UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192022
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission file number: 1-33106
Douglas Emmett, Inc.
(Exact name of registrant as specified in its charter)
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| Maryland | 20-3073047 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1299 Ocean Avenue, Suite 1000,, Santa Monica,, California90401
(Address of principal executive offices, including zip code)
(
310)
(310) 255-7700
(Registrant’s telephone number, including area code)
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| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $0.01 par value per share | DEI | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | Yes | ☑ | No | ☐ |
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| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | Yes | ☐ | No | ☑ |
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| Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☑ | No | ☐ |
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| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Yes | ☑ | No | ☐ |
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| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
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| Large accelerated filer | ☑ | | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| | | | Emerging growth company | ☐ | | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
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| Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | ☑ |
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| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☑ |
The aggregate market value of the common stock $0.01 par value, held by non-affiliates of the registrant, as of June 28, 2019,30, 2022, was $6.61$3.78 billion. (This computation excludes the market value of all shares of Common Stock reported as beneficially owned by executive officers and directors of the registrant. Such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.)
The registrant had 175,373,806175,809,682 shares of its common stock $0.01 par value, outstanding as of February 7, 2020.10, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be issuedfiled in conjunction with the registrant’s annual meeting of shareholders to be held in 20202023 are incorporated by reference in Part III of this Report on Form 10-K. Such proxy statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 20192022.
DOUGLAS EMMETT, INC.
FORM 10-K
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Glossary
Abbreviations used in this Report:
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| ADA | Americans with Disabilities Act of 1990 |
| AOCI | Accumulated Other Comprehensive Income (Loss) |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
| ATM | At-the-Market |
| BOMA | Building Owners and Managers Association |
| CEO | Chief Executive Officer |
| CFO | Chief Financial Officer |
| Code | Internal Revenue Code of 1986, as amended |
COOCOVID-19 | Coronavirus Disease 2019 |
| COO | Chief Operating Officer |
| DEI | Douglas Emmett, Inc. |
| EPA | United States Environmental Protection Agency |
| EPS | Earnings Per Share |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
FDICFCA | Financial Conduct Authority |
| FDIC | Federal Deposit Insurance Corporation |
| FFO | Funds From Operations |
Fund XFIRPTA | Douglas Emmett Fund X, LLC |
FIRPTA | Foreign Investment in Real Property Tax Act of 1980, as amended |
FundsFund | Unconsolidated institutional real estate fundsInstitutional Real Estate Fund |
| GAAP | Generally Accepted Accounting Principles (United States) |
| IRS | Internal Revenue Service |
| IT | Information Technology |
| JV | Joint Venture |
| LIBOR | London Interbank Offered Rate |
| LTIP Units | Long-Term Incentive Plan Units |
| MGCL | Maryland General Corporation Law |
| NAREIT | National Association of Real Estate Investment Trusts |
| NYSE | New York Stock Exchange |
| OCI | Other Comprehensive Income (Loss) |
| OP Units | Operating Partnership Units |
| Operating Partnership | Douglas Emmett Properties, LP |
Opportunity FundOFAC | Fund X Opportunity Fund, LLC |
OFAC | Office of Foreign Assets Control |
| Partnership X | Douglas Emmett Partnership X, LP |
| PCAOB | Public Company Accounting Oversight Board (United States) |
| QRS | Qualified REIT subsidiary(ies) |
| REIT | Real Estate Investment Trust |
| Report | Annual Report on Form 10-K |
| SEC | Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as amended |
| S&P 500 | Standard & Poor's 500 Index |
TRSSOFR | Secured Overnight Financing Rate |
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| Abbreviations used in this Report (continued): | |
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| TRS | Taxable REIT subsidiary(ies)Subsidiary(ies) |
| US | United States |
| USD | United States Dollar |
| VIE | Variable Interest Entity(ies) |
Defined terms used in this Report:
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| Annualized Rent | Annualized cash base rent (excludes tenant reimbursements, parking and other revenue) before abatements under leases commenced as of the reporting date and expiring after the reporting date. Annualized Rent for our triple net office properties (in Honolulu and twoone single tenant buildingsbuilding in Los Angeles) is calculated by adding expense reimbursements and estimates of normal building expenses paid by tenants to base rent. Annualized Rent does not include lost rent recovered from insurance and rent for building management use. Annualized Rent does includeincludes rent for a health club that we own and operate in Honolulu and our corporate headquarters in Santa Monica. We report Annualized Rent because it is a widely reported measure of the performance of equity REITs, and is used by some investors as a means to determine tenant demand and to compare our performance and value with other REITs. We use Annualized Rent to manage and monitor the performance of our office and multifamily portfolios. |
| Consolidated Portfolio | Includes all of the properties included in our consolidated results, including our consolidated JVs. |
| Funds From Operations (FFO) | We calculate FFO in accordance with the standards established by NAREIT by excluding gains (or losses) on sales of investments in real estate, gains (or losses) from changes in control of investments in real estate, real estate depreciation and amortization (other than amortization of right-of-use assets for which we are the lessee and amortization of deferred loan costs), and impairment write-downs of real estate from our net income (loss) (including adjusting for the effect of such items attributable to our consolidated JVs and our unconsolidated Funds,Fund, but not for noncontrolling interests included in our Operating Partnership). FFO is a non-GAAP supplemental financial measure that we report because we believe it is useful to our investors. See Management’s"Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations" in Item 7 of this Report for a discussion of FFO. |
| Leased Rate | The percentage leased as of the reporting date. Management space is considered leased. Space taken out of service during a repositioning or which is vacant as a result of a fire or other damage is excluded from both the numerator and denominator for calculating percentage leased. We report Leased Rate because it is a widely reported measure of the performance of equity REITs, and is also used by some investors as a means to determine tenant demand and to compare our performance with other REITs. We use Leased Rate to manage and monitor the performance of our office and multifamily portfolios. |
| Net Operating Income (NOI) | We calculate NOI as revenue less operating expenses attributable to the properties that we own and operate. NOI is calculated by excluding the following from our net income:income (loss): general and administrative expense,expenses, depreciation and amortization expense, other income, other expenses, income from unconsolidated Funds,Fund, interest expense, gain from consolidation of JVs, gains (or losses) on sales of investments in real estate and net income (loss) attributable to noncontrolling interests. NOI is a non-GAAP supplemental financial measure that we report because we believe it is useful to our investors. See Management’s"Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations" in Item 7 of this Report for a discussion of our Same Property NOI. |
| Occupancy Rate | The percentage leased,We calculate Occupancy Rate by excluding signed leases not yet commenced as offrom the reporting date.Leased Rate. Management space is considered leased and occupied, while spaceoccupied. Space taken out of service during a repositioning or which is vacant as a result of a fire or other damage is excluded from both the numerator and denominator for calculating percentage leasedOccupancy Rate. We report Occupancy Rate because it is a widely reported measure of the performance of equity REITs, and occupied.is also used by some investors as a means to determine tenant demand and to compare our performance with other REITs. We use Occupancy Rate to manage and monitor the performance of our office and multifamily portfolios. |
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| Recurring Capital Expenditures | Building improvements required to maintain revenues once a property has been stabilized, and excludes capital expenditures for (i) acquired buildings being stabilized, (ii) newly developed space, (iii) upgrades to improve revenues or operating expenses or significantly change the use of the space, (iv) casualty damage and (v) bringing the property into compliance with governmental or lender requirements. We report Recurring Capital Expenditures because it is a widely reported measure of the performance of equity REITs, and is used by some investors as a means to determine our cash flow requirements and to compare our performance with other REITs. We use Recurring Capital Expenditures to manage and monitor the performance of our office and multifamily portfolios. |
Rentable Square Feet
| Based on the BOMA remeasurement and consists of leased square feet (including square feet with respect to signed leases not commenced as of the reporting date), available square feet, building management use square feet and square feet of the BOMA adjustment on leased space. We report Rentable Square Feet because it is a widely reported measure of the performance and value of equity REITs, and is also used by some investors to compare our performance and value with other REITs. We use Rentable Square Feet to manage and monitor the performance of our office portfolio. |
| Rental Rate | We present two forms of Rental Rates - Cash Rental Rates and Straight-Line Rental Rates. Cash Rental Rate is calculated by dividing the rent paid by the Rentable Square Feet. Straight-Line Rental Rate is calculated by dividing the average rent over the lease term by the Rentable Square Feet. |
| Same Properties | Our consolidated properties that have been owned and operated by us in a consistent manner, and reported in our consolidated results during the entire span of both periods being compared. We exclude from our same property subset any properties (i) acquiredthat during the comparative periods;comparable periods were (i) acquired, (ii) sold, held for sale, contributed or otherwise removed from our consolidated financial statements, during the comparative periods; or (iii) that underwent a major repositioning project or were impacted by development activity, or suffered significant casualty loss that we believed significantly affected the properties' results during the comparative periods.operating results. We also exclude rent received from ground leases. |
| Short-Term Leases | Represents leases that expired on or before the reporting date or had a term of less than one year, including hold over tenancies, month to month leases and other short termshort-term occupancies. |
| Total Portfolio | Includes our Consolidated Portfolio plus the properties owned by our Fund. |
Forward Looking Statements
This Report contains forward-looking statements within the meaning of the Section 27A of the Securities Act and Section 21E of the Exchange Act. You can find many (but not all) of these statements by looking for words such as “believe”, “expect”, “anticipate”, “estimate”, “approximate”, “intend”, “plan”, “would”, “could”, “may”, “future” or other similar expressions in this Report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements used in this Report, or those that we make orally or in writing from time to time, are based on our beliefs and assumptions, as well as information currently available to us. Actual outcomes will be affected by known and unknown risks, trends, uncertainties and factors beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution when relying on previously reported forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends. Some of the risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:
•adverse economic or real estate developments affecting Southern California or Honolulu, Hawaii;
•competition from other real estate investors in our markets;
•decreasing rental rates or increasing tenant incentive and vacancy rates;
•defaults on, early terminations of, or non-renewal of leases by tenants;
•increases in interest rates orrates;
•increases in operating costs;costs, including due to inflation;
•insufficient cash flows to service our outstanding debt or pay rent on ground leases;
•difficulties in raising capital;
•inability to liquidate real estate or other investments quickly;
•adverse changes to rent control laws and regulations;
•environmental uncertainties;
•natural disasters;
•fire and other property damage;
•insufficient insurance, or increases in insurance costs;
•inability to successfully expand into new markets and submarkets;
•difficulties in identifying properties to acquire and failure to complete acquisitions successfully;
•failure to successfully operate acquired properties;
•risks associated with property development;
•risks associated with JVs;
•conflicts of interest with our officers and reliance on key personnel;
•changes in zoning and other land use laws;
•adverse results of litigation or governmental proceedings;
•failure to comply with laws, regulations and covenants that are applicable to our business;
•possible terrorist attacks or wars;
•possible cyber attacks or intrusions;
•adverse changes to accounting rules;
•weaknesses in our internal controls over financial reporting;
•failure to maintain our REIT status under federal tax laws; and
•adverse changes to tax laws, including those related to property taxes.
For further discussion of these and other risk factors see Item 1A. "Risk Factors” in this Report. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
PART I
Item 1. Business
Overview
Business description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties located in premier coastal submarkets in Los Angeles and Honolulu. Through our interest in our Operating Partnership and its subsidiaries, our consolidated JVs, and our unconsolidated Fund, we focus on owning, acquiring, developing and managing a significantsubstantial market share of top-tier office properties and premier multifamily communities in neighborhoods with significant supply constraints, high-end executive housing and key lifestyle amenities. Our properties are located in the Beverly Hills, Brentwood, Burbank, Century City, Olympic Corridor, Santa Monica, Sherman Oaks/Encino, Warner Center/Woodland Hills and Westwood submarkets of Los Angeles County, California, and in Honolulu, Hawaii. We intend to increase our market share in our existing submarkets and may enter into other submarkets with similar characteristics where we believe we can gain significant market share. The terms "us," "we" and "our" as used in this Report refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis.
At December 31, 2019,2022, we owned a Consolidated Portfolio consisting of (i) an 18.0a 17.7 million square foot office portfolio, (ii) 4,1615,013 multifamily apartment units and (iii) fee interests in two parcels of land from which we receive rent under ground leases. We also manage and own equity interests in our unconsolidated Fund which, at December 31, 2019,2022, owned an additional 0.4 million square feet of office space. We manage our unconsolidated Fund alongside our Consolidated Portfolio, and we therefore present the statistics for our office portfolio on a Total Portfolio basis. For more information, see Item 2 “Properties” of this Report. As of December 31, 2019,2022, our portfolio consisted of the following (including ancillary retail space and excluding the two parcels of land from which we receive rent under ground leases):
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| | Consolidated Portfolio | | Total
Portfolio |
| Office | | | |
| Wholly-owned properties | 53 | | 53 |
| Consolidated JV properties | 16 | | 16 |
| Unconsolidated Fund properties | — | | 2 |
| Total | 69 | | 71 |
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| Multifamily | | | |
| Wholly-owned properties | 12 | | 12 |
| Consolidated JV properties | 2 | | 2 |
| Total | 14 | | 14 |
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| Total | 83 | | 85 |
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| | Consolidated Portfolio | | Total Portfolio |
| Office | | | |
| Wholly-owned properties | 53 | | 53 |
| Consolidated JV properties | 17 | | 17 |
| Unconsolidated Fund properties | — | | 2 |
| Total | 70 | | 72 |
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| Rentable square feet (in thousands) | 17,960 | | 18,346 |
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| Multifamily | | | |
| Wholly-owned properties | 10 | | 10 |
| Consolidated JV properties | 1 | | 1 |
| Total | 11 | | 11 |
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| Units | 4,161 | | 4,161 |
Business Strategy
We employ a focused business strategy that we have developed and implemented over the past four decades:
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• | •Concentration of High Quality Office and Multifamily Properties in Premier Submarkets. |
First we select submarkets that are supply constrained, with high barriers to entry, key lifestyle amenities, proximity to high-end executive housing and a strong, diverse economic base. Virtually no entitled Class A office space is currently under construction in our targeted submarkets. Our submarkets are dominated by small, affluent tenants, whose rents are very small relative to their revenues and often not the paramount factor in their leasing decisions. At December 31, 2019,2022, our office portfolio median size tenant was approximately 2,7002,500 square feet. Our office tenants operate in diverse industries, including among others legal, financial services, entertainment, real estate, accounting and consulting, health services, retail, technology and insurance, reducing our dependence on any one industry. In 2017, 20182020, 2021 and 2019,2022, no tenant accounted for more than 10% of our total revenues.
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•Disciplined Strategy of Acquiring Substantial Market Share In Each Submarket. | Disciplined Strategy of Acquiring Substantial Market Share.
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Once we select a submarket, we follow a disciplined strategy of gaining substantial market share to provide us with extensive local transactional market information, pricing power in lease and vendor negotiations and an enhanced ability to identify and negotiate investment opportunities. As a result, we average approximately a 39%37% share of the Class A office space in our submarkets based on the square feet of exposure in our total portfolio to each submarket. See "Office Portfolio Summary" in Item 2 “Properties” of this Report.
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• | Proactive Asset and Property Management. |
Our fully integrated and focused operating platform provides the unsurpassed tenant service demanded in our submarkets, with in-house leasing, proactive asset and property management and internal design and construction services, which we believe provides us with a competitive advantage in managing our property portfolio. Our in-house leasing agents and legal specialists allow us to lease a large property portfolio with a diverse group of smaller tenants, closing an average of approximately threefour office leases each business day, and our in-house construction company allows us to compress the time required for building out many smaller spaces, resulting in reduced vacancy periods. Our property management group oversees day-to-day property management of both our office and multifamily portfolios, allowing us to benefit from the operational efficiencies permitted by our submarket concentration.
Corporate Structure
Douglas Emmett, Inc. was formed as a Maryland corporation on June 28, 2005 to continue and expand the operations of Douglas Emmett Realty Advisors and its 9 institutional funds. All of our assets are directly or indirectly held by our Operating Partnership, which was formed as a Delaware limited partnership on July 25, 2005. As the sole stockholder of the general partner of our Operating Partnership, we generally have the exclusive power under the partnership agreement to manage and conduct the business of our Operating Partnership, subject to certain limited approval and voting rights of the other limited partners. Our interest in our Operating Partnership entitles us to share in the profits and losses and cash distributions in proportion to our percentage ownership.
JVs and Fund
InAt December 31, 2022, in addition to fifty-three office properties and tentwelve residential properties wholly-owned by our Operating Partnership, we manage and own equity interests in:
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•four consolidated JVs, through which we and institutional investors own sixteen office properties in our core markets totaling 4.2 million square feet and two residential properties with 470 apartments, and in which we own a weighted average of 46% at December 31, 2022 based on square footage. We are entitled to (i) distributions based on invested capital as well as additional distributions based on cash net operating income, (ii) fees for property management and other services and (iii) reimbursement of certain acquisition-related expenses and certain other costs. • | four consolidated JVs, through which we and institutional investors own seventeen office properties in our core markets totaling 4.3 million square feet and one residential property with 350 apartments, and in which we own a weighted average of 46% at December 31, 2019 based on square footage. We are entitled to (i) distributions based on invested capital as well as (in the case of three of the JVs) additional distributions based on cash net operating income, (ii) fees for property management and other services and (iii) reimbursement of certain acquisition-related expenses and certain other costs. |
one unconsolidated Fund through which we and institutional investors own two office properties in our core markets totaling 0.4 million square feet and in which we own 30%34% at December 31, 2019.2022. We are entitled to (i) priority distributions, (ii) distributions based on invested capital, (iii) a carried interest if the investors’ distributions exceed a hurdle rate, (iv) fees for property management and other services and (v) reimbursement of certain costs.
The financial data in this Report presents our JVs on a consolidated basis and our FundsFund on an unconsolidated basis in accordance with GAAP. See "Basis of Presentation" in Note 1 to our consolidated financial statementstatements in Item 15 of this Report for more information regarding the consolidation of our JVs. On November 21, 2019, we restructured one of our previously unconsolidated Funds, after which it is treated as a consolidated JV in our financial statements. The results of the consolidated JV are included in our operating results from November 21, 2019 (before November 21, 2019, our share of the Fund's net income was included in our statements of operations in Income from unconsolidated Funds).
See Note 3 and Note 6 to our consolidated financial statement in Item 15 of this Report for more information regarding the consolidation of the JV and our unconsolidated Funds, respectively.
Most of the property data in this Report is presented for our Total Portfolio, which includes the properties owned by our JVs and our Funds,Fund, as we believe this presentation assists in understanding our business. See Note 3 to our consolidated financial statements in Item 15 of this Report for more information regarding our JV transactions.
Segments
We operate two business segments, our office segment and our multifamily segment. Our segments include the acquisition, development, ownership and management of office and multifamily real estate. The services for our office segment include primarily the rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily segment include primarily the rental of apartments and other tenant services, including parking and storage space rental. See Note 15 to our consolidated financial statements in Item 15 of this Report for more information regarding our segments.
Taxation
We believe that we qualify, and we intend to continue to qualify, for taxation as a REIT under the Code, although we cannot provide assurance that this has happened or will happen. See Item 1A "Risk Factors" of this Report for the risks we face regarding taxation as a REIT. The following summary is qualified in its entirety by the applicable Code provisions and related rules, and administrative and judicial interpretations. If we qualify for taxation as a REIT, we will generally not be required to pay federal corporate income taxes on the portion of our net income that is currently distributed to stockholders. This treatment substantially eliminates the “double taxation” (i.e., at the corporate and stockholder levels) that generally results from investment in a corporation. However, we will be required to pay federal income tax under certain circumstances.
The Code defines a REIT as a corporation, trust or association (i) which is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares or certificates of beneficial interest; (iii) which would be taxable but for Sections 856 through 860 of the Code as a domestic corporation; (iv) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) of which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, actually or constructively, by five or fewer individuals; and (vii) which meets certain other tests, described below, regarding the amount of its distributions and the nature of its income and assets. The Code requires that conditions (i) to (iv) be met during the entire taxable year and that condition (v) be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.
There are two gross income requirements we must satisfy:
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i. | at least 75% of our gross income (excluding gross income from “prohibited transactions” as defined below and qualifying hedges) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property or from certain types of temporary investment income, and |
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ii. | at least 95% of our gross income (excluding gross income from “prohibited transactions” and qualifying hedges) for each taxable year must be derived from income that qualifies under the 75% test or from other dividends, interest or gain from the sale or other disposition of stock or securities. In general, a “prohibited transaction” is a sale or other disposition of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business. |
i.at least 75% of our gross income (excluding gross income from “prohibited transactions” as defined below and qualifying hedges) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property or from certain types of temporary investment income, and
ii.at least 95% of our gross income (excluding gross income from “prohibited transactions” and qualifying hedges) for each taxable year must be derived from income that qualifies under the 75% test or from other dividends, interest or gain from the sale or other disposition of stock or securities. In general, a “prohibited transaction” is a sale or other disposition of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business.
We must satisfy five asset tests at the close of each quarter of our taxable year:
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i. | at least 75% of the value of our total assets must be represented by real estate assets including shares of stock of other REITs, debt instruments of publicly offered REITs, certain other stock or debt instruments purchased with the proceeds of a stock offering or long-term public debt offering by us (but only for the one-year period after such offering), cash, cash items and government securities, |
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ii. | not more than 25% of our total assets may be represented by securities other than those in the 75% asset class, |
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iii. | of the assets included in the 25% asset class, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of the vote or value of the securities of any one issuer, in each case other than securities included under the 75% asset test above and interests in TRS or QRS, each as defined below, and in the case of the 10% value test, subject to certain other exceptions, |
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iv. | not more than 20% of the value of our total assets may be represented by securities of one or more TRS, and |
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v. | not more than 25% of the value of our total assets may be represented by nonqualified publicly offered REIT debt instruments. |
i.at least 75% of the value of our total assets must be represented by real estate assets including shares of stock of other REITs, debt instruments of publicly offered REITs, certain other stock or debt instruments purchased with the proceeds of a stock offering or long-term public debt offering by us (but only for the one-year period after such offering), cash, cash items and government securities,
ii.not more than 25% of our total assets may be represented by securities other than those in the 75% asset class,
iii.of the assets included in the 25% asset class, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of the vote or value of the securities of any one issuer, in each case other than securities included under the 75% asset test above and interests in TRS or QRS, each as defined below, and in the case of the 10% value test, subject to certain other exceptions,
iv.not more than 20% of the value of our total assets may be represented by securities of one or more TRS, and
v.not more than 25% of the value of our total assets may be represented by nonqualified publicly offered REIT debt instruments.
In order to qualify as a REIT, we are required to distribute dividends (other than capital gains dividends) to our stockholders equal to at least (A) the sum of (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain) and (ii) 90% of the net income, if any (after tax), from foreclosure property, less (B) the sum of certain items of non-cash income. The distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year, if paid on or before the first regular dividend payment date after such declaration and if we so elect and specify the dollar amount in our tax return. To the extent that we do not distribute all of our net long-term capital gains or distribute at least 90%, but less than 100%, of our REIT taxable income, we will be required to pay tax thereon at the regular corporate tax rates.rate. Furthermore, if we fail to distribute during each calendar year the sum of at least (i) 85% of our ordinary income for such year, (ii) 95% of our capital gains income for such year, and (iii) any undistributed taxable income from prior periods, we would be required to pay a 4% excise tax on the excess of such required distributions over the amounts actually distributed.
We own interests in various partnerships and limited liability companies. In the case of a REIT that is a partner in a partnership or a member of a limited liability company that is treated as a partnership under the Code, Treasury Regulations provide that for purposes of the REIT income and asset tests, the REIT will be deemed to own its proportionate share of the assets of the partnership or limited liability company (determined in accordance with its capital interest in the entity), subject to special rules related to the 10% asset test, and will be deemed to be entitled to the income of the partnership or limited liability company attributable to such share.
We own an interest in a subsidiary that is intended to be treated as a QRS. The Code provides that a QRS will be ignored for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of the QRS will be treated as our assets, liabilities and items of income. We hold certain of our properties through subsidiaries that have elected to be taxed as REITs. We also wholly own interestsan interest in certain corporationsa corporation which havehas elected to be treated as TRSs.a TRS. A REIT may own more than 10% of the voting stock and value of the securities of a corporation that jointly elects with the REIT to be a TRS, provided certain requirements are met. A TRS generally may engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT and of others, except a TRS may not manage or operate a hotel or healthcare facility. A TRS is treated as a regular corporation and is subject to federal income tax and applicable state income and franchise taxes at regular corporate rates. In addition, a 100% tax may be imposed on a REIT if its rental, service or other agreements with its TRS, or the TRS agreements with the REIT’s tenants, are not on arm’s-length terms.
We may be required to pay state or local tax in various state or local jurisdictions, including those in which we own properties or otherwise transact business or reside. The state and local tax treatment of us and our stockholders may not conform to the federal income tax consequences discussed above. We may also be subject to certain taxes applicable to REITs, including taxes in lieu of disqualification as a REIT, on undistributed income, and on income from prohibited transactions.
In addition, if we acquire any asset from a corporation that is or has been a C corporation in a transaction in which our tax basis in the asset is less than the fair market value of the asset, in each case determined as of the date on which we acquired the asset, and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then we generally will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of the excess of (i) the fair market value of the asset over (ii) our adjusted tax basis in the asset, in each case determined as of the date on which we acquired the asset.
Insurance
We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the properties in our portfolio under blanket insurance policies. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss and the cost of the coverage and industry practice. See Item 1A “Risk Factors” of this Report for the risks we face regarding insurance.
Competition
We compete with a number of developers, owners and operators of office and multifamily real estate, many of which own properties similar to ours in the same markets in which our properties are located. See Item 2 of this Report for more information about our properties. See Item 1A “Risk Factors” of this Report for the risks we face regarding competition.
Regulation
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas, fire and safety requirements, various environmental laws, the ADA, eviction moratoriums related to COVID-19, and rent control laws. See Item 1A “Risk Factors” of this Report for the risks we face regarding laws and regulations.
Environmental Sustainability
Our approach
We actively manage our operations in an environmentally sustainable manner.On an annual basis, our board of directors assesses material climate-related risks by assigning numeric values based on both the likelihood of occurrence and the potential impact, with mitigation approaches considered and evaluated. Throughout the year, our Corporate Sustainability Committee, led by the Chairman of our board of directors and our COO, oversees our policies and operational controls for environmental, health, safety and social risks, and monitors our progress and results. Every month, our Director of Engineering Services and our six Regional Engineers meet to monitor and implement the policies set by our Corporate Sustainability Committee. Our Regional Engineers hold monthly meetings with each Building Engineer in their respective regions to review specific building operating issues and opportunities for improvement. We also use external resources to provide critical expertise, tools and resources for our sustainability program.
We engage with our stakeholders to align sustainability efforts and improve the efficiency and health of our business and communities. We share our sustainability goals and standards with our tenants, vendors and suppliers and work closely with them to gather information, develop solutions, and implement technologies and programs to achieve our goals. In operatingour communities, we seek input from other stakeholders and participate in local Business Improvement Districts.We have integrated sustainability into our property management practices, tenant improvement build-outs and meetings with existing and prospective tenants.
Our sustainability program covers four key areas:
•Energy Usage
Our actual energy consumption from year to year is impacted by many factors, such as weather, occupancy in our buildings and runningactivities of our business,tenants. Many of these factors are beyond our control. However, we actively workcan and do seek to promotemake our operations in a sustainable and responsible manner. Our sustainabilitybuildings more energy efficient.
Some of our initiatives to reduce our consumption include items such as real time energy monitoring software, LED lighting retrofitting, and new energy management systems, variable frequency drives in our motors, electricity co-generation, energy efficiency, recycling and water conservation. systems.As a result of our efforts, 78%89% of our stabilized eligible office space is ENERGYas of December 31, 2021 qualified for "ENERGY STAR certifiedCertification" by the EPA as having energy efficiency in the top 25% of buildings nationwide.nationwide (our 2022 ENERGY STAR scores were not yet available as of the date of this Report).
Our energy and electricity are provided by utility providers through the grid (LA Department of Water and Power, Southern California Edison, and Hawaii Electric Company). We estimate the percentage of renewable energy provided by our utility providers was approximately one-third in 2020 (the most recent available data).
•Water Usage
We have undertaken a number of initiatives to conserve water across our portfolio. Our buildings use low flow faucets and toilets, and we have also saved water by using waterless urinals. Where permitted, we try to recycle used water (by law, we cannot recycle most of the water used in our buildings since it must be fit for human consumption). In a few of our buildings where groundwater naturally seeps into our subterranean parking garages, we treat the water before pumping it back into the ground.
•Controlling Waste, including hazardous waste and recycling
Recycling: In partnership with our vendors and tenants, we have implemented business waste and e-waste recycling programs (we do not generate any production waste or packaging waste) at our properties.
Non-Hazardous Waste: Our routine operations only generate modest amounts of ancillary waste, primarily from typical operations in an office setting. A major source of our waste is the debris generated by refurbishment of our buildings, particularly in recurring tenant improvements that can be generated when a new tenant moves into a building. To minimize that waste, we attempt to construct tenant improvements that will be usable by future tenants, and to fit tenants into existing spaces without substantial refurbishment.
Segments
•Air Emissions, including transportation
Although our operations do not create significant air emissions such as nitrogen oxides (NOx), sulfur oxides (Sox), volatile organic compounds (VOCs) or particulate matter (PM), our Los Angeles properties produce a small amount of emissions from stationary sources such as natural gas boilers. We have been working to reduce those emissions by upgrading to lower emission models. We expect to reduce the indirect air emissions from our utility suppliers by reducing our per square foot electricity usage.
We operate twoalso encourage sustainable transportation choices by our tenants: We have installed over 200 electric vehicle charging stations at our properties and have plans to add additional stations. All of our buildings provide ample bicycle parking.
•Development
Ground up development is a small but growing part of our business. So far, all our development projects have been adding additional density in existing office or apartment community sites we already owned. We are committed to selecting development sites that are not in environmentally protected areas or areas of high biodiversity, and strive to use brownfield sites instead of greenfield sites.
Community Impact
We have a long history of providing meaningful, and often transformational, support to the communities in which we operate. We also provide charitable support to key industry and professional organizations, often in the form of event sponsorships.
Part of our business segments: the acquisition, development, ownership and managementstrategy is owning very large concentrations of office buildings and residential communities in our target submarkets. Our large ownership share in many of these neighborhoods put us in a unique position to sometimes invest in outdoor enhancement projects that not only improve our properties but also provide a valuable amenity to the surrounding community. For example, at our recently completed residential development project in Brentwood we invested significant additional capital to build a one acre park on Wilshire Boulevard that is available to the public, providing urban green space as well as a valuable amenity to the surrounding properties and community.
Human Capital
Central to our long-term strategy is attracting, developing and retaining the best talent with the right skills to drive our success. Our ability to maintain our competitive position is largely dependent upon the skill and effort of our executive officers and key personnel, who have significant real estate industry experience, strong industry reputations and networks, and assist us in identifying acquisition, disposition, development and borrowing opportunities, negotiating with tenants and sellers of properties, and managing our development projects and the acquisition, development, ownership and managementoperations of multifamily real estate. The services for our office segment include primarily rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily segment include primarily rental of apartments and other tenant services, including parking and storage space rental. See Note 15 to our consolidated financial statements in Item 15 of this Report for more information regarding our segments.
Employees
properties. As of December 31, 2019,2022, we employed approximately 750 people.
713 people.
We promote a culture of openness, respect and trust and bring a sense of teamwork and inclusion to all we do. We recognize that having a range of experiences, backgrounds and perspectives allows us to find new ways of doing things. We make sure to walk the talk in fostering a workplace culture that encourages and empowers all our employees to have a voice and fulfill their potential. We have programs that actively promote our culture, such as our Daily Exchange program, which provides employees with daily training regarding our vision statement and core values, and our quarterly employee recognition program, the Jane Joyce Award.
We value and advance the diversity and inclusion of the people with whom we work. We are committed to equal opportunity in workplaces that are free from discrimination or harassment on the basis of race, sex, color, ancestry, citizenship, marital status, family status, national or social origin, ethnicity, religion, age, disability, sexual orientation, gender identification or expression, medical condition, genetic information, military or veteran status, political opinion or any other status protected by applicable law. Recruitment, hiring, placement, development, training, compensation and advancement may not be based on any of these factors, but should instead be based on factors such as qualifications, performance, skills and experience.
We know that the first step in hiring and retaining the best talent is to create safe and inspiring workplaces where people feel valued. We offer competitive compensation and benefits to all regular full-time employees, including but not limited to paid holiday, vacation, and sick time, retirement savings plans and medical, dental, and vision coverage. We also offer a very generous equity compensation program that empowers our employees to act and feel like owners, not just employees. In 2022, we provided equity compensation to approximately half of our approximately 750 employees.
The health and safety of our employees, tenants, and vendors is of the utmost importance to us. We adhere to leading health and safety standards across our portfolio, and each year, we require all our employees to complete safety training. We have a wellness program that is designed to raise health awareness among our employees. Some of the program's activities include biometric screenings, flu shots, healthy snacks and employee walking challenges. The program provides many benefits including higher employee satisfaction, reduced healthcare costs, and improved employee performance.
The COVID-19 pandemic had a significant impact on our human capital management during 2020, 2021 and 2022. We are deemed an essential business and we moved quickly to institute safety protocols and procedures to keep our properties open and to protect our tenants and employees who continued to work on site and at our headquarters. These measures included enhanced cleaning/sanitization practices, maximizing fresh air ventilation, and upgrading air filter efficiencies. These ventilation and filtration measures will have longer-term beneficial impacts on our indoor air quality well past the pandemic. We also implemented employee training and workforce guidelines for preventing the spread of COVID-19 at our properties.
