interest rate based on, at our option, either (1) one-, two-, three- or six-month LIBOR, plus, in each case, a spread (ranging from 1.60%-2.20%) based on our consolidated leverage ratio, or (2) a base rate equal to the highest of the (a) prime rate, (b) federal funds rate plus 0.50% or (c) Eurodollar rate plus 1.00%. Such rates were more favorable than previously contained in the revolving credit facility. In addition, the amendment reduced our secured debt ratio covenant under the credit facility to 50%. On September 7, 2012, the credit facility was amended a third time to allow our consolidated total secured indebtedness to be up to 55% of our secured total asset value for the period commencing upon the date that a material acquisition (generally, greater than $100 million) is consummated through and including the last day of the third fiscal quarter that followed such date. The amended credit facility included a number of customary financial covenants, including: a maximum leverage ratio (defined as total indebtedness net of certain unrestricted cash and cash equivalents to total asset value) of 60%, a minimum fixed charge coverage ratio (defined as



consolidated

earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.50x, a maximum secured leverage ratio (defined as total secured indebtedness to secured total asset value) of 55%, a minimum tangible net worth equal to at least 75% of our tangible net worth at January, 19, 2011, the closing date of our initial public offering, plus 85% of the net proceeds of any



additional

equity issuances (other than additional equity issuances in connection with any dividend reinvestment program), and a $35.0 million limit on the maximum principal amount of recourse indebtedness we may have outstanding at any time, other than under credit facility. The credit facility provided that our annual distributions may not exceed the greater of (1) 95.0% of our funds from operations, or FFO, or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution, we may have been precluded from making distributions other than those necessary to qualify and maintain our status as a REIT. 62 -------------------------------------------------------------------------------- We and certain of our subsidiaries guarantee the obligations under the credit facility, and certain of our subsidiaries pledged specified equity interests in our subsidiaries as collateral for our obligations under the credit facility. As of December 31, 2013, we were in compliance with all then in-place credit facility covenants. On January 9, 2014, we entered into an amended and restated credit agreement, or the amended and restated credit facility, which amended and restated the then-in place credit facility. The amended and restated credit facility provides for aggregate, unsecured borrowing of $350 million, consisting of a revolving line of credit of $250 million, or the revolver loans, and a term loan of $100 million, or the term loan. The amended and restated credit facility has an accordion feature that may allow us to increase the availability thereunder up to an additional $250 million, subject to meeting specified requirements and obtaining additional commitments from lenders. Borrowings under the amended and restated credit facility initially bear interest at floating rates equal to, at our option, either (1) LIBOR, plus a spread which ranges from (a) 1.35%-1.95% (with respect to the revolver loan) and (b) 1.30% to 1.90% (with respect to the term loan), in each case based on our consolidated leverage ratio, or (2) a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 50 bps or (c) the Eurodollar rate plus 100 bps, plus a spread which ranges from (i) 0.35%-0.95% (with respect to the revolver loan) and (ii) 0.30% to 0.90% (with respect to the term loan), in each case based on our consolidated leverage ratio. The foregoing rates are more favorable than previously contained in the credit agreement in place as of December 31, 2013. If we obtain an investment-grade debt rating, under the terms set forth in the amended and restated credit facility, the spreads will further improve. The revolver loan initially matures on January 9, 2018, subject to our option to extend the revolver loan up to two times, with each such extension for a six-month period. The term loan initially matures on January 9, 2016, subject to our option to extend the term loan up to three times, with each such extension for a 12-month period. The foregoing extension options are exercisable by us subject to the satisfaction of certain conditions. Concurrent with the closing of the amended and restated credit facility, we drew down on the entirety of the $100 million term loan and entered into an interest rate swap agreement that is intended to fix the interest rate associated with the term loan at approximately 3.08% through its maturity date and extension options, subject to adjustments based on our consolidated leverage ratio. Additionally, the amended and restated credit facility includes a number of customary financial covenants, including: A maximum leverage ratio (defined as total indebtedness net of certain cash and cash equivalents to total asset value) of 60%, and during any material acquisition period the maximum leverage ratio allowable is 65%,



A maximum secured leverage ratio (defined as total secured debt to secured

total asset value) of 45% at any time prior to December 31, 2015, and 40%

thereafter, during a material acquisition period the maximum secured leverage ratio is increased to 50% at any time prior to December 31, 2015 and 45% thereafter,



