Executive Summary / Key Takeaways

• Strategic Resilience and Value Creation: American Assets Trust (AAT) is a vertically integrated REIT focused on high-barrier-to-entry coastal markets, leveraging its deep operational expertise and strategic capital allocation to drive long-term shareholder value amidst dynamic economic conditions.
• Operational Innovation as a Competitive Edge: AAT differentiates itself not through traditional technology products, but through advanced operational strategies like its "spec suite program," hands-on construction management, and amenity-rich property enhancements, which accelerate leasing and enhance tenant satisfaction.
• Disciplined Capital Recycling and Balance Sheet Strength: Recent strategic transactions, including the sale of Del Monte Center for $123.5 million and the acquisition of Genesee Park Apartments for $67.9 million, demonstrate a commitment to optimizing portfolio quality and reducing leverage, with no debt maturities until 2027.
• Positive Outlook with Significant Upside: AAT projects 2025 FFO per diluted share of $1.89 to $2.01, with a midpoint of $1.95, reflecting core operational momentum. The company anticipates over $0.30 per share in FFO upside from the lease-up and stabilization of its key office developments, targeting stabilization by 2026.
• Attractive Valuation and Shareholder Returns: Trading at a compelling valuation with a TTM P/E of 15.66 and a dividend yield of 6.85%, AAT offers a well-covered payout, signaling management's confidence in the portfolio's long-term cash flow stability.

Setting the Scene: A Foundation in High-Barrier Markets

American Assets Trust, Inc. (AAT) operates as a full-service, vertically integrated, and self-administered real estate investment trust (REIT), with a rich history tracing back to American Assets, Inc., founded in 1967. Since its initial public offering (IPO) in 2011, AAT has strategically built a diversified portfolio of high-quality office, retail, multifamily, and mixed-use properties. These assets are concentrated in dynamic, high-barrier-to-entry coastal markets across Southern California (San Diego, San Francisco Bay Area), Washington (Bellevue), Oregon (Portland), and Hawaii (Oahu). This geographic and asset diversification is a cornerstone of AAT's strategy, designed to provide resilience and long-term value creation across various economic cycles.

AAT's overarching strategy is rooted in a disciplined, long-term approach: staying nimble, thoughtful, and true to its core principles of investing in high-quality assets, maintaining balance sheet strength, and consistently creating shareholder value. This philosophy has enabled the company to achieve significant milestones, including record FFO per share in 2024, its highest since the IPO, alongside record total revenue, net operating income (NOI), and average monthly base rents across its core segments.

The broader real estate industry is currently shaped by several key trends. The "return-to-office" movement, while gradual, continues to gain momentum, with average days in the office for Fortune 100 companies incrementally improving. This trend, coupled with employers prioritizing collaborative and amenity-rich environments, is driving demand for best-in-class office spaces. In retail, resilient consumer spending in affluent, supply-constrained markets supports strong performance, even as e-commerce continues to evolve. The multifamily sector benefits from housing affordability constraints, particularly in high-growth areas, though new supply in some markets can create competitive leasing environments.

Operational Innovation: AAT's Differentiated Approach

Unlike REITs that might boast proprietary software or manufacturing processes, AAT's competitive edge stems from its deep operational expertise and innovative property-level strategies. The company's vertical integration, encompassing in-house asset management, property management, development, leasing, and construction, provides unparalleled control and efficiency. This integrated model allows AAT to implement advanced operational strategies that function as its "technological differentiators" in the real estate space.

A key innovation is AAT's "spec suite program." This proactive approach involves pre-building office spaces to meet the specific demands of tenants seeking less-than-full-floor requirements and move-in ready solutions. This strategy tangibly reduces downtime and upfront capital investment for tenants, thereby accelerating lease-up cycles and improving occupancy rates. Furthermore, AAT's hands-on construction management minimizes cost and schedule uncertainty for both the company and its tenants, a crucial advantage given elevated construction costs. The company also emphasizes an efficient, solutions-oriented lease negotiation process, recognizing that "time kills deals" and speed can be a decisive factor in securing tenants.

Beyond these process innovations, AAT consistently invests in completed renovations and amenities across its portfolio. Properties like La Jolla Commons III, One Beach Street, and the Bellevue office assets are being enhanced with destination restaurants, cafes, fitness centers, outdoor spaces, and conference centers. These enhancements are not merely cosmetic; they are strategic responses to evolving tenant preferences for collaborative and amenity-rich environments, attracting and retaining high-quality tenants. For investors, these operational innovations translate into a stronger competitive moat, enhanced tenant satisfaction, faster lease-up of vacant spaces, better cost control, and ultimately, improved financial performance through higher occupancy and rental rates.

Strategic Capital Allocation: Reshaping the Portfolio

AAT's commitment to long-term value creation is evident in its disciplined approach to capital allocation and balance sheet management. The company actively recycles capital to optimize its portfolio and strengthen its financial position. A significant recent example is the sale of Del Monte Center, a retail property in Monterey, California, for approximately $123.5 million (net proceeds of $117.8 million) on February 25, 2025. This divestiture generated a substantial gain of $44.5 million and aligned with AAT's strategy to concentrate capital in core markets where it can achieve greater operational scale and efficiency.