Principal Executive Offices
Our principal executive offices are located in the building we own at 1299 Ocean Avenue, Suite 1000, Santa Monica, California 90401 (telephone 310-255-7700).
Available Information
We make available on our website at www.douglasemmett.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, free of charge, as soon as reasonably practicable after we file such reports with, or furnish them to, the SEC. See "Our Company - Investors - SEC Filings" on our website. Also available on our website, free of charge, are our governance documents, which includes our Code of Business Conduct and Ethics, and the charters of our board of directors and its committees. See "Our Company - Investors - Management" on our website. None of the information on or hyperlinked from our website is incorporated into this Report.
For more information, please contact:
Stuart McElhinney
Vice President, Investor Relations
310-255-7751
smcelhinney@douglasemmett.com
Item 1A. Risk Factors
The following risk factors are what we believe to be the most significant risk factors that could adversely affect our business and operations, including, without limitation, our financial condition, REIT status, results of operations and cash flows, our ability to service our debt and pay dividends to our stockholders, our ability to capitalize on business opportunities as they arise, our ability to raise capital, and the market price of our common stock. This is not an exhaustive list, and additional risk factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment and new risk factors emerge from time to time. It is therefore not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This discussion of risk factors includes many forward-looking statements. For cautions about relying on forward-looking statements see “Forward Looking Statements” at the beginning of this Report.
Below is a summary of our risk factors:
Risks Related to Our Properties and Our Business
•Persistent higher inflation could adversely impact our operating results, cash flows, financial position, our ability to pay dividends and distributions, and the market price of our common stock.
•All of our properties are located in Los Angeles County, California, and Honolulu, Hawaii, and we are therefore exposed to greater risk than if we owned a more geographically diverse portfolio. Our properties in Los Angeles County are concentrated in certain submarkets, exposing us to risks associated with those specific areas.
Because of the geographic concentration of our properties, we are susceptible to adverse economic and regulatory developments, as well as natural disasters, in the markets and submarkets where we operate, including, for example, economic slowdowns, industry slowdowns, business downsizing, business relocations, increases in real estate and other taxes, changes in regulation, earthquakes, floods, droughts and wildfires. California is also regarded as being more litigious, regulated and taxed than many other states.
Our operating performance is subject to risks associated with the real estate industry.
Real estate investments are subject to various risks, fluctuations and cycles in value and demand, many of which are beyond our control. These events include, but are not limited to:
adverse changes in international, national or local economic conditions;
inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or below-market renewal options;
adverse changes in financial conditions of actual or potential investors, buyers, sellers or tenants;
inability to collect rent from tenants;
competition from other real estate investors, including other real estate operating companies, publicly-traded REITs and institutional investment funds;
reduced tenant demand for office space and residential units from matters such as (i) changes in space utilization, (ii) changes in the relative popularity of our properties, (iii) the type of space we provide or (iv) purchasing versus leasing;
reduced demand for parking space due to the impact of technology such as self driving cars, and the increasing popularity of car ride sharing services;
increases in the supply of office space and residential units;
fluctuations in interest rates and the availability of credit, which could adversely affect our ability to obtain financing on favorable terms or at all;
increases in expenses (or our reduced ability to recover expenses from our tenants), including insurance costs, labor costs (such as the unionization of our employees or the employees of any parties with whom we contract for services to our buildings), energy prices, real estate assessments and other taxes, as well as costs of compliance with laws, regulations and governmental policies;
utility disruptions;
the effects of rent controls, stabilization laws and other laws or covenants regulating rental rates;
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the ADA;
legislative uncertainty related to federal and state spending and tax policy;
difficulty in operating properties effectively;
acquiring undesirable properties; and
inability to dispose of properties at appropriate times or at favorable prices.
•We have a substantial amount of debt, which exposes us to interest rate fluctuation risk and the risk of not being able to refinance our debt, which in turn could expose us to the risk of default under our debt obligations.
We have a substantial amount of debt and we may incur significant additional debt for various purposes, including, without limitation, to fund future property acquisitions and development activities, reposition properties and to fund our operations. See Note 8 to our consolidated financial statements in Item 15 of this Report for more detail regarding our consolidated debt. See "Off-Balance Sheet Arrangements" in Item 7 of this Report for more detail regarding our unconsolidated debt.
Our substantial indebtedness, and the limitations and other constraints imposed on us by our debt agreements, especially during economic downturns when credit is harder to obtain, could adversely affect us, including the following:
our cash flows may be insufficient to meet our required principal and interest payments;
servicing our borrowings may leave us with insufficient cash to operate our properties or to pay the distributions necessary to maintain our REIT qualification;
we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon acquisition opportunities;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our existing indebtedness;
we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;
we may violate any restrictive covenants in our loan documents, which could entitle the lenders to accelerate our debt obligations;
we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under our hedge agreements, the hedge agreements may not effectively hedge the interest rate fluctuation risk, and, upon the expiration of any hedge agreements we do have, we will be exposed to the then-existing market rates of interest and future interest rate volatility with respect to debt that is currently hedged; we could also be declared in default on our hedge agreements if we default on the underlying debt that we are hedging;
we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;
our default under any of our indebtedness with cross default provisions could result in a default on other indebtedness;
any foreclosure on our properties could also create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Code.
our floating rate debt and related hedges are indexed to USD-LIBOR, any regulatory changes which impact the USD-LIBOR benchmark, such as the potential transition to the Secured Overnight Financing Rate (see Item 7A - "Quantitative and Qualitative Disclosures about Market Risk" below), could impact our borrowing costs or the effectiveness of our hedges.
The rents we receive from new leases may be less than our asking rents, and we may experience rent roll-down from time to time.
As a result of various factors, such as competitive pricing pressure in our submarkets, adverse conditions in the Los Angeles County or Honolulu real estate market, general economic downturns, or the desirability of our properties compared to other properties in our submarkets, the rents we receive on new leases could be less than our in-place rents.
•In order to successfully compete against other properties, we must spend moneyneed to maintain, repair, and renovate our properties, which reduces our cash flows.
If our properties are not as attractive to current and prospective tenants in terms of rent, services, condition, or location as properties owned by our competitors, we could lose tenants or suffer lower rental rates. As a result, we may from time to time be required to incur significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditures would result in higher occupancy or rental rates, or deter existing tenants from relocating to properties owned by our competitors.
•We face intense competition, which could adversely impact the occupancy and rental rates of our properties.
We compete with a number of developers, owners and operators of office and multifamily real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates that we currently charge our tenants, or if they offer tenants significant rent or other concessions, we may lose existing or potential tenants and may not be able to replace them, and we may be pressured to reduce our rental rates below those we currently charge or offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire.
•Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by insurance.
Our business operations in Los Angeles County, California and Honolulu, Hawaii are susceptible to, and could be significantly affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, drought, wind, floods, landslides and fires. The likelihood of such disasters may be increased as a result of climate changes. Adverse weather conditions and natural disasters could cause significant damage to our properties or to the economies of the regions in which they are located, the risk of which is enhanced by the concentration of our properties’ locations. Our insurance coverage may not be adequate to cover business interruption or losses resulting from adverse weather or natural disasters. In addition, our insurance policies include substantial self-insurance portions and significant deductibles and co-payments for such events, and we are subject to the availability of insurance in the US and the pricing thereof. As a result, we may incur significant costs in the event of adverse weather conditions and natural disasters.
Most of our properties are located in Southern California, an area subject to an increased risk of earthquakes. While we presently carry earthquake insurance on our properties, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from earthquakes. We may reduce or discontinue earthquake or any other insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss.
We do not carry insurance for certain losses, such as losses caused by certain environmental conditions, asbestos, riots or war. In addition, our title insurance policies generally only insure the value of a property at the time of purchase, and we have not and do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title claims.
If we experience a loss that is uninsured or which exceeds policy limits, we could incur significant costs and lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. If the damaged properties are encumbered, we may continue to be liable for the indebtedness, even if these properties were irreparably damaged.
If any of our properties were destroyed or damaged, then we might not be permitted to rebuild many of those properties to their existing height or size at their existing location under current zoning and land use regulations. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications and otherwise may have to upgrade such property to meet current code requirements.
New regulations in the submarkets in which we operate could require us to make safety improvements to our buildings, for example requiring us to retrofit our buildings to better withstand earthquakes, and we could incur significant costs complying with those regulations.
Terrorism and war could harm our business and operating results.•
The possibility of future terrorist attacks or war could have a negative impact on our operations, even if they are not directed at our properties and even if they never actually occur. Terrorist attacks can also substantially affect the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. The lack of sufficient insurance for these types of acts could expose us to significant losses.
Security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our IT networks and related systems could harm our business.
We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our efforts will be effective in preventing attempted security breaches or disruptions. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk. A security breach or other significant disruption involving our IT networks and related systems could have an adverse effect on our business, for example:
Disruption to our networks and systems and thus our operations and/or those of our tenants or vendors;
Misstated financial reports, violations of loan covenants, missed reporting deadlines and missed permitting deadlines;
Inability to comply with laws and regulations;
Unauthorized access to, destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could be used to compete against us or for disruptive, destructive or otherwise harmful purposes;
Rendering us unable to maintain the building systems relied upon by our tenants;
The requirement of significant management attention and resources to remedy any damages that result;
Claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; and
Damage to our reputation among our tenants, investors, or others.
We may be unable to renew leases or lease vacant space.
We may be unable to renew our tenants' leases, in which case we must find new tenants. To attract new tenants or retain existing tenants, particularly in periods of recession, we may have to accept rental rates below our existing rental rates or offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options. Accordingly, portions of our office and multifamily properties may remain vacant for extended periods of time. In addition, some existing leases currently provide tenants with options to renew the terms of their leases at rates that are below the current market rates or to terminate their leases prior to the expiration date thereof. We actively pursue opportunities for what we believe to be well-located and high quality buildings that may be in a transitional phase due to current or impending vacancies. We cannot assure that any such vacancies will be filled following a property acquisition, or that new tenant leases will be executed at or above market rates. As of December 31, 2019, 6.7% of the square footage in our total office portfolio was available for lease and 12.4% was scheduled to expire in 2020. As of •December 31, 2019, 1.9% of the units in our multifamily portfolio were available for lease, and substantially all of the leases in our multifamily portfolio must be renewed within the next year. For more information see Item 2 “Properties” of this Report.
Our business strategy for our office portfolio focuses on leasing to smaller-sized tenants which may present greater credit risks.
Our business strategy for our office portfolio focuses on leasing to smaller-sized tenants, which may present greater credit risks because they are more susceptible to economic downturns than larger tenants, and may be more likely to cancel or not renew their leases.
•Real estate investments are generally illiquid.
Our real estate investments are relatively difficult to sell quickly. Return of capital and realization of gains, if any, from an investment will generally occur upon disposition or refinancing of the underlying property. We may not be able to realize our investment objectives by sale or be able to refinance at attractive prices within any given period of time. We may also not be able to complete any exit strategy. Any number of factors could increase these risks, such as (i) weak market conditions, (ii) the lack of an established market for a property, (iii) changes in the financial condition or prospects of prospective buyers, (iv) changes in local, national or international economic conditions, and (v) changes in laws, regulations or fiscal policies. Furthermore, certain properties may be adversely affected by contractual rights, such as rights of first offer or ground leases.
•We may incur significant costs complyingto comply with laws, regulations and covenants that are applicable to our properties.covenants.
The properties in our portfolio are subject to various covenants, federal, state and local laws, ordinances, regulatory requirements, including permitting and licensing requirements, various environmental laws, the ADA and rent control laws. Such laws and regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic, asbestos-cleanup or hazardous material abatement requirements. There can be no assurance that existing laws and regulations will not adversely affect us or the timing or cost of any future acquisitions, developments or renovations, or that additional regulations that increase such delays or result in additional costs will not be adopted. Under the ADA, our properties must meet federal requirements related to access and use by disabled persons to the extent that such properties are “public accommodations”. The costs of our on-going efforts to comply with these laws and regulations are substantial. Moreover, as we have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance with applicable laws and regulations, we may be liable for investigation and remediation costs, penalties, and/or damages, which could be substantial and could adversely affect our ability to sell or rent our property or to borrow using such property as collateral.
Because we own real property, we are subject to extensive environmental regulations, which create uncertainty regarding future environmental expenditures and liabilities.
Environmental laws regulate, and impose•Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for releases of hazardous or toxic substances into the environment. Under various provisions of these laws, an owner or operator of real estate may be liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. Persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for theadverse health effects and costs of cleaning up contamination at the disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow using the property as collateral. Persons exposed to hazardous or toxic substances may sue for personal injury damages, for example, some laws impose liability for release of or exposure to asbestos-containing materials, a substance known to be present in a number of our buildings. In other cases, some of our properties have been (or may have been) impacted by contamination from past operations or from off-site sources. As a result, in connection with our current or former ownership, operation, management and development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under environmental laws.remediation.
Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments. We cannot assure that these or other environmental studies identified all potential environmental liabilities, or that we will not incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may face significant remediation costs and may find it difficult to sell any affected properties. See Note 17 to our consolidated financial statements in Item 15 of this Report for more detail regarding our buildings that contain asbestos.
•Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents and pass through new or increased operating costs to our tenants.
We presently expect to continue operating and acquiring properties in areas that have adopted laws and regulations imposing restrictions on the timing or amount of rent increases or have imposed regulations relating to low- and moderate-income housing.
California and various municipalities within Southern California, including the cities of Los Angeles and Santa Monica where our properties are located, have enacted rent control legislation. All of our multifamily properties in Los Angeles County are affected by these laws and regulations. Under current California law we are able to increase rents to market rates once a tenant vacates a rent-controlled unit, however increases in rental rates for renewing tenants are limited by California, Los Angeles and Santa Monica rent control regulations.
Hawaii does not have state mandated rent control, however portions of the Honolulu multifamily market are subject to low- and moderate-income housing regulations. We have agreed to rent specified percentages of the units at some of our Honolulu multifamily properties to persons with income below specified levels in exchange for certain tax benefits.
These laws and regulations can (i) limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses, (ii) negatively impact our ability to attract higher-paying tenants, (iii) require us to incur costs for reporting and compliance, and (iv) make it more difficult for us to dispose of properties in certain circumstances. Any failure to comply with these regulations could result in fines, penalties and/or the loss of certain tax benefits and the forfeiture of rents.
•We may be unable to complete acquisitions that would grow our business, or successfully integrate and operate acquired properties.
Our planned growth strategy includes the disciplined acquisition of properties as opportunities arise. Our ability to acquire properties on favorable terms and to successfully integrate and operate them is subject to significant risks, including the following:
we may be unable to acquire desired properties because of competition from other real estate investors, including other real estate operating companies, publicly-traded REITs and investment funds;
competition from other potential acquirers may significantly increase the purchase price of a desired property;
we may acquire properties that are not accretive to our results upon acquisition or we may not successfully manage and lease them up to meet our expectations;
we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity financing to consummate an acquisition or, if obtained, the financing may not be on favorable terms;
cash flows from the acquired properties may be insufficient to service the related debt financing;
we may need to spend more than we budgeted to make necessary improvements or renovations to acquired properties;
we may spend significant time and money on potential acquisitions that we do not close;
the process of acquiring or pursuing the acquisition of a property may divert the attention of our senior management team from our existing business operations;
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;
occupancy and rental rates of acquired properties may be less than expected; and
we may acquire properties without recourse, or with limited recourse, for liabilities, whether known or unknown, such as clean-up of environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
We may be unable to successfully expand our operations into new markets and submarkets.
If the opportunity arises, we may explore acquisitions of properties in new markets. The risks applicable to our ability to acquire, integrate and operate properties in our current markets are also applicable to our ability to acquire, integrate and operate properties in new markets. In addition to these risks, we will not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our investments in new markets.
•We are exposed to risks associated with property development.
We engage in development and redevelopment activities with respect to certain of our properties. To the extent that we do so, we are subject to certain risks, including the following:
We may not complete a development or redevelopment project on schedule or within budgeted amounts (as a result of risks beyond our control, such as weather, labor conditions, material shortages and price increases);
We may be unable to lease the developed or redeveloped properties at budgeted rental rates or lease up the property within budgeted time frames;
We may devote time and expend funds on development or redevelopment of properties that we may not complete;
We may encounter delays or refusals in obtaining all necessary zoning, land use, and other required entitlements, and building, occupancy and other required governmental permits and authorizations;
We may encounter delays, refusals and unforeseen cost increases resulting from third-party litigation or objections;
We may fail to obtain the financial results expected from properties we develop or redevelop; and
We have developed and redeveloped properties in the past, however only in a limited manner in recent years, which could adversely affect our ability to develop or redevelop properties or to achieve our expected returns.
•We are exposed to certain risks when we enter into JVs or issue securities of our subsidiaries, including our Operating Partnership.
We have and may in the future develop or acquire properties with, or raise capital from, third parties through partnerships, JVs or other entities, or through acquiring or disposing of non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, JV or other entity. This may subject us to risks that may not be present with other methods of ownership, including for example the following:
We may not be able to exercise sole decision-making authority regarding the properties, partnership, JV or other entity, which would allow for impasses on decisions that could restrict our ability to sell or transfer our interests in such entity or such entity’s ability to transfer or sell its assets;
Partners or co-venturers may default on their obligations including those related to capital contributions, debt financing or interest rate swaps, which could delay acquisition, construction or development of a property or increase our financial commitment to the partnership or JV;
Conflicts of interests with our partners or co-venturers as result of matters such as different needs for liquidity, assessments of the market or tax objectives; ownership of competing interests in other properties; and other business interests, policies or objectives that are competitive or inconsistent with ours;
If any such jointly owned or managed entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may suffer significantly, including having to dispose of our interest in such entity (if that is possible) or even losing our status as a REIT;
Our assumptions regarding the tax impact of any structure or transaction could prove to be incorrect, and we could be exposed to significant taxable income, property tax reassessments or other liabilities, including any liability to third parties that we may assume as part of such transaction or otherwise;
Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses, affect our ability to develop or operate a property and/or prevent our officers and/or directors from focusing their time and effort on our business;
We may, in certain circumstances, be liable for the actions of our third-party partners or co-venturers; and
We may not be able to raise capital as needed from institutional investors or sovereign wealth funds, or on terms that are favorable.
If we default on the ground lease to which one of our properties is subject, our business could be adversely affected.
Some of our properties may be subject to a ground lease. If we default under the terms of such a lease, we may be liable for damages and could lose our ownership interest in the property.
•We may not have sufficient cash available for distribution to stockholders at expected levels in the future.
Our distributions could exceed our cash generated from operations. If necessary, we may fund the difference from our existing cash balances or additional borrowings. If our available cash were to decline significantly below our taxable income, we could lose our REIT status unless we could borrow to make such distributions or make any required distributions in common stock.
Our property taxes could increase due to property tax rate changes, reassessments or changes in property tax laws, which would adversely impact our cash flows.•
We are required to pay property taxes for our properties, which could increase as property tax rates increase or as our properties are assessed or reassessed by taxing authorities. In California, under current law, reassessment occurs primarily as a result of a “change in ownership”. A potential reassessment may take a considerable amount of time, during which the property taxing authorities make a determination of the occurrence of a “change of ownership”, as well as the actual reassessed value. In addition, from time to time, there have been proposals to base property taxes on commercial properties on their current market value, without any limit based on purchase price. If any similar proposal were adopted, the property taxes we pay could increase substantially. In California, pursuant to an existing state law commonly referred to as Proposition 13, properties are reassessed to market value only at the time of change in ownership or completion of construction, and thereafter, annual property reassessments are limited to 2% increases over the previously assessed values. As a result, Proposition 13 generally results in significant below-market assessed values over time. From time to time, including recently, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13 to eliminate its application to commercial and industrial properties. If successful, a repeal of Proposition 13 could substantially increase the assessed values and property taxes for our properties in California.
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable or if we are unable to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
From time to time we may dispose of properties in transactions that are intended to qualify as tax deferred exchanges under Section 1031 of the Code (Section 1031 Exchanges). It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged and determined to be currently taxable. In such cases, our taxable income would increase as would the amount of distributions we are required to make to satisfy our REIT distribution requirements. This could increase the dividend income to our stockholders by reducing any return of capital they receive. In some circumstances, we may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. As a result, we may be required to borrow in order to pay additional dividends or taxes, and the payment of such taxes could cause us to have less cash available to distribute to our stockholders. If a Section 1031 Exchange were later to be determined to be taxable, we may be required to amend our tax returns for the applicable year in question, including any reports we distributed to our stockholders. It is possible that legislation could be enacted that could modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or not possible for us to dispose of properties on a tax deferred basis.
We face risks associated with contractual counterparties being designated “Prohibited Persons” by the Office of Foreign Assets Control.
•Terrorism and war could harm our business and operating results.
The OFAC of the US Department of the Treasury maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). The OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons. Some of our agreements require us and the other party to comply with the OFAC requirements. If a party with whom we contract is placed on the OFAC list we may be required by the OFAC regulations to terminate the agreement, which could result in a losses or a damage claim by the other party that the termination was wrongful.
Risks Related to Our Organization and Structure
•Tax consequences to holders of OP Units upon a sale or refinancing of our properties may cause the interests of our executive officers to differ from the interests of our stockholders.
Some of our properties were contributed to us in exchange for units of our Operating Partnership. As a result of the unrealized built-in gain attributable to such properties at the time of their contribution, some holders of OP Units, including our executive officers, may suffer different and more adverse tax consequences than holders of our common stock upon the sale or refinancing of the properties owned by our Operating Partnership, including disproportionately greater allocations of items of taxable income and gain upon a realization event. As a result, those holders may have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain properties, or whether to sell or refinance such properties at all.
•Our executive officers have significant influence over our affairs.
At •December 31, 2019, our executive officers owned 4% of our outstanding common stock, but they would own 14% if they converted all of their OP Units into common stock. As a result, our executive officers, to the extent that they vote their shares in a similar manner, will have significant influence over our affairs and could exercise such influence in a manner that is not in the best interests of our other stockholders, including by attempting to delay, defer or prevent a change of control transaction that might otherwise be in the best interests of our stockholders.
Our growth depends on external sources of capital which are outside of our control.
In order to qualify as a REIT, we are required under the Code to distribute annually at least 90% of our “REIT taxable income", determined without regard to the dividends paid deduction and by excluding any net capital gain. To the extent that we do not distribute all of our net long-term capital gains or at least 90% of our REIT taxable income, we will be required to pay tax thereon at regular corporate tax rates. Because of these distribution requirements, we may not be able to fund future capital needs from our operating cash flows, including acquisitions, development and debt refinancing. Consequently, we expect to rely on third-party sources to fund some of our capital needs and we may not be able to obtain financing on favorable terms or at all. Any additional borrowings will increase our leverage, and any additional equity that we issue will dilute our common stock. Our access to third-party sources of capital depends on many factors, some of which include:
general market conditions;
the market’s perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flows and cash dividends; and
the market price per share of our common stock.
We face risks associated with short-term liquid investments.
From time to time, we have significant cash balances that we invest in a variety of short-term money market fund investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments are not insured against loss of principal and there is no guarantee that our investments in these funds will be redeemable at par value. If we cannot liquidate our investments or redeem them at par we could incur losses and experience liquidity issues.
Our charter, the partnership agreement of our Operating Partnership, and Maryland law contain provisions that may delay or prevent a change of control transaction.
(i) Our charter contains a five percent ownership limit.
Our charter, subject to certain exceptions, contains restrictions on ownership that limit, and authorizes our directors to take such actions as are necessary and desirable to limit, any person to actual or constructive ownership of not more than five percent of the value or number, whichever is more restrictive, of the outstanding shares of our common stock. Our board of directors, in its sole discretion, may exempt a proposed transferee from the ownership limit. The ownership limit contained in our charter may delay or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
(ii) Our board of directors may create and issue a class or series of preferred stock without stockholder approval.
Our board of directors is empowered under our charter to amend our charter to increase or decrease the aggregate number of shares of our common stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock without stockholder approval. Our board of directors may determine the relative rights, preferences and privileges of any class or series of preferred stock issued. As a result, we may issue series or classes of preferred stock with preferences, dividends, powers and rights, voting or otherwise, senior to the rights of our common stock holders. The issuance of preferred stock could also have the effect of delaying or preventing a change of control transaction that might otherwise be in the best interests of our stockholders.
(iii) Certain provisions in the partnership agreement of our Operating Partnership may delay or prevent an unsolicited acquisition of us.
Provisions in our Operating Partnership agreement may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:
redemption rights of qualifying parties;
transfer restrictions on our OP Units;
the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited partners; and
the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified circumstances.
Any potential change of control transaction may be further limited as a result of provisions of the partnership unit designation for certain LTIP Units, which require us to preserve the rights of LTIP unit holders and may restrict us from amending the partnership agreement for our Operating Partnership in a manner that would have an adverse effect on the rights of LTIP unit holders.
(iv) Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the market price of our common stock, including:
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and
“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have elected to opt out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our board of directors, and in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. However, our board of directors may by resolution elect to repeal the foregoing opt-outs from the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Our charter, bylaws, our Operating Partnership agreement and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Under their employment agreements, certain of our executive officers will receive severance if they are terminated without cause or resign for good reason.
We have employment agreements with Jordan L. Kaplan, Kenneth M. Panzer and Kevin A. Crummy, which provide each executive with severance if they are terminated without cause or resign for good reason (including following a change of control), based on two or three times (depending on the officer) his annual total of salary, bonus and incentive compensation such as LTIP Units, options or outperformance grants. In addition, these executive officers would not be restricted from competing with us after their departure.
Our fiduciary duties as the sole stockholder of the general partner of our Operating Partnership could create conflicts of interest.•
As the sole stockholder of the general partner of our Operating Partnership, we have fiduciary duties to the other limited partners in our Operating Partnership, the discharge of which may conflict with the interests of our stockholders. The limited partners of our Operating Partnership have agreed that, in the event of a conflict in the fiduciary duties owed by us to our stockholders and, in our capacity as general partner of our Operating Partnership, to such limited partners, we are under no obligation to give priority to the interests of such limited partners. The limited partners have the right to vote on certain amendments to the Operating Partnership agreement (which require approval by a majority in interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. For example, we are unable to modify the rights of limited partners to receive distributions as set forth in the Operating Partnership agreement in a manner that adversely affects their rights without their consent, even though such modification might be in the best interest of our stockholders.
The loss of any of our executive officers or key senior personnel could significantly harm our business.
Our ability to maintain our competitive position is largely dependent on the skill and effort of our executive officers and key senior personnel, who have strong industry reputations, assist us in identifying acquisition and borrowing opportunities, having such opportunities brought to us, and negotiating with tenants and sellers of properties. If we lose the services of any of our executive officers or key senior personnel our business could be adversely affected.
Our board of directors may change significant corporate policies without stockholder approval.•
Our investment, financing, borrowing, dividend, operating and other policies are determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of our board of directors without a vote of our stockholders. Our board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements.
Compensation awards to our management may not be tied to or correspond with improved financial results or the market price of our common stock.
The compensation committee of our•Our board of directors is responsible for overseeing our compensation and incentive compensation plans. may change significant corporate policies without stockholder approval.
•Our compensation committee has significant discretion in structuring compensation packages and may make compensation decisions basedgrowth depends on any numberexternal sources of factors. Compensation awards may not be tied to or correspond with improved financial results or the market pricecapital which are outside of our common stock. See Note 13 tocontrol.
•We face risks associated with short-term liquid investments.
•Our charter, the partnership agreement of our consolidated financial statements in Item 15Operating Partnership, and Maryland law contain provisions that may delay or prevent a change of this Report for more information regarding our stock-based compensation.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.•
An effective system of internal control over financial reporting is necessary for us to provide reliable financial reports, prevent fraud and operate successfullyOur fiduciary duties as a public company. There can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all control objectives allthe sole stockholder of the time. Deficiencies, including material weaknesses, in our internal control over financial reporting that may occur in the future could result in material misstatements in our financial reporting, which could result in restatementsgeneral partner of our financial statements. Failure to maintain effective internal controlsOperating Partnership could cause us to not meet our reporting obligations, which could affect our ability to remain listed with the NYSE or result in SEC enforcement actions, and could cause investors to lose confidence in our reported financial information.
Litigation could have an adverse effect on our business.
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary coursecreate conflicts of our business. An unfavorable resolution of litigation could adversely affect us. Even when there is a favorable outcome, litigation may result in substantial expenses and significantly divert the attention of our management with a similar adverse effect on us.interest.
New accounting pronouncements could adversely affect our operating results or the reported financial performance of our tenants.
Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Uncertainties posed by various initiatives of accounting standard-setting by the FASB and the SEC, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations, credit ratings and preferences regarding leasing real estate. See "New Accounting Pronouncements" in Note 2 to our consolidated financial statements in Item 15 of this Report.
Risks Related to Taxes and Our Status as a REIT
Prospective investors should consult with their•Our property taxes could increase due to property tax advisors regarding the effects of recently enactedrate changes, reassessments or changes in property tax legislation and other legislative, regulatory and administrative developments.
laws, which would adversely impact our cash flows.
On December 22, 2017, the Tax Cuts and Jobs Act (the “•TCJA”) was signed into law. The TCJA makes major changes to the Code, including a number of provisions of the Code that affect the taxation of REITs and their stockholders. Among the changes made by the TCJA are:
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(i) | permanently reducing the generally applicable corporate tax rate, |
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(ii) | generally reducing the tax rate applicable to individuals and other non-corporate taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026, |
(iii) eliminating or modifying certain previously allowed deductions (including substantially limiting interest deductibility, compensation deductions in excess of $1.0 million per year for certain executives of publicly held corporations and, for individuals, the deduction for non-business state and local taxes),
(iv) for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for preferential rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends and certain trade or business income of non-corporate taxpayers, and
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(v) | imposes new limitations on the deduction of net operating losses, which may result in us having to make additional taxable distributions to our stockholders in order to comply with REIT distribution requirements or avoid taxes on retained income and gains. |
The effect of the significant changes made by the TCJA are uncertain, and the IRS has issued only limited guidance to date, additional administrative guidance will be required in order to fully evaluate the effect of many provisions. The effect of any technical corrections with respect to the TCJA could have an adverse effect on us or our stockholders. Investors should consult their tax advisors regarding the implications of the TCJA on their investment in our common stock.
Failure to qualify as a REIT would result in higher taxes and reduced cash available for distributions.
•If the Operating Partnership, or any of its subsidiaries, were treated as a regular corporation for federal income tax purposes, we could cease to qualify as a REIT.
•Even if we qualify as a REIT, we will be required to pay some taxes which would reduce cash available for distributions.
•REIT distribution requirements could adversely affect our liquidity and cause us to forego otherwise attractive opportunities.
•REIT stockholders can receive taxable income without cash distributions.
•If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable or if we are unable to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
•Legislative or other actions affecting REITs could have a negative effect on our investors or us, including our ability to maintain our qualification as a REIT or the federal income tax consequences of such qualification.
•Non-U.S. investors may be subject to FIRPTA, which would impose tax on certain distributions and on the sale of common stock if we are unable to qualify as a “domestically controlled” REIT or if our stock is not considered to be regularly traded on an established securities market.
General Risks
•Security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our IT networks and related systems could harm our business.
•Litigation could have an adverse effect on our business.
•If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.
•New accounting pronouncements could adversely affect our operating results or the reported financial performance of our tenants.
Risks Related to Our Properties and Our Business
The COVID-19 global pandemic has and could continue to adversely affect our business, financial position, results of operations, cash flows, our ability to service our debt, our ability to pay dividends to our stockholders, our REIT status, our ability to capitalize on business opportunities as they arise, our ability to raise capital, and/or the market price of our common stock.
The COVID-19 global pandemic has led to severe disruption to general economic activities as governments and businesses take actions to mitigate the public health crisis. The extent to which the pandemic ultimately impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of each variant, its severity, the actions taken to contain the virus, the emergence and impact of future virus variants, and how quickly and to what extent normal economic and operating conditions resume. Even as the pandemic subsides, we may continue to experience significant impacts to our business as a result of its global economic impact, including any resulting economic recession.
Not all of the impacts of the pandemic are known at this time, however, some of the potential impacts from the pandemic could include:
•Government actions, including but not limited to lease enforcement moratoriums, that reduce or otherwise hinder our ability to collect rent promptly or at all, adversely affect tenant demand, increase our costs or otherwise reduce our collections;
•Supply chain, governmental or other disruptions that adversely affect construction or our operations and/or those of our tenants;
•Economic pressure on our tenants, which could lead to lower collections or defaults;
•Reduced or different tenant demand, leading to lower occupancy and/or rental rates in our buildings;
•Reduced attendance in our buildings, resulting in lower parking revenues;
•Increases in expenses and/or capital investments or decreases in tenant demand as a result of safety concerns;
•Increased risks of IT disruptions and/or cyber attacks as a result of our employees or tenants working remotely;
•Disruption of our operations as a result of the illness or social distancing of our employees or tenants;
•Impact on the labor market, which could lead to higher employee turnover and increased labor costs;
•Changes in the financial markets, the value of our properties and/or our cash flows which adversely affect our stock price and/or our tenants' access to needed debt or equity capital on reasonable or any terms; and/or
•Increases in the cost or availability, or changes to the terms, of insurance.
Persistent higher inflation could adversely impact our operating results, cash flows, financial position, our ability to pay dividends and distributions, and the market price of our common stock.
Some of the potential adverse impacts of higher inflation on our business could include:
•an increase in our rental operating costs and our general and administrative costs;
•we may be unable to increase rental rates at the same rate as inflation;
•if we are able to increase rental rates at the same rate as inflation, it could reduce tenant demand for our properties;
•we may be unable to recover higher rental operating costs from our office tenants;
•higher operating costs billed to our office tenants could reduce tenant demand for our office properties;
•higher inflation is usually accompanied by higher interest rates, which could: (i) increase our borrowing costs, (ii) adversely impact our property valuations, and (iii) cause an economic recession which would adversely affect our business;
•an increase in recurring capital expenditures to maintain our properties;
•an increase in construction costs, which would increase the cost of development and respositioning projects;
•reduced cash flows would adversely impact our ability to pay dividends and distributions.