A minimum fixed charge coverage ratio (defined as consolidated earnings

before interest, taxes, depreciation and amortization to consolidated

fixed charges) of 1.50x,

A minimum unsecured interest coverage ratio of 1.75x,

A maximum unsecured leverage ratio of 60%, and during any material

acquisition period the maximum unsecured leverage ratio allowable is 65%, A minimum tangible net worth of $721.16 million, and 75% of the net



proceeds of any additional equity issuances (other than additional equity

issuances in connection with any dividend reinvestment program), and

Recourse indebtedness at any time cannot exceed 15% of total asset value.

The amended and restated credit facility provides that annual distributions by the Operating may not exceed the greater of (1) 95% of its funds from operations or (2) the amount required for us to (a) qualify and maintain our REIT status and (b) avoid the payment of federal or state income or excise tax. If certain events of default exist or would result from a distribution, we may be precluded from making distributions other than those necessary to qualify and maintain our status as a REIT. 63 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements. Cash Flows Comparison of the year ended December 31, 2013 to the year ended December 31, 2012 Cash and cash equivalents were $49.0 million and $42.5 million at December 31, 2013 and 2012, respectively. Net cash provided by operating activities increased $16.8 million to $92.7 million for the year ended December 31, 2013, compared to $75.9 million for the year ended December 31, 2012. The increase was primarily the result of an increase in cash net operating income generated from the full year inclusion of our 2012 acquisitions of One Beach Street, City Center Bellevue and Geary Marketplace and was partially offset by our disposition of 160 King Street in December 2012. Net cash used in investing activities decreased $136.0 million to $58.3 million for the year ended December 31, 2013, compared to $194.3 million for the year ended December 31, 2012. This decrease was primarily attributable to a decrease in cash paid for 2012 acquisitions of $274.0 million, which was partially offset by cash received in 2012 from the sale of marketable securities of $27.6 million and investing activities of discontinued operations of $87.6 million. The decrease was further offset by an increase in our 2013 capital expenditures of $21.1 million related to our development and redevelopment activities primarily at Torrey Reserve Campus and Lloyd District Portfolio. Net cash used in financing activities was $28.0 million for the year ended December 31, 2013 compared to net cash provided by financing activities of $48.1 million for the year ended December 31, 2012. The decrease of cash provided by financing activities of $76.1 million is primarily related to secured notes payable of $132.9 million obtained during 2012 related to our 2012 acquisitions, with no such activity in 2013. In addition, dividends paid to common stock and unitholders increased $1.0 million in 2013. The decrease was partially offset by net proceeds of $25.3 million received in 2013 from the issuance of common stock under the ATM equity program. Comparison of the year ended December 31, 2012 to the year ended December 31, 2011 Cash and cash equivalents were $42.5 million and $112.7 million at December 31, 2012 and 2011, respectively. Net cash provided by operating activities increased $10.5 million to $75.9 million for the year ended December 31, 2012, compared to $65.4 million for the year ended December 31, 2011. The increase was primarily due to the acquisitions of the Solana Beach Centre entities, the Waikiki Beach Walk entities, First & Main, Lloyd District Portfolio, One Beach Street, and City Center Bellevue. Net cash used in investing activities decreased $37.4 million to $194.3 million for the year ended December 31, 2012, compared to $231.7 million for the year ended December 31, 2011. The decrease was primarily due to the sale of our marketable securities during the third quarter of 2012, to help finance our acquisition of City Center Bellevue and the sale of 160 King Street during the fourth quarter of 2012. The proceeds from the sale were offset by the acquisition of One Beach Street on January 24, 2012, City Center Bellevue on August 21, 2012, and Geary Marketplace on December 19, 2012 and an increase in capital expenditures related to construction activity for our development properties. Net cash provided by financing activities decreased $189.0 million to $48.1 million for the year ended December 31, 2012, compared to net cash used of $237.1 million for the year ended December 31, 2011. The decrease was primarily due to the proceeds from the issuance of shares of our common stock in connection with our initial public offering in 2011, which was partially offset by the repayment of certain indebtedness in connection with the Formation Transactions. During the year ended December 31, 2012, we drew down on our line of credit during the third quarter of 2012 to finance our acquisition of City Center Bellevue. We subsequently repaid the outstanding line of credit balance during the fourth quarter of 2012 in connection with our sale of 160 King Street. During the year ended December 31, 2012, financing activities also included $132.9 million of loan proceeds related to the mortgage loans on One Beach Street and City Center Bellevue . 64 -------------------------------------------------------------------------------- Net Operating Income Net Operating Income, or NOI, is a non-GAAP financial measure of performance. We define NOI as operating revenues (rental income, tenant reimbursements, lease termination fees, ground lease rental income and other property income) less property and related expenses (property expenses, ground lease expense, property marketing costs, real estate taxes and insurance). NOI excludes general and administrative expenses, interest expense, depreciation and amortization, acquisition-related expense, other non-property income and losses, gains and losses from property dispositions, extraordinary items, tenant improvements and leasing commissions. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to 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. 65 -------------------------------------------------------------------------------- The following is a reconciliation of our NOI to net income for the years ended December 31, 2013, 2012 and 2011 computed in accordance with GAAP (in thousands): Year Ended December 31, 2013 2012 2011 Net operating income $ 165,071$ 149,352$ 125,906 General and administrative (17,195 ) (15,593 ) (13,627 ) Depreciation and amortization (66,775 ) (61,853 ) (55,936 ) Interest expense (58,020 ) (57,328 ) (54,580 ) Early extinguishment of debt - - (25,867 ) Loan transfer and consent fees - - (8,808 ) Gain on acquisition - - 46,371 Other income (expense), net (487 ) (629 ) 212 Income from continuing operations 22,594 13,949 13,671 Discontinued operations: Income from discontinued operations - 932