Just days after the sale, on February 28, 2025, AAT strategically redeployed a portion of these proceeds to acquire Genesee Park Apartments, a 192-unit multifamily community in San Diego, for $67.9 million. This acquisition offers substantial value upside through operational improvements and long-term redevelopment potential, with initial vacant units leasing at a remarkable 40% increase over average in-place rents. This transaction underscores AAT's focus on enhancing portfolio quality and leveraging its expertise in high-growth multifamily markets.

The company has also proactively managed its debt profile. In September 2024, its Operating Partnership issued a 10-year, $525 million bond at a 6.15% coupon, which was notably oversubscribed. This strategic move strengthened AAT's liquidity and flexibility, addressing all debt maturities until early 2027. Subsequent repayments included $100 million of Series B Notes in December 2024 and $325 million in aggregate of Term Loan B, Term Loan C, and Series C Notes in early 2025. As of June 30, 2025, AAT boasts total liquidity of approximately $544 million, comprising $144 million in cash and cash equivalents and $400 million available under its revolving line of credit. The company's net debt-to-EBITDA stood at 6.3x on a trailing 12-month basis, with a long-term goal to reduce and maintain this ratio at 5.5x or lower.

Segment Performance: Resilience in a Dynamic Environment

AAT's diversified portfolio has demonstrated resilience, though performance varies by segment in the current economic climate. For the six months ended June 30, 2025, total property revenue was $216.54 million, a slight decrease from $221.58 million in the prior year period. Net income attributable to common stockholders for the six months ended June 30, 2025, was $47.99 million, or $0.79 per diluted share. Funds From Operations (FFO) per diluted share for Q2 2025 was $0.52, with same-store cash NOI approximately flat for the quarter and up 1.4% year-to-date.

Office Segment: The office portfolio ended Q2 2025 at 82% leased (87% for same-store assets). Same-store office cash NOI was approximately flat for Q2 and up over 2% year-to-date. While comparable rent spreads saw a 2% decrease on a cash basis in Q2, they increased 9.6% on a straight-line basis, reflecting the long-term value of new leases. This cash basis decrease was primarily due to a specific deal at First & Main with a lower start rate but 5% annual bumps. Management notes increasing touring activity and inbound RFP volume, particularly for less-than-full-floor requirements. Key developments like La Jolla Commons III (placed in service April 1, 2025) and One Beach Street (redevelopment completed August 1, 2024) are seeing increased interest, with amenities like restaurants and conference centers nearing completion. The Bellevue office properties (14 Acres, Timber Springs, Timber Ridge) are also progressing well with renovations and leasing, with Timber Ridge now 97% leased.

Retail Segment: AAT's retail portfolio continues its strong performance, ending Q2 2025 at 98% leased with a robust 4.5% same-store cash NOI growth. New and renewal leases in Q2 saw impressive spreads, increasing 7.4% on a cash basis and 21.9% on a straight-line basis. The company successfully backfilled a former Party City space at Gateway Marketplace with rents approximately 30% above prior levels. This segment benefits from durable demand, strong local employment, and favorable demographics in its trade areas, with limited new supply.

Multifamily Segment: The multifamily portfolio ended Q2 2025 approximately 94% leased. Rent increases were 7% on renewals and 4% on new leases, resulting in a blended increase of 6%. However, same-store multifamily operating income declined 3% in Q2, primarily due to lower rental income at Hassalo on Eighth in Portland and higher operating expenses at Pacific Ridge in San Diego. The San Diego market is experiencing increased competition from new supply, leading to elevated operating costs and concessions. In Portland, the market is still absorbing excess supply, but management is encouraged by steady leasing activity and expects improvement in the quarters ahead. The newly acquired Genesee Park is performing in line with underwriting, demonstrating significant upside potential.

Mixed-Use Segment (Waikiki Beach Walk): The mixed-use segment's NOI declined 5% in Q2 2025, primarily driven by softer performance at the Embassy Suites hotel. The hotel saw lower paid occupancy (86%) and RevPAR ($305, down 4%) amid softness in domestic leisure demand, heightened rate competition, and global economic uncertainty. Elevated labor costs also impacted margins. Despite these headwinds, the Embassy Suites continues to lead its competitive set in RevPAR, underscoring its prime location and asset quality. Management views these challenges, including the weak Japanese Yen and rising travel costs, as temporary, maintaining confidence in Hawaii's long-term tourism market.

Competitive Landscape: A Differentiated Approach

AAT operates in a competitive real estate landscape, facing larger, more specialized REITs such as Vornado Realty Trust (VNO) in office, Simon Property Group (SPG) in retail, Equity Residential (EQR) in multifamily, Boston Properties (BXP) in office, and Kimco Realty (KIM) in retail/mixed-use. AAT's diversified portfolio and vertically integrated model provide a distinct market position.