All of our properties are located in Los Angeles County, California, and Honolulu, Hawaii, and we are therefore exposed to greater risk than if we owned a more geographically diverse portfolio. Our properties in Los Angeles County are concentrated in certain submarkets, exposing us to risks associated with those specific areas.
Because of the geographic concentration of our properties, we are susceptible to adverse economic and regulatory developments, as well as natural disasters, in the markets and submarkets where we operate, including, for example, economic slowdowns, industry slowdowns, business downsizing, business relocations, increases in real estate and other taxes, changes in regulation, earthquakes, floods, droughts and wildfires. California is also regarded as being more litigious, regulated and taxed than many other states.
Our operating performance is subject to risks associated with the real estate industry.
Real estate investments are subject to various risks, fluctuations and cycles in value and demand, many of which are beyond our control. These events include, but are not limited to:
•adverse changes in international, national or local economic conditions;
•inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or below-market renewal options;
•adverse changes in financial conditions of actual or potential investors, buyers, sellers or tenants;
•inability to collect rent from tenants;
•competition from other real estate investors, including other real estate operating companies, publicly-traded REITs and institutional investment funds;
•reduced tenant demand for office space and residential units from matters such as: (i) trends in space utilization, (ii) changes in the relative popularity of our properties, (iii) the type of space we lease, (iv) purchasing versus leasing, (v) increasing crime or homelessness in our submarkets or (vi) economic recessions;
•reduced demand for parking space due to matters such as: (i) reduced attendance in our buildings, (ii) the impact of technology such as self-driving cars, or (iii) the increasing popularity of car ride sharing services;
•increases in the supply of office space and residential units;
•fluctuations in interest rates and the availability of credit, which could adversely affect our ability to obtain financing on favorable terms or at all;
•increases in operating costs (or our reduced ability to recover operating costs from our tenants), including: (i) insurance costs, (ii) labor costs (such as the unionization of our employees or the employees of any parties with whom we contract for services to our buildings), (iii) energy prices, (iv) real estate assessments and other taxes, and (v) costs of compliance with laws, regulations and governmental policies;
•utility disruptions;
•the effects of rent controls, stabilization laws and other laws or covenants regulating rental rates;
•changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the ADA;
•legislative uncertainty related to federal and state spending and tax policy;
•difficulty in operating properties effectively;
•acquiring undesirable properties; and
•inability to dispose of properties at appropriate times or at favorable prices.
We have a substantial amount of debt, which exposes us to interest rate fluctuation risk and the risk of not being able to refinance our debt, which in turn could expose us to the risk of default under our debt obligations.
We have a substantial amount of debt and we may incur significant additional debt for various purposes, including, without limitation, to fund future property acquisitions and development activities, reposition properties and to fund our operations. See Note 8 to our consolidated financial statements in Item 15 of this Report for more detail regarding our consolidated debt. See "Off-Balance Sheet Arrangements" in Item 7 of this Report for more detail regarding our unconsolidated debt.
Our substantial indebtedness, and the limitations and other constraints imposed on us by our debt agreements, especially during economic downturns when credit is harder to obtain, could adversely affect us, including the following:
•periods of rising and high interest rates would adversely affect: (i) our results of operations, (ii) our ability to pay dividends and distributions, (iii) the market price of our common stock, and (iv) our ability to borrow or to borrow on favorable terms;
•our cash flows may be insufficient to meet our required principal and interest payments;
•servicing our borrowings may leave us with insufficient cash to operate our properties or to pay the distributions necessary to maintain our REIT qualification;
•we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon acquisition opportunities;
•we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our existing indebtedness;
•we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;
•we may violate any restrictive covenants in our loan documents, which could entitle the lenders to accelerate our debt obligations;
•we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under our hedge agreements, the hedge agreements may not effectively hedge the interest rate fluctuation risk, and, upon the expiration of any hedge agreements we do have, we will be exposed to the then-existing market rates of interest and future interest rate volatility with respect to debt that is currently hedged; we could also be declared in default on our hedge agreements if we default on the underlying debt that we are hedging;
•we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;
•our default under any of our indebtedness with cross default provisions could result in a default on other indebtedness;
•any foreclosure on our properties could also create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Code; and
•most of our floating rate debt and related hedges are indexed to USD-LIBOR, any regulatory changes which impact the USD-LIBOR benchmark, such as the transition to SOFR (see Item 7A - "Quantitative and Qualitative Disclosures about Market Risk" in this Report) or other indexes, could impact our borrowing costs or the effectiveness of our hedges.
The rents we receive from new leases may be less than our asking rents, and we may experience rent roll-down from time to time.
As a result of various factors, such as competitive pricing pressure in our submarkets, adverse conditions in the Los Angeles County or Honolulu real estate market, general economic downturns, or the desirability of our properties compared to other properties in our submarkets, the rents we receive on new leases could be less than our in-place rents.
In order to successfully compete against other properties, we need to maintain, repair, and renovate our properties, which reduces our cash flows.
If our properties are not as attractive to current and prospective tenants in terms of rent, services, condition, or location as properties owned by our competitors, we could lose tenants or suffer lower rental rates. As a result, we may from time to time be required to incur significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditures would result in higher occupancy or rental rates, or deter existing tenants from relocating to properties owned by our competitors.
We face intense competition, which could adversely impact the occupancy and rental rates of our properties.
We compete with a number of developers, owners and operators of office and multifamily real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates that we currently charge our tenants, or if they offer tenants significant rent or other concessions, we may lose existing or potential tenants and may not be able to replace them, and we may be pressured to reduce our rental rates below those we currently charge or offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire.
Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by insurance.
Our business operations in Los Angeles County, California and Honolulu, Hawaii are susceptible to, and could be significantly affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, drought, wind, floods, landslides and fires. The likelihood of such disasters may be increased as a result of climate change, and climate change could also have other impacts such as rising sea levels, which could impact our properties in Honolulu.
Adverse weather conditions, natural disasters and climate change impacts could cause significant damage to our properties or to the economies of the regions in which they are located, the risk of which is enhanced by the concentration of our properties’ locations. Our insurance coverage may not be adequate to cover business interruption or losses resulting from adverse weather or natural disasters. In addition, our insurance policies include substantial self-insurance portions and significant deductibles and co-payments for such events, and we are subject to the availability of insurance in the US and the pricing thereof. As a result, we may incur significant costs in the event of adverse weather conditions and natural disasters.
Most of our properties are located in Southern California, an area subject to an increased risk of earthquakes. While we presently carry earthquake insurance on our properties, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from earthquakes. We may reduce or discontinue earthquake or any other insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss.
We do not carry insurance for certain losses, such as losses caused by certain environmental conditions, asbestos, riots or war. In addition, our title insurance policies generally only insure the value of a property at the time of purchase, and we have not and do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title claims.
If we experience a loss that is uninsured or which exceeds policy limits, we could incur significant costs and lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. If the damaged properties are encumbered, we may continue to be liable for the indebtedness, even if these properties were irreparably damaged.
If any of our properties were destroyed or damaged, then we might not be permitted to rebuild many of those properties to their existing height or size at their existing location under current zoning and land use regulations. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications and otherwise may have to upgrade such property to meet current code requirements.
New regulations in the submarkets in which we operate could require us to make safety improvements to our buildings, for example requiring us to retrofit our buildings to better withstand earthquakes, and we could incur significant costs complying with those regulations.
We may be unable to renew leases or lease vacant space.
We may be unable to renew our tenants' leases, in which case we must find new tenants. To attract new tenants or retain existing tenants, particularly in periods of recession, we may have to accept rental rates below our existing rental rates or offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options. Accordingly, portions of our office and multifamily properties may remain vacant for extended periods of time. In addition, some existing leases currently provide tenants with options to renew the terms of their leases at rates that are below the current market rates or to terminate their leases prior to the expiration date thereof. We actively pursue opportunities for what we believe to be well-located and high quality buildings that may be in a transitional phase due to current or impending vacancies. We cannot assure that any such vacancies will be filled following a property acquisition, or that new tenant leases will be executed at or above market rates. As of December 31, 2022, 12.9% of the square footage in our total office portfolio was available for lease and 13.8% was scheduled to expire in 2023. As of December 31, 2022, 0.6% of the units in our multifamily portfolio were available for lease, and substantially all of the leases in our multifamily portfolio must be renewed within the next year. For more information see Item 2 “Properties” of this Report.
Our business strategy for our office portfolio focuses on leasing to smaller-sized tenants which may present greater credit risks.
Our business strategy for our office portfolio focuses on leasing to smaller-sized tenants, which may present greater credit risks because they are more susceptible to economic downturns than larger tenants, and may be more likely to cancel or not renew their leases.
Real estate investments are generally illiquid.
Our real estate investments are relatively difficult to sell quickly. Return of capital and realization of gains, if any, from an investment will generally occur upon disposition or refinancing of the underlying property. We may not be able to realize our investment objectives by sale or be able to refinance at attractive prices within any given period of time. We may also not be able to complete any exit strategy. Any number of factors could increase these risks, such as (i) weak market conditions, (ii) the lack of an established market for a property, (iii) changes in the financial condition or prospects of prospective buyers, (iv) changes in local, national or international economic conditions, and (v) changes in laws, regulations or fiscal policies. Furthermore, certain properties may be adversely affected by contractual rights, such as rights of first offer or ground leases.
We may incur significant costs to comply with laws, regulations and covenants.
The properties in our portfolio are subject to various covenants, federal, state and local laws, ordinances, regulatory requirements, including permitting and licensing requirements, various environmental laws, the ADA and rent control laws. Such laws and regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic, asbestos abatement or hazardous material cleanup requirements. There can be no assurance that existing laws and regulations will not adversely affect us or the timing or cost of any future acquisitions, developments or renovations, or that additional regulations that increase such delays or result in additional costs will not be adopted. Under the ADA, our properties must meet federal requirements related to access and use by disabled persons to the extent that such properties are “public accommodations”. The costs of our on-going efforts to comply with these laws and regulations are substantial. Moreover, as we have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance with applicable laws and regulations, we may be liable for investigation and remediation costs, penalties, and/or damages, which could be substantial and could adversely affect our ability to sell or rent our property or to borrow using such property as collateral.
Because we own real property, we are subject to extensive environmental regulations, which create uncertainty regarding future environmental expenditures and liabilities.
Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various provisions of these laws, a current or former owner or operator of real estate may be liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. Persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. In addition, some laws may create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow using the property as collateral. Persons exposed to hazardous or toxic substances at our properties may sue for personal injury damages, for example, some laws impose liability for release of or exposure to asbestos-containing materials, a substance known to be present in a number of our buildings. In other cases, some of our properties have been (or may have been) impacted by contamination from past operations or from off-site sources. As a result, in connection with our current or former ownership, operation, management and development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under environmental laws.
Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants in order to identify potential environmental concerns, Phase I assessments are limited in scope, and may not identify all potential environmental liabilities or risks associated with the property. For example, a prior owner or operator of a property or historical operations at or near our properties may have created a material environmental condition that is not known to us or the independent consultants preparing the Phase I assessments. Unless required by applicable laws or regulations, we may not further investigate, remedy or ameliorate the environmental conditions identified in the Phase I assessments. We cannot assure that these or other environmental studies identified all potential environmental liabilities, or that we will not incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may face significant remediation costs and may find it difficult to sell any affected properties. See Note 17 to our consolidated financial statements in Item 15 of this Report for more detail regarding our buildings that contain asbestos.
In addition, we may incur costs to comply with federal, state and local legislation and regulations that are implemented to mitigate the effects of climate change. The costs of complying with evolving regulatory requirements could negatively impact our results of operations.
Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for adverse health effects and costs of remediation.
Moisture may accumulate in buildings or on building materials, and mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury is alleged to have occurred.
Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents and pass through new or increased operating costs to our tenants.
We presently expect to continue operating and acquiring properties in areas that have adopted laws and regulations imposing restrictions on the timing or amount of rent increases or have imposed regulations relating to low- and moderate-income housing.
California and various municipalities within Southern California, including the cities of Los Angeles and Santa Monica where our properties are located, have enacted rent control legislation. All of our multifamily properties in Los Angeles County are affected by these laws and regulations. Under current California law we are able to increase rents to market rates once a tenant vacates a rent-controlled unit; however, increases in rental rates for renewing tenants are limited by California, Los Angeles and Santa Monica rent control regulations.
Hawaii does not have state mandated rent control, however portions of the Honolulu multifamily market are subject to low- and moderate-income housing regulations. We have agreed to rent specified percentages of the units at some of our Honolulu multifamily properties to persons with income below specified levels in exchange for certain tax benefits.
These laws and regulations can (i) limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses, (ii) negatively impact our ability to attract higher-paying tenants, (iii) require us to incur costs for reporting and compliance, and (iv) make it more difficult for us to dispose of properties in certain circumstances. Any failure to comply with these regulations could result in fines, penalties and/or the loss of certain tax benefits and the forfeiture of rents.
We may be unable to complete acquisitions that would grow our business, or successfully integrate and operate acquired properties.
Our planned growth strategy includes the disciplined acquisition of properties as opportunities arise. Our ability to acquire properties on favorable terms and to successfully integrate and operate them is subject to significant risks, including the following:
•we may be unable to acquire desired properties because of competition from other real estate investors, including other real estate operating companies, publicly-traded REITs and investment funds;
•competition from other potential acquirers may significantly increase the purchase price of a desired property;
•we may acquire properties that are not accretive to our results upon acquisition or we may not successfully manage and lease them up to meet our expectations;
•we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity financing to consummate an acquisition or, if obtained, the financing may not be on favorable terms;
•cash flows from the acquired properties may be insufficient to service the related debt financing;
•we may need to spend more than we budgeted to make necessary improvements or renovations to acquired properties;
•we may spend significant time and money on potential acquisitions that we do not close;
•the process of acquiring or pursuing the acquisition of a property may divert the attention of our senior management team from our existing business operations;
•we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;
•occupancy and rental rates of acquired properties may be less than expected; and
•we may acquire properties without recourse, or with limited recourse, for liabilities, whether known or unknown, such as clean-up of environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
We may be unable to successfully expand our operations into new markets and submarkets.
If the opportunity arises, we may explore acquisitions of properties in new markets. The risks applicable to our ability to acquire, integrate and operate properties in our current markets are also applicable to our ability to acquire, integrate and operate properties in new markets. In addition to these risks, we will not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our investments in new markets.
We are exposed to risks associated with property development.
We engage in development and redevelopment activities with respect to certain of our properties. To the extent that we do so, we are subject to certain risks, including the following:
•We may not complete a development or redevelopment project on schedule or within budgeted amounts (as a result of risks beyond our control, such as weather, labor conditions, permitting issues, material shortages and price increases);
•We may be unable to lease the developed or redeveloped properties at budgeted rental rates or lease up the property within budgeted time frames;
•We may devote time and expend funds on development or redevelopment of properties that we may not complete;
•We may encounter delays or refusals in obtaining all necessary zoning, land use, and other required entitlements, and building, occupancy and other required governmental permits and authorizations, and our costs to comply with the conditions imposed by such permits and authorizations could increase;
•We may encounter delays, refusals and unforeseen cost increases resulting from third-party litigation or objections; and
•We may fail to obtain the financial results expected from properties we develop or redevelop;
We are exposed to certain risks when we enter into JVs or issue securities of our subsidiaries, including our Operating Partnership.
We have and may in the future develop or acquire properties with, or raise capital from, third parties through partnerships, JVs or other entities, or through acquiring or disposing of non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, JV or other entity. This may subject us to risks that may not be present with other methods of ownership, including for example the following:
•We may not be able to exercise sole decision-making authority regarding the properties, partnership, JV or other entity, which would allow for impasses on decisions that could restrict our ability to sell or transfer our interests in such entity or such entity’s ability to transfer or sell its assets;
•Partners or co-venturers may default on their obligations including those related to capital contributions, debt financing or interest rate swaps, which could delay acquisition, construction or development of a property or increase our financial commitment to the partnership or JV;
•Conflicts of interests with our partners or co-venturers as result of matters such as different needs for liquidity, assessments of the market or tax objectives; ownership of competing interests in other properties; and other business interests, policies or objectives that are competitive or inconsistent with ours;
•If any such jointly owned or managed entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may suffer significantly, including having to dispose of our interest in such entity (if that is possible) or even losing our status as a REIT;
•Our assumptions regarding the tax impact of any structure or transaction could prove to be incorrect, and we could be exposed to significant taxable income, property tax reassessments or other liabilities, including any liability to third parties that we may assume as part of such transaction or otherwise;
•Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses, affect our ability to develop or operate a property and/or prevent our officers and/or directors from focusing their time and effort on our business;
•We may, in certain circumstances, be liable for the actions of our third-party partners or co-venturers; and
•We may not be able to raise capital as needed from institutional investors or sovereign wealth funds, or on terms that are favorable.
If we default on the ground lease to which one of our properties is subject, our business could be adversely affected.
Some of our properties may be subject to a ground lease. If we default under the terms of such a lease, we may be liable for damages and could lose our ownership interest in the property.
We may not have sufficient cash available for distribution to stockholders at expected levels in the future.
Our distributions could exceed our cash generated from operations. If necessary, we may fund the difference from our existing cash balances or additional borrowings. If our available cash were to decline significantly below our taxable income, we could lose our REIT status unless we could borrow to make such distributions or make any required distributions in common stock.
We face risks associated with contractual counterparties being designated “Prohibited Persons” by the Office of Foreign Assets Control.
The OFAC of the US Department of the Treasury maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). The OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons. Some of our agreements require us and the other party to comply with the OFAC requirements. If a party with whom we contract is placed on the OFAC list we may be required by the OFAC regulations to terminate the agreement, which could result in a losses or a damage claim by the other party that the termination was wrongful.
Terrorism and war could harm our business and operating results.
The possibility of future terrorist attacks or war could have a negative impact on our operations, even if they are not directed at our properties and even if they never actually occur. Terrorist attacks can also substantially affect the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. The lack of sufficient insurance for these types of acts could expose us to significant losses.
Risks Related to Our Organization and Structure
Tax consequences to holders of OP Units upon a sale or refinancing of our properties may cause the interests of our executive officers to differ from the interests of our stockholders.
Some of our properties were contributed to us in exchange for units of our Operating Partnership. As a result of the unrealized built-in gain attributable to such properties at the time of their contribution, some holders of OP Units, including our executive officers, may suffer different and more adverse tax consequences than holders of our common stock upon the sale or refinancing of the properties owned by our Operating Partnership, including disproportionately greater allocations of items of taxable income and gain upon a realization event. As a result, those holders may have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain properties, or whether to sell or refinance such properties at all.
Our executive officers have significant influence over our affairs.
At December 31, 2022, our executive officers owned 4% of our outstanding common stock, but they would own 16% if all of their outstanding LTIPs and OP Units were converted into common stock. As a result, our executive officers, to the extent that they vote their shares in a similar manner, will have significant influence over our affairs and could exercise such influence in a manner that is not in the best interests of our other stockholders, including by attempting to delay, defer or prevent a change of control transaction that might otherwise be in the best interests of our stockholders.
Under their employment agreements, certain of our executive officers will receive severance if they are terminated without cause or resign for good reason.
We have employment agreements with Jordan L. Kaplan, Kenneth M. Panzer and Kevin A. Crummy, which provide each executive with severance if they are terminated without cause or resign for good reason (including following a change of control), based on two or three times (depending on the officer) his annual total of salary, bonus and incentive compensation such as LTIP Units, options or outperformance grants. In addition, these executive officers would not be restricted from competing with us after their departure.
The loss of any of our executive officers or key senior personnel could significantly harm our business.
Our ability to maintain our competitive position is largely dependent upon the skill and effort of our executive officers and key personnel, who have significant real estate industry experience, strong industry reputations and networks, and assist us in identifying acquisition, disposition, development and borrowing opportunities, negotiating with tenants and sellers of properties, and managing our development projects and the operations of our properties. If we lose the services of any of our executive officers or key senior personnel our business could be adversely affected.
Compensation awards to our management may not be tied to or correspond with improved financial results or the market price of our common stock.
The compensation committee of our board of directors is responsible for overseeing our compensation and incentive compensation plans. Our compensation committee has significant discretion in structuring compensation packages and may make compensation decisions based on any number of factors. Compensation awards may not be tied to or correspond with improved financial results or the market price of our common stock. See Note 13 to our consolidated financial statements in Item 15 of this Report for more information regarding our stock-based compensation.
Our board of directors may change significant corporate policies without stockholder approval.
Our investment, financing, borrowing, dividend, operating and other policies are determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of our board of directors without a vote of our stockholders. Our board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements.
Our growth depends on external sources of capital which are outside of our control.
In order to qualify as a REIT, we are required under the Code to distribute annually at least 90% of our “REIT taxable income", determined without regard to the dividends paid deduction and by excluding any net capital gain. To the extent that we do not distribute all of our net long-term capital gains or at least 90% of our REIT taxable income, we will be required to pay tax thereon at the regular corporate tax rate. Because of these distribution requirements, we may not be able to fund future capital needs from our operating cash flows, including acquisitions, development and debt refinancing. Consequently, we expect to rely on third-party sources to fund some of our capital needs and we may not be able to obtain financing on favorable terms or at all. Any additional borrowings will increase our leverage, and any additional equity that we issue will dilute our common stock. Our access to third-party sources of capital depends on many factors, some of which include:
•general market conditions;
•the market’s perception of our growth potential;
•our current debt levels;
•our current and expected future earnings;
•our cash flows and cash dividends; and
•the market price per share of our common stock.
We face risks associated with short-term liquid investments.
From time to time, we have significant cash balances that we invest in a variety of short-term money market fund investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments are not insured against loss of principal and there is no guarantee that our investments in these funds will be redeemable at par value. If we cannot liquidate our investments or redeem them at par we could incur losses and experience liquidity issues.
Our charter, the partnership agreement of our Operating Partnership, and Maryland law contain provisions that may delay or prevent a change of control transaction.
(i) Our charter contains a five percent ownership limit.
Our charter, subject to certain exceptions, contains restrictions on ownership that limit, and authorizes our directors to take such actions as are necessary and desirable to limit, any person to actual or constructive ownership of not more than five percent of the value or number, whichever is more restrictive, of the outstanding shares of our common stock. Our board of directors, in its sole discretion, may exempt a proposed transferee from the ownership limit. The ownership limit contained in our charter may delay or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
(ii) Our board of directors may create and issue a class or series of preferred stock without stockholder approval.
Our board of directors is empowered under our charter to amend our charter to increase or decrease the aggregate number of shares of our common stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock without stockholder approval. Our board of directors may determine the relative rights, preferences and privileges of any class or series of preferred stock issued. As a result, we may issue series or classes of preferred stock with preferences, dividends, powers and rights, voting or otherwise, senior to the rights of our common stock holders. The issuance of preferred stock could also have the effect of delaying or preventing a change of control transaction that might otherwise be in the best interests of our stockholders.
(iii) Certain provisions in the partnership agreement of our Operating Partnership may delay or prevent an unsolicited acquisition of us.
Provisions in our Operating Partnership agreement may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:
•redemption rights of qualifying parties;
•transfer restrictions on our OP Units;
•the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited partners; and
•the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified circumstances.
Any potential change of control transaction may be further limited as a result of provisions of the partnership unit designation for certain LTIP Units, which require us to preserve the rights of LTIP unit holders and may restrict us from amending the partnership agreement for our Operating Partnership in a manner that would have an adverse effect on the rights of LTIP unit holders.
(iv) Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the market price of our common stock, including:
•“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and
•“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have elected to opt out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our board of directors, and in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. However, our board of directors may by resolution elect to repeal the foregoing opt-outs from the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Our charter, bylaws, our Operating Partnership agreement and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Our fiduciary duties as the sole stockholder of the general partner of our Operating Partnership could create conflicts of interest.
As the sole stockholder of the general partner of our Operating Partnership, we have fiduciary duties to the other limited partners in our Operating Partnership, the discharge of which may conflict with the interests of our stockholders. The limited partners of our Operating Partnership have agreed that, in the event of a conflict in the fiduciary duties owed by us to our stockholders and, in our capacity as general partner of our Operating Partnership, to such limited partners, we are under no obligation to give priority to the interests of such limited partners. The limited partners have the right to vote on certain amendments to the Operating Partnership agreement (which require approval by a majority in interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. For example, we are unable to modify the rights of limited partners to receive distributions as set forth in the Operating Partnership agreement in a manner that adversely affects their rights without their consent, even though such modification might be in the best interest of our stockholders.
Risks Related to Taxes and Our Status as a REIT
Our property taxes could increase due to property tax rate changes, reassessments or changes in property tax laws, which would adversely impact our cash flows.
We are required to pay property taxes for our properties, which could increase as property tax rates increase or as our properties are assessed or reassessed by taxing authorities. In California, pursuant to an existing state law commonly referred to as Proposition 13, properties are currently reassessed to market value only at the time of change in ownership or completion of construction, and thereafter, annual property reassessments are generally limited to 2% increases over the previously assessed values. As a result, Proposition 13 generally results in significant below-market assessed values over time.
From time to time, including recently, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13 to eliminate its application to commercial and/or other properties. If Proposition 13 no longer limited the assessed value of our California properties, the assessed values and property taxes for those properties could increase substantially, which could have a material impact on our results of operations, cash flows and financial condition.
Failure to qualify as a REIT would result in higher taxes and reduced cash available for distributions.
We have elected to be taxed as a REIT under the Code, commencing with our initial taxable year ended December 31, 2006. To qualify as a REIT, we must satisfy on a continuing basis certain technical and complex income, asset, organizational, distribution, stockholder ownership and other requirements. See Item 1 "Business Overview" of this Report for more information regarding these tests. Our ability to satisfy these tests depends upon our analysis of and compliance with numerous factors, many of which are not subject to a precise determination and have only limited judicial and administrative interpretations, and which are not entirely within our control. Holding most of our assets through our Operating Partnership further complicates the application of the REIT requirements and a technical or inadvertent mistake could jeopardize our REIT status. Legislation, newNew legislation, Treasury regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to the requirements for qualification as a REIT or the federal income tax consequences of qualification as a REIT. Although we believe that we will continue to qualify as a REIT, we can give no assurance that we have qualified or will continue to qualify as a REIT.
If we were to fail to qualify as a REIT in any taxable year, and certain relief provisions did not apply, we would be subject to federal income tax on our taxable income at the regular corporate rate, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders. Unless entitled to relief under certain Code provisions, we would also be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. In addition, if we fail to qualify as a REIT, we would not be required to make distributions to stockholders, and all distributions to stockholders will be subject to tax as dividend income to the extent of our current and accumulated earnings and profits. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the relief provisions under the Code in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of $50,000 or more for each such failure.
As a result of the above factors, our failure to qualify as a REIT could impair our ability to raise capital and expand our business, substantially reduce distributions to stockholders, result in us incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes, and adversely affect the market price of our common stock.
Our Fund, and twothree of our consolidated JVs, also own properties through one or more entities which are intended to qualify as REITs, and we may in the future use other structures that include REITs. The failure of any such entities to qualify as a REIT could have similar consequences to the REIT subsidiary and could also cause us to fail to qualify as a REIT.
If the Operating Partnership, or any of its subsidiaries, were treated as a regular corporation for federal income tax purposes, we could cease to qualify as a REIT.
Although we believe that the Operating Partnership and other subsidiary partnerships, limited liability companies, REIT subsidiaries, QRS and other subsidiaries (other than the TRS) in which we own a direct or indirect interest will be treated for tax purposes as a partnership, disregarded entity (e.g., in the case of a 100% owned limited liability company), REIT or QRS, as applicable, no assurance can be given that the IRS will not successfully challenge the tax classification of any such entity, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership or other subsidiaries as entities taxable as a corporation (including a “publicly traded partnership” taxed as a corporation) for federal income tax purposes, we would likely fail to qualify as a REIT and it would significantly reduce the amount of cash available for distribution by such subsidiaries to us.
Even if we qualify as a REIT, we will be required to pay some taxes which would reduce cash available for distributions.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject to income tax to the extent that we distribute less than 100% of our REIT taxable income (including capital gains). In addition, any net taxable income earned directly by our TRS, or through entities that are disregarded for federal income tax purposes as entities separate from our TRS, will be subject to federal and possibly state corporate income tax. We have elected to treat severalone of our subsidiaries as TRSs,a TRS, and we may elect to treat other subsidiaries as TRSs in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a TRS will be subject to an appropriate level of federal income taxation. For example, for taxable years prior to 2018, a TRS is limited in its ability to deduct interest payments made to an affiliated REIT.REIT and, for taxable years after 2017, a TRS is subject to more general limitations on its ability to deduct interest payments to any lender. In addition, the REIT has to pay a 100% tax on some payments that it receives or on some deductions taken by its TRS if the economic arrangements between the REIT, the REIT’s tenants, and the TRS are not comparable to similar arrangements between unrelated parties. In addition, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities treat REITs the same as they are treated for federal income tax purposes. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held primarily for sale to customers in the ordinary course of our business, such characterization is a factual determination and we cannot guarantee that the IRS would agree with our characterization of our properties. To the extent that we are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
REIT distribution requirements could adversely affect our liquidity and cause us to forego otherwise attractive opportunities.
To qualify as a REIT, we generally must distribute annually at least 90% of our REIT taxable income, excluding any net capital gains. To the extent that we do not distribute all of our net long-term capital gains or at least 90% of our REIT taxable income, we will be required to pay tax thereon at the regular corporate tax rates.rate. We intend to make distributions to our stockholders to comply with the Code requirements for REITs and to minimize or eliminate our corporate income tax obligation. Certain types of assets and activities generate substantial mismatches between taxable income and available cash.cash, either because of differences in timing between the recognition of income and the actual receipt of cash or because of differences between the deduction of expenses and the actual payment of those expenses. Such assets include rental real estate that has been financed through financing structures which require some or all of available cash flows to be used to service borrowings. As a result, the requirement to distribute a substantial portion of our taxable income could cause us to sell assets in adverse market conditions, borrow on unfavorable terms, make a taxable distribution of our stock as part of a distribution in which stockholders may elect to receive our stock or (subject to a limit measured as a percentage of the total distribution) cash, distribute amounts that could otherwise be used to fund our operations, capital expenditures, acquisitions or repayment of debt, or cause us to forego otherwise attractive opportunities.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum federal tax rate (not including the Medicare Contribution Tax on unearned income) applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for the 20% rate. However, under the TCJA, for taxable years beginning after December 31, 2017 and before January 1, 2026, individuals, trusts, and estates generally may deduct up to 20% of ordinary REIT dividends. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends.
REIT stockholders can receive taxable income without cash distributions.
Under certain circumstances, REITs are permitted to pay required dividends in shares of their stock rather than in cash. If we were to avail ourselves of that option, our stockholders could be required to pay taxes on such stock distributions without the benefit of cash distributions to pay the resulting taxes.
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable or if we are unable to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
From time to time we may dispose of real properties in transactions that are intended to qualify as tax deferred exchanges under Section 1031 of the Code (Section 1031 Exchanges). It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged and determined to be currently taxable. In such cases, our taxable income would increase as would the amount of distributions we are required to make to satisfy our REIT distribution requirements. This could increase the dividend income to our stockholders by reducing any return of capital they receive. In some circumstances, we may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. As a result, we may be required to borrow in order to pay additional dividends or taxes, and the payment of such taxes could cause us to have less cash available to distribute to our stockholders. If a Section 1031 Exchange were later to be determined to be taxable, we may be required to amend our tax returns for the applicable year in question, including any reports we distributed to our stockholders. It is possible that legislation could be enacted that could modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or not possible for us to dispose of real properties on a tax deferred basis.
Legislative or other actions affecting REITs could have a negative effect on our investors or us, including our ability to maintain our qualification as a REIT or the federal income tax consequences of such qualification.
Federal income tax laws are constantly under review by persons involved in the legislative process, the IRS and the U.S. Department of the Treasury. Changes to the laws could adversely affect us and our investors. New legislation, Treasury Regulations,regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT, the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Changes to laws relating to the tax treatment of other entities, or an investment in other entities, could make an investment in such other entities more attractive relative to an investment in a REIT.
Non-U.S. investors may be subject to FIRPTA, which would impose tax on certain distributions and on the sale of common stock if we are unable to qualify as a “domestically controlled” REIT or if our stock is not considered to be regularly traded on an established securities market.
A non-U.S. investor disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests or USRPIs is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is a “domestically controlled qualified investment entity.”entity”. A domestically controlled qualified investment entity includes a REIT in which, at all times during a specified testing period, less than 50% of the value of its shares is held directly or indirectly by non-U.S. holders. In the event that we do not constitute a domestically controlled qualified investment entity, a non-U.S. investor’s sale of our common stock nonetheless will generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (1) the stock owned is of a class that is “regularly traded” as defined by applicable Treasury regulations, on an established securities market, and (2) the selling non-U.S. investor held 10% or less of our outstanding common stock at all times during a specified testing period. If we were to fail to so qualify as a domestically controlled qualified investment entity and our common stock were to fail to be “regularly traded”, a gain realized by a non-U.S. investor on a sale of our common stock would be subject to FIRPTA tax and applicable withholding. No assurance can be given that we will be a domestically controlled qualified investment entity. Additionally, any distributions we make to our non-U.S. stockholders that are attributable to gain from the sale of any USRPI will also generally be subject to FIRPTA tax and applicable withholdings, unless the recipient non-U.S. stockholder has not owned more than 10% of our common stock at any time during the year preceding the distribution and our common stock is treated as being “regularly traded”.
General Risks
Security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our IT networks and related systems could harm our business.