1,672

Gain on sale of real estate property - 36,720



3,981

Results from discontinued operations - 37,652 5,653 Net income $ 22,594$ 51,601$ 19,324 Funds from Operations We present FFO because we consider FFO an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, impairment losses, real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP. 66 -------------------------------------------------------------------------------- The following table sets forth a reconciliation of our FFO for the years ended December 31, 2013, 2012 and 2011 to net income, the nearest GAAP equivalent (in thousands, except per share and share data): Year Ended December 31, 2013 2012 2011 Net income $ 22,594$ 51,601$ 19,324 Plus: Real estate depreciation and amortization (1) 66,775 63,011 58,543 Plus: Depreciation and amortization on unconsolidated real estate joint ventures (pro rata) - - 688 Less: Gain on sale of real estate - (36,720 ) (3,981 ) Funds from operations, as defined by NAREIT $ 89,369$ 77,892$ 74,574 Less: FFO attributable to Predecessor's controlled and noncontrolled owners' equity - - (16,973 ) Less: Nonforfeitable dividends on incentive stock awards (357 ) (354 ) (316 )



FFO attributable to common stock and units $ 89,012$ 77,538$ 57,285 FFO per diluted share/unit

$ 1.54$ 1.35$ 1.05 Weighted average number of common shares and units, diluted (2) 57,726,012 57,262,767 54,417,123



(1) Includes depreciation and amortization related to Valencia Corporate Center,

which was sold on August 30, 2011and 160 King Street, which was sold on

December 4, 2012 and is included in discontinued operations on the statement

of operations.

(2) For the years ended December 31, 2013, 2012 and 2011 the weighted average

common shares used to compute FFO per diluted share include unvested

restricted stock awards that are subject to time vesting, as the vesting of

the restricted stock awards is dilutive in the computation of FFO per diluted

shares, but is anti-dilutive for the computation of diluted EPS for the

periods. Diluted shares exclude incentive restricted stock as these awards

are considered contingently issuable. For the year ended December 31, 2011,

the weighted average shares outstanding have been weighted for the full year

to date, not the date of our initial public offering.

Inflation

Substantially all of our office and retail leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above. In addition, our multifamily leases (other than at our RV resort where spaces can be rented at a daily, weekly or monthly rate) generally have lease terms ranging from seven to 15 months, with a majority having 12-month lease terms, and generally allow for rent adjustments at the time of renewal, which we believe reduces our exposure to the effects of inflation. For the hotel portion of our mixed-use property, we possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit our ability to raise room rates.


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