Executive Summary / Key Takeaways

• American Assets Trust is a diversified REIT strategically focused on high-barrier-to-entry coastal markets, leveraging its vertically integrated platform for operational efficiency and value creation across office, retail, multifamily, and mixed-use segments.
• First Quarter 2025 results were in line with management's expectations, demonstrating resilience in retail and multifamily segments while navigating softness in office and mixed-use, reflecting the portfolio's mixed performance in the current economic environment.
• Recent capital recycling, including the sale of Del Monte Center and the acquisition of Genesee Park apartments, underscores a deliberate strategy to concentrate capital in core markets like San Diego and pursue value-add opportunities with long-term growth potential, even if it entails near-term FFO dilution.
• The 2025 FFO guidance midpoint of $1.94 per share reflects the absence of significant non-recurring income from 2024 and the initial lease-up phase of major development/redevelopment projects, but management sees potential upside tied to successful leasing, multifamily outperformance, and tourism recovery.
• Significant invested capital in key office developments and renovations (La Jolla Commons III, One Beach Street, Bellevue assets) represents a substantial future FFO growth driver (>$0.30/share potential at stabilization), contingent on successful leasing execution over the next 1-2 years.

A Coastal Fortress Strategy Built on Integrated Expertise

American Assets Trust, Inc. ($AAT) operates as a diversified real estate investment trust, strategically concentrating its portfolio in some of the most dynamic and supply-constrained coastal markets across Southern California, Northern California, Washington, Oregon, Texas, and Hawaii. Its business model spans office, retail, multifamily, and mixed-use properties, a diversification that management views as a strength designed to weather various economic cycles. AAT's history is rooted in the real estate business founded by Ernest S. Rady in 1967, with the current REIT structure established through an IPO in 2011, inheriting decades of experience and deep market knowledge.

A foundational element of AAT's strategy and a key differentiator in the competitive landscape is its vertically integrated operational platform. This is not a single piece of technology in the traditional sense, but rather a comprehensive, in-house capability encompassing asset management, property management, property development, leasing, tenant improvement construction, acquisitions, repositioning, redevelopment, and financing, supported by approximately 230 employees. This integrated expertise provides tangible benefits: management commentary suggests it enables more efficient execution of value-add and development projects, potentially leading to faster project cycles and better cost control compared to relying solely on third parties. It also fosters stronger tenant relationships, crucial for retention and leasing velocity, particularly in competitive markets. While specific, quantifiable metrics like percentage cost savings or cycle time reductions compared to external management are not detailed, the strategic intent is clear: this integrated model aims to enhance operational effectiveness, support organic growth initiatives, and ultimately drive value creation for shareholders.

In the broader REIT landscape, AAT competes with both larger, more specialized players and other diversified REITs. Peers like Kilroy Realty Corporation (KRC) and Boston Properties, Inc. (BXP) are significant forces in the office sector, particularly on the West and East Coasts, respectively. KRC, with its focus on sustainable office properties in tech-heavy West Coast markets, often exhibits strong operating margins (EBITDA margin around 55-60%) and growth, while BXP, the largest office REIT, benefits from scale and premium urban locations, showing even higher efficiency (EBITDA margin ~60%). AAT's TTM EBITDA margin of 55.26% places it competitively within this group, suggesting its integrated model allows it to maintain solid profitability despite its smaller scale compared to BXP. However, AAT's diversification across sectors provides a different risk profile than pure-play office REITs. Against competitors like Vornado Realty Trust (VNO) and SL Green Realty Corp. (SLG), which are heavily concentrated in specific urban markets like New York, AAT's broader coastal footprint offers a degree of geographic diversification. AAT's focus on high-barrier markets means it often competes for tenants seeking quality space in desirable locations, where its ability to execute complex tenant improvements and manage properties directly can be a competitive advantage. The company's strategy explicitly seeks opportunities that leverage its in-house capabilities, such as value-add multifamily acquisitions or complex redevelopments within its existing portfolio.

Portfolio Performance: Navigating Sectoral Crosscurrents

The first quarter of 2025 provided a snapshot of AAT's portfolio performance amidst ongoing economic uncertainty and specific sector dynamics. Total property revenue decreased by $2.1 million year-over-year, primarily attributable to the disposition of Del Monte Center. However, a deeper dive into segment performance reveals varied trends.

The Office segment, representing 46.8% of Q1 2025 revenue, saw total rental revenue decrease by $0.8 million. This was primarily driven by lower occupancy and annualized base rents at Torrey Reserve Campus and lower occupancy at Lloyd Portfolio, alongside a decrease in cost recoveries. Same-store office NOI decreased by 2.9%. Management noted increased touring and proposal activity for high-quality space and continued return-to-office momentum as potential tailwinds, but economic uncertainty remains a headwind. Leasing activity in Q1 totaled approximately 140,000 square feet, with spreads on comparable spaces showing increases of 8% cash and 15% GAAP, demonstrating that demand exists for well-located, modern spaces.