We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our efforts will be effective in preventing attempted security breaches or disruptions. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk. A security breach or other significant disruption involving our IT networks and related systems could have an adverse effect on our business, for example:
•Disruption to our networks and systems and thus our operations and/or those of our tenants or vendors;
•Misstated financial reports, violations of loan covenants, missed reporting deadlines and missed permitting deadlines;
•Inability to comply with laws and regulations;
•Unauthorized access to, destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could be used to compete against us or for disruptive, destructive or otherwise harmful purposes;
•Rendering us unable to maintain the building systems relied upon by our tenants;
•The requirement of significant management attention and resources to remedy any damages that result;
•Claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; and
•Damage to our reputation among our tenants, investors, or others.
Litigation could have an adverse effect on our business.
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. An unfavorable resolution of litigation could adversely affect us. Even when there is a favorable outcome, litigation may result in substantial expenses and significantly divert the attention of our management with a similar adverse effect on us.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.
An effective system of internal control over financial reporting is necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. There can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including material weaknesses, in our internal control over financial reporting that may occur in the future could result in material misstatements in our financial reporting, which could result in restatements of our financial statements. Failure to maintain effective internal controls could cause us to not meet our reporting obligations, which could affect our ability to remain listed with the NYSE or result in SEC enforcement actions, and could cause investors to lose confidence in our reported financial information.
New accounting pronouncements could adversely affect our operating results or the reported financial performance of our tenants.
Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Uncertainties posed by various initiatives of accounting standard-setting by the FASB and the SEC, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations, credit ratings and preferences regarding leasing real estate. See "New Accounting Pronouncements" in Note 2 to our consolidated financial statements in Item 15 of this Report.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We present property level data for our Total Portfolio, except that we present historical capital expenditures for our Consolidated Portfolio.
Office Portfolio Summary as of December 31, 20192022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Region | | Number of Properties | | Our Rentable Square Feet | | Region Rentable Square Feet(1) | | Our Average Market Share(2) |
| | | | | | | | |
| Los Angeles | | | | | | | | |
Westside(3) | | 52 | | | 9,998,784 | | | 40,042,780 | | 34.7 | % |
| Valley | | 16 | | | 6,790,777 | | | 21,755,737 | | 43.6 | |
Honolulu(3) | | 3 | | | 1,277,664 | | | 5,172,139 | | 24.7 | |
| Total / Average | | 71 | | | 18,067,225 | | | 66,970,656 | | 37.4 | % |
(1) The rentable square feet in each region is based on the Rentable Square Feet as reported in the 2022 fourth quarter CBRE Marketview report for our submarkets in that region.
(2) Our market share is calculated by dividing our Rentable Square Feet by the applicable Region's Rentable Square Feet, weighted in the case of averages based on the square feet of exposure in our total portfolio to each submarket as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Region | | Submarket | | Number of Properties | | Our Rentable Square Feet | | Our Market Share(2) |
| | | | | | | | |
| Westside | | Brentwood | | 15 | | | 2,085,745 | | | 60.3 | % |
| Westwood | | 7 | | | 2,191,444 | | | 43.6 | |
| Olympic Corridor | | 5 | | | 1,142,885 | | | 29.5 | |
| Beverly Hills(3) | | 11 | | | 2,196,067 | | | 27.8 | |
| Santa Monica | | 11 | | | 1,425,374 | | | 14.4 | |
| Century City | | 3 | | | 957,269 | | | 9.0 | |
| Valley | | Sherman Oaks/Encino | | 12 | | | 3,488,995 | | | 53.6 | |
| Warner Center/Woodland Hills | | 3 | | | 2,845,577 | | | 37.5 | |
| Burbank | | 1 | | | 456,205 | | | 6.0 | |
| Honolulu | | Honolulu(3) | | 3 | | | 1,277,664 | | | 24.7 | |
| | Total / Weighted Average | | 71 | | | 18,067,225 | | | 37.4 | % |
(3) In calculating market share, we adjusted the rentable square footage by (i) removing approximately 406,000 rentable square feet of vacant space at an office building in Honolulu that we are converting to residential apartments, from both our rentable square footage and that of the submarket and (ii) removing a 218,000 square foot property located just outside the Beverly Hills city limits from both the numerator and the denominator.
|
| | | | | | | | | | | |
| Region | | Number of Properties | | Our Rentable Square Feet | | Region Rentable Square Feet(1) | | Our Average Market Share(2) |
| | | | | | | | | |
| Los Angeles | | | | | | | | |
Westside(3) | | 52 |
| | 9,992,932 |
| | 37,358,326 | | 37.6 | % |
| Valley | | 16 |
| | 6,790,777 |
| | 21,257,083 | | 43.4 |
|
Honolulu(3) | | 4 |
| | 1,562,235 |
| | 4,872,939 | | 32.1 |
|
| Total / Average | | 72 |
| | 18,345,944 |
| | 63,488,348 | | 39.3 | % |
| |
(1) | The rentable square feet in each region is based on the Rentable Square Feet as reported in the 2019 fourth quarter CBRE Marketview report for our submarkets in that region. |
| |
(2) | Our market share is calculated by dividing Rentable Square Feet by the applicable Rentable Square Feet, weighted in the case of averages based on the square feet of exposure in our total portfolio to each submarket as follows: |
|
| | | | | | | | | | | |
| Region | | Submarket | | Number of Properties | | Our Rentable Square Feet | | Our Market Share(2) |
| | | | | | | | | |
| Westside | | Brentwood | | 15 |
| | 2,085,745 |
| | 62.5 | % |
| | Westwood | | 7 |
| | 2,185,592 |
| | 51.3 |
|
| | Olympic Corridor | | 5 |
| | 1,142,885 |
| | 33.1 |
|
| | Beverly Hills(3) | | 11 |
| | 2,196,067 |
| | 28.6 |
|
| | Santa Monica | | 11 |
| | 1,425,374 |
| | 15.4 |
|
| | Century City | | 3 |
| | 957,269 |
| | 9.4 |
|
| Valley | | Sherman Oaks/Encino | | 12 |
| | 3,488,995 |
| | 53.4 |
|
| | Warner Center/Woodland Hills | | 3 |
| | 2,845,577 |
| | 37.1 |
|
| | Burbank | | 1 |
| | 456,205 |
| | 6.5 |
|
| Honolulu | | Honolulu(3) | | 4 |
| | 1,562,235 |
| | 32.1 |
|
| | | Total / Weighted Average | | 72 |
| | 18,345,944 |
| | 39.3 | % |
| |
(3) | In calculating market share, we adjusted the rentable square footage by (i) removing approximately 202,000 rentable square feet of vacant space at an office building in Honolulu, which we are converting to residential apartments, from both our rentable square footage and that of the submarket and (ii) removing a 218,000 square foot property located just outside the Beverly Hills city limits from both the numerator and the denominator. |
Office Portfolio Percentage Leased and In-place Rents as of December 31, 20192022
| | Region(1) | | Percent Leased | | Annualized Rent(2) | | Annualized Rent Per Leased Square Foot(2) | | Monthly Rent Per Leased Square Foot(2) | Region(1) | | Percent Leased | | Annualized Rent(2) | | Annualized Rent Per Leased Square Foot(2) | | Monthly Rent Per Leased Square Foot(2) |
| | | | | | | | | | | | | | | | | | |
| Los Angeles | | | | | | | | | Los Angeles | |
| Westside | | 93.7 | % | | $ | 470,576,030 |
| | $ | 52.58 |
| | $ | 4.38 |
| Westside | | 87.1 | % | | $ | 465,109,266 | | | $ | 56.75 | | | $ | 4.73 | |
| Valley | | 92.6 |
| | 214,855,878 |
| | 35.55 |
| | 2.96 |
| Valley | | 86.2 | | | 203,666,873 | | | 36.34 | | | 3.03 | |
| Honolulu | | 94.3 |
| | 48,661,931 |
| | 34.96 |
| | 2.91 |
| Honolulu | | 91.3 | | | 38,029,901 | | | 34.28 | | | 2.86 | |
| Total / Weighted Average | | 93.3 | % | | $ | 734,093,839 |
| | $ | 44.80 |
| | $ | 3.73 |
| Total / Weighted Average | | 87.0 | % | | $ | 706,806,040 | | | $ | 47.41 | | | $ | 3.95 | |
| |
(1) | Regional data reflects the following underlying submarket data: |
| | | Region | | Submarket | | Percent Leased | | Monthly Rent Per Leased Square Foot(2) | Region | | Submarket | | Percent
Leased | | | Monthly Rent Per Leased Square Foot(2) |
| | | | | | | | | | | | | |
| Westside | | Beverly Hills | | 96.4 | % | | $ | 4.38 |
| Westside | | Beverly Hills | | 94.9 | % | | | $ | 4.76 | |
| | Brentwood | | 91.0 |
| | 3.83 |
| | Brentwood | | 83.0 | | | | 4.01 | |
| | Century City | | 93.7 |
| | 4.24 |
| | Century City | | 91.6 | | | | 4.50 | |
| | Olympic Corridor | | 93.6 |
| | 3.37 |
| | Olympic Corridor | | 80.2 | | | | 3.40 | |
| | Santa Monica | | 95.2 |
| | 6.23 |
| | Santa Monica | | 92.5 | | | | 7.00 | |
| | Westwood | | 92.5 |
| | 4.25 |
| | Westwood | | 81.2 | | | | 4.54 | |
| Valley | | Burbank | | 100.0 |
| | 4.28 |
| Valley | | Burbank | | 100.0 | | | | 4.83 | |
| | Sherman Oaks/Encino | | 94.3 |
| | 3.13 |
| | Sherman Oaks/Encino | | 88.9 | | | | 3.09 | |
| | Warner Center/Woodland Hills | | 89.4 |
| | 2.49 |
| | Warner Center/Woodland Hills | | 80.7 | | | | 2.58 | |
| Honolulu | | Honolulu | | 94.3 |
| | 2.91 |
| Honolulu | | Honolulu | | 91.3 | | | | 2.86 | |
| | | Weighted Average | | 93.3 | % | | $ | 3.73 |
| | | Weighted Average | | 87.0 | % | | | $ | 3.95 | |
| |
(2) | Does not include signed leases not yet commenced, which are included in percent leased but excluded from annualized rent. |
(2) Does not include signed leases not yet commenced, which are included in percent leased but excluded from annualized rent.
Office Lease Diversification as of December 31, 20192022
| | | | | | | | | | | |
| Portfolio Tenant Size |
| Median | | Average |
| | | |
| Square feet | 2,500 | | 5,500 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Office Leases | | Rentable Square Feet | | Annualized Rent |
| Square Feet Under Lease | | Number | | Percent | | Amount | | Percent | | Amount | | Percent |
| | | | | | | | | | | | |
| 2,500 or less | | 1,345 | | | 49.6 | % | | 1,935,678 | | 13.0 | % | | $ | 84,814,085 | | | 12.0 | % |
| 2,501-10,000 | | 1,034 | | | 38.1 | | | 5,056,569 | | | 33.9 | | | 232,673,212 | | | 32.9 | |
| 10,001-20,000 | | 210 | | | 7.7 | | | 2,905,325 | | | 19.5 | | | 137,034,451 | | | 19.4 | |
| 20,001-40,000 | | 91 | | | 3.4 | | | 2,453,302 | | | 16.5 | | | 117,019,233 | | | 16.6 | |
| 40,001-100,000 | | 30 | | | 1.1 | | | 1,745,925 | | | 11.7 | | | 90,760,299 | | | 12.8 | |
| Greater than 100,000 | | 3 | | | 0.1 | | | 812,969 | | | 5.4 | | | 44,504,760 | | | 6.3 | |
| Total for all leases | | 2,713 | | | 100.0 | % | | 14,909,768 | | 100.0 | % | | $ | 706,806,040 | | | 100.0 | % |
|
| | | |
| Portfolio Tenant Size |
| | Median | | Average |
| | | | |
| Square feet | 2,700 | | 5,600 |
|
| | | | | | | | | | | | | | | | | | | |
| | | Office Leases | | Rentable Square Feet | | Annualized Rent |
| Square Feet Under Lease | | Number | | Percent | | Amount | | Percent | | Amount | | Percent |
| | | | | | | | | | | | | |
| 2,500 or less | | 1,406 |
| | 47.9 | % | | 1,961,349 |
| | 12.0 | % | | $ | 86,387,301 |
| | 11.8 | % |
| 2,501-10,000 | | 1,150 |
| | 39.2 |
| | 5,647,365 |
| | 34.5 |
| | 248,326,228 |
| | 33.8 |
|
| 10,001-20,000 | | 243 |
| | 8.3 |
| | 3,357,323 |
| | 20.5 |
| | 144,200,267 |
| | 19.7 |
|
| 20,001-40,000 | | 99 |
| | 3.4 |
| | 2,722,556 |
| | 16.6 |
| | 121,979,833 |
| | 16.6 |
|
| 40,001-100,000 | | 32 |
| | 1.1 |
| | 1,789,354 |
| | 10.9 |
| | 89,728,037 |
| | 12.2 |
|
| Greater than 100,000 | | 4 |
| | 0.1 |
| | 908,539 |
| | 5.5 |
| | 43,472,173 |
| | 5.9 |
|
| Total for all leases | | 2,934 |
| | 100.0 | % | | 16,386,486 |
| | 100.0 | % | | $ | 734,093,839 |
| | 100.0 | % |
Largest Office Tenants as of December 31, 20192022
The table below presents tenants paying 1% or more of our aggregate Annualized Rent:
| | | Tenant | | Number of Leases | | Number of Properties | | Lease Expiration(1) | | Total Leased Square Feet | | Percent of Rentable Square Feet | | Annualized Rent | | Percent of Annualized Rent | Tenant | | Number of Leases | | Number of Properties | | Lease Expiration(1) | | Total Leased Square Feet | | Percent of Rentable Square Feet | | Annualized Rent | | Percent of Annualized Rent |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Time Warner(2) | | 3 |
| | 3 |
| | 2020-2024 | | 468,775 |
| | 2.5 | % | | $ | 23,892,512 |
| | 3.2 | % | |
Warner Bros. Discovery(2) | | Warner Bros. Discovery(2) | | 4 | | 3 | | 2023-2024 | | 483,412 | | 2.7 | % | | $ | 27,477,617 | | | 3.9 | % |
UCLA(3) | | 26 |
| | 10 |
| | 2020-2027 | | 335,996 |
| | 1.8 |
| | 16,964,929 |
| | 2.3 |
| UCLA(3) | | 22 | | 10 | | 2023-2027 | | 261,179 | | 1.4 | | | 14,209,652 | | | 2.0 | |
William Morris Endeavor(4) | | 2 |
| | 1 |
| | 2022-2027 | | 213,539 |
| | 1.2 |
| | 12,415,744 |
| | 1.7 |
| William Morris Endeavor(4) | | 3 | | | 1 | | | 2023-2027 | | 219,364 | | | 1.2 | | | 13,953,542 | | | 2.0 | |
Morgan Stanley(5) | | 5 |
| | 5 |
| | 2022-2027 | | 145,488 |
| | 0.8 |
| | 9,340,152 |
| | 1.3 |
| Morgan Stanley(5) | | 5 | | | 5 | | | 2025-2028 | | 142,020 | | | 0.8 | | | 10,273,231 | | | 1.4 | |
Equinox Fitness(6) | | 5 |
| | 5 |
| | 2024-2033 | | 181,177 |
| | 1.0 |
| | 8,744,891 |
| | 1.2 |
| Equinox Fitness(6) | | 6 | | | 5 | | | 2029-2038 | | 185,236 | | | 1.0 | | | 10,142,330 | | | 1.4 | |
Macerich(7) | | Macerich(7) | | 2 | | | 1 | | | 2023-2028 | | 82,368 | | | 0.5 | | | 7,501,247 | | | 1.1 | |
| Total | | 41 |
| | 24 |
| | 1,344,975 |
| | 7.3 | % | | $ | 71,358,228 |
| | 9.7 | % | Total | | 42 | | 25 | | 1,373,579 | | 7.6 | % | | $ | 83,557,619 | | | 11.8 | % |
| |
(1) | Expiration dates are per lease (expiration dates do not reflect storage and similar leases). |
| |
(2) | Square footage expires as follows: 2,000 square feet in 2020, 10,000 square feet in 2023, and 456,000 square feet in 2024. |
| |
(3) | Square footage expires as follows: 36,000 square feet in 2020, 72,000 square feet in 2021, 55,000 square feet in 2022, 46,000 square feet in 2023, 10,000 square feet in 2024, 49,000 square feet in 2025, and 67,000 square feet in 2027. Tenant has options to terminate 31,000 square feet in 2020, 16,000 square feet in 2023, and 51,000 square feet in 2025. |
| |
(4) | Square footage expires as follows: 1,000 square feet in 2022 and 213,000 square feet in 2027. Tenant has an option to terminate 2,000 square feet in 2020 and 212,000 square feet in 2022. |
| |
(5) | Square footage expires as follows: 16,000 square feet in 2022, 30,000 square feet in 2023, 26,000 square feet in 2025, and 74,000 square feet in 2027. Tenant has options to terminate 30,000 square feet in 2021, 26,000 square feet in 2022, and 32,000 square feet in 2024. |
| |
(6) | Square footage expires as follows: 34,000 square feet in 2024, 31,000 square feet in 2027, 44,000 square feet in 2028, 42,000 square feet in 2030, and 30,000 square feet in 2033. |
(1) Expiration dates are per lease (expiration dates do not reflect storage and similar leases).
(2) Square footage (rounded) expires as follows: 27,000 square feet in 2023; and 456,000 square feet in 2024.
(3) Square footage (rounded) expires as follows: 8 leases totaling 59,000 square feet in 2023; 2 leases totaling 11,000 square feet in 2024; 4 leases totaling 89,000 square feet in 2025; 5 leases totaling 32,000 square feet in 2026; and 3 leases totaling 71,000 square feet in 2027. Tenant has options to terminate 15,000 square feet in 2024; and 51,000 square feet in 2025.
(4) Square footage (rounded) expires as follows: 1,000 square feet in 2023; and 211,000 square feet in 2027.
(5) Square footage (rounded) expires as follows: 26,000 square feet in 2025; and 86,000 square feet in 2027; and 30,000 square feet in 2028. Tenant has options to terminate 32,000 square feet in 2024.
(6) Square footage (rounded) expires as follows: 34,000 square feet in 2029; 46,000 square feet in 2035, 31,000 square feet in 2037, and 74,000 square feet in 2038.
(7) Square footage (rounded) expires as follows: 27,000 square feet in 2023, and 55,000 square feet in 2028.
Office Industry Diversification as of December 31, 20192022
| | | | | | | | | | | | | | |
| Industry | | Number of Leases | | Annualized Rent as a Percent of Total |
| | | | |
| Legal | | 578 | | 18.4 | % |
| Financial Services | | 366 | | 15.6 | |
| Entertainment | | 173 | | 14.5 | |
| Real Estate | | 317 | | 12.3 | |
| Accounting & Consulting | | 294 | | 9.5 | |
| Health Services | | 372 | | 8.3 | |
| Technology | | 91 | | 4.3 | |
| Retail | | 162 | | 4.8 | |
| Insurance | | 94 | | 3.8 | |
| Educational Services | | 47 | | 2.6 | |
| Public Administration | | 76 | | 2.4 | |
| Manufacturing & Distribution | | 50 | | 1.2 | |
| Advertising | | 38 | | 1.0 | |
| Other | | 55 | | 1.3 | |
| Total | | 2,713 | | 100.0 | % |
|
| | | | | |
| Industry | | Number of Leases | | Annualized Rent as a Percent of Total |
| | | | | |
| Legal | | 578 | | 18.0 | % |
| Financial Services | | 392 | | 15.0 |
|
| Entertainment | | 235 | | 13.7 |
|
| Real Estate | | 297 | | 11.5 |
|
| Accounting & Consulting | | 346 | | 10.0 |
|
| Health Services | | 371 | | 7.4 |
|
| Retail | | 183 | | 5.8 |
|
| Technology | | 123 | | 4.9 |
|
| Insurance | | 102 | | 3.9 |
|
| Educational Services | | 58 | | 3.6 |
|
| Public Administration | | 91 | | 2.4 |
|
| Advertising | | 58 | | 1.4 |
|
| Manufacturing & Distribution | | 55 | | 1.2 |
|
| Other | | 45 | | 1.2 |
|
| Total | | 2,934 | | 100.0 | % |
Office Lease Expirations as of December 31, 20192022 (assuming non-exercise of renewal options and early termination rights)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year of Lease Expiration | Number of
Leases | | Rentable
Square Feet | | Expiring
Square Feet
as a Percent of Total | | Annualized Rent at December 31, 2022 | | Annualized
Rent as a
Percent of Total | | Annualized
Rent Per
Leased Square Foot(1) | | Annualized
Rent Per
Leased
Square
Foot at Expiration(2) |
| | | | | | | | | | | | | |
| Short Term Leases | 90 | | | 346,608 | | | 1.9 | % | | $ | 12,892,329 | | | 1.8 | % | | $ | 37.20 | | | $ | 37.21 | |
| 2023 | 647 | | | 2,491,715 | | | 13.8 | | | 112,973,008 | | | 16.0 | | | 45.34 | | | 45.72 | |
| 2024 | 540 | | | 2,982,209 | | | 16.5 | | | 141,332,159 | | | 20.0 | | | 47.39 | | | 49.23 | |
| 2025 | 478 | | | 2,246,320 | | | 12.4 | | | 102,529,281 | | | 14.5 | | | 45.64 | | | 49.40 | |
| 2026 | 324 | | | 1,780,115 | | | 9.9 | | | 84,561,041 | | | 12.0 | | | 47.50 | | | 52.94 | |
| 2027 | 270 | | | 1,941,468 | | | 10.7 | | | 96,798,669 | | | 13.7 | | | 49.86 | | | 57.31 | |
| 2028 | 148 | | | 1,006,021 | | | 5.6 | | | 51,271,967 | | | 7.2 | | | 50.97 | | | 58.25 | |
| 2029 | 63 | | | 434,813 | | | 2.4 | | | 21,231,469 | | | 3.0 | | | 48.83 | | | 59.61 | |
| 2030 | 52 | | | 589,002 | | | 3.3 | | | 30,448,670 | | | 4.3 | | | 51.70 | | | 63.96 | |
| 2031 | 40 | | | 323,138 | | | 1.8 | | | 17,025,341 | | | 2.4 | | | 52.69 | | | 66.50 | |
| 2032 | 27 | | | 208,182 | | | 1.1 | | | 9,800,526 | | | 1.4 | | | 47.08 | | | 62.80 | |
| Thereafter | 34 | | | 560,177 | | | 3.1 | | | 25,941,580 | | | 3.7 | | | 46.31 | | | 65.07 | |
| Subtotal/weighted average | 2,713 | | | 14,909,768 | | | 82.5 | | | 706,806,040 | | | 100.0 | | | 47.41 | | | 52.54 | |
| Signed leases not commenced | | 600,540 | | | 3.3 | | | | | | | | | |
| Available | | | 2,338,608 | | | 12.9 | | | | | | | | | |
| Building management use | | 114,226 | | | 0.7 | | | | | | | | | |
BOMA adjustment (3) | | | 104,083 | | | 0.6 | | | | | | | | | |
| Total/Weighted Average | 2,713 | | | 18,067,225 | | | 100.0 | % | | $ | 706,806,040 | | | 100.0 | % | | $ | 47.41 | | | $ | 52.54 | |
(1)Represents annualized rent at December 31, 2022 divided by leased square feet.
(2)Represents annualized rent at expiration divided by leased square feet.
(3)Represents the square footage adjustments for leases that do not reflect BOMA remeasurement.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year of Lease Expiration | Number of
Leases | | Rentable
Square Feet | | Expiring
Square Feet
as a Percent of Total | | Annualized Rent at December 31, 2019 | | Annualized
Rent as a
Percent of Total | | Annualized
Rent Per
Leased Square Foot(1) | | Annualized
Rent Per
Leased
Square
Foot at Expiration(2) |
| | | | | | | | | | | | | | |
| Short Term Leases | 90 |
| | 388,857 |
| | 2.1 | % | | $ | 15,542,730 |
| | 2.1 | % | | $ | 39.97 |
| | $ | 40.07 |
|
| 2020 | 603 |
| | 2,280,149 |
| | 12.4 |
| | 94,274,941 |
| | 12.8 |
| | 41.35 |
| | 41.93 |
|
| 2021 | 608 |
| | 2,671,166 |
| | 14.5 |
| | 114,622,103 |
| | 15.6 |
| | 42.91 |
| | 44.77 |
|
| 2022 | 520 |
| | 2,368,191 |
| | 12.9 |
| | 101,568,616 |
| | 13.8 |
| | 42.89 |
| | 46.67 |
|
| 2023 | 379 |
| | 2,350,706 |
| | 12.8 |
| | 109,054,580 |
| | 14.9 |
| | 46.39 |
| | 51.74 |
|
| 2024 | 291 |
| | 2,213,656 |
| | 12.1 |
| | 102,218,624 |
| | 13.9 |
| | 46.18 |
| | 53.30 |
|
| 2025 | 193 |
| | 1,389,093 |
| | 7.6 |
| | 63,364,148 |
| | 8.6 |
| | 45.62 |
| | 55.62 |
|
| 2026 | 88 |
| | 770,888 |
| | 4.2 |
| | 37,218,326 |
| | 5.1 |
| | 48.28 |
| | 60.98 |
|
| 2027 | 75 |
| | 1,074,520 |
| | 5.9 |
| | 51,969,743 |
| | 7.1 |
| | 48.37 |
| | 61.86 |
|
| 2028 | 39 |
| | 363,667 |
| | 2.0 |
| | 20,345,515 |
| | 2.8 |
| | 55.95 |
| | 72.38 |
|
| 2029 | 26 |
| | 164,083 |
| | 0.9 |
| | 7,169,890 |
| | 1.0 |
| | 43.70 |
| | 57.83 |
|
| Thereafter | 22 |
| | 351,510 |
| | 1.9 |
| | 16,744,623 |
| | 2.3 |
| | 47.64 |
| | 74.12 |
|
| Subtotal/weighted average | 2,934 |
| | 16,386,486 |
| | 89.3 |
| | 734,093,839 |
| | 100.0 |
| | 44.80 |
| | 50.87 |
|
| Signed leases not commenced | | 360,085 |
| | 1.9 |
| | | | | | | | |
| Available | | | 1,223,319 |
| | 6.7 |
| | | | | | | | |
| Building management use | | 121,450 |
| | 0.7 |
| | | | | | | | |
BOMA adjustment (3) | | | 254,604 |
| | 1.4 |
| | | | | | | | |
| Total/Weighted Average | 2,934 |
| | 18,345,944 |
| | 100.0 | % | | $ | 734,093,839 |
| | 100.0 | % | | $ | 44.80 |
| | $ | 50.87 |
|
| |
(1) | Represents annualized rent at December 31, 2019 divided by leased square feet. |
| |
(2) | Represents annualized rent at expiration divided by leased square feet. |
| |
(3) | Represents the square footage adjustments for leases that do not reflect BOMA remeasurement. |
Historical Office Tenant Improvements and Leasing Commissions
| | | | | | | | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | 2022 | | 2021 | | 2020 |
| | 2019 | | 2018 | | 2017 | |
| Renewals | | | | | | |
| Renewal leases | | Renewal leases | | | | | |
| Number of leases | 450 |
| | 467 |
| | 482 |
| Number of leases | 571 | | | 557 | | | 438 | |
| Square feet | 2,068,345 |
| | 2,420,185 |
| | 2,213,716 |
| Square feet | 2,416,521 | | | 2,553,056 | | | 1,990,974 | |
Tenant improvement costs per square foot (1) | $ | 12.47 |
| | $ | 9.22 |
| | $ | 11.47 |
| Tenant improvement costs per square foot (1) | $ | 11.06 | | | $ | 8.59 | | | $ | 8.98 | |
Leasing commission costs per square foot (1) | 7.61 |
| | 10.15 |
| | 7.77 |
| Leasing commission costs per square foot (1) | 5.86 | | | 5.88 | | | 6.99 | |
Total costs per square foot (1) | $ | 20.08 |
| | $ | 19.37 |
| | $ | 19.24 |
| Total costs per square foot (1) | $ | 16.92 | | | $ | 14.47 | | | $ | 15.97 | |
| | | | | | | | | | | | |
| New leases | |
| | |
| | |
| New leases | | | | | |
| Number of leases | 354 |
| | 332 |
| | 337 |
| Number of leases | 343 | | | 351 | | | 228 | |
| Square feet | 1,362,489 |
| | 1,195,118 |
| | 1,189,808 |
| Square feet | 1,225,024 | | | 1,105,297 | | | 700,509 | |
Tenant improvement costs per square foot (1) | $ | 26.41 |
| | $ | 24.63 |
| | $ | 28.22 |
| Tenant improvement costs per square foot (1) | $ | 27.68 | | | $ | 27.43 | | | $ | 25.46 | |
Leasing commission costs per square foot (1) | 10.73 |
| | 9.30 |
| | 12.26 |
| Leasing commission costs per square foot (1) | 9.26 | | | 9.81 | | | 9.41 | |
Total costs per square foot (1) | $ | 37.14 |
| | $ | 33.93 |
| | $ | 40.48 |
| Total costs per square foot (1) | $ | 36.94 | | | $ | 37.24 | | | $ | 34.87 | |
| | | | | | | | | | | | |
| Total | |
| | |
| | |
| |
| Total leases | | Total leases | | | | | |
| Number of leases | 804 |
| | 799 |
| | 819 |
| Number of leases | 914 | | | 908 | | | 666 | |
| Square feet | 3,430,834 |
| | 3,615,303 |
| | 3,403,524 |
| Square feet | 3,641,545 | | | 3,658,353 | | | 2,691,483 | |
Tenant improvement costs per square foot (1) | $ | 17.93 |
| | $ | 14.31 |
| | $ | 17.32 |
| Tenant improvement costs per square foot (1) | $ | 16.65 | | | $ | 14.28 | | | $ | 13.27 | |
Leasing commission costs per square foot (1) | 8.84 |
| | 9.87 |
| | 9.34 |
| Leasing commission costs per square foot (1) | 7.01 | | | 7.07 | | | 7.62 | |
Total costs per square foot (1) | $ | 26.77 |
| | $ | 24.18 |
| | $ | 26.66 |
| Total costs per square foot (1) | $ | 23.66 | | | $ | 21.35 | | | $ | 20.89 | |
| |
(1) | Tenant improvements and leasing commissions are reported in the period in which the lease is signed. Tenant improvements are based on signed leases, or, for leases in which a tenant improvement allowance was not specified, the amount budgeted at the time the lease commenced. |
Historical
Office Recurring Capital Expenditures (consolidated office portfolio)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Recurring Capital Expenditures(1) | $ | 4,224,496 | | | $ | 3,838,453 | | | $ | 3,887,091 | |
Total square feet(1) | 14,851,378 | | | 14,851,378 | | | 14,851,378 | |
Recurring Capital Expenditures per square foot(1) | $ | 0.28 | | | $ | 0.26 | | | $ | 0.26 | |
(1)We excluded the following properties in accordance with our definition of Recurring Capital Expenditures:
•For 2022, we excluded eleven properties with an aggregate 2.8 million square feet.
•For 2021, we excluded eleven properties with an aggregate 2.9 million square feet.
•For 2020, we excluded eleven properties with an aggregate 3.0 million square feet.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Recurring capital expenditures(1) | $ | 4,043,540 |
| | $ | 3,684,483 |
| | $ | 3,537,175 |
|
Total square feet(1) | 14,785,961 |
| | 13,784,509 |
| | 13,700,370 |
|
Recurring capital expenditures per square foot(1) | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.26 |
|
| |
(1) | For 2019, we excluded eleven properties with an aggregate 3.2 million square feet. For 2018 and 2017, we excluded ten properties with an aggregate 2.8 million square feet. |
Multifamily Portfolio as of December 31, 20192022
| | | Submarket | | Number of Properties | | Number of Units | | Units as a Percent of Total | Submarket | | Number of Properties | | Number of Units | | Units as a Percent of Total |
| | | | | | | | | | | | | | |
| Los Angeles | | | | | | | Los Angeles | |
| Santa Monica | | 2 | | 820 |
| | 20 | % | Santa Monica | | 3 | | 940 | | | 19 | % |
| West Los Angeles | | 6 | | 1,300 |
| | 31 |
| West Los Angeles | | 7 | | 1,676 | | | 33 | |
Honolulu(1) | | 3 | | 2,041 |
| | 49 |
| |
| Honolulu | | Honolulu | | 4 | | 2,397 | | | 48 | |
| Total | | 11 | | 4,161 |
| | 100 | % | Total | | 14 | | 5,013 | | | 100 | % |
| | | | | | | | | | | | | |
| Submarket | | Percent Leased | | Annualized Rent(2) | | Monthly Rent Per Leased Unit | Submarket | | Percent Leased | | Annualized Rent(1) | | Monthly Rent Per Leased Unit |
| | | | | | | | | | | | | | |
| Los Angeles | | | | | | | Los Angeles | |
| Santa Monica | | 99.1 | % | | $ | 29,961,408 |
| | $ | 3,075 |
| Santa Monica | | 99.0 | % | | $ | 48,792,756 | | | $ | 4,372 | |
| West Los Angeles | | 98.1 |
| | 48,843,348 |
| | 3,197 |
| |
Honolulu(1) | | 97.8 |
| | 44,281,644 |
| | 1,852 |
| |
West Los Angeles(2) | | West Los Angeles(2) | | 99.0 | | | 44,809,560 | | | 3,133 | |
| Honolulu | | Honolulu | | 99.8 | | | 61,607,256 | | | 2,151 | |
| Total / Weighted Average | | 98.1 | % | | $ | 123,086,400 |
| | $ | 2,516 |
| Total / Weighted Average | | 99.4 | % | | $ | 155,209,572 | | | $ | 2,869 | |
| |
(1) | Includes newly developed units just made available for rent. |
| |
(2) | The multifamily portfolio also includes 10,495 square feet of ancillary retail space generating annualized rent of $408,077,(1) The multifamily portfolio also includes 10,495 square feet of ancillary retail space generating annualized rent of $449,224, which is not included in multifamily annualized rent. |
Historical
Multifamily Recurring Capital Expenditures
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Recurring Capital Expenditures(1)(2) | $ | 3,092,613 | | | $ | 2,821,969 | | | $ | 2,666,273 | |
Total units(1)(2) | 3,925 | | | 3,449 | | | 3,230 | |
Recurring Capital Expenditures per unit(1)(2) | $ | 807 | | | $ | 818 | | | $ | 832 | |
(1)Recurring Capital Expenditures include costs associated with the turnover of units. Our multifamily portfolio includes a large number of units that, due to Santa Monica rent control laws, have had only modest rent increases since 1979. During 2022, when a tenant vacated one of these units, we incurred on average $65 thousand per unit to bring the unit up to our standards. We classify these capital expenditures as non-recurring.
