Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) for American Assets Trust, Inc. (NYSE: AAT) and American Assets Trust LP at 'BBB'.

The Rating Outlook is Stable. The rating and Outlook reflect Fitch's expectation that the company will return to metrics appropriate for the rating within the forecast period.

AAT's diversified portfolio is focused on high growth and high-quality assets in the U.S. West Coast markets. Fitch expects this diversification will mitigate risk from retail- and hospitality-derived NOI in the current economic environment. While the impact and duration of current market volatility on operations remain unclear, total rent collections were 92% in the fourth quarter, with improvements over the year in retail collections.

KEY RATING DRIVERS

Rent Collections Recovery to Continue: Total rent collections improved to 92% in 4Q20, from 87% in 2Q20, including 99% of office rents and 95% of multifamily. Retail collections were 82% in 4Q20, from 58% in 2Q20. As vaccinations continue to roll out and the economy opens back up, performance at retail assets, and the Waikiki Beach Walk Retail and Embassy Suites Hotel should continue to improve. Fitch assumes modest incremental improvement in 2021 in retail/hotel performance, accelerating in 2022 and approaching pre-pandemic levels by 2024.

Tenant & Industry Exposures: As of Dec. 31, 2020, the portfolio's two largest retail tenant industry exposures were apparel at 21.0% of retail ABR and restaurants/QSRs at 15.5%. AAT also has exposure to cinemas and gyms, at 3.8% and 3.1% of retail ABR, respectively. Tenants in these industries and other customer-facing segments have experienced greater difficulty in the current environment due to social distancing measures and restrictions on consumer movement and interaction.

Essential tenants account for 28.7% of retail ABR, including grocery/drug at 10.1%. Three of its top 10 retail tenants are grocers, including Sprouts, Vons and Safeway. Grocery stores have remained open during the pandemic and have benefitted from increased demand. The company's retail exposure is well-diversified by tenant, with no tenant accounting for more than 1.5% of total ABR.

AAT's two largest office tenants are Google and LPL Holdings, Inc. comprising 10.0% and 7.5% of total ABR, respectively. These exposures are both concentrated in a single lease with each operator, which are notable concerns from a credit perspective, even as these leases are both relatively long-term (approximately 8-9 years remaining).

Asset Concentration: The company has high individual asset concentrations, with La Jolla Commons representing 13.7% of 4Q20 ABR and The Landmark at One Market representing 12.8%. Asset concentration risk is mitigated by the strong tenant profile as The Landmark is entirely leased to Google and Autodesk. Fitch generally considers concentration in an individual asset above 10% as high.

Strong Markets: As of 4Q20, the company's core markets in terms of ABR include Greater San Diego (51%), Greater San Francisco (16%), and Oregon (13%). Fitch views these markets as having attractive long-term growth dynamics and strong asset liquidity and leveragability.

West Coast Office Holding Up: The office segment saw robust re-leasing spreads of 19% on a cash basis in 2020 and 22% on a straight-line basis. Fitch expects same store NOI growth in 2022 in the low-single digits due in particular to strong office leasing activity and easier retail comps. AAT plans to grow NOI from the office segment with the development of La Jolla Commons in UTC, San Diego.

Solid Unencumbered Asset Coverage: As of Dec. 31, 2019, AAT's unencumbered assets (defined as unencumbered NOI divided by a stressed 8% capitalization rate) covered net unsecured debt by 2.1x, which is appropriate for the 'BBB' rating.

DERIVATION SUMMARY

AAT's diversified portfolio of office, retail and multifamily assets focused in U.S. West Coast markets narrows its peer set.

AAT's market exposure lends comparison to a number of property-sector-focused REITs, including shopping center owner Retail Opportunity Investments Corp (BBB-/Stable), which owns a portfolio of high-quality grocery anchored shopping centers in several West Coast markets. Hudson Pacific (HPP; BBB-/Stable) is a West Coast owner and operator of class A office assets with a significant concentration in San Francisco. HPP has a financial policy of sustained leverage in the low to mid 6.0x range and a FCC in the low to mid 3.0x range.

Vornado Realty Trust (BBB/Negative) owns and operates a similar property mix but is focused primarily in New York City. AAT's mid-5x long term leverage target and low-2x fixed charge coverage compare well to Vornado's high-6x to low-7x leverage and similar fixed charge coverage; however, Vornado's stronger, more established capital markets access and the best-in-class contingent liquidity of NYC commercial real estate justify its higher leverage at the same rating. VNO is significantly larger than AAT and has historically enjoyed better capital markets access.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

--Occupancy loss of 200bps in fiscal 2021, with 350 bps of recovery from 2022-2024;

Expiring rents subject to flat to mid-single digit increases, as office strength offsets lingering retail weakness;

Embassy Suites is a hotel operating asset of the company, leased to a taxable subsidiary and operated by third-party management company. Fitch assumes minimal incremental NOI in 2021, with recovery accelerating in 2022 and approaching peak levels around 2024;

Recurring capex returns to normalized range consistent with guidance in fiscal 2022;

Development capex of $60 million annually in fiscal 2021-2023;

No acquisition or disposition activity in the forecast period;

No equity issuance in the forecast period.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch's expectation of leverage sustaining below 5.5x;

Fitch's expectation of fixed-charge coverage (FCC) sustaining above 3.0x;

Continued access to the unsecured debt markets, in particular execution of public unsecured debt offerings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's expectation of leverage sustaining above 6.5x;

Fitch's expectation of FCC sustaining below 2.0x.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: Fitch estimates AAT's base case liquidity coverage at 1.4x through YE22, pro forma for the $500 million 3.375% unsecured bonds issued in January 2021, which is adequate for the rating. Liquidity coverage improves to 1.6x if the company were to refinance 80% of its secured maturities. After repaying 2021 maturing debt and paying down the revolver, the company has full availability on its line and $379 million of cash on hand at Feb. 19, 2021.

Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex and forecast (re)development costs.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
American Assets Trust, Inc.	LT IDR	BBB 	Affirmed		BBB
American Assets Trust, L.P.	LT IDR	BBB 	Affirmed		BBB

senior unsecured

LT	BBB 	Affirmed		BBB

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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