The Retail segment, contributing 22.7% of Q1 2025 revenue, demonstrated notable durability. While total retail revenue decreased, same-store retail rental revenue increased by $0.5 million, leading to a 5.0% increase in same-store NOI. This growth was fueled by new tenant leases and scheduled rent increases at properties like Alamo Quarry Market and Solana Beach Towne Center, as well as an increase in cost recoveries and the non-recurrence of a Q1 2024 construction cost write-off. The retail portfolio ended Q1 2025 at 97.4% leased and reached an all-time high average base rent. Management believes the demographics surrounding their assets support resilient consumer spending, with budgeted percentage rents comprising less than 1% of total retail revenue, limiting exposure to potential consumer spending cracks.

The Multifamily segment saw total rental revenue increase, largely due to the acquisition of Genesee Park. Same-store multifamily revenue increased by $0.2 million, resulting in a modest 0.8% increase in same-store NOI. This was primarily driven by an overall increase in average monthly base rent across the portfolio, particularly in San Diego where same-store cash NOI increased 3.5% year-over-year and net effective rents were almost 2% above Q1 2024 levels. San Diego communities were approximately 95% leased with a 2% blended rent increase. In Portland, Hassalo on Eighth was approximately 90% leased with 3% blended rent growth, though net effective rents were about flat year-over-year as the market continues to absorb new supply. Management remains bullish on San Diego fundamentals due to affordability constraints supporting rental demand, while anticipating vacancy declines in Portland later in 2025.

The Mixed-Use segment, primarily Waikiki Beach Walk, experienced a decrease in revenue and a significant 9.5% decline in same-store NOI. This was largely attributed to lower performance at the Embassy Suites hotel, driven by a decrease in domestic tourism and rate competition, resulting in lower average occupancy (85%) and RevPAR ($298) compared to Q1 2024. Despite this, the hotel reportedly performed at the top of its competitive set in Waikiki. Management views this as a temporary "moment in time," expecting tourism to improve. The retail portion of the mixed-use property saw increased rental revenue from new leases at higher base rents, partially offsetting the hotel softness.

Overall property net operating income decreased by $2.3 million, or 3.0%, to $67.3 million for Q1 2025. General and administrative expenses increased by $0.5 million, primarily due to higher employee costs. Depreciation and amortization increased slightly due to new assets placed in service. Interest expense, net, increased by $2.5 million, or 16.0%, primarily due to the issuance of the 6.15% Senior Notes in September 2024, partially offset by recent debt repayments. A significant gain on sale of real estate of $44.5 million was recognized from the Del Monte Center disposition. Other income, net, decreased substantially due to a non-recurring $10 million settlement received in Q1 2024, partially offset by higher interest income from cash balances. Net income attributable to common stockholders increased significantly to $42.5 million, or $0.70 per diluted share, primarily driven by the gain on the sale of Del Monte Center.

Strategic Capital Allocation and Development Pipeline

AAT's strategic focus on disciplined capital allocation and recycling was evident in early 2025. On February 25, 2025, the company completed the sale of Del Monte Center, a retail property in Monterey, California, for $123.5 million, resulting in net proceeds of approximately $117.8 million and a $44.5 million gain. This disposition aligns with the strategy to concentrate capital in core markets where AAT benefits from operational scale and long-term growth prospects. Just days later, on February 28, 2025, the company acquired Genesee Park, a 192-unit multifamily community in San Diego, for $67.9 million, funded primarily with proceeds from the Del Monte sale. This acquisition fits the company's strategy of acquiring high-quality assets in key markets with potential for value creation through operational improvements and long-term redevelopment. Management noted that rents at Genesee Park were significantly below market, with vacant units leasing at or above projected pro forma rents (generally a 40% increase from average in-place rents), reinforcing the value-add thesis.

The company continues to pursue organic growth through its development and redevelopment pipeline. This includes future phases at Lloyd Portfolio, redevelopments at Waikele Center, and potential multifamily densification opportunities within existing retail properties like Lomas Santa Fe Plaza, Solana Beach Towne Centre, Carmel Mountain Plaza, and the recently acquired Genesee Park. The commencement of these projects is contingent on market conditions and expected risk-adjusted returns.

A significant portion of AAT's future FFO growth is tied to the lease-up and stabilization of major development and redevelopment projects, including La Jolla Commons Tower III in San Diego, the One Beach Street renovation in San Francisco, and renovations at its suburban Bellevue office properties. Management has invested over $450 million in these assets. Once stabilized at approximately 93% leased occupancy, these projects are expected to contribute over $0.30 per share in FFO upside, reduce net debt to EBITDA, and increase NAV. Stabilization is currently anticipated in 2026, give or take a year, depending on market conditions and leasing velocity. Efforts to accelerate leasing include building spec suites (e.g., entire fourth floor at La Jolla Commons 3 to be completed in November 2025) and completing amenities (conference center, restaurant, cafe at La Jolla Commons 3).

Financial Strength and Capital Structure

AAT maintains a focus on balance sheet strength and liquidity to provide flexibility in the current environment. As of March 31, 2025, the company had approximately $144 million in cash and cash equivalents and $400 million available on its revolving line of credit, totaling approximately $544 million in liquidity.