(2)We excluded the following properties in accordance with our definition of Recurring Capital Expenditures:
•For 2022, we excluded two properties with an aggregate 1088 units.
•For 2021, we excluded two properties with an aggregate 939 units.
•For 2020, we excluded four properties with an aggregate 1057 units.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Recurring capital expenditures(1)(2) | $ | 3,191,162 |
| | $ | 2,564,003 |
| | $ | 1,693,466 |
|
Total units(1)(2) | 3,324 |
| | 3,324 |
| | 3,380 |
|
Recurring capital expenditures per unit(1) | $ | 960 |
| | $ | 772 |
| | $ | 507 |
|
| |
(1) | Recurring capital expenditures are costs associated with the turnover of units. Our multifamily portfolio includes a large number of units that, due to Santa Monica rent control laws, have had only modest rent increases since 1979. During 2019, when a tenant vacated one of these units, we incurred on average $55 thousand per unit to bring the unit up to our standards. We classify these capital expenditures as non-recurring. |
| |
(2) | For 2019, we excluded two properties, one that we acquired in 2019 and another with newly developed units, with an aggregate 837 apartments. |
Item 3. Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results of operations.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Stock; Dividends
Our common stock is traded on the NYSE under the symbol “DEI”. On December 31, 2019,30, 2022, the closing price of our common stock was $15.68.
$43.90.
The table below presents the dividends declared for our common stock as reported by the NYSE:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2022 | | | | | | | | |
| | | | | | | | |
| Dividend declared | | $ | 0.28 | | | $ | 0.28 | | | $ | 0.28 | | | $ | 0.19 | |
| | | | | | | | |
| 2021 | | | | | | | | |
| | | | | | | | |
| Dividend declared | | $ | 0.28 | | | $ | 0.28 | | | $ | 0.28 | | | $ | 0.28 | |
|
| | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2019 | | | | | | | | |
| | | | | | | | | |
| Dividend declared | | $ | 0.26 |
| | $ | 0.26 |
| | $ | 0.26 |
| | $ | 0.28 |
|
| | | | | | | | | |
| 2018 | | |
| | |
| | |
| | |
|
| | | | | | | | | |
| Dividend declared | | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.26 |
|
Holders of Record
We had 1311 holders of record of our common stock on February 7, 2020.10, 2023. Many of the shares of our common stock are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Sales of Unregistered Securities
On November 21, 2019, we issued 332 thousand OP Units valued at $14.4 million to existing investors in one of our previously unconsolidated Funds in connection with the purchase of equity in that Fund. Each OP Unit can be exchanged into one share of our common stock (or its cash equivalent at our option). This issuance did not involve underwriters or any public offering. We believe that the issuance of OP Units is exempt from the registration requirements of the Securities Act under Rule 506 of Regulation D promulgated under the Securities Act and Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving any public offering. There was no advertising, general promotion or other marketing undertaken in connection with the issuance. The investors represented and warranted that (i) they acquired the OP Units for investment purposes only and not for the purpose of further distribution, (ii) they had sufficient knowledge and experience in financial and business matters and the ability to bear the economic risk of its investment, and (iii) that the OP Units were taken for investment purposes and not with a view to resale in violation of applicable securities laws.None.
Repurchases of Equity Securities
None.
Performance Graph
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The graph below compares the cumulative total return on our common stock from December 31, 20142017 to December 31, 20192022 to the cumulative total return of the S&P 500, NAREIT Equity and an appropriate “peer group” index (assuming a $100 investment in our common stock and in each of the indexes on December 31, 2014,2017, and that all dividends were reinvested into additional shares of common stock at the frequency with which dividends are paid on the common stock during the applicable fiscal year). The total return performance presented in this graph is not necessarily indicative of, and is not intended to suggest, the total future return performance.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | Period Ending | |
| | Index | | 12/31/14 | | 12/31/15 | | 12/31/16 | | 12/31/17 | | 12/31/18 | | 12/31/19 | |
| | | | | | | | | | | | | | | |
| | DEI | | 100.00 |
| | 113.05 |
| | 136.10 |
| | 156.57 |
| | 133.80 |
| | 176.56 |
| |
| | S&P 500 | | 100.00 |
| | 101.38 |
| | 113.51 |
| | 138.29 |
| | 132.23 |
| | 173.86 |
| |
| | NAREIT Equity(1) | | 100.00 |
| | 103.20 |
| | 111.99 |
| | 117.84 |
| | 112.39 |
| | 141.61 |
| |
| | Peer group(2) | | 100.00 |
| | 97.97 |
| | 103.38 |
| | 103.81 |
| | 88.76 |
| | 110.00 |
| |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | Period Ending | |
| Index | | 12/31/17 | | 12/31/18 | | 12/31/19 | | 12/31/20 | | 12/31/21 | | 12/31/22 | |
| | | | | | | | | | | | | | |
| DEI | | 100.00 | | | 85.46 | | | 112.77 | | | 77.97 | | | 92.59 | | | 45.48 | | |
| S&P 500 | | 100.00 | | | 95.62 | | | 125.72 | | | 148.85 | | | 191.58 | | | 156.88 | | |
| NAREIT Equity(1) | | 100.00 | | | 95.38 | | | 120.17 | | | 110.56 | | | 158.36 | | | 119.77 | | |
| Peer group(2) | | 100.00 | | | 85.50 | | | 106.60 | | | 72.66 | | | 88.27 | | | 50.01 | | |
| | | | | | | | | | | | | | |
| |
(1) | FTSE NAREIT Equity REITs index. |
| |
(2) | Consists of Boston Properties, Inc. (BXP), Kilroy Realty Corporation (KRC), SL Green Realty Corp. (SLG), Vornado Trust (VNO) and Hudson Pacific Properties, Inc (HPP). |
(2)Consists of Boston Properties, Inc. (BXP), Kilroy Realty Corporation (KRC), SL Green Realty Corp. (SLG), Vornado Trust (VNO) and Hudson Pacific Properties, Inc (HPP).
Item 6. Selected Financial Data
The table below presents selected consolidated financial and operating data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements included in Items 7 and 15 in this Report, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Consolidated Statements of Operations Data (In thousands): | | | | | | | | | |
| Total office revenues | $ | 816,755 |
| | $ | 777,931 |
| | $ | 715,546 |
| | $ | 645,633 |
| | $ | 540,975 |
|
| Total multifamily revenues | $ | 119,927 |
| | $ | 103,385 |
| | $ | 96,506 |
| | $ | 96,918 |
| | $ | 94,799 |
|
| Total revenues | $ | 936,682 |
| | $ | 881,316 |
| | $ | 812,052 |
| | $ | 742,551 |
| | $ | 635,774 |
|
| Operating income | $ | 242,708 |
| | $ | 251,944 |
| | $ | 241,023 |
| | $ | 220,817 |
| | $ | 189,527 |
|
| Net income attributable to common stockholders | $ | 363,713 |
| | $ | 116,086 |
| | $ | 94,443 |
| | $ | 85,397 |
| | $ | 58,384 |
|
| Per Share Data: | |
| | |
| | |
| | |
| | |
|
| Net income attributable to common stockholders per share - basic | $ | 2.09 |
| | $ | 0.68 |
| | $ | 0.58 |
| | $ | 0.57 |
| | $ | 0.40 |
|
| Net income attributable to common stockholders per share - diluted | $ | 2.09 |
| | $ | 0.68 |
| | $ | 0.58 |
| | $ | 0.55 |
| | $ | 0.39 |
|
| Weighted average common shares outstanding (in thousands): | |
| | |
| | |
| | |
| | |
|
| Basic | 173,358 |
| | 169,893 |
| | 160,905 |
| | 149,299 |
| | 146,089 |
|
| Diluted | 173,358 |
| | 169,902 |
| | 161,230 |
| | 153,190 |
| | 150,604 |
|
| Dividends declared per common share | $ | 1.06 |
| | $ | 1.01 |
| | $ | 0.94 |
| | $ | 0.89 |
| | $ | 0.85 |
|
| |
| |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Consolidated Balance Sheet Data (In thousands): | |
| | |
| | |
| | |
| | |
|
| Total assets | $ | 9,349,301 |
| | $ | 8,261,709 |
| | $ | 8,292,641 |
| | $ | 7,613,705 |
| | $ | 6,066,161 |
|
| Secured notes payable and revolving credit facility, net | $ | 4,619,058 |
| | $ | 4,134,030 |
| | $ | 4,117,390 |
| | $ | 4,369,537 |
| | $ | 3,611,276 |
|
| Property Data: | |
| | |
| | |
| | |
| | |
|
Number of consolidated properties(1) | 81 |
| | 73 |
| | 73 |
| | 69 |
| | 64 |
|
| |
(1) | Excludes properties owned by our unconsolidated Fund(s). |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Forward Looking Statements disclaimer and our consolidated financial statements and related notes in Part IV, Item 15 of this Report. OurDuring 2022, our results of operations forwere impacted by the years ended December 31, 2019COVID-19 pandemic, inflation and 2018 were affected by a property acquisition, consolidation of a JV, development activity, repositionings and loan refinancingscapital transactions - see Acquisitions,"Impact of the COVID-19 Pandemic on our Business" and "Acquisitions, Financings, Developments and RepositioningsRepositionings" further below.
Business Description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. Through our interest in our Operating Partnership and its subsidiaries, our consolidated JVs and our unconsolidated Fund, we are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and in Honolulu, Hawaii. We focus on owning, acquiring, developing and managing a substantial market share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities. As of December 31, 2019,2022, our portfolio consisted of the following (including ancillary retail space)space and excluding two parcels of land from which we receive rent under ground leases):
|
| | | | | |
| | | | | | |
| | | Consolidated Portfolio(1) | | Total Portfolio(2) | |
| | Office | | | | |
| | Class A Properties | 70 | | 72 | |
| | Rentable Square Feet (in thousands) | 17,960 | | 18,346 | |
| | Leased rate | 93.3% | | 93.3% | |
| | Occupied rate | 91.5% | | 91.4% | |
| | | | | | |
| | Multifamily | | | | |
| | Properties | 11 | | 11 | |
| | Units | 4,161 | | 4,161 | |
| | Leased rate | 98.1% | | 98.1% | |
| | Occupied rate | 95.2% | | 95.2% | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | Consolidated Portfolio(1) | | Total Portfolio(2) | |
| Office | | | | |
| Class A Properties | 69 | | 71 | |
| Rentable Square Feet (in thousands)(3) | 17,681 | | 18,067 | |
| Leased rate | 87.1% | | 87.0% | |
| Occupancy rate | 83.7% | | 83.7% | |
| | | | | |
| Multifamily | | | | |
| Properties | 14 | | 14 | |
| Units | 5,013 | | 5,013 | |
| Leased rate(4) | 99.4% | | 99.4% | |
| Occupancy rate(4) | 98.1% | | 98.1% | |
| | | | | |
| |
(1) | Our Consolidated Portfolio includes the properties in our consolidated results. Through our subsidiaries, we own 100% of these properties, except for seventeen office properties totaling 4.3(1) Our Consolidated Portfolio includes the properties in our consolidated results. Through our subsidiaries, we wholly-own 53 office properties totaling 13.5 million square feet and 12 residential properties with 4,543 apartments. Through four consolidated JVs, we partially own an additional 16 office properties totaling 4.2 million square feet and two residential properties with 470 apartments. Our Consolidated Portfolio excludes two wholly-owned land parcels from which we receive ground rent from ground leases to the owners of a Class A office building and a hotel. (2) Our Total Portfolio includes our Consolidated Portfolio as well as two properties totaling 0.4 million square feet owned by our unconsolidated Fund, Partnership X. See Note 6 to our consolidated financial statements in Item 15 of this Report for more information about Partnership X. (3) As of December 31, 2022, we removed approximately 406,000 Rentable Square Feet of vacant space at an office building that we are converting to residential apartments. See "Acquisitions, Financings, Developments and Repositionings" further below. (4) Calculations exclude 94 units temporarily unoccupied as a result of a fire and 376 units at a newly constructed property undergoing lease up.
and one residential property with 350 apartments, which we own through four consolidated JVs. Our Consolidated Portfolio also includes two land parcels from which we receive ground rent from ground leases to the owners of a Class A office building and a hotel.
|
| |
(2) | Our Total Portfolio includes our Consolidated Portfolio as well as two properties totaling 0.4 million square feet owned by our unconsolidated Fund. See Note 6 to our consolidated financial statements in Item 15 of this Report for more information about our unconsolidated Fund. |
Revenues by Segment and Location
During the year ended December 31, 2019,2022, revenues from our Consolidated Portfolio waswere derived as follows:
Impact of the COVID-19 Pandemic on our Business
Our buildings have remained open and available to our tenants throughout the pandemic. The governmental authorities in the jurisdictions in which we primarily operate, California, Los Angeles, Beverly Hills and Santa Monica, passed COVID-19 pandemic relief ordinances of varying duration and scope (residential, retail, and office), and with varying exemptions, that generally prohibit evictions, late fees and interest and allow rent deferral over certain periods. While improving, our rent collections continue to be negatively impacted by the remaining impact of these ordinances and the pandemic.
Our results of operations since 2020 have been adversely impacted by the COVID-19 pandemic. Our results of operations for 2022 generally compare favorably with 2021, primarily due to: (i) the gradual recovery, (ii) better collections from our tenants, (iii) lower write-offs of uncollectible tenant receivables, (iv) restoring certain office tenants to accrual basis accounting, (v) higher office parking income, (vi) a multifamily property we acquired in the second quarter of 2022, (vii) new units from our multifamily development projects, and (viii) higher rental rates for our multifamily portfolio. The favorable impacts were partly offset by the impact of inflation on our rental expenses.
The pandemic had a significant impact on our collections, although they improved in 2021 and 2022. Charges for uncollectible office tenant receivables and deferred rent receivables, which were primarily due to the COVID-19 pandemic, reduced our office revenues by $0.6 million and $3.0 million for 2022 and 2021, respectively. We restored accrual basis accounting for certain office tenants that were previously determined to be uncollectible and accounted for on a cash basis of accounting, which increased our office revenues by $3.6 million for 2022. See "Collectibility" in our revenue recognition accounting policy in Note 2 to our consolidated financial statements in Item 15 of this Report regarding our accounting policy for collections. It is unclear how the pandemic will impact our future collections.
Other considerations that could impact our future leasing, rent collections, and revenue include:
•How long the pandemic continues;
•Whether governmental authorities authorize any new tenant protections;
•Whether more tenants stop paying rent if their business worsens;
•How attendance in our buildings changes and impacts parking revenue or rent collection; and/or
•How leasing activity and occupancy will evolve, including any long-term trends after the pandemic ends.
Overall, we expect the pandemic to continue to adversely impact many parts of our business, and those impacts have been, and will continue, to be material. For more information about the risks to our business, see "Risk Factors” in Part I, Item 1A. of this Report.
Acquisitions, Financings, Developments and Repositionings
Acquisitions
Acquisition of 1221 Ocean Avenue
On June 7, 2019,April 26, 2022, we acquired The Glendon,paid $330.0 million, excluding acquisition costs, to acquire a residential communityluxury multifamily apartment building with 120 units, located at 1221 Ocean Avenue in Westwood with 350 apartments and approximately 50,000 square feet of retail, for $365.1 million. On June 28, 2019, we completed the contribution ofSanta Monica. We acquired the property tothrough a new consolidated JV that we manage and in which we own a twenty percent capital55% interest. We contributed $99.0 million to the JV and an outside investor contributed $81.0 million to the JV. The JV partly financed the acquisition and related working capital was funded with a $160.0$175.0 million secured, non-recourse interest-only term loan a $44.0 million capital contribution by us and a $176.0 million capital contribution by other investors. See second quarter financing transactions below for more information regardingthat matures in April 2029. We swap-fixed the funding for thisinterest rate on the loan at 3.90% using interest rate swaps, which expire in May 2026. The acquired property's results of operations are included in our consolidated operating results from the date of acquisition. See Note 3 to our consolidated financial statements in Item 15 of this Report for more information regarding this acquisition.the purchase price allocation.
On November 21, 2019, we acquired an additional 16.3%
Table of the equity in one of our previously unconsolidated Funds, Fund X, in exchange for $76.9 million in cash and 332 thousand OP Units valued at $14.4 million, which increased our ownership in the Fund to 89.0%. In connection with this transaction, we restructured the Fund with the one remaining institutional investor. The new JV is a VIE, and as a result of the amended operating agreement, we became the primary beneficiary of the VIE and commenced consolidating the JV on November 21, 2019. The JV owns six Class A office properties totaling 1.5 million square feet in the prime Los Angeles submarkets of Beverly Hills, Santa Monica, Sherman Oaks/Encino and Warner Center. The JV also owns an interest of 9.4% in our remaining unconsolidated Fund, Partnership X, which owns two additional Class A office properties totaling 386,000 square feet in Beverly Hills and Brentwood. The results of the consolidated JV are included in our operating results from November 21, 2019.Contents
Financings
During the first quarter of 2019:2022:
| |
◦ | In March 2019, we renewed our $400.0 million revolving credit facility, releasing two previously encumbered properties, lowering the borrowing rate and unused facility fees, and extending the maturity date. The renewed facility bears interest at LIBOR + 1.15% and matures on August 21, 2023. |
•Interest rate swaps which hedged a $300.0 million interest-only term loan for one of our consolidated wholly- owned subsidiaries expired, and were replaced with an interest rate swap that reduced the term-loan swap-fixed interest rate to 2.66% from 3.42%.
During the second quarter of 2019:2022:
| |
◦ | We closed a secured, non-recourse $255.0 million interest-only loan scheduled to mature in June 2029. The loan bears interest at LIBOR + 0.98%, which we have effectively fixed through an interest rate swap at 3.26% until June 2027. We used the proceeds to pay off a $145.0 million loan that was scheduled to mature in October 2019. |
| |
◦ | We closed a secured, non-recourse $125.0 million interest-only loan scheduled to mature in June 2029. The loan bears interest at LIBOR + 0.98%, which we have effectively fixed through interest rate swaps at 2.55% until December 2020, which then increases to 3.25% until June 2027. We used the proceeds to pay off a $115.0 million loan that was scheduled to mature in December 2025. |
| |
◦ | We closed a secured, non-recourse $160.0 million interest-only loan scheduled to mature in June 2029. The loan bears interest at LIBOR + 0.98%, which we have effectively fixed through an interest rate swap at 3.25% until July 2027. We used the proceeds to partially fund the acquisition of The Glendon property. This loan has been assumed by the consolidated JV to which we contributed The Glendon property. |
| |
◦ | We entered into a forward interest rate swap to extend the fixed-rate period for a term loan with a principal balance of $102.4 million, scheduled to mature in April 2025, for three years. We also entered into forward interest rate swaps with an initial notional amount of $75.0 million, effective as of September 2019 and scheduled to mature in August 2025, fixing one-month LIBOR at 1.97%, to hedge the $415.0 million term-loan we closed in the third quarter - see third quarter financing transactions below. |
| |
◦ | We issued 4.9 million shares of our common stock under our ATM program for net proceeds of $201.0 million. We used a portion of the funds to partially fund the acquisition of The Glendon property, and a portion of the funds to pay off a $220.0 million loan in the third quarter - see third quarter financing transactions below. |
| |
◦ | Other investors in the consolidated JV to which we contributed The Glendon property contributed $176.0 million to the JV to fund the acquisition of the property, and we contributed $44.0 million to the JV. |
•A new consolidated JV that we manage and in which we own a fifty-five percent interest partly financed the purchase of a residential property with a new term loan, see "Acquisitions" above.
•Interest rate swaps that hedged a $550.0 million floating-rate term loan that matures in June 2027 expired on June 1, 2022, so that the interest on that loan is currently floating.
During the third quarter of 2019:
| |
◦ | We paid off a $220.0 million loan scheduled to mature in December 2023 and terminated the related interest rate swaps. |
| |
◦ | We closed a secured, non-recourse $415.0 million interest-only loan scheduled to mature in August 2026. The loan bears interest at LIBOR + 1.10%, which we have effectively fixed through interest rate swaps at 2.58% until |
35
April 2020, which then increases to 3.07% until August 2025. Part of the proceeds were used to pay-off a $340.0 million loan scheduled to mature in April 2022.
| |
◦ | We closed a secured, non-recourse $400.0 million interest-only loan scheduled to mature in September 2026. The loan bears interest at LIBOR + 1.15%, which we have effectively fixed through interest rate swaps at 2.44% until September 2024. The proceeds were used to pay-off a $400.0 million loan scheduled to mature in November 2022. |
| |
◦ | We closed a secured, non-recourse $200.0 million interest-only loan scheduled to mature in September 2026. The loan bears interest at LIBOR + 1.20%, which we have effectively fixed through interest rate swaps at 2.77% until July 2020, which then decreases to 2.36% until October 2024. Part of the proceeds were used to pay off a $180.0 million loan scheduled to mature in July 2022. |
During the fourth quarter of 2019
| |
◦ | We closed a secured, non-recourse $400.0 million interest-only loan scheduled to mature in November 2026. The loan bears interest at LIBOR + 1.15%, which we have effectively fixed through interest rate swaps at 2.18% until July 2021, which increases to 2.31% until October 2024. Part of the proceeds were used to pay off a $360.0 million loan scheduled to mature in June 2023. |
•We did not have any financing transactions during the fourth quarter of 2022.
See Notes 3, 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our acquisitions, debt and derivatives, respectively.
Developments
•Residential High-Rise Tower, Brentwood, California - "The Landmark Los Angeles"
In West Los Angeles, we are buildingcompleted the construction of a 34 story34-story high-rise apartment building with 376 apartments.apartments and placed it in service in 2022. The tower is beingwas built on a site that is directly adjacent to an existinga 394 thousand square foot office building, a one acre park, and a 712 unit residential property, bothall of which we own. We expect the cost of the development to be approximately $180 million to $200 million, which does not include the cost of the land which we have owned since 1997. As part of the project, we are investing additional capital to build a one-acre park on Wilshire Boulevard that will be available to the public and provide a valuable amenity to our surrounding properties and community. We expect construction to take about three years.
At our Moanalua Hillside Apartments in•1132 Bishop Street, Honolulu, we completed the construction of an additional 491 new apartments on 28 acres which now join our existing 680 apartments. We also invested additional capital to upgrade the existing buildings, improve the parking and landscaping, build a new leasing and management office, and construct a new fitness center and two pools.Hawaii - "The Residences at Bishop Place"
In downtown Honolulu, we are converting a 25 story, 49025-story, 493 thousand square foot office tower into approximately 500493 rental apartments. We expect the conversion to occur in phases over a number of years as the office space is vacated. We currently estimate the construction costs to be approximately $80 million to $100.0 million, although the inherent uncertainties of development are compounded by the multi-year and phased nature of the conversion. Assuming timely city approvals, we expect the first units to be delivered in 2020. This project will helpis helping to address the severe shortage of rental housing in Honolulu and revitalize the central business district.district, where we own a significant portion of the Class A office space. As of December 31, 2022, we had delivered seventy-two percent of the planned units and leased all of the units delivered. The conversion will continue in phases through 2025 as the remaining office space is vacated, therefore, the expected timing of the remaining spending is uncertain.
Repositionings
We often strategically purchase properties with large vacancies or expected near-term lease roll-over and use our knowledge of the property and submarket to reposition the property for the optimal use and tenant mix. In addition, we may reposition properties already in our portfolio. The work we undertake to reposition a building typically takes months or even years, and could involve a range of improvements from a complete structural renovation to a targeted remodeling of selected spaces. During the repositioning, the affected property may display depressed rental revenue and occupancy levels that impact our results and, therefore, comparisons of our performance from period to period.
Rental Rate Trends - Total Portfolio
Office Rental Rates
Our office rental rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022, although the lower rental rates for the respective periods were partly offset by lower tenant improvement costs. The table below presents the average annual rental rate per leased square foot and the annualized lease transaction costs per leased square foot for leases executed in our total office portfolio:portfolio during the respective periods:
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| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Year Ended December 31, | |
| | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |
| | | | | | | | | | | | | |
| | Average straight-line rental rate(1)(2) | | $49.65 | | $48.77 | | $44.48 | | $43.21 | | $42.65 | |
| | Annualized lease transaction costs(3) | | $6.02 | | $5.80 | | $5.68 | | $5.74 | | $4.77 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | |
| | | | | | | | | | | | |
| Average straight-line rental rate(1)(2) | | $46.78 | | $44.99 | | $45.26 | | $49.65 | | $48.77 | |
| Annualized lease transaction costs(3) | | $5.85 | | $4.77 | | $5.11 | | $6.02 | | $5.80 | |
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(1) | These average rental rates are not directly comparable from year to year because the averages are significantly affected from period to period by factors such as the buildings, submarkets, and types of space and terms involved in the leases executed during the respective reporting period. Because straight-line rent takes into account the full economic value of each lease, including rent concessions and escalations, we believe that it may provide a better comparison than ending cash rents, which include the impact of the annual escalations over the entire term of the lease. |
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(2) | Reflects the weighted average straight-line Annualized Rent. |
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(3) | Reflects the weighted average leasing commissions and tenant improvement allowances divided by the weighted average number of years for the leases. Excludes leases substantially negotiated by the seller in the case of acquired properties and leases for tenants relocated from space being taken out of service. |
(1)These average rental rates are not directly comparable from year to year because the averages are significantly affected from period to period by factors such as the buildings, submarkets, and types of space and terms involved in the leases executed during the respective reporting period. Because straight-line rent takes into account the full economic value during the full term of each lease, including rent concessions and escalations, we believe that it may provide a better comparison than ending cash rents, which include the impact of the annual escalations over the entire term of the lease.
(2)Reflects the weighted average straight-line Annualized Rent.
(3)Reflects the weighted average leasing commissions and tenant improvement allowances divided by the weighted average number of years for the leases. Excludes leases substantially negotiated by the seller in the case of acquired properties and leases for tenants relocated from space at the landlord's request.
Office Rent Roll
Our office rent roll continued to be adversely impacted by the COVID-19 pandemic during 2022. The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio:
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| | Year Ended December 31, 2022 | |
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| Rent Roll(1)(2) | Expiring Rate(2) | | New/Renewal Rate(2) | | Percentage Change | |
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| Cash Rent | $49.19 | | $45.66 | | (7.2)% | |
| Straight-line Rent | $44.21 | | $46.78 | | 5.8% | |
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(1)Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the year compared to the prior leases for the same space. Excludes leases with a term of twelve months or less, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated at the landlord's request, leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe the base rent reflects other off-market inducements to the tenant, and other non-comparable leases.
(2)Our office rent roll can fluctuate from period to period as a result of changes in our submarkets, buildings and term of the expiring leases, making these metrics difficult to predict.
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| | | Year Ended December 31, 2019 | |
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| | Rent Roll(1)(2) | Expiring Rate(2) | | New/Renewal Rate(2) | | Percentage Change | |
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| | Cash Rent | $42.91 | | $47.25 | | 10.1% | |
| | Straight-line Rent | $38.92 | | $49.65 | | 27.6% | |
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(1) | Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the year compared to the prior leases for the same space. Excludes Short Term Leases, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated from space being taken out of service, and leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe base rent reflects other off-market inducements to the tenant that are not reflected in the prior lease document. |
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(2) | Our office rent roll can fluctuate from period to period as a result of changes in our submarkets, buildings and term of the expiring leases, making these metrics difficult to predict. |
Multifamily Rental Rates
Our multifamily rental rates were adversely impacted by the COVID-19 pandemic in 2020, but improved in 2021 and 2022. The table below presents the average annual rental rate per leased unit for new tenants:
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| | | | Year Ended December 31, | |
| | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |
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| | Average annual rental rate - new tenants(1) | | $ | 28,350 |
| | $ | 27,542 |
| | $ | 28,501 |
| | $ | 28,435 |
| | $ | 27,936 |
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| | | Year Ended December 31, | |
| | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | |
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| Average annual rental rate - new tenants(1)(2) | | $ | 31,763 | | | $ | 29,837 | | | $ | 28,416 | | | $ | 28,350 | | | $ | 27,542 | | |
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(1) | These average rental rates are not directly comparable from year to year because of changes in the properties and units included. For example: (i) the average for 2018 decreased from 2017 because we added a significant number of units at our Moanalua Hillside Apartments development in Honolulu, where the rental rates are lower than the average in our portfolio, and (ii) the average for 2019 increased from 2018 because we acquired The Glendon where higher rental rates offset the effect of adding additional units at our Moanalua Hillside Apartments development. |
(1) Calculations exclude 376 units at a newly constructed property undergoing lease up.
(2) These average rental rates are not directly comparable from year to year because of changes in the properties and units included. For example:
(i) In 2019, the average was impacted by our acquisition of The Glendon where rental rates were higher than the average in our portfolio,
(ii) In 2020, the average was impacted by the addition of a significant number of units at our Bishop Place development in Honolulu, where the rental rates were higher than the average in our portfolio, and
(iii) In 2022, the average was impacted by the acquisition of 1221 Ocean Avenue, where the rental rates were higher than the average in our portfolio. See "Acquisitions, Financings, Developments and Repositionings" for more information regarding this acquisition.
Multifamily Rent Roll
The rent on leases subject to rent change during the year ended December 31, 20192022 (new tenants and existing tenants undergoing annual rent review) was 0.9%6.4% higher on average than the prior rent on the same unit. This excludes leasing at a newly constructed property undergoing lease up.
Occupancy Rates - Total Portfolio
Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022. Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, but recovered during 2021 and 2022. The tables below present the occupancy rates for our total office portfolio and multifamily portfolio:
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| | | December 31, | |
| Occupancy Rates(1) as of: | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | |
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| Office portfolio | | 83.7 | % | | 84.9 | % | | 87.4 | % | | 91.4 | % | | 90.3 | % | |
| Multifamily portfolio(2) | | 98.1 | % | | 98.0 | % | | 94.2 | % | | 95.2 | % | | 97.0 | % | |
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| | | Year Ended December 31, | |
| Average Occupancy Rates(1)(3): | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | |
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| Office portfolio | | 84.2 | % | | 85.7 | % | | 89.5 | % | | 90.7 | % | | 89.4 | % | |
| Multifamily portfolio(2) | | 97.9 | % | | 96.8 | % | | 94.2 | % | | 96.5 | % | | 96.6 | % | |
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(1)Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were below that of our existing portfolio.
(2)Our Occupancy Rates may not be directly comparable from year to year, as they can be impacted by acquisitions, dispositions, development and redevelopment projects. Multifamily calculations exclude units temporarily unoccupied as a result of a fire at one property and all units at a newly constructed property undergoing lease up.
(3)Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period.
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| | | | December 31, | |
| | Occupancy Rates(1) as of: | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |
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| | Office portfolio | | 91.4 | % | | 90.3 | % | | 89.8 | % | | 90.4 | % | | 91.2 | % | |
| | Multifamily portfolio(2) | | 95.2 | % | | 97.0 | % | | 96.4 | % | | 97.9 | % | | 98.0 | % | |
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| | | | Year Ended December 31, | |
| | Average Occupancy Rates(1)(3): | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |
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| | Office portfolio | | 90.7 | % | | 89.4 | % | | 89.5 | % | | 90.6 | % | | 90.9 | % | |
| | Multifamily portfolio(2) | | 96.5 | % | | 96.6 | % | | 97.2 | % | | 97.6 | % | | 98.2 | % | |
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(1) | Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were below that of our existing portfolio. |
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(2) | The Occupancy Rate for our multifamily portfolio was impacted by an acquisition in 2019 and by new units at our Moanalua Hillside Apartments development in Honolulu in 2019 and 2018 - see "Acquisitions, Financings, Developments and Repositionings" above. |
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(3) | Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period. |
Office Lease Expirations
As of December 31, 2019,2022, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio as follows:
(1) Average of the percentage of leases at December 31, 2016, 2017,2019, 2020, and 20182021 with the same remaining duration as the leases for the labeled year had at December 31, 2019.2022. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
Results of Operations
Comparison of 20192022 to 20182021
Our results of operations for 2022 and 2021 were adversely impacted by the COVID-19 pandemic. Our results of operations for 2022 generally compare favorably with 2021 primarily due to: (i) the gradual recovery from the pandemic, (ii) better collections from our tenants, (iii) lower write-offs of uncollectible tenant receivables, (iv) restoring certain office tenants to accrual basis accounting, (v) higher office parking income, (vi) a multifamily property we acquired in the second quarter of 2022, (vii) new units from our multifamily development projects, and (viii) higher rental rates for our multifamily portfolio. The favorable impacts were partly offset by the impact of inflation on our rental expenses.
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| | | Year Ended December 31, | | Favorable (Unfavorable) | | | |
| | | 2022 | | 2021 | | Change | | % | | Commentary | |
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| Revenues | |
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| Office rental revenue and tenant recoveries | | $ | 724,131 | | | $ | 704,946 | | | $ | 19,185 | | | 2.7 | % | | The increase was primarily due to better collections, lower write-offs of uncollectible receivables, and restoring certain tenants to accrual basis accounting. The increase was partly offset by a decrease in rental revenues due to a decrease in occupancy and lower accretion from below-market leases. | |
| Office parking and other income | | $ | 100,442 | | | $ | 81,924 | | | $ | 18,518 | | | 22.6 | % | | The increase was primarily due to an increase in parking income due to an increase in parking activity. | |
| Multifamily revenue | | $ | 169,079 | | | $ | 131,527 | | | $ | 37,552 | | | 28.6 | % | | The increase was primarily due to: (i) revenues from our 1221 Ocean Avenue property in Santa Monica which we purchased in the second quarter of 2022, (ii) higher rental rates, (iii) new units at our Landmark Los Angeles development project and our Bishop Place conversion project, and (iv) better collections. | |
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| Operating expenses | |
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| Office rental expenses | | $ | 284,522 | | | $ | 265,376 | | | $ | (19,146) | | | (7.2) | % | | The increase was primarily due to an increase in utility, janitorial, personnel, insurance and parking expenses. The increase was partly offset by a decrease in rental expenses at our Bishop Place conversion project and lower advocacy expenses. | |
| Multifamily rental expenses | | $ | 49,299 | | | $ | 38,025 | | | $ | (11,274) | | | (29.6) | % | | The increase was primarily due to: (i) rental expenses from our 1221 Ocean Avenue property in Santa Monica which we purchased in the second quarter of 2022, (ii) rental expenses from new units at our Bishop Place conversion project and Landmark Los Angeles development project, and (iii) an increase in utility and personnel expenses. The increase was partly offset by a decrease in property taxes. | |
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| | | | Year Ended December 31, | | Favorable | | | | | |
| | | | 2019 | | 2018 | | (Unfavorable) | | % | | Commentary | |
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| | | | (In thousands) | | | | | |
| | Revenues | |
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| | Office rental revenue and tenant recoveries | | $ | 694,315 |
| | $ | 661,147 |
| | $ | 33,168 |
| | 5.0 | % | | The increase was due to (i) an increase of $25.4 million of rental revenue and tenant recoveries from properties that we owned throughout both periods, due to higher rental and occupancy rates, (ii) $6.6 million of rental revenue and tenant recoveries from a JV we consolidated in November 2019, and (iii) $2.5 million of rental revenue and tenant recoveries from retail space at the residential community we acquired in June 2019, partly offset by (iv) a decrease of $1.3 million of rental revenue and tenant recoveries at an office building we are converting to a residential building in Hawaii. | |
| | Office parking and other income | | $ | 122,440 |
| | $ | 116,784 |
| | $ | 5,656 |
| | 4.8 | % | | The increase was due to (i) an increase in parking and other income of $3.9 million from properties we owned throughout both periods, due to higher occupancy and rates, (ii) $1.2 million of parking and other income from a JV we consolidated in November 2019, and (iii) $0.8 million of parking and other income from retail space at the residential community we acquired in June 2019, partly offset by (iv) a decrease of $0.3 million in parking and other income at an office building we are converting to a residential building in Hawaii. | |
| | Multifamily revenue | | $ | 119,927 |
| | $ | 103,385 |
| | $ | 16,542 |
| | 16.0 | % | | The increase was due to (i) revenues of $9.7 million from the residential community we acquired in June 2019, (ii) an increase in revenues of $4.8 million from the new apartments at our Moanalua Hillside Apartments development, and (iii) an increase in revenues of $2.0 million at our other residential properties, which was primarily due to an increase in rental revenues due to higher rental rates. | |
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| | Operating expenses | |
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| | Office rental expenses | | $ | 264,482 |
| | $ | 252,751 |
| | $ | (11,731 | ) | | (4.6 | )% | | The increase was due to (i) an increase of $9.0 million of rental expenses from properties that we owned throughout both periods, (ii) $2.4 million of rental expenses from a JV we consolidated in November 2019, and (iii) $0.8 million of rental expenses from retail space at the residential community we acquired in June 2019, partly offset by (iv) a decrease of $0.5 million in rental expenses at an office building we are converting to a residential building in Hawaii. The increase in rental expenses from properties that we owned throughout both periods was due to an increase in utility expenses, property taxes, personnel expenses, repairs and maintenance expenses, scheduled services expenses and insurance expense. | |
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| | | | Year Ended December 31, | | Favorable | | | | | |
| | | | 2019 | | 2018 | | (Unfavorable) | | % | | Commentary | |
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| | Multifamily rental expenses | | $ | 33,681 |
| | $ | 28,116 |
| | $ | (5,565 | ) | | (19.8 | )% | | The increase was due to (i) $3.2 million of rental expenses from the residential community we acquired in June 2019, (ii) an increase in rental expenses of $1.3 million at our residential properties that we owned throughout both periods, and (iii) an increase in rental expenses of $1.1 million from the new apartments at our Moanalua Hillside Apartments development. The increase in rental expenses from properties that we owned throughout both periods was due to an increase in property taxes, scheduled services expenses, personnel expenses and repairs and maintenance expenses. | |
| | General and administrative expenses | | $ | 38,068 |
| | $ | 38,641 |
| | $ | 573 |
| | 1.5 | % | | The decrease was primarily due to a decrease in personnel expenses. | |
| | Depreciation and amortization | | $ | 357,743 |
| | $ | 309,864 |
| | $ | (47,879 | ) | | (15.5 | )% | | The increase was due to (i) an increase in depreciation and amortization of $28.0 million from an office building we are converting to a residential building in Hawaii, due to accelerated depreciation of the building, (ii) $6.0 million of depreciation and amortization from the residential community that we acquired in June 2019, (iii) $3.0 million from a JV we consolidated in November 2019, (iv) an increase in depreciation and amortization of $2.3 million from the new apartments at our Moanalua Hillside Apartments development, and (v) an increase of $8.7 million at our other properties, which reflects activity at our repositioning properties and an increase in investment in real estate balances. | |
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| | Non-Operating Income and Expenses | |
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| | Other income | | $ | 11,653 |
| | $ | 11,414 |
| | $ | 239 |
| | 2.1 | % | | The increase was primarily due to an increase in interest income and an increase in revenue from the health club that we own and operate. | |
| | Other expenses | | $ | (7,216 | ) | | $ | (7,744 | ) | | $ | 528 |
| | 6.8 | % | | The decrease was primarily due to a decrease in expenses related to our property management and other services we provide to our Funds and a decrease in acquisition expenses. | |
| | Income from unconsolidated Funds | | $ | 6,923 |
| | $ | 6,400 |
| | $ | 523 |
| | 8.2 | % | | The increase was primarily due to an increase in net income from our unconsolidated Funds, which was primarily due to an increase in revenues due to an increase in occupancy and rental rates. | |
| | Interest expense | | $ | (143,308 | ) | | $ | (133,402 | ) | | $ | (9,906 | ) | | (7.4 | )% | | The increase was primarily due to loan costs incurred in connection with our debt refinancing activities during the current year. | |
| | Gain from consolidation of JV | | $ | 307,938 |
| | $ | — |
| | $ | 307,938 |
| | 100.0 | % | | The gain is due to the consolidation of a JV in November 2019 that was previously accounted for as an unconsolidated Fund using the equity method. | |
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| | | Year Ended December 31, | | Favorable (Unfavorable) | | | |
| | | 2022 | | 2021 | | Change | | % | | Commentary | |
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| General and administrative expenses | | $ | 45,405 | | | $ | 42,554 | | | $ | (2,851) | | | (6.7) | % | | The increase was primarily due to an increase in advocacy and leasing expenses. The increase was partly offset by a decrease in legal expenses and stock-based compensation expense. | |
| Depreciation and amortization | | $ | 372,798 | | | $ | 371,289 | | | $ | (1,509) | | | (0.4) | % | | The increase was primarily due to depreciation from the property we purchased in the second quarter, and depreciation from the Landmark Los Angeles development project. The increase was partly offset by a decrease in depreciation from our Bishop Place conversion project and a decrease in depreciation for our other properties. | |
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| Non-Operating Income and Expenses | |
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| Other income | | $ | 4,587 | | | $ | 2,465 | | | $ | 2,122 | | | 86.1 | % | | The increase was primarily due to an increase in interest income, partly offset by the recovery of transaction fees in 2021. | |
| Other expenses | | $ | (714) | | | $ | (937) | | | $ | 223 | | | 23.8 | % | | The decrease was primarily due to transaction expenses in 2021, partly offset by an increase in expenses related to services we provide to our unconsolidated fund, Partnership X. | |
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| Income from unconsolidated Fund | | $ | 1,224 | | | $ | 946 | | | $ | 278 | | | 29.4 | % | | The increase was due to an increase in the net income of our unconsolidated fund, Partnership X, which was primarily due to: (i) an increase in rental revenues due to higher rental rates and (ii) an increase in parking income due to higher parking activity. | |
| Interest expense | | $ | (150,185) | | | $ | (147,496) | | | $ | (2,689) | | | (1.8) | % | | The increase was primarily due to higher debt and interest rates, partly offset by a decrease in loan costs. | |
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Comparison of 20182021 to 20172020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 20182021 filed with the SEC on February 15, 201918, 2022 for a discussioncomparison of our results of operations for the year ended December 31, 2018.
Non-GAAP Supplemental Financial Measure: FFO
Usefulness to Investors
We report FFO because it is a widely reported measure of the performance of equity REITs, and is also used by some investors to identify the impact of trends in occupancy rates, rental rates and operating costs from year to year, excluding the impacts from changes in the value of our real estate, and to compare our performance with other REITs. FFO is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. FFO should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other REITs. See "Results of Operations" above for a discussion of the items that impacted our net income.
Comparison of 20192022 to 20182021
OurDuring 2022, FFO increased by $25.1$36.2 million, or 6.3%9.4%, to $424.8$419.7 million, compared to $383.5 million for 2019 compared to $399.7 million for 2018, which2021. The increase was primarily due to (i) an increase in operating income from our office portfolio due to an increase in occupancyNOI from our multifamily and office portfolios, partly offset by an increase in general and administrative expenses and higher interest expense. The increase in NOI from our multifamily portfolio was primarily due to: (i) our acquisition of the 1221 Ocean Avenue property in Santa Monica in the second quarter of 2022, (ii) higher rental rates, (iii) new units at our Landmark Los Angeles development project and operating incomeour Bishop Place conversion project, and (iv) better collections. The increase in NOI from retail space at The Glendon residential community we acquired in June 2019,our office portfolio was primarily due to: (i) better collections, lower write-offs of uncollectible receivables, and restoring certain tenants to accrual basis accounting, and (ii) an increase in operating income from our residential portfolio due to operating income from apartments at The Glendon residential community and leasing of new units at our Moanalua Hillside Apartments development, which was partially offset by (iii) loan costs incurred in connection with the new loans we closed.
Comparison of 20182021 to 20172020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 20182021 filed with the SEC on February 15, 201918, 2022 for a discussioncomparison of our FFO for the year ended December 31, 2018.2021 compared to 2020.
Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in our Operating Partnership - which includes our share of our consolidated JVs and our unconsolidated FundsFund's FFO) to net income attributable to common stockholders computed(the most directly comparable GAAP measure):
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| | | Year Ended December 31, | |
| (In thousands) | | 2022 | | 2021 | |
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| Net income attributable to common stockholders | | $ | 97,145 | | | $ | 65,267 | | |
| Depreciation and amortization of real estate assets | | 372,798 | | | 371,289 | | |
| Net loss attributable to noncontrolling interests | | (605) | | | (9,136) | | |
| Adjustments attributable to unconsolidated Fund (1) | | 2,848 | | | 2,796 | | |
| Adjustments attributable to consolidated JVs (2) | | (52,503) | | | (46,760) | | |
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| FFO | | $ | 419,683 | | | $ | 383,456 | | |
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(1)Adjusts for our share of Partnership X's depreciation and amortization of real estate assets.
(2)Adjusts for the net income (loss) and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in accordance with GAAP:
our consolidated JVs.
|
| | | | | | | | | | |
| | | | | | | |
| | | | Year Ended December 31, | |
| | (In thousands) | | 2019 | | 2018 | |
| | | | | | | |
| | Net income attributable to common stockholders | | $ | 363,713 |
| | $ | 116,086 |
| |
| | Depreciation and amortization of real estate assets | | 357,743 |
| | 309,864 |
| |
| | Net income attributable to noncontrolling interests | | 54,985 |
| | 12,526 |
| |
| | Adjustments attributable to unconsolidated Funds (1) | | 15,815 |
| | 16,702 |
| |
| | Adjustments attributable to consolidated JVs (2) | | (59,505 | ) | | (55,448 | ) | |
| | Gain from consolidation of JV | | (307,938 | ) | | — |
| |
| | FFO | | $ | 424,813 |
| | $ | 399,730 |
| |
| | | | | | | |
| |
(1) | Adjusts for our share of our unconsolidated Funds depreciation and amortization of real estate assets. |
| |
(2) | Adjusts for the net income and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in our consolidated JVs. |
Non-GAAP Supplemental Financial Measure: Same Property NOI
Usefulness to Investors
We report Same Property NOI to facilitate a comparison of our operations between reported periods. Many investors use Same Property NOI to evaluate our operating performance and to compare our operating performance with other REITs, because it can reduce the impact of investing transactions on operating trends. Same Property NOI is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. We report Same Property NOI because it is a widely recognized measure of the performance of equity REITs, and is used by some investors to identify trends in occupancy rates, rental rates and operating costs and to compare our operating performance with that of other REITs. Same Property NOI has limitations as a measure of our performance because it excludes depreciation and amortization expense, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. Other REITs may not calculate Same Property NOI in the same manner. As a result, our Same Property NOI may not be comparable to the Same Property NOI of other REITs. Same Property NOI should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends.
Comparison of 20192022 to 2018:2021:
Our 2019 same propertiesSame Properties for 2022 included 6067 office properties, aggregating 15.517.6 million Rentable Square Feet, and 910 multifamily properties with an aggregate 2,6403,449 units. The amounts presented includebelow reflect 100% (not our pro-rata share).
Our Same Property results for 2022 and 2021 were adversely impacted by the COVID-19 pandemic. The Same Property results for 2022 generally compare favorably with 2021 due to: (i) the gradual recovery from the pandemic, (ii) better collections from our tenants, (iii) lower write-offs of uncollectible tenant receivables, (iv) restoring certain office tenants to accrual basis accounting, (v) higher office parking income, and (vi) higher rental rates for our multifamily portfolio. These favorable impacts were partly offset by the impact of inflation on our rental expenses. |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Year Ended December 31, | | Favorable | | | | | |
| | | 2019 | | 2018 | | (Unfavorable) | | % | | Commentary | |
| | | (In thousands) | | | | | |
| | | | | | | | | | | | |
| | Office revenues | $ | 760,616 |
| | $ | 726,096 |
| | $ | 34,520 |
| | 4.8 | % | | The increase was primarily due to (i) an increase in rental revenues due to an increase in rental and occupancy rates, (ii) an increase in tenant recoveries due to an increase in recoverable operating costs and (iii) an increase in parking and other income. | |
| | Office expenses | (241,130 | ) | | (232,377 | ) | | (8,753 | ) | | (3.8 | )% | | The increase was primarily due to an increase in property taxes, insurance, utility expenses, personnel expenses and repairs and maintenance expenses. | |
| | Office NOI | 519,486 |
| | 493,719 |
| | 25,767 |
| | 5.2 | % | | | |
| | | | | | | | | | | | |
| | Multifamily revenues | 85,716 |
| | 84,601 |
| | 1,115 |
| | 1.3 | % | | The increase was primarily due to (i) an increase in rental revenues due to an increase in rental rates and (ii) parking and other income. | |
| | Multifamily expenses | (21,997 | ) | | (21,522 | ) | | (475 | ) | | (2.2 | )% | | The increase was primarily due to an increase in personnel expenses, repairs and maintenance expenses and utility expenses. | |
| | Multifamily NOI | 63,719 |
| | 63,079 |
| | 640 |
| | 1.0 | % | | | |
| | | | | | | | | | | | |
| | Total NOI | $ | 583,205 |
| | $ | 556,798 |
| | $ | 26,407 |
| | 4.7 | % | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | Year Ended December 31, | | Favorable
(Unfavorable) | | | |
| | 2022 | | 2021 | | Change | | % | | Commentary | |
| | (In thousands) | | | | | |
| | | | | | | | | | | |
| Office revenues | $ | 814,084 | | | $ | 776,734 | | | $ | 37,350 | | | 4.8 | % | | The increase was primarily due to: (i) better collections, a decrease in write-offs of uncollectible receivables, and restoring certain tenants to accrual basis accounting, and (ii) an increase in parking income. The increase was partly offset by a decrease in rental revenues due to a decrease in occupancy and lower accretion from below-market leases. | |
| Office expenses | (279,653) | | | (258,262) | | | (21,391) | | | (8.3) | % | | The increase was primarily due to an increase in utility, janitorial, personnel, insurance and parking expenses. The increase was partly offset by lower advocacy expenses. | |
| Office NOI | 534,431 | | | 518,472 | | | 15,959 | | | 3.1 | % | | | |
| | | | | | | | | | | |
| Multifamily revenues | 114,688 | | | 105,743 | | | 8,945 | | | 8.5 | % | | The increase was primarily due to an increase in rental revenues due to higher rental rates and better collections. | |
| Multifamily expenses | (34,633) | | | (31,958) | | | (2,675) | | | (8.4) | % | | The increase was primarily due to an increase in utility and personnel expenses. The increase was partly offset by a decrease in property taxes. | |
| Multifamily NOI | 80,055 | | | 73,785 | | | 6,270 | | | 8.5 | % | | | |
| | | | | | | | | | | |
| Total NOI | $ | 614,486 | | | $ | 592,257 | | | $ | 22,229 | | | 3.8 | % | | | |
| | | | | | | | | | | |
Reconciliation to GAAP
The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders:
|
| | | | | | | | | |
| | | | | | |
| | | Year Ended December 31, | |
| | (In thousands) | 2019 | | 2018 | |
| | | | | | |
| | Same Property NOI | $ | 583,205 |
| | $ | 556,798 |
| |
| | Non-comparable office revenues | 56,139 |
| | 51,835 |
| |
| | Non-comparable office expenses | (23,352 | ) | | (20,374 | ) | |
| | Non-comparable multifamily revenues | 34,211 |
| | 18,784 |
| |
| | Non-comparable multifamily expenses | (11,684 | ) | | (6,594 | ) | |
| | NOI | 638,519 |
| | 600,449 |
| |
| | General and administrative expenses | (38,068 | ) | | (38,641 | ) | |
| | Depreciation and amortization | (357,743 | ) | | (309,864 | ) | |
| | Operating income | 242,708 |
| | 251,944 |
| |
| | Other income | 11,653 |
| | 11,414 |
| |
| | Other expenses | (7,216 | ) | | (7,744 | ) | |
| | Income from unconsolidated Funds | 6,923 |
| | 6,400 |
| |
| | Interest expense | (143,308 | ) | | (133,402 | ) | |
| | Gain from consolidation of JV | 307,938 |
| | — |
| |
| | Net income | 418,698 |
| | 128,612 |
| |
| | Less: Net income attributable to noncontrolling interests | (54,985 | ) | | (12,526 | ) | |
| | Net income attributable to common stockholders | $ | 363,713 |
| | $ | 116,086 |
| |
| | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| | Year Ended December 31, | |
| (In thousands) | 2022 | | 2021 | |
| | | | | |
| Same Property NOI | $ | 614,486 | | | $ | 592,257 | | |
| Non-comparable office revenues | 10,489 | | | 10,136 | | |
| Non-comparable office expenses | (4,869) | | | (7,114) | | |
| Non-comparable multifamily revenues | 54,391 | | | 25,784 | | |
| Non-comparable multifamily expenses | (14,666) | | | (6,067) | | |
| NOI | 659,831 | | | 614,996 | | |
| General and administrative expenses | (45,405) | | | (42,554) | | |
| Depreciation and amortization | (372,798) | | | (371,289) | | |
| Other income | 4,587 | | | 2,465 | | |
| Other expenses | (714) | | | (937) | | |
| Income from unconsolidated Fund | 1,224 | | | 946 | | |
| Interest expense | (150,185) | | | (147,496) | | |
| | | | | |
| | | | | |
| | | | | |
| Net income | 96,540 | | | 56,131 | | |
| Net loss attributable to noncontrolling interests | 605 | | | 9,136 | | |
| Net income attributable to common stockholders | $ | 97,145 | | | $ | 65,267 | | |
| | | | | |
Comparison of 20182021 to 20172020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 20182021 filed with the SEC on February 15, 201918, 2022 for a discussioncomparison of our same property NOI for the year ended December 31, 2018.2021 compared to 2020.
Liquidity and Capital Resources
Short-term liquidity
Our short-term liquidity needs consist primarily of funds necessary for our operating activities, development, repositioning projects and dividends and distributions. During 2022, we generated cash from operations of $496.9 million. As of December 31, 2022, we had $268.8 million of cash and cash equivalents, and we had no balance outstanding on our $400.0 million revolving credit facility. Our earliest term loan maturity is December 2024. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt. Excluding acquisitions development projects and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand, cash generated by operations and our revolving credit facility. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our revolving credit facility.
Long-term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development projects and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to the requirement toREIT federal tax rules which require that we distribute a substantial majorityat least 90% of our income on an annual basis imposed by REIT federal tax rules.basis. We plan to meet our long-term liquidity needs through long-term secured non-recourse indebtedness,debt, the issuance of equity securities, including common stock and OP Units, as well as property dispositions and JV transactions. We have an ATM program which would allow us, subject to market conditions, to sell up to an additional $198$400.0 million of shares of common stock asstock.
We only use non-recourse debt, secured by our properties. As of the dateDecember 31, 2022, approximately 46% of this Report.
our total office portfolio was unencumbered. To mitigate the impact of changing interest rates on our cash flows from operations, we generally enter into interest rate swap agreements with respect to our loans with floating interest rates. These swap agreements generally expire between one to two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and derivative contracts, respectively. See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" of this Report regarding the impact of interest rate increases on our future operating results and cash flows.
Certain Contractual obligations asObligations
See the following notes to our consolidated financial statements in Item 15 of December 31, 2019this Report for information regarding our contractual commitments:
•Note 4 - minimum future ground lease payments;
•Note 8 - minimum future principal payments for our secured notes payable and revolving credit facility, and the interest rates that determine our future periodic interest payments; and
•Note 17 - contractual commitments.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Payment due by period | |
| | (In thousands) | | Total | | Less than 1 year | | 2-3 years | | 4-5 years | | Thereafter | |
| | | | | | | | | | | | | |
| | Term loan principal payments(1) | | $ | 4,653,264 |
| | $ | 752 |
| | $ | 301,610 |
| | $ | 1,716,764 |
| | $ | 2,634,138 |
| |
| | Term loan interest payments(2) | | 828,601 |
| | 140,779 |
| | 281,923 |
| | 205,247 |
| | 200,652 |
| |
| | Ground lease payments(3) | | 49,110 |
| | 733 |
| | 1,466 |
| | 1,466 |
| | 45,445 |
| |
| | Development commitments(4) | | 233,374 |
| | 122,623 |
| | 110,750 |
| | — |
| | — |
| |
| | Capital expenditures and tenant improvements commitments(5) | | 24,600 |
| | 24,600 |
| | — |
| | — |
| | — |
| |
| | Total | | $ | 5,788,949 |
| | $ | 289,487 |
| | $ | 695,749 |
| | $ | 1,923,477 |
| | $ | 2,880,235 |
| |
| | | | | | | | | | | | | |
| |
(1) | Reflects the future principal payments due on our consolidated secured notes payable and revolving credit facility, excluding any maturity extension options. See Note 8 to our consolidated financial statements in Item 15 of this Report. |
| |
(2) | Reflects the future interest payments due on our consolidated secured notes payable and revolving credit facility, excluding any maturity extension options. The interest payments include the effect of interest rate swaps when relevant, and are based on the USD one-month LIBOR rate as of December 31, 2019 when floating. Future interest payments on our revolving credit facility are based on the balance as of December 31, 2019. See Note 8 to our consolidated financial statements in Item 15 of this Report. |
| |
(3) | Reflects the future minimum ground lease payments. See Note 4 to our consolidated financial statements in Item 15 of this Report. |
| |
(4) | See "Acquisitions, Financings, Developments and Repositionings" for a discussion of our developments. |
| |
(5) | Reflects the aggregate remaining contractual commitment for capital expenditure projects and repositionings, as well as tenant improvements. See "Acquisitions, Financings, Developments and Repositionings" for a discussion of our repositionings. |
Off-Balance Sheet Arrangements
Unconsolidated Fund'sFund Debt
Our unconsolidated Fund, Partnership X, has its own secured non-recourse debt and weinterest rate swaps. We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to that loan. Weloan, and we have also guaranteed the related swap. Our Fundinterest rate swaps. Partnership X has agreed to indemnify us for any amounts that we would be required to pay under that agreement.these agreements. As of December 31, 2019,2022, all of the obligations under the respective loan and swap agreements have been performed in accordance with the terms of those agreements. For information regarding our Fund and our Fund's debt, see Notes 6 andSee "Guarantees" in Note 17 respectively, to our consolidated financial statements in Item 15 of this Report.Report for more information about our Fund's debt and swaps, and the respective guarantees.
Cash Flows
Comparison of 20192022 to 2021
2018
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | 2019 | | 2018 | | Increase (Decrease) | | % | |
| | | | (In thousands) | | | |
| | | | | | | | | | | |
| | Net cash provided by operating activities(1) | | $ | 469,586 |
| | $ | 432,982 |
| | $ | 36,604 |
| | 8.5 | % | |
| | Net cash used in investing activities(2) | | $ | (649,668 | ) | | $ | (249,551 | ) | | $ | 400,117 |
| | 160.3 | % | |
| | Cash provided by (used in) financing activities(3) | | $ | 187,538 |
| | $ | (213,849 | ) | | $ | 401,387 |
| | 187.7 | % | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Year Ended December 31, | | Increase (Decrease)
In Cash | | % | |
| | | 2022 | | 2021 | | | |
| | | (In thousands) | | | |
| | | | | | | | | | |
| Net cash provided by operating activities(1) | | $ | 496,888 | | | $ | 446,951 | | | $ | 49,937 | | | 11.2 | % | |
| Net cash used in investing activities(2) | | $ | (560,953) | | | $ | (288,708) | | | $ | (272,245) | | | (94.3) | % | |
| Cash (used in) provided by financing activities(3) | | $ | (3,003) | | | $ | 5,246 | | | $ | (8,249) | | | (157.2) | % | |
| | | | | | | | | | |
| |
(1) | Our cash flows provided by operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectability of rent and recoveries from our tenants, and the level of our operating expenses and general and administrative expenses, and interest expense. The increase was primarily due to: (i) an increase in operating income from our office portfolio due to an increase in occupancy and rental rates, and operating income from retail space at The Glendon residential community we acquired in June 2019, and (ii) an increase in operating income from our residential portfolio due to operating income from apartments at The Glendon residential community and leasing of new units at our Moanalua Hillside Apartments development. |
| |
(2) | Our cash flows used in investing activities are generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The increase is primarily due to $365.9 million paid for The Glendon residential community in 2019 and an increase of $81.4 million paid for additional interests in unconsolidated Funds in 2019, partially offset by $39.2 million of cash assumed from the consolidation of a JV. |
| |
(3) | Our cash flows provided by financing activities are generally impacted by our borrowings and capital activities, as well as dividends and distributions paid to common stockholders and noncontrolling interests, respectively. The increase is primarily due to (i) $201.0 million of net proceeds from the issuance of common stock, (ii) $163.6 million of contributions from noncontrolling interests in consolidated JVs, and (iii) an increase of $77.6 million in net borrowings, partially offset by (a) an increase in loan cost payments of $18.4 million, (b) an increase in distributions to noncontrolling interests of $12.4 million, and (c) an increase in dividends paid to common stockholders of $9.8(1) Our cash flows from operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectibility of tenant receivables, the level of our operating and general and administrative expenses, and interest expense. The increase in cash from operating activities of $49.9 million was primarily due to an increase in NOI from our multifamily and office portfolios, partly offset by higher interest expense and an increase in general and administrative expenses. The increase in NOI from our multifamily portfolio was primarily due to: (i) our acquisition of the 1221 Ocean Avenue property in Santa Monica in the second quarter of 2022, (ii) higher rental rates, (iii) new units at our Landmark Los Angeles development project and our Bishop Place conversion project, and (iv) better collections. The increase in NOI from our office portfolio was primarily due to: (i) better collections and (ii) an increase in parking income. For both portfolios, these improvements were partially offset by increases in expenses. (2) Our cash flows from investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The decrease in cash from investing activities of $272.2 million was primarily due to a property acquisition of $330.5 million and an increase in capital expenditures for improvements to real estate of $53.9 million, partly offset by a decrease in capital expenditures for developments of $108.8 million. (3) Our cash flows from financing activities are generally impacted by our borrowings and capital activities, as well as dividends and distributions paid to common stockholders and noncontrolling interests, respectively. The decrease in cash from financing activities of $8.2 million was primarily due to a decrease in net borrowings of $95.0 million and higher distributions paid to noncontrolling interests of $4.1 million, partly offset by contributions from noncontrolling interests in our consolidated JVs of $81.0 million and a decrease in loan cost payments of $10.4 million. |
Comparison of 20182021 to 20172020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 20182021 filed with the SEC on February 15, 201918, 2022 for a discussioncomparison of our cash flows for the year ended December 31, 2018.2021 compared to 2020.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP, which requires us to make estimates of certain items which affect the reported amounts of our assets, liabilities, revenues and expenses. While we believe that our estimates are based upon reasonable assumptions and judgments at the time that they are made, some of our estimates could prove to be incorrect, and those differences could be material. Below is a discussion of our critical accounting policies, which are the policies we believe require the most estimate and judgment. See Note 2 to our consolidated financial statements included in Item 15 of this Report for the summary of our significant accounting policies.
Investment in Real Estate
Acquisitions and Initial Consolidation of VIEs
We account for property acquisitions as asset acquisitions. We allocate the purchase price for asset acquisitions, which includes the capitalized transaction costs, and for the properties upon the initial consolidation of VIEs not determined to be a business, on a relative fair value basis to: (i) land, (ii) buildings and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place at-market leases, (iv) acquired above- and below-market ground and tenant leases, and if applicable (v) assumed debt, based upon comparable sales for land, and the income approach using our estimates of expected future cash flows and other valuation techniques, which include but are not limited to, our estimates of rental rates, revenue growth rates, capitalization rates and discount rates, for other assets and liabilities. We estimate the relative fair values of the tangible assets on an ‘‘as-if-vacant’’ basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the property to the occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We evaluate the time period over which we expect such occupancy level to be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period. Above and below-market ground and tenant leases are recorded as an asset or liability based upon the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid or received pursuant to the in-place ground or tenant leases, respectively, and our estimate of fair market rental rates for the corresponding in-place leases, over the remaining non-cancelable term of the leases. Assumed debt is recorded at fair value based upon the present value of the expected future payments and current interest rates.
These estimates require judgment, involve complex calculations, and the allocations have a direct and material impact on our results of operations because, for example, (i) there would be less depreciation if we allocate more value to land (which is not depreciated), or (ii) if we allocate more value to buildings than to tenant improvements, the depreciation would be recognized over a much longer time period, because buildings are depreciated over a longer time period than tenant improvements.
Cost capitalization
We capitalize development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related to the development of real estate. Indirect development costs, including salaries and benefits, office rent, and associated costs for those individuals directly responsible for and who spend their time on development activities are also capitalized and allocated to the projects to which they relate. Development costs are capitalized while substantial activities are ongoing to prepare an asset for its intended use. We consider a development project to be substantially complete when the residential units or office space is available for occupancy but no later than one year after cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred. Costs previously capitalized related to abandoned developments are charged to earnings. Expenditures for repairs and maintenance are expensed as incurred.
The capitalization of development costs requires judgment, and can directly and materially impact our results of operations because, for example, (i) if we don't capitalize costs that should be capitalized, then our operating expenses would be overstated during the development period, and the subsequent depreciation of the developed real estate would be understated, or (ii) if we capitalize costs that should not be capitalized, then our operating expenses would be understated during the development period, and the subsequent depreciation of the real estate would be overstated. We capitalized development costs of $75.3$59.7 million, $78.7$185.4 million and $66.0$186.4 million during 2019, 2018 or 2017,2022, 2021 and 2020, respectively.
Impairment of Long-Lived Assets
We assess our investment in real estate and our investment in our Funds for impairment on a periodic basis, and whenever events or changes in circumstances indicate that the carrying value of our investments in real estate may not be recoverable. If the undiscounted future cash flows expected to be generated by the asset are less than the carrying value of the asset, and our evaluation indicates that we may be unable to recover the carrying value, then we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. Our estimates of future cash flows are based in part upon assumptions regarding future occupancy, rental ratesrevenues and operating costs, and could differ materially from actual results. We record real estate held for sale at the lower of carrying value or estimated fair value, less costs to sell, and similarly recognize impairment losses if we believe that we cannot recover the carrying value. Our evaluation of market conditions for assets held for sale requires judgment, and our expectations could differ materially from actual results. Impairment losses would reduce our net income and could be material. Based upon such periodic assessments we did not record any impairment losses for our long-lived assets and Fund during 2019, 20182022, 2021 or 2017. 2020.