Comparing profitability, AAT's TTM Gross Profit Margin of 62.92% is competitive, surpassing VNO (48%) and BXP (35%), and aligning closely with EQR (63%), though trailing SPG (83%) and KIM (69%). AAT's TTM Operating Profit Margin of 36.62% is strong, outperforming VNO (15%), EQR (29%), BXP (30%), and KIM (31%), but lower than SPG (52%). This indicates AAT's operational efficiency across its diverse asset classes. AAT's TTM Net Profit Margin of 16.84% also demonstrates solid profitability compared to VNO (4%) and BXP (0.42%), though it is lower than SPG (40%) and EQR (35%).

In terms of valuation, AAT appears compelling. Its TTM P/E ratio of 15.66 is significantly lower than VNO (113.8), SPG (23.69), EQR (26.24), BXP (820.44), and KIM (38.3), suggesting a potential undervaluation. Similarly, its TTM Price-to-Sales ratio of 2.66 and Price-to-Book ratio of 1.05 are lower than all listed competitors, reinforcing this view. AAT's TTM Dividend Yield of 6.85% is also notably higher than its peers, including VNO (3%), SPG (5%), EQR (4%), BXP (6%), and KIM (4%), making it an attractive option for income-focused investors.

AAT's competitive advantages are rooted in its operational model. Its vertical integration provides superior operational control, allowing for streamlined processes and potentially better margins compared to less integrated peers. This also fosters stronger, more responsive tenant relationships. The company's deep market expertise in high-barrier-to-entry regions, cultivated over 50 years, translates into an intimate understanding of local dynamics, enabling better pricing power and more effective growth strategies. Furthermore, AAT's financial capacity to fund tenant improvements (TIs) and leasing commissions is a significant differentiator, particularly in the current market where tenants are hesitant to commit upfront capital. This ability to deliver "ready-to-go spaces" accelerates leasing and tenant occupancy. While larger competitors like SPG may have greater scale in specific segments, AAT's diversified portfolio and operational agility allow it to adapt more flexibly to market shifts.

However, AAT faces vulnerabilities, including its geographic concentration in Southern California, which exposes it to regional economic risks. The company is also susceptible to economic sensitivity in its office and retail segments, which could impact occupancy and profitability during downturns. Barriers to entry in the REIT sector, such as high capital requirements and regulatory hurdles, generally benefit established players like AAT by limiting new competition.

Outlook and Guidance: Charting the Course Ahead

AAT has increased its full-year 2025 FFO guidance range to $1.89 to $2.01 per diluted share, with a midpoint of $1.95, a $0.01 increase over its initial midpoint. This outlook reflects management's confidence in steady momentum across core sectors, driven by ongoing leasing activity, contractual rent escalations, and disciplined operations. The guidance assumes a stable operating environment and sustained tenant demand.

Achieving the higher end of this guidance range hinges on several factors: the continued payment of rents by tenants for whom credit reserves have been established (approximately $0.02 per share of FFO reserved in Q2 2025, split evenly between office and retail); the multifamily segment exceeding expectations through improved occupancy, rent growth, or better expense management; and a meaningful recovery in Hawaii tourism to bolster Embassy Suites' performance.

A significant long-term FFO upside is anticipated from the lease-up and stabilization of AAT's key office developments: La Jolla Commons III, One Beach Street, and the suburban Bellevue office assets. These projects represent over $450 million of invested capital and are expected to contribute over $0.30 per share of FFO once stabilized at 93% occupancy. Management anticipates stabilization for these properties by 2026, give or take a year, depending on market conditions. This lease-up will also contribute to reducing the net debt-to-EBITDA ratio towards the company's target of 5.5x or lower.

The Board's approval of a quarterly dividend of $0.34 per share for Q3 2025, following a 1.5% increase in Q1 2025, signals strong confidence in the company's long-term financial performance and outlook. While the payout ratio is in the high eighties to low nineties percent, it remains below 100% and is considered affordable given AAT's substantial cash on hand and robust balance sheet.

Conclusion

American Assets Trust stands as a resilient and strategically positioned REIT, leveraging its deep historical roots and vertically integrated model to drive long-term value. The company's core investment thesis is built upon its high-quality, diversified portfolio in supply-constrained coastal markets, underpinned by a unique operational innovation that acts as its competitive moat. This includes proactive "spec suite" development, hands-on construction, and a relentless focus on amenity-rich property enhancements, which collectively accelerate leasing and foster strong tenant relationships.

Despite a dynamic macroeconomic backdrop, AAT has demonstrated consistent operational execution, reflected in its solid Q2 2025 performance and increased 2025 FFO guidance. The strategic capital recycling, exemplified by the Del Monte sale and Genesee Park acquisition, further refines the portfolio for enhanced long-term growth. While challenges persist in certain segments, particularly the Hawaii hotel market and competitive multifamily environments, AAT's properties consistently outperform their respective competitive sets. The significant FFO upside from the lease-up of its premier office developments, coupled with a strong balance sheet and attractive dividend yield, positions AAT as a compelling investment for discerning investors seeking stable income and long-term capital appreciation in the real estate sector.