Recent proactive debt management has significantly improved the debt maturity profile. Subsequent to year-end 2024, the company repaid the $150 million Term Loan B and $75 million Term Loan C in full on January 2, 2025, and prepaid the $100 million Senior C Notes in full on February 3, 2025. These repayments utilized cash on hand, primarily from the proceeds of the September 2024 $525 million 6.15% Senior Notes issuance and the Del Monte Center sale. As a result, AAT has no debt maturities until 2027, providing a significant runway.

Leverage, measured by net debt to EBITDA, stood at 6.2x on a trailing 12-month basis and 6.7x on a quarter annualized basis as of Q1 2025. The company's stated objective is to achieve and maintain long-term net debt to EBITDA of 5.5 times or below. The successful lease-up of the development pipeline is expected to be a key driver in reducing this leverage metric over time. The interest coverage and fixed charge coverage ratio was 3.2 times on a trailing 12-month basis.

AAT has access to capital through various sources, including cash flow from operations, its credit facility, long-term secured and unsecured debt, and equity markets. The company has a universal shelf registration statement and an ATM equity program with $250 million capacity remaining as of March 31, 2025, although no shares were sold under the ATM program in Q1 2025.

The company declared a quarterly dividend of $0.34 per share for Q2 2025, reflecting the Board's confidence in the company's outlook and commitment to shareholder returns. While the payout ratio may fluctuate in the near term due to the anticipated FFO reset in 2025, management has historically targeted a payout ratio below 85% and views the current dividend level as manageable given the company's overall financial position and liquidity.

Outlook and Key Considerations

American Assets Trust reaffirmed its full-year 2025 FFO per diluted share guidance range of $1.87 to $2.01, with a midpoint of $1.94. This guidance represents a decrease from the 2024 actual FFO of $2.58 per share, primarily due to the absence of significant non-recurring income realized in 2024 (approximately $0.15 from termination fees and $0.13 from litigation income). Other factors contributing to the lower 2025 FFO expectation include increased net interest expense (approximately $0.06 reduction), lower other income (approximately $0.04 reduction), negative impact from GAAP adjustments (approximately $0.07 reduction), and the net impact of the Del Monte disposition (approximately $0.11 reduction) partially offset by the Genesee Park acquisition (approximately $0.02 addition), and a slight increase in G&A (approximately $0.01 reduction). These items collectively account for a net decrease of approximately $0.64 per FFO share from the 2024 level.

The guidance assumes a relatively healthy operating environment, sustained tenant demand, and disciplined risk management. Management indicated potential for performance towards the upper end of the guidance range if certain factors align favorably. These include the continued payment of rents by tenants for whom credit reserves have been established (approximately $0.04 per FFO share reserved in Q1 2025, with $0.01 office and $0.03 retail), outperformance in the multifamily segment (driven by improved occupancy, rent growth, or better expense management), and a meaningful recovery in tourism supporting the Embassy Suites property.

Key long-term growth drivers for AAT include capturing embedded rent escalations, leasing up vacant space (particularly in the development pipeline), benefiting from a potential return of Asian tourism to Hawaii, pursuing multifamily densification opportunities, and opportunistically making accretive acquisitions.

Risks and Challenges

Despite its strengths, AAT faces several risks and challenges. Macroeconomic uncertainty, including sticky inflation, volatile interest rates, and geopolitical factors, could impact tenant demand, operating costs, and capital availability. The office segment continues to face headwinds from economic uncertainty and evolving return-to-office dynamics, although AAT's focus on high-quality assets aims to mitigate this. Potential cracks in consumer spending could affect retail tenant performance, although AAT's portfolio demographics are seen as a mitigating factor. The mixed-use segment remains vulnerable to fluctuations in tourism.

Execution risk exists in the development and redevelopment pipeline, with stabilization timing dependent on market conditions and leasing success. Concentration of properties in Southern California and reliance on specific tenant industries (office, retail) also pose risks. While recent debt management has improved the maturity profile, the ability to access capital markets for future needs depends on market conditions and investor perception. Changes in trade policies, including tariffs, are a newly noted risk that could affect tenant profitability, leasing activity, and project costs.

Conclusion

American Assets Trust is a well-established, diversified REIT with a strategic focus on high-growth, supply-constrained coastal markets. Its vertically integrated operational platform provides a competitive edge in executing value-add initiatives and managing its portfolio effectively. While the first quarter of 2025 reflected mixed performance across segments and the 2025 FFO guidance signals a near-term reset due to the absence of non-recurring income and the lease-up phase of new developments, the company's strategic capital recycling, proactive debt management resulting in no maturities until 2027, and significant invested capital in its development pipeline position it for potential long-term value creation.

The core investment thesis hinges on AAT's ability to successfully lease up its new and renovated assets, which represent a substantial source of future FFO growth and leverage reduction. While macroeconomic headwinds and sector-specific challenges persist, particularly in the office and tourism-dependent mixed-use segments, the resilience demonstrated in the retail and multifamily portfolios, coupled with management's disciplined approach and focus on high-quality assets, provides a foundation for navigating the current environment. Investors should monitor leasing progress in the development pipeline, trends in core market fundamentals, and the pace of tourism recovery for indicators of future performance and the realization of the company's long-term growth potential.