Revenue Recognition - Collectibility of lease payments from office tenants
In downtown Honolulu, 1132 Bishop Street,accordance with Topic 842, if collectibility of lease payments is not probable at the commencement date, then we are converting a 25 story, 490,000 square foot office tower into approximately 500 apartments. We expectlimit the conversion to occur in phases over a number of years as the office space is vacated. Duelease income to the significant change in planned uselesser of the property,income recognized on a straight-line basis or cash basis. If our assessment of collectibility changes after the commencement date, we performedrecord the difference between the lease income that would have been recognized on a straight-line basis and cash basis as a current-period adjustment to lease income. We adopted the Topic 842 complete impairment model. Under this model, we no longer maintain a general reserve related to our receivables, and instead analyze, on a lease-by-lease basis, whether amounts due under the operating lease are deemed probable for collection. We write off tenant and deferred rent receivables as a charge against rental revenue in the period we determine the lease payments are not probable for collection. If we subsequently collect amounts that were previously written off then the amounts collected are recorded as an impairmentincrease to our rental revenues and tenant recoveries.
Our assessment of the collectibility of lease payments requires judgment and could have a material impact on our results of operations. This assessment involves using a methodology that requires judgment and estimates about matters that are uncertain at the time the estimates are made, including tenant specific factors, specific industry conditions, and general economic trends and conditions.
During 2022, 2021 and 2020, our results of operations were materially impacted by comparing the property's expected undiscounted cash flowsCOVID-19 pandemic. See "Impact of the COVID-19 Pandemic on our Business". Charges for uncollectible amounts related to tenant receivables and deferred rent receivables, which were primarily due to the property's carrying value plus the expected development costsCOVID-19 pandemic, reduced our rental revenues and concludedtenant recoveries by $0.6 million, $3.0 million, and $41.0 million in 2022, 2021 and 2020, respectively. We restored accrual basis accounting for certain office tenants that there was no impairment aswere previously determined to be uncollectible and accounted for on a cash basis of December 31, 2019. We determined the undiscounted cash flows usingaccounting, which increased our estimates of the expected future cash flows which included, but were not limited to, our estimates of property's net operating income, and capitalization rates.office revenues by $3.6 million in 2022.
Revenue Recognition for Tenant Recoveries
Our tenant recovery revenues for recoverable operating expenses are recognized as revenue in the period that the recoverable expenses are incurred. Subsequent to year-end, we perform reconciliations on a lease-by-lease basis and bill or credit each tenant for any differences between the estimated expenses we billed to the tenant and the actual expenses incurred. Estimating tenant recovery revenues requires an in-depth analysis of the complex terms of each underlying lease. Examples of estimates and judgments made when determining the amounts recoverable include:
•estimating the recoverable expenses;
•estimating the impact of changes to expense and occupancy during the year;
•estimating the fixed and variable components of operating expenses for each building;
•conforming recoverable expense pools to those used in the base year for the underlying lease; and
•judging whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease.
These estimates require judgment and involve complex calculations.calculations for each of our office properties. If our estimates prove to be incorrect, then our tenant recovery revenues and net income could be materially and adversely affected in future periods when we perform our reconciliations. The impact of changing our current year tenant recovery billings by 5% would result in a change to our tenant recovery revenues and net income of $2.6$2.2 million, $2.4 million and $2.1$2.6 million during 2019, 20182022, 2021 and 2017,2020, respectively.
Stock-Based Compensation
We award stock-based compensation to certain employees and non-employee directors in the form of LTIP Units. We recognize the fair value of the awards over the requisite vesting period, which is based upon service. The fair value of the awards is based upon the market value of our common stock on the grant date and a discount for post-vesting restrictions.
Our estimate of the discount for post-vesting restrictions requires judgment. If our estimate of the discount is too high or too low it would result in the fair value of the awards that we make being too low or too high, respectively, which would result in an under- or over-expense of stock-based compensation, respectively, and this under- or over-expensing of stock-based compensation could be material towould result in our net income.income being overstated or understated, respectively. Stock-based compensation expense was $18.4$21.0 million, $22.3$20.9 million and $18.5$21.4 million for 2019, 20182022, 2021 and 2017,2020, respectively. The impact of changing the discount rate by 5% would result in a change to our stock-based compensation expense and net income of $0.9 million, $1.1 million, $1.0 million and $0.9$1.1 million during 2019, 20182022, 2021 and 2017,2020, respectively.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We use derivative instruments to hedgeHedging our Floating Rate Borrowings
As of December 31, 2022, the interest rates for 89% of our consolidated borrowings were fixed or swap-fixed with interest rate risk related to our floating rate borrowings. However, ourswaps. Our use of these instruments exposes us to credit risk from the potential inability of our counterparties to perform under the terms of those agreements. We attempt to minimize this credit risk by contracting with a variety of high-quality financial counterparties. counterparties with investment grade ratings. As of December 31, 2022, the interest expense for our floating rate borrowings that are not hedged would increase by $5.6 million per year for every one hundred basis point increase in the related benchmark interest rate. See Note 8 to our consolidated financial statements in Item 15 of this Report for the future swap expirations with a total notional amount of $837.4 million in the first quarter of 2023. Higher interest rates would cause an increase in our future interest expense, which would reduce our future net income and cash flows from operations.
Market Transition to SOFR from USD-LIBOR
On March 5, 2021, the FCA announced that USD-LIBOR would no longer be published after June 30, 2023. This announcement has several implications, including setting the type of SOFR to which LIBOR is converted (e.g., Term SOFR, Daily Simple SOFR or Daily Compounded SOFR) and agreeing on a spread that may be applied when converting contracts from USD-LIBOR to SOFR. As of December 31, 2022, most of our floating rate borrowings and interest rate swaps are indexed to USD-LIBOR, and we currently expect that all of these loans and interest rate swaps will be converted to SOFR by July 1, 2023. We are evaluating issues relating to transitioning contracts to SOFR - which include, among other issues, the calculation of: (i) loan interest payments, (ii) swap interest payments, and (iii) the value of, and accounting for, loans and swaps. While we currently expect USD-LIBOR to be available in substantially its current form until at least June 30, 2023, it is possible that USD-LIBOR will become unavailable prior to that time. This could occur if, for example, sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to SOFR will be accelerated and potentially magnified.
See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and derivatives. As of December 31, 2019, we have no outstanding floatinginterest rate debt that is unhedged.swaps.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC"), which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR.
Our floating rate borrowings and derivative instruments are indexed to USD-LIBOR and we are monitoring this activity and evaluating the related risks - which include interest on loans and amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate. The value of loans or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and potentially magnified.
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of December 31, 2019,2022, the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of management, including our CEO and CFO, regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at the end of the period covered by this Report. Based on the foregoing, our CEO and CFO concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow for timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2019,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon appear at pages F-1 and F-3F-5, respectively, and are incorporated herein by reference.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
InformationThe information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors (Proposal 1) – Information Concerning Current Directors and Nominees”, “Information About Our Executive Officers”, “Corporate Governance”, “Board Meetings and Committees” and “Delinquent Section 16(a) Reports” (to the extent required), in our Proxy Statement for the 20202023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.2022.
Item 11. Executive Compensation
InformationThe information required by this item is incorporated by reference to the information set forth under the captions “Executive Compensation”, “Compensation Committee Report”, “Director Compensation”, and “Compensation Committee Interlocks and Insider Participation”, in our Proxy Statement for the 20202023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Stock-Based Compensation Plan
The following table presents information with respect to shares of our common stock that may be issued under our existing stock incentive plan as of December 31, 2019:2022:
| | | Plan Category | | Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights (In thousands) | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of shares of common stock remaining available for future issuance under stock-based compensation plans (excluding shares reflected in column (a)) (In thousands) | Plan Category | | Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights
(In thousands) | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of shares of common stock remaining available for future issuance under stock-based compensation plans (excluding shares reflected in column (a))
(In thousands) |
| | | (a) | | (b) | | (c) | | | (a) | | (b) | | (c) |
| Stock-based compensation plans approved by stockholders | (1) | 1,723 | (2) | $— | (3) | 105 | Stock-based compensation plans approved by stockholders | (1) | 3,961 | (2) | $— | (3) | 2,276 |
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(1) | For a description of our 2016 Omnibus Stock Incentive Plan, see Note 13 to our consolidated financial statements in Item 15 of this Report. We did not have any other stock-based compensation plans as of December 31, 2019. |
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(2) | Consists of 0.8 million vested and 0.9 million unvested LTIP Units. |
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(3) | We have no outstanding options. There are no exercise prices for LTIP Units. |
(1) For a description of our 2016 Omnibus Stock Incentive Plan, see Note 13 to our consolidated financial statements in Item 15 of this Report. We did not have any other stock-based compensation plans as of December 31, 2022.
(2) Consists of 2.4 million vested and 1.6 million unvested LTIP Units.
(3) We have no outstanding options. There are no exercise prices for LTIP Units.
The remaining information required by this item is incorporated by reference to the information set forth under the caption “Voting Securities and Principal Stockholders—Security Ownership of Certain Beneficial Owners and Management”, in our Proxy Statement for the 20202023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence
InformationThe information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors (Proposal 1) – Information Concerning Current Directors and Nominees”, “Corporate Governance” and “Transactions With Related Persons”, in our Proxy Statement for the 20202023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.2022.
Item 14. Principal Accounting Fees and Services
InformationOur Independent Registered Public Accounting Firm is Ernst & Young LLP, Los Angeles California, PCAOB Firm ID: 42. The information required by this item is incorporated by reference to the information set forth under the caption “Independent Registered Public Accounting Firm” in our Proxy Statement for the 20202023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.
PART IV
Item 15. Exhibits and Financial Statement Schedule
(a)(1) and (2) Financial Statements and Schedules
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| Note: All other schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or notes thereto. | |
Douglas Emmett, Inc.
Exhibits
(a)(3) exhibits
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| Number | Description | Footnote |
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| 3.1 | | (1) |
| 3.2 | | (2) |
| 3.3 | | (3) |
| 3.4 | | (4) |
| 4.1 | | (5) |
| 4.2 | | (6) |
| 10.1 | | (5) |
| 10.2 | | (7) |
| 10.3 | | (8) |
| 10.4 | | (9) |
| 10.5 | | (10) |
| 10.6 | | (11) |
| 10.7 | | (12) |
| 10.8 | | (12) |
| 10.9 | | (12) |
| 21.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | (13) |
| 32.2 | | (13) |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document)* | |
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| * | Filed with this Annual Report on Form 10-K . | |
| + | Denotes management contract or compensatory plan, contract or arrangement. | |
| (1) | Filed with Amendment No. 6 to Form S-11 on October 19, 2006 and incorporated herein by this reference. (File number 333-135082) | |
| (2) | Filed with Form 8-K on September 6, 2013 and incorporated herein by this reference. (File number 001-33106) | |
| (3) | Filed with Form 8-K on October 30, 2006 and incorporated herein by this reference. (File number 001-33106) | |
| (4) | Filed with Form 8-K on April 9, 2018 and incorporated herein by this reference. (File number 001-33106) | |
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| Number | Description | Footnote |
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| 1.1 | Equity Distribution Agreement, dated August 4, 2017, by and among Douglas Emmett, Inc., Douglas Emmett Management, Inc., Douglas Emmett Properties, LP, Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC. | (1) |
| 1.2 | Supplement No. 1 to Equity Distribution Agreement, dated November 20, 2017, by and among Douglas Emmett, Inc., Douglas Emmett Management, Inc., Douglas Emmett Properties, LP, Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner, & Smith Incorporated and J.P. Morgan Securities LLC. | (2) |
| 3.1 | | (3) |
| 3.2 | | (4) |
| 3.3 | | (5) |
| 3.4 | | (6) |
| 4.1 | | (7) |
| 4.2 | | |
| 10.1 | | (7) |
| 10.2 | | (8) |
| 10.3 | | (9) |
| 10.4 | | (10) |
| 10.5 | | (11) |
| 10.6 | | (11) |
| 10.7 | | (12) |
| 10.8 | | (12) |
| 10.9 | | (12) |
| 21.1 | |
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| 23.1 | |
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| 31.1 | |
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| 31.2 | |
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| 32.1 | | (13) |
| 32.2 | | (13) |
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |
| 101.CAL | | |
| 101.DEF | | |
| 101.LAB | | |
| 101.PRE | | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document)* | |
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| * | Filed with this Annual Report on Form 10-K . | |
| + | Denotes management contract or compensatory plan, contract or arrangement. | |
| (1) | Filed with Form 8-K on August 7, 2017 and incorporated herein by this reference. (File number 001-33106) | |
Douglas Emmett, Inc.
Exhibits (continued)
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(2)(5) | Filed with Form 8-K on November 22, 2017 and incorporated herein by this reference. (File number 001-33106) | |
(3) | Filed with Amendment No. 6 to Form S-11 on October 19, 2006 and incorporated herein by this reference. (File number 333-135082) | |
(4) | Filed with Form 8-K on September 6, 2013 and incorporated herein by this reference. (File number 001-33106) | |
(5) | Filed with Form 8-K on October 30, 2006 and incorporated herein by this reference. (File number 001-33106) | |
(6) | Filed with Form 8-K on April 9, 2018 and incorporated herein by this reference. (File number 001-33106) | |
(7) | Filed with Amendment No. 3 to Form S-11 on October 3, 2006 and incorporated herein by this reference. (File number 333-135082) | |
(8)(6) | Filed with Form 10-K on February 18, 2022 and incorporated herein by this reference. (File number 001-33106) | |
| (7) | Filed with Form S-11 on June 16, 2006 and incorporated herein by this reference. (File number 333-135082) | |
(9)(8) | Filed with Amendment No. 2 to Form S-11 on September 20, 2006 and incorporated herein by this reference. (File number 333-135082) | |
(10)(9) | Filed with Form 8-KDefinitive Proxy Statement on June 3, 2016April 17, 2020 and incorporated herein by this reference. (File number 001-33106) | |
(11)(10) | Filed with Form 8-K on December 12, 2016 and incorporated herein by this reference. (File number 001-33106) | |
(12)(11) | Filed with Form 10-K on February 18, 2022 and incorporated herein by this reference. (File number 001-33106) | |
| (12) | Filed with Form 8-K on December 21,24, 2018 and incorporated herein by this reference. (File number 001-33106) | |
| (13) | In accordance with SEC Release No. 33-8212, these exhibits are being furnished, and are not being filed as part of this Report on Form 10-K or as a separate disclosure document, and are not being incorporated by reference into any Securities Act registration statement. | |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| DOUGLAS EMMETT, INC. |
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| Dated: | By: | /s/ JORDAN L. KAPLAN |
February 14, 202017, 2023 | | Jordan L. Kaplan |
| | President and CEO |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the persons below, in their respective capacities, on behalf of the registrant as of February 14, 2020.17, 2023.
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| Signature | | Title |
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| /s/ JORDAN L. KAPLAN | | |
| Jordan L. Kaplan | | President, CEO and Director
(Principal Executive Officer) |
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| /s/ PETER D. SEYMOUR | | |
| Peter D. Seymour | | CFO
(Principal Financial and Accounting Officer) |
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| /s/ DAN A. EMMETT | | |
| Dan A. Emmett | | Chairman of the Board |
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| /s/ KENNETH M. PANZER | | |
| Kenneth M. Panzer | | COO and Director |
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| /s/ LESLIE E. BIDER | | |
| Leslie E. Bider | | Director |
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Signature/s/ DORENE C. DOMINGUEZ | | Title |
| Dorene C. Dominguez | | Director |
/s/ JORDAN L. KAPLAN | | |
Jordan L. Kaplan
| | President, CEO and Director
(Principal Executive Officer)
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/s/ PETER D. SEYMOUR | | |
Peter D. Seymour | | CFO
(Principal Financial and Accounting Officer)
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/s/ DAN A. EMMETT | | |
Dan A. Emmett
| | Chairman of the Board
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/s/ KENNETH M. PANZER | | |
Kenneth M. Panzer
| | COO and Director
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/s/ CHRISTOPHER H. ANDERSON | | |
Christopher H. Anderson
| | Director
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/s/ LESLIE E. BIDER | | |
Leslie E. Bider
| | Director
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| /s/ DR. DAVID T. FEINBERG | | |
| Dr. David T. Feinberg | | Director |
| | |
| /s/ RAY C. LEONARD | | |
| Ray C. Leonard | | Director |
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| /s/ VIRGINIA A. MCFERRAN | | |
| Virginia A. McFerran | | Director |
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| /s/ THOMAS E. O’HERN | | |
Thomas E. O’Hern | | Director |
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| /s/ WILLIAM E. SIMON, JR. | | |
William E. Simon, Jr. | | Director |
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/s/ JOHNESE SPISSOSHIRLEY WANG | | |
Johnese SpissoShirley Wang | | Director
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Report of Management on Internal Control over Financial Reporting
The management of Douglas Emmett, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Our system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external reporting purposes in accordance with US GAAP. Our management, including the undersigned CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2022. In conducting its assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control—Integrated Framework (2013 Framework). Based on this assessment, management concluded that, as of December 31, 2019,2022, our internal control over financial reporting was effective based on those criteria.
Management, including our CEO and CFO, does not expect that our disclosure controls and procedures, or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
The effectiveness of our internal control over financial reporting as of December 31, 2019,2022, has been audited by Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this annual report, as stated in their report appearing on page F-3F-2, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 20192022..
| | |
| /s/ JORDAN L. KAPLAN |
| Jordan L. Kaplan |
| President and CEO |
|
/s/ JORDAN L. KAPLAN |
Jordan L. Kaplan |
President and CEO |
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| /s/ PETER D. SEYMOUR |
| Peter D. Seymour |
| CFO |
February 17, 2023
February 14, 2020
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Douglas Emmett, Inc. (the “Company”)Company) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 20192022 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 14, 202017, 2023 expressed an unqualified opinion thereon.
BasisReport of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Douglas Emmett, Inc. (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for Opinion
Theseeach of the three years in the period ended December 31, 2022 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBCompany at December 31, 2022 and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws2021, and the applicable rulesresults of its operations and regulationsits cash flows for each of the Securities and Exchange Commission andthree years in the PCAOB.period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the PCAOB. Those standards require that we plan and performPublic Company Accounting Oversight Board (United States) (PCAOB), the audit to obtain reasonable assurance about whetherCompany’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the financial statements are freeCommittee of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatementSponsoring Organizations of the financial statements, whether due to error or fraud,Treadway Commission (2013 framework), and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way ourreport dated February 17, 2023 expressed an unqualified opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.thereon.
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| | Consolidation of Douglas Emmett Fund X, LLC |
Description of the Matter | | As explained in Note 3 to the consolidated financial statements, the Company and the remaining non-controlling interest holder purchased additional interests in Douglas Emmett Fund X, LLC ("Fund X"). Upon completing the transaction including amending the operating agreement, Fund X was determined to be a variable interest entity (“VIE”) and the Company was determined to be its primary beneficiary. Accordingly, the Company began consolidating the VIE and recorded a $307.9 million gain on revaluing Fund X's assets and liabilities upon consolidation.
Auditing management’s application of the variable interest entity consolidation model to this transaction, and the resulting gain upon consolidation, was complex and required significant judgment. In particular, significant judgment was required in determining the fair value of each of Fund X’s six properties which utilized a combination of market and income valuation approaches. The significant assumptions for the market approach included assumptions of transactions of comparable size and location. The significant assumptions for the income approach related to the assumptions underlying the cash flow projections and included market rental rates, market growth rates and market discount rates. Changes in these assumptions may have materially affected the Company’s determination of the fair value of Fund X’s net assets which, in turn, would have impacted the gain on consolidation.
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| | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over management’s accounting for the consolidation of Fund X, including controls over management’s review of the significant assumptions mentioned above that were used to estimate fair value. This included management’s consideration of corroborative and contrary evidence from current industry and economic trends, prevailing market conditions, internally available information and other relevant factors.
To evaluate the Company’s consolidation analysis of the transaction, we performed audit procedures that included, among others, reviewing the amended and restated Fund X operating agreement and testing the fair value of Fund X’s assets and liabilities. Our audit procedures in testing the fair value of Fund X’s assets and liabilities included, among others, (i) evaluating the methods and significant assumptions used in the valuation of Fund X’s assets, (ii) assessing the reasonableness of the resulting fair values utilizing comparable market transactions, (iii) testing the completeness and accuracy of the valuation model and underlying data supporting the significant assumptions and estimates, and (iv) comparing the fair value of Fund X’s resulting net assets to the price paid by the Company and the unrelated non-managing member to acquire the other Fund X non-managing member interests. We also involved a valuation specialist to assist in the assessment of the methodology utilized by the Company, and to test the significant assumptions mentioned above in the cash flow projections.
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| | |
| | Purchase price accounting |
Description of the Matter | | During the year ended December 31, 2019, the Company acquired The Glendon, a residential property in Westwood consisting of apartments and retail space, for $365.9 million and consolidated a previously owned equity method accounted for investment in Douglas Emmett Fund X, LLC (“Fund X”) on a relative fair value basis. As explained in Note 3 to the consolidated financial statements, the Glendon transaction was accounted for as an asset acquisition, and as such, is recorded at the price to acquire the real estate property, including acquisition costs. In addition, as discussed in Note 3 to the consolidated financial statements, the Company consolidated Fund X’s six office properties and related identifiable assets and liabilities on a relative fair value basis.
For both of these transactions, the purchase price/consideration are allocated to land, building and intangible lease assets and liabilities based upon the relative fair value of the acquired assets and liabilities. The fair value of the acquired assets and liabilities were determined by the Company utilizing the sales comparison approach as it relates to land and the income approach which utilized discounted cash flows as it relates the other acquired assets and liabilities. Both approaches used market information available to the Company as inputs.
Auditing the Company’s accounting for its Glendon acquisition and Fund X consolidation was complex due to the significant estimation required by management in determining the fair value assigned to the acquired land, building and intangible lease assets and liabilities. The significant estimation was primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of the assets and liabilities as well as the sensitivity of the respective fair values to the significant underlying assumptions. The Company utilized the sales comparison approach to measure the fair value of the acquired land and the discounted cash flow method to measure the fair value of the remaining acquired assets and liabilities. The more significant assumptions utilized included comparable land sales, revenue growth rates, discount rates, market rental rates and capitalization rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
|
| | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s accounting for the Glendon property acquisition and Fund X consolidation, including controls over the Company’s review of the assumptions underlying the purchase price allocation, the cash flow projections and the accuracy of the underlying data used. For example, we tested controls over the determination of the fair value of the land, building and intangible lease assets and liabilities, including the controls over the review of the valuation models and the underlying assumptions used to develop such estimates.
For the Company’s Glendon property acquisition and Fund X consolidation, we read the respective transaction agreements, and evaluated whether the Company had appropriately determined whether the transactions were accounted for as business combinations or asset acquisitions. For both transactions, we also evaluated the significant assumptions and methods used in developing the fair value estimates of the tangible assets and intangible lease assets and liabilities. To test the estimated fair value of the land, building and intangible lease assets and liabilities, we performed audit procedures that included, among other procedures, evaluating the Company’s use of the sales comparison and income approaches and testing the significant assumptions used in the discounted cash flow model, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we agreed the contractual rents used in the cash flow projections to in-place tenant leases and compared certain property operating expenses, such as real estate property taxes, to historical operating results adjusted for the transaction. We involved our valuation specialists to assist in evaluating the methodologies utilized by the Company as compared to standard valuation practices, performing procedures to corroborate the reasonableness of the significant assumptions utilized in developing the fair value estimates of the acquired land, building, and intangible lease assets and liabilities, and performing corroborative calculations to assess the reasonableness of the acquired building asset. For example, our valuation specialists (i) used independently identified data sources to evaluate the appropriateness of management’s selected comparable land sales, (ii) obtained market specific information (i.e. revenue growth rates, discount rates, market rental rates and capitalization rates) and compared it to the market information utilized by the Company, and (iii) for a sample of properties, performed comparative calculations using the cost approach to validate the amount allocated to the building asset.
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| | |
| | Real Estate Investments - Impairment Assessment of 1132 Bishop Street |
Description of the Matter | | As explained in Note 2 to the consolidated financial statements, the Company finalized plans to convert 1132 Bishop Street, a commercial office property located in Honolulu, Hawaii into a residential property. Due to the change in planned use of the property, the Company assessed whether the property was potentially impaired by comparing 1132 Bishop Street’s expected cash flows on an undiscounted basis to the property’s net book value plus expected development costs.
Auditing the Company's accounting for potential impairment and its tests for recoverability involved a high degree of subjectivity as estimates underlying the determination of the undiscounted cash flows were based on assumptions about future market rental rates, operating expenses and capitalization rates. These assumptions are forward-looking and could be affected by future economic and market conditions, and are dependent, in part, on the completion of the planned redevelopment.
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| | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's processes to determine indicators of impairment and to conduct tests for recoverability if indicators of impairment are present. This included controls over management's review of the significant assumptions underlying the undiscounted cash flows.
Our testing of the Company's impairment assessment included, among other procedures, evaluating the significant assumptions and operating data used to estimate the property’s undiscounted cash flows. For example, we compared the significant assumptions, namely market rental rates, operating expenses and capitalization rates, used to estimate future cash flows to current market rental rates and capitalization rates for similar properties published in multiple third-party market studies. We also performed a sensitivity analysis on the Company’s inputs, namely expected net operating income, capitalization rates and expected construction costs to assess whether changes to certain assumptions would result in a materially different outcome. We also recalculated management's undiscounted cash flows.
|
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1995.
Los Angeles, California
February 14, 2020
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Douglas Emmett, Inc. (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2022 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 17, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | |
| Purchase price accounting |
| Description of the Matter | During the year ended December 31, 2022, the Company acquired 1221 Ocean Avenue, a multifamily apartment building in Santa Monica, through a new joint venture that the Company manages and owns a controlling 55% interest. As explained in Note 3 to the consolidated financial statements, the transaction was accounted for as an asset acquisition, and as such, is recorded at the price to acquire the real estate property, including acquisition costs. The purchase price is allocated to land, buildings and improvements, and identifiable intangible assets such as in-place at-market leases and acquired below-market tenant leases liabilities, based upon the relative fair value of the acquired assets and liabilities. The fair values of the acquired assets and liabilities were determined by the Company utilizing the sales comparison approach as it relates to land and the income approach which utilized discounted cash flows as it relates the other acquired assets and liabilities. Both approaches used market information available to the Company as inputs.
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| | | | | |
| Auditing the Company’s accounting for its acquisition was complex due to the significant estimation required by management in determining the fair value assigned to the acquired land, buildings and improvements, and intangible lease assets and liabilities. The significant estimation was primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of the assets and liabilities as well as the sensitivity of the respective fair values to changes in the significant underlying assumptions. The more significant assumptions utilized included comparable land sales, rental rates, revenue growth rates, discount rates, and capitalization rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
|
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s accounting for the property acquisition, including controls over the Company’s review of the assumptions underlying the purchase price allocation, the cash flow projections and the accuracy of the underlying data used. For example, we tested controls over the review of the valuation models and the underlying assumptions used to develop such estimates. For the Company’s property acquisition, we read the transaction agreement, and evaluated whether the Company had appropriately determined whether the transaction was accounted for as a business combination or asset acquisition. We also evaluated the significant assumptions and methods used in developing the fair value estimates of the tangible assets and intangible lease assets and liabilities. To test the estimated fair value of the land, building and intangible lease assets and liabilities, we performed audit procedures that included, among other procedures, evaluating the Company’s use of the sales comparison and income approaches and testing the significant assumptions used in the discounted cash flow model, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we agreed the contractual rents used in the cash flow projections to in-place tenant leases on a sample basis and evaluated the property operating expenses for reasonableness. We involved our valuation specialists to assist in evaluating the methodologies utilized by the Company as compared to standard valuation practices, performing procedures to corroborate the reasonableness of the significant assumptions utilized in developing the fair value estimates of the acquired land, building, and intangible lease assets and liabilities. For example, our valuation specialists (i) used independently identified data sources to evaluate the appropriateness of management’s selected comparable land sales, and (ii) obtained market specific information (i.e., revenue growth rates, discount rates, market rental rates and capitalization rates) and compared it to the market information utilized by the Company. |
| |
| Impairment of investment in real estate |
| Description of the Matter | The Company’s net investment in real estate totaled $9.0 billion as of December 31, 2022. As discussed in Note 2 to the consolidated financial statements, the Company assesses on a periodic basis whether there has been any impairment in the carrying value of its properties, and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. When indicators of impairment are present for a property, management calculates the future undiscounted cash flows expected to be generated by the property and compares it to the property’s carrying value to determine whether an impairment occurred. Auditing the Company’s evaluation of whether its real estate assets are recoverable was complex and involved a high degree of subjectivity in evaluating management’s assumptions in estimating the future cash flows as they are based on assumptions about future market and economic conditions. The estimation required in the undiscounted future cash flow assumptions includes management’s assumptions regarding future occupancy, rental revenues and operating costs. |
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| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s real estate asset impairment assessment process. For example, we tested controls over management’s process for estimating and evaluating the assumptions used in the future undiscounted cash flow projections for the properties where impairment indicators existed.
For properties with identified indicators of impairment, we performed audit procedures over the Company’s estimation of the properties’ undiscounted future cash flows. For example, we compared the significant assumptions used to estimate future cash flows to the Company’s historical accounting records or to available market data. We also tested the mathematical accuracy of management’s forecasted cash flows. Additionally, for certain assumptions, we performed sensitivity analyses to evaluate the changes in the undiscounted cash flows of the properties that would result from changes in the assumptions. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1995.
Los Angeles, California
February 17, 2023
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Douglas Emmett, Inc.’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Douglas Emmett, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Douglas Emmett, Inc. as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 20192022 and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated February 14, 202017, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Los Angeles, California
February 14, 202017, 2023
Douglas Emmett, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
| | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Assets | | | |
| Investment in real estate, gross | $ | 12,292,973 | | | $ | 11,819,077 | |
| Less: accumulated depreciation and amortization | (3,299,365) | | | (3,028,645) | |
| Investment in real estate, net | 8,993,608 | | | 8,790,432 | |
| | | |
| Ground lease right-of-use asset | 7,455 | | | 7,464 | |
| Cash and cash equivalents | 268,837 | | | 335,905 | |
| Tenant receivables | 6,879 | | | 13,127 | |
| Deferred rent receivables | 114,980 | | | 115,148 | |
| Acquired lease intangible assets, net | 3,536 | | | 4,168 | |
| Interest rate contract assets | 270,234 | | | 15,473 | |
| Investment in unconsolidated Fund | 47,976 | | | 46,594 | |
| Other assets | 33,941 | | | 25,721 | |
| Total Assets | $ | 9,747,446 | | | $ | 9,354,032 | |
| | | |
| Liabilities | | | |
| Secured notes payable and revolving credit facility, net | $ | 5,191,893 | | | $ | 5,012,076 | |
| Ground lease liability | 10,848 | | | 10,860 | |
| Interest payable, accounts payable and deferred revenue | 140,925 | | | 145,460 | |
| Security deposits | 61,429 | | | 55,285 | |
| Acquired lease intangible liabilities, net | 31,364 | | | 24,710 | |
| Interest rate contract liabilities | 1,790 | | | 69,930 | |
| Dividends payable | 33,414 | | | 49,158 | |
| Total Liabilities | 5,471,663 | | | 5,367,479 | |
| | | |
| Equity | | | |
| Douglas Emmett, Inc. stockholders' equity: | | | |
| Common Stock, $0.01 par value, 750,000,000 authorized, 175,809,682 and 175,529,133 outstanding at December 31, 2022 and December 31, 2021, respectively | 1,758 | | | 1,755 | |
| Additional paid-in capital | 3,493,307 | | | 3,488,886 | |
| Accumulated other comprehensive income (loss) | 187,063 | | | (38,774) | |
| Accumulated deficit | (1,119,714) | | | (1,035,798) | |
| Total Douglas Emmett, Inc. stockholders' equity | 2,562,414 | | | 2,416,069 | |
| Noncontrolling interests | 1,713,369 | | | 1,570,484 | |
| Total Equity | 4,275,783 | | | 3,986,553 | |
| Total Liabilities and Equity | $ | 9,747,446 | | | $ | 9,354,032 | |
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Assets | |
| | |
|
| Investment in real estate: | |
| | |
|
| Land | $ | 1,152,684 |
| | $ | 1,065,099 |
|
| Buildings and improvements | 9,308,481 |
| | 7,995,203 |
|
| Tenant improvements and lease intangibles | 905,753 |
| | 840,653 |
|
| Property under development | 111,715 |
| | 129,753 |
|
| Investment in real estate, gross | 11,478,633 |
| | 10,030,708 |
|
| Less: accumulated depreciation and amortization | (2,518,415 | ) | | (2,246,887 | ) |
| Investment in real estate, net | 8,960,218 |
| | 7,783,821 |
|
| Ground lease right-of-use asset | 7,479 |
| | — |
|
| Cash and cash equivalents | 153,683 |
| | 146,227 |
|
| Tenant receivables | 5,302 |
| | 4,371 |
|
| Deferred rent receivables | 134,968 |
| | 124,834 |
|
| Acquired lease intangible assets, net | 6,407 |
| | 3,251 |
|
| Interest rate contract assets | 22,381 |
| | 73,414 |
|
| Investment in unconsolidated Funds | 42,442 |
| | 111,032 |
|
| Other assets | 16,421 |
| | 14,759 |
|
| Total Assets | $ | 9,349,301 |
| | $ | 8,261,709 |
|
| | | | |
| Liabilities | | | |
| Secured notes payable and revolving credit facility, net | $ | 4,619,058 |
| | $ | 4,134,030 |
|
| Ground lease liability | 10,882 |
| | — |
|
| Interest payable, accounts payable and deferred revenue | 131,410 |
| | 130,154 |
|
| Security deposits | 60,923 |
| | 50,733 |
|
| Acquired lease intangible liabilities, net | 52,367 |
| | 52,569 |
|
| Interest rate contract liabilities | 54,616 |
| | 1,530 |
|
| Dividends payable | 49,111 |
| | 44,263 |
|
| Total liabilities | 4,978,367 |
| | 4,413,279 |
|
| | | | |
| Equity | | | |
| Douglas Emmett, Inc. stockholders' equity: | | | |
| Common Stock, $0.01 par value, 750,000,000 authorized, 175,369,746 and 170,214,809 outstanding at December 31, 2019 and December 31, 2018, respectively | 1,754 |
| | 1,702 |
|
| Additional paid-in capital | 3,486,356 |
| | 3,282,316 |
|
| Accumulated other comprehensive (loss) income | (17,462 | ) | | 53,944 |
|
| Accumulated deficit | (758,576 | ) | | (935,630 | ) |
| Total Douglas Emmett, Inc. stockholders' equity | 2,712,072 |
| | 2,402,332 |
|
| Noncontrolling interests | 1,658,862 |
| | 1,446,098 |
|
| Total equity | 4,370,934 |
| | 3,848,430 |
|
| Total Liabilities and Equity | $ | 9,349,301 |
| | $ | 8,261,709 |
|
See accompanying notes to the consolidated financial statements.
Douglas Emmett, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
| Revenues | | | |
| | | Revenues | | | | | |
| Office rental | | | |
| | | Office rental | | | |
| Rental revenues and tenant recoveries | $ | 694,315 |
| | $ | 661,147 |
| | $ | 606,852 |
| Rental revenues and tenant recoveries | $ | 724,131 | | | $ | 704,946 | | | $ | 680,359 | |
| Parking and other income | 122,440 |
| | 116,784 |
| | 108,694 |
| Parking and other income | 100,442 | | | 81,924 | | | 90,810 | |
| Total office revenues | 816,755 |
| | 777,931 |
| | 715,546 |
| Total office revenues | 824,573 | | | 786,870 | | | 771,169 | |
| | | | |
| | |
| | | | |
| Multifamily rental | | | | | | Multifamily rental | |
| Rental revenues | 110,697 |
| | 95,423 |
| | 89,039 |
| Rental revenues | 152,314 | | | 116,095 | | | 107,011 | |
| Parking and other income | 9,230 |
| | 7,962 |
| | 7,467 |
| Parking and other income | 16,765 | | | 15,432 | | | 13,343 | |
| Total multifamily revenues | 119,927 |
| | 103,385 |
| | 96,506 |
| Total multifamily revenues | 169,079 | | | 131,527 | | | 120,354 | |
| | | | | | | |
| Total revenues | 936,682 |
| | 881,316 |
| | 812,052 |
| Total revenues | 993,652 | | | 918,397 | | | 891,523 | |
| | | | |
| | |
| | | | | | |
| Operating Expenses | | | | | | Operating Expenses | |
| Office expenses | 264,482 |
| | 252,751 |
| | 233,633 |
| Office expenses | 284,522 | | | 265,376 | | | 268,259 | |
| Multifamily expenses | 33,681 |
| | 28,116 |
| | 24,401 |
| Multifamily expenses | 49,299 | | | 38,025 | | | 37,154 | |
| General and administrative expenses | 38,068 |
| | 38,641 |
| | 36,234 |
| General and administrative expenses | 45,405 | | | 42,554 | | | 39,601 | |
| Depreciation and amortization | 357,743 |
| | 309,864 |
| | 276,761 |
| Depreciation and amortization | 372,798 | | | 371,289 | | | 385,248 | |
| Total operating expenses | 693,974 |
| | 629,372 |
| | 571,029 |
| Total operating expenses | 752,024 | | | 717,244 | | | 730,262 | |
| | | | | | | | | | | | |
| Operating income | 242,708 |
| | 251,944 |
| | 241,023 |
| |
| | | | | | | | |
| Other income | 11,653 |
| | 11,414 |
| | 9,712 |
| Other income | 4,587 | | | 2,465 | | | 16,288 | |
| Other expenses | (7,216 | ) | | (7,744 | ) | | (7,037 | ) | Other expenses | (714) | | | (937) | | | (2,947) | |
| Income from unconsolidated Funds | 6,923 |
| | 6,400 |
| | 5,905 |
| |
| Income from unconsolidated Fund | | Income from unconsolidated Fund | 1,224 | | | 946 | | | 430 | |
| Interest expense | (143,308 | ) | | (133,402 | ) | | (145,176 | ) | Interest expense | (150,185) | | | (147,496) | | | (142,872) | |
| Gain from consolidation of JV | 307,938 |
| | — |
| | — |
| |
| | Gain on sale of investment in real estate | | Gain on sale of investment in real estate | — | | | — | | | 6,393 | |
| | Net income | 418,698 |
| | 128,612 |
| | 104,427 |
| Net income | 96,540 | | | 56,131 | | | 38,553 | |
| Less: Net income attributable to noncontrolling interests | (54,985 | ) | | (12,526 | ) | | (9,984 | ) | |
| Net loss attributable to noncontrolling interests | | Net loss attributable to noncontrolling interests | 605 | | | 9,136 | | | 11,868 | |
| Net income attributable to common stockholders | $ | 363,713 |
| | $ | 116,086 |
| | $ | 94,443 |
| Net income attributable to common stockholders | $ | 97,145 | | | $ | 65,267 | | | $ | 50,421 | |
| | | | | | | | | | | | |
| Net income per common share – basic | $ | 2.09 |
| | $ | 0.68 |
| | $ | 0.58 |
| |
| Net income per common share – diluted | $ | 2.09 |
| | $ | 0.68 |
| | $ | 0.58 |
| |
| Net income per common share – basic and diluted | | Net income per common share – basic and diluted | $ | 0.55 | | | $ | 0.37 | | | $ | 0.28 | |
|
See accompanying notes to the consolidated financial statements.
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | |
| Net income | $ | 96,540 | | | $ | 56,131 | | | $ | 38,553 | |
| Other comprehensive income (loss): cash flow hedges | 325,548 | | | 158,923 | | | (183,521) | |
| Comprehensive income (loss) | 422,088 | | | 215,054 | | | (144,968) | |
| Comprehensive (income) loss attributable to noncontrolling interests | (99,106) | | | (40,526) | | | 64,816 | |
| Comprehensive income (loss) attributable to common stockholders | $ | 322,982 | | | $ | 174,528 | | | $ | (80,152) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
| Net income | $ | 418,698 |
| | $ | 128,612 |
| | $ | 104,427 |
|
| Other comprehensive (loss) income: cash flow hedges | (107,292 | ) | | 15,070 |
| | 34,290 |
|
| Comprehensive income | 311,406 |
| | 143,682 |
| | 138,717 |
|
| Less: Comprehensive income attributable to noncontrolling interests | (19,099 | ) | | (16,751 | ) | | (16,331 | ) |
| Comprehensive income attributable to common stockholders | $ | 292,307 |
| | $ | 126,931 |
| | $ | 122,386 |
|
See accompanying notes to the consolidated financial statements.
Douglas Emmett, Inc.
Consolidated Statements of Equity
(In thousands, except dividend per share data)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| Shares of Common Stock | Beginning balance | 175,529 | | | 175,464 | | | 175,370 | |
| Exchange of OP Units for common stock | 281 | | | 65 | | | 94 | |
| | | | | |
| | | | | |
| Ending balance | 175,810 | | | 175,529 | | | 175,464 | |
| | | | | | |
| Common Stock | Beginning balance | $ | 1,755 | | | $ | 1,755 | | | $ | 1,754 | |
| Exchange of OP Units for common stock | 3 | | | — | | | 1 | |
| | | | | |
| | | | | |
| Ending balance | $ | 1,758 | | | $ | 1,755 | | | $ | 1,755 | |
| | | | | | |
| Additional Paid-in Capital | Beginning balance | $ | 3,488,886 | | | $ | 3,487,887 | | | $ | 3,486,356 | |
| Exchange of OP Units for common stock | 4,597 | | | 1,056 | | | 1,535 | |
| Repurchase of OP Units with cash | (176) | | | (57) | | | (4) | |
| | | | | |
| | | | | |
| | | | | |
| Ending balance | $ | 3,493,307 | | | $ | 3,488,886 | | | $ | 3,487,887 | |
| | | | | | |
| Accumulated Other Comprehensive Income (Loss) | Beginning balance | $ | (38,774) | | | $ | (148,035) | | | $ | (17,462) | |
| | | | | |
| Cash flow hedge adjustments | 225,837 | | | 109,261 | | | (130,573) | |
| Ending balance | $ | 187,063 | | | $ | (38,774) | | | $ | (148,035) | |
| | | | | | |
| Accumulated Deficit | Beginning balance | $ | (1,035,798) | | | $ | (904,516) | | | $ | (758,576) | |
| | | | | |
| | | | | |
| Net income attributable to common stockholders | 97,145 | | | 65,267 | | | 50,421 | |
| Dividends | (181,061) | | | (196,549) | | | (196,361) | |
| Ending balance | $ | (1,119,714) | | | $ | (1,035,798) | | | $ | (904,516) | |
| | | | | | |
| Noncontrolling Interests | Beginning balance | $ | 1,570,484 | | | $ | 1,558,928 | | | $ | 1,658,862 | |
| | | | | |
| Net loss attributable to noncontrolling interests | (605) | | | (9,136) | | | (11,868) | |
| Cash flow hedge adjustments | 99,711 | | | 49,662 | | | (52,948) | |
| Contributions | 81,000 | | | — | | | — | |
| | | | | |
| | | | | |
| Distributions | (58,969) | | | (54,919) | | | (60,392) | |
| | | | | |
| | | | | |
| | | | | |
| Exchange of OP Units for common stock | (4,600) | | | (1,056) | | | (1,536) | |
| Repurchase of OP Units with cash | (161) | | | (65) | | | (3) | |
| Stock-based compensation | 26,509 | | | 27,070 | | | 26,813 | |
| Ending balance | $ | 1,713,369 | | | $ | 1,570,484 | | | $ | 1,558,928 | |
| | | | | | |
| Statement continues on the following page. |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | | | | | |
| Shares of Common Stock | Beginning balance | 170,215 |
| | 169,565 |
| | 151,530 |
|
| Exchange of OP units for common stock | 222 |
| | 629 |
| | 1,059 |
|
| Issuance of common stock | 4,933 |
| | — |
| | 15,687 |
|
| Exercise of stock options | — |
| | 21 |
| | 1,289 |
|
| Ending balance | 175,370 |
| | 170,215 |
| | 169,565 |
|
| | | | | |
| | |
|
| Common Stock | Beginning balance | $ | 1,702 |
| | $ | 1,696 |
| | $ | 1,515 |
|
| Exchange of OP units for common stock | 2 |
| | 6 |
| | 11 |
|
| Issuance of common stock | 50 |
| | — |
| | 157 |
|
| Exercise of stock options | — |
| | — |
| | 13 |
|
| Ending balance | $ | 1,754 |
| | $ | 1,702 |
| | $ | 1,696 |
|
| | | | | |
| | |
|
| Additional Paid-in Capital | Beginning balance | $ | 3,282,316 |
| | $ | 3,272,539 |
| | $ | 2,725,157 |
|
| Exchange of OP units for common stock | 3,538 |
| | 10,286 |
| | 14,231 |
|
| Repurchase of OP Units with cash | (431 | ) | | (59 | ) | | (6,763 | ) |
| Issuance of common stock, net | 200,933 |
| | — |
| | 593,011 |
|
| Taxes paid on exercise of stock options | — |
| | (450 | ) | | (53,097 | ) |
| Ending balance | $ | 3,486,356 |
| | $ | 3,282,316 |
| | $ | 3,272,539 |
|
| | | | | |
| | |
|
| AOCI | Beginning balance | $ | 53,944 |
| | $ | 43,099 |
| | $ | 15,156 |
|
| ASU 2017-12 adoption | — |
| | 211 |
| | — |
|
| Cash flow hedge adjustments | (71,406 | ) | | 10,634 |
| | 27,943 |
|
| Ending balance | $ | (17,462 | ) | | $ | 53,944 |
| | $ | 43,099 |
|
| | | | | |
| | |
|
| Accumulated Deficit | Beginning balance | $ | (935,630 | ) | | $ | (879,810 | ) | | $ | (820,685 | ) |
| ASU 2016-02 adoption | (2,144 | ) | | — |
| | — |
|
| ASU 2017-12 adoption | — |
| | (211 | ) | | — |
|
| Net income attributable to common stockholders | 363,713 |
| | 116,086 |
| | 94,443 |
|
| Dividends | (184,515 | ) | | (171,695 | ) | | (153,568 | ) |
| Ending balance | $ | (758,576 | ) | | $ | (935,630 | ) | | $ | (879,810 | ) |
| | | | | | | |
| Noncontrolling Interests | Beginning balance | $ | 1,446,098 |
| | $ | 1,464,525 |
| | $ | 1,092,928 |
|
| ASU 2016-02 adoption | (355 | ) | | — |
| | — |
|
| Net income attributable to noncontrolling interests | 54,985 |
| | 12,526 |
| | 9,984 |
|
| Cash flow hedge adjustments | (35,886 | ) | | 4,225 |
| | 6,347 |
|
| Contributions | 176,000 |
| | — |
| | 284,248 |
|
| Consolidation of JV | 61,394 |
| | — |
| | — |
|
| Distributions | (76,978 | ) | | (52,142 | ) | | (38,101 | ) |
| Issuance of OP Units for acquisition of additional interest in unconsolidated Fund | 14,390 |
| | — |
| | — |
|
| Issuance of OP Units for acquisition of real estate | — |
| | — |
| | 105,687 |
|
| Exchange of OP units for common stock | (3,540 | ) | | (10,292 | ) | | (14,242 | ) |
| Repurchase of OP Units with cash | (303 | ) | | (49 | ) | | (3,341 | ) |
| Stock-based compensation | 23,057 |
| | 27,305 |
| | 21,015 |
|
| Ending balance | $ | 1,658,862 |
| | $ | 1,446,098 |
| | $ | 1,464,525 |
|
| | | | | | | |
Douglas Emmett, Inc.
Consolidated Statements of Equity
(In thousands, except dividend per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| Total Equity | Beginning balance | $ | 3,986,553 | | | $ | 3,996,019 | | | $ | 4,370,934 | |
| | | | | |
| | | | | |
| Net income | 96,540 | | | 56,131 | | | 38,553 | |
| Cash flow hedge adjustments | 325,548 | | | 158,923 | | | (183,521) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Repurchase of OP Units with cash | (337) | | | (122) | | | (7) | |
| | | | | |
| Contributions | 81,000 | | | — | | | — | |
| | | | | |
| Dividends | (181,061) | | | (196,549) | | | (196,361) | |
| Distributions | (58,969) | | | (54,919) | | | (60,392) | |
| Stock-based compensation | 26,509 | | | 27,070 | | | 26,813 | |
| Ending balance | $ | 4,275,783 | | | $ | 3,986,553 | | | $ | 3,996,019 | |
| | | | | | |
| Dividends declared per common share | $ | 1.03 | | | $ | 1.12 | | | $ | 1.12 | |
|
| | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | | | |
| | |
|
| Total Equity | Beginning balance | $ | 3,848,430 |
| | $ | 3,902,049 |
| | $ | 3,014,071 |
|
| ASU 2016-02 adoption | (2,499 | ) | | — |
| | — |
|
| Net income | 418,698 |
| | 128,612 |
| | 104,427 |
|
| Cash flow hedge adjustments | (107,292 | ) | | 14,859 |
| | 34,290 |
|
| Consolidation of JV | 61,394 |
| | — |
| | — |
|
| Issuance of common stock, net | 200,983 |
| | — |
| | 593,168 |
|
| Issuance of OP Units for acquisition of additional interest in unconsolidated Fund | 14,390 |
| | — |
| | — |
|
| Issuance of OP Units for acquisition of real estate | — |
| | — |
| | 105,687 |
|
| Repurchase of OP Units with cash | (734 | ) | | (108 | ) | | (10,104 | ) |
| Taxes paid on exercise of stock options | — |
| | (450 | ) | | (53,084 | ) |
| Contributions | 176,000 |
| | — |
| | 284,248 |
|
| Dividends | (184,515 | ) | | (171,695 | ) | | (153,568 | ) |
| Distributions | (76,978 | ) | | (52,142 | ) | | (38,101 | ) |
| Stock-based compensation | 23,057 |
| | 27,305 |
| | 21,015 |
|
| Ending balance | $ | 4,370,934 |
| | $ | 3,848,430 |
| | $ | 3,902,049 |
|
| | | | | | | |
| | Dividends declared per common share | $ | 1.06 |
| | $ | 1.01 |
| | $ | 0.94 |
|
See accompanying notes to the consolidated financial statements.
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Operating Activities | | | | | |
| Net income | $ | 96,540 | | | $ | 56,131 | | | $ | 38,553 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Income from unconsolidated Fund | (1,224) | | | (946) | | | (430) | |
| Gain from insurance recoveries for damage to real estate | — | | | — | | | (13,105) | |
| Gain on sale of investment in real estate | — | | | — | | | (6,393) | |
| | | | | |
| Depreciation and amortization | 372,798 | | | 371,289 | | | 385,248 | |
| Net accretion of acquired lease intangibles | (11,255) | | | (9,541) | | | (15,878) | |
| Straight-line rent | 169 | | | 1,051 | | | 18,733 | |
| | | | | |
| Loan premium amortized and written off | (460) | | | (460) | | | (2,274) | |
| Deferred loan costs amortized and written off | 7,943 | | | 10,902 | | | 7,832 | |
| | | | | |
| Amortization of stock-based compensation | 21,025 | | | 20,887 | | | 21,365 | |
| Operating distributions from unconsolidated Fund | 1,224 | | | 943 | | | 394 | |
| Change in working capital components: | | | | | |
| Tenant receivables | 6,248 | | | 5,099 | | | (11,645) | |
| Interest payable, accounts payable and deferred revenue | (1,399) | | | (2,842) | | | 5,557 | |
| Security deposits | 4,832 | | | (962) | | | (4,676) | |
| Other assets | 447 | | | (4,600) | | | (3,063) | |
| Net cash provided by operating activities | 496,888 | | | 446,951 | | | 420,218 | |
| | | | | |
| Investing Activities | | | | | |
| Capital expenditures for improvements to real estate | (162,364) | | | (108,499) | | | (143,445) | |
| Capital expenditures for developments | (75,754) | | | (184,592) | | | (154,153) | |
| Insurance recoveries for damage to real estate | 5,716 | | | 3,041 | | | 17,120 | |
| Property acquisition | (330,470) | | | — | | | — | |
| | | | | |
| | | | | |
| Proceeds from sale of investment in real estate, net | — | | | — | | | 20,658 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Acquisition of additional interests in unconsolidated Fund | — | | | — | | | (6,591) | |
| Capital distributions from unconsolidated Fund | 1,919 | | | 1,342 | | | 1,236 | |
| Net cash used in investing activities | (560,953) | | | (288,708) | | | (265,175) | |
| | | | | |
| Financing Activities | | | | | |
| Proceeds from borrowings | 245,000 | | | 1,345,000 | | | 674,000 | |
| Repayment of borrowings | (70,823) | | | (1,075,787) | | | (549,752) | |
| | | | | |
| Loan cost payments | (2,032) | | | (12,397) | | | (3,846) | |
| Purchase of interest rate caps | (481) | | | — | | | — | |
| Proceeds from sale of interest rate cap | 444 | | | — | | | — | |
| Contributions from noncontrolling interests in consolidated JVs | 81,000 | | | — | | | — | |
| Distributions paid to noncontrolling interests | (58,969) | | | (54,919) | | | (60,392) | |
| | | | | |
| Dividends paid to common stockholders | (196,805) | | | (196,529) | | | (196,333) | |
| | | | | |
| | | | | |
| | | | | |
| Repurchase of OP Units | (337) | | | (122) | | | (7) | |
| | | | | |
| | | | | |
| Net cash (used in) provided by financing activities | (3,003) | | | 5,246 | | | (136,330) | |
| | | | | |
| (Decrease) increase in cash and cash equivalents and restricted cash | (67,068) | | | 163,489 | | | 18,713 | |
| Cash and cash equivalents and restricted cash - beginning balance | 336,006 | | | 172,517 | | | 153,804 | |
| Cash and cash equivalents and restricted cash - ending balance | $ | 268,938 | | | $ | 336,006 | | | $ | 172,517 | |
| | | | | |
| | | | | |
| | | | | |
| Reconciliation of Ending Cash Balance |
| | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Cash and cash equivalents | $ | 268,837 | | | $ | 335,905 | | | $ | 172,385 | |
| Restricted cash | 101 | | | 101 | | | 132 | |
| Cash and cash equivalents and restricted cash | $ | 268,938 | | | $ | 336,006 | | | $ | 172,517 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 |
| 2018 |
| 2017 |
| Operating Activities | |
| | |
| | |
| Net income | $ | 418,698 |
| | $ | 128,612 |
| | $ | 104,427 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Income from unconsolidated Funds | (6,923 | ) | | (6,400 | ) | | (5,905 | ) |
| Gain from consolidation of JV | (307,938 | ) | | — |
| | — |
|
| Depreciation and amortization | 357,743 |
| | 309,864 |
| | 276,761 |
|
| Net accretion of acquired lease intangibles | (16,264 | ) | | (22,025 | ) | | (18,006 | ) |
| Straight-line rent | (10,134 | ) | | (18,813 | ) | | (12,855 | ) |
| Write-off of uncollectible amounts | 4,103 |
| | 2,154 |
| | 406 |
|
| Deferred loan costs amortized and written off | 14,314 |
| | 8,292 |
| | 10,834 |
|
| Amortization of loan premium | (261 | ) | | (205 | ) | | — |
|
| Derivative non-cash adjustments | — |
| | — |
| | 51 |
|
| Amortization of stock-based compensation | 18,359 |
| | 22,299 |
| | 18,478 |
|
| Operating distributions from unconsolidated Funds | 6,820 |
| | 6,400 |
| | 5,905 |
|
| Change in working capital components: | | | | | |
| Tenant receivables | (4,712 | ) | | (3,545 | ) | | (1,221 | ) |
| Interest payable, accounts payable and deferred revenue | (6,844 | ) | | 1,376 |
| | 24,942 |
|
| Security deposits | 1,919 |
| | 319 |
| | 4,424 |
|
| Other assets | 706 |
| | 4,654 |
| | (5,544 | ) |
| Net cash provided by operating activities | 469,586 |
| | 432,982 |
| | 402,697 |
|
| | | | | | |
| Investing Activities | | | | | |
| Capital expenditures for improvements to real estate | (176,448 | ) | | (179,062 | ) | | (108,326 | ) |
| Capital expenditures for developments | (61,660 | ) | | (68,459 | ) | | (63,018 | ) |
| Property acquisitions | (365,885 | ) | | — |
| | (537,669 | ) |
| Cash assumed from consolidation of JV | 39,226 |
| | — |
| | — |
|
| Acquisition of additional interests in unconsolidated Funds | (90,754 | ) | | (9,379 | ) | | (4,142 | ) |
| Capital distributions from unconsolidated Funds | 5,853 |
| | 7,349 |
| | 43,560 |
|
| Net cash used in investing activities | (649,668 | ) | | (249,551 | ) | | (669,595 | ) |
| | | | | | |
| Financing Activities | | | | | |
| Proceeds from borrowings | 2,185,000 |
| | 667,000 |
| | 1,410,500 |
|
| Repayment of borrowings | (2,095,718 | ) | | (655,326 | ) | | (1,698,544 | ) |
| Loan cost payments | (21,348 | ) | | (2,992 | ) | | (11,442 | ) |
| Contributions from noncontrolling interests in consolidated JVs | 163,556 |
| | — |
| | 284,248 |
|
| Distributions paid to noncontrolling interests | (64,534 | ) | | (52,142 | ) | | (38,101 | ) |
| Dividends paid to common stockholders | (179,667 | ) | | (169,831 | ) | | (146,026 | ) |
| Taxes paid on exercise of stock options | — |
| | (450 | ) | | (53,084 | ) |
| Repurchase of OP Units | (734 | ) | | (108 | ) | | (10,104 | ) |
| Proceeds from issuance of common stock, net | 200,983 |
| | — |
| | 593,169 |
|
| Net cash provided by (used in) financing activities | 187,538 |
| | (213,849 | ) | | 330,616 |
|
| | | | | | |
| Increase (decrease) in cash and cash equivalents and restricted cash | 7,456 |
| | (30,418 | ) | | 63,718 |
|
| Cash and cash equivalents and restricted cash - beginning balance | 146,348 |
| | 176,766 |
| | 113,048 |
|
| Cash and cash equivalents and restricted cash - ending balance | $ | 153,804 |
| | $ | 146,348 |
| | $ | 176,766 |
|
Supplemental Cash Flows Information
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | |
| Cash paid for interest, net of capitalized interest | $ | 141,427 | | | $ | 136,999 | | | $ | 136,823 | |
| Capitalized interest paid | $ | 9,101 | | | $ | 8,814 | | | $ | 4,810 | |
| | | | | |
| Non-cash Investing Transactions | | | | | |
| Accrual for real estate and development capital expenditures | $ | 33,783 | | | $ | 38,101 | | | $ | 37,185 | |
| Capitalized stock-based compensation for improvements to real estate and developments | $ | 5,479 | | | $ | 6,183 | | | $ | 5,448 | |
| Removal of fully depreciated and amortized buildings, building improvements, tenant improvements and lease intangibles | $ | 100,050 | | | $ | 157,325 | | | $ | 73,045 | |
| Removal of fully amortized acquired lease intangible assets | $ | 1,438 | | | $ | 442 | | | $ | 372 | |
| Removal of fully accreted acquired lease intangible liabilities | $ | 11,900 | | | $ | 23,725 | | | $ | 20,649 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Non-cash Financing Transactions | | | | | |
| | | | | |
| Gain (loss) recorded in AOCI - consolidated derivatives | $ | 326,396 | | | $ | 82,876 | | | $ | (232,652) | |
| Gain (loss) recorded in AOCI - unconsolidated Fund's derivatives (our share) | $ | 3,780 | | | $ | 569 | | | $ | (410) | |
| | | | | |
| | | | | |
| | | | | |
| Dividends declared | $ | 181,061 | | | $ | 196,549 | | | $ | 196,361 | |
| Exchange of OP Units for common stock | $ | 4,600 | | | $ | 1,056 | | | $ | 1,536 | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Operating Activities | | | | | |
| Cash paid for interest, net of capitalized interest | $ | 128,205 |
| | $ | 124,487 |
| | $ | 135,824 |
|
| Capitalized interest paid | $ | 3,782 |
| | $ | 3,520 |
| | $ | 2,745 |
|
| | | | | | |
| Non-cash Investing Transactions | | | | | |
| Accrual for real estate and development capital expenditures | $ | 35,398 |
| | $ | 24,702 |
| | $ | 3,776 |
|
| Capitalized stock-based compensation for improvements to real estate and developments | $ | 4,698 |
| | $ | 5,006 |
| | $ | 2,537 |
|
| Removal of fully depreciated and amortized tenant improvements and lease intangibles | $ | 88,205 |
| | $ | 75,729 |
| | $ | 53,687 |
|
| Removal of fully amortized acquired lease intangible assets | $ | 2,132 |
| | $ | 1,582 |
| | $ | 414 |
|
| Removal of fully accreted acquired lease intangible liabilities | $ | 29,660 |
| | $ | 15,431 |
| | $ | 5,057 |
|
| Recognition of ground lease right-of-use asset - Adoption of ASU 2016-02 | $ | 10,885 |
| | $ | — |
| | $ | — |
|
| Above-market ground lease intangible liability offset against right-of-use asset - Adoption of ASU 2016-02 | $ | 3,408 |
| | $ | — |
| | $ | — |
|
| Recognition of ground lease liability - Adoption of ASU 2016-02 | $ | 10,885 |
| | $ | — |
| | $ | — |
|
| | | | | | |
| Non-cash Financing Transactions | | | | | |
| Gain recorded in AOCI - Adoption of ASU 2017-12 - consolidated derivatives | $ | — |
| | $ | 211 |
| | $ | — |
|
| (Loss) gain recorded in AOCI - consolidated derivatives | $ | (76,273 | ) | | $ | 22,723 |
| | $ | 16,512 |
|
| (Loss) gain recorded in AOCI - unconsolidated Funds' derivatives (our share) | $ | (5,023 | ) | | $ | 3,052 |
| | $ | 3,275 |
|
| Accrual for deferred loan costs | $ | 1,416 |
| | $ | — |
| | $ | — |
|
| Assumption of term loan for acquisition of real estate | $ | — |
| | $ | — |
| | $ | 36,460 |
|
| Non-cash contributions from noncontrolling interests in consolidated JVs | $ | 12,444 |
| | $ | — |
| | $ | — |
|
| Non-cash distributions to noncontrolling interests | $ | 12,444 |
| | $ | — |
| | $ | — |
|
| Dividends declared | $ | 184,515 |
| | $ | 171,695 |
| | $ | 153,568 |
|
| Exchange of OP units for common stock | $ | 3,540 |
| | $ | 10,292 |
| | $ | 14,242 |
|
| Issuance of OP Units for acquisition of real estate | $ | — |
| | $ | — |
| | $ | 105,687 |
|
| OP Units issued for acquisition of additional interest in unconsolidated Fund | $ | 14,390 |
| | $ | — |
| | $ | — |
|
See accompanying notes to the consolidated financial statements.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements
1. Overview
Organization and Business Description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and Honolulu, Hawaii. Through our interest in our Operating Partnership and its subsidiaries, consolidated JVs and unconsolidated Fund, we focus on owning, acquiring, developing and managing a significantsubstantial market share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities. The terms "us," "we" and "our" as used in the consolidated financial statements refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis.
At December 31, 2019,2022, our Consolidated Portfolio consisted of (i) an 18.0a 17.7 million square foot office portfolio, (ii) 4,1615,013 multifamily apartment units and (iii) fee interests in 2two parcels of land from which we receive rent under ground leases. We also manage and own an equity interest in an unconsolidated Fund which, at December 31, 2019,2022, owned an additional 0.4 million square feet of office space. We manage our unconsolidated Fund alongside our Consolidated Portfolio, and we therefore present the statistics for our office portfolio on a Total Portfolio basis. As of December 31, 2019,2022, our portfolio (not including 2consisted of the following (including ancillary retail space and excluding two parcels of land from which we receive rent under ground leases), consisted of the following properties (including ancillary retail space):
|
| | | |
| | Consolidated Portfolio | | Total Portfolio |
| Office | | | |
| Wholly-owned properties | 53 | | 53 |
| Consolidated JV properties | 17 | | 17 |
| Unconsolidated Fund properties | — | | 2 |
| | 70 | | 72 |
| | | | |
| Multifamily | | | |
| Wholly-owned properties | 10 | | 10 |
| Consolidated JV properties | 1 | | 1 |
| | 11 | | 11 |
| | | | |
| Total | 81 | | 83 |
| | | | | | | | | | | |
| | Consolidated Portfolio | | Total Portfolio |
| Office | | | |
| Wholly-owned properties | 53 | | 53 |
| Consolidated JV properties | 16 | | 16 |
| Unconsolidated Fund properties | — | | 2 |
| 69 | | 71 |
| | | |
| Multifamily | | | |
| Wholly-owned properties | 12 | | 12 |
| Consolidated JV properties | 2 | | 2 |
| 14 | | 14 |
| | | |
| Total | 83 | | 85 |
Basis of Presentation
The accompanying consolidated financial statements are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries, including our Operating Partnership and our consolidated JVs. All significant intercompany balances and transactions have been eliminated in our consolidated financial statements.
We consolidate entities in which we are considered to be the primary beneficiary of a VIE or have a majority of the voting interest of the entity. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of that VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We do not consolidate entities in which the other parties have substantive kick-out rights to remove our power to direct the activities, most significantly impacting the economic performance, of that VIE. In determining whether we are the primary beneficiary, we consider factors such as ownership interest, management representation, authority to control decisions, and contractual and substantive participating rights of each party.
We consolidate our Operating Partnership through which we conduct substantially all of our business, and own, directly and through subsidiaries, substantially all of our assets, and are obligated to repay substantially all of our liabilities, including $3.11liabilities. The consolidated debt, excluding our consolidated JVs, was $3.41 billion, as of consolidated debt.December 31, 2022 and December 31, 2021, respectively. See Note 8. We also consolidate 4 JVs. As of December 31, 2019, these consolidated entities had aggregate total consolidated assets of $9.35 billion (of which $8.96 billion related to investment in real estate), aggregate total consolidated liabilities of $4.98 billion (of which $4.62 billion related to debt),four JVs through our Operating Partnership. See Note 3 for more information regarding our JV transactions. We consolidate our Operating Partnership and aggregate total consolidated equity of $4.37 billion (of which $1.66 billion related to noncontrolling interests).our four JVs because they are VIEs and we or our Operating Partnership are the primary beneficiary for each.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2022, our consolidated VIE entities, excluding our Operating Partnership, had:
•aggregate consolidated assets of $3.94 billion (of which $3.54 billion related to investment in real estate), and
•aggregate consolidated liabilities of $1.89 billion (of which $1.81 billion related to debt).
As of December 31, 2021, our consolidated VIE entities, excluding our Operating Partnership, had:
•aggregate consolidated assets of $3.56 billion (of which $3.28 billion related to investment in real estate), and
•aggregate consolidated liabilities of $1.72 billion (of which $1.64 billion related to debt).
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC in conformity with US GAAP as established by the FASB in the ASC. The accompanying consolidated financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. Any references to the number or class of properties, square footage, per square footage amounts, apartment units and geography, are unaudited and outside the scope of our independent registered public accounting firm’s audit of our consolidated financial statements in accordance with the standards of the PCAOB.
During the current reporting period, we reported our demolition expenses as part of Other expenses in our consolidated statements of operations and we reclassified the comparable periods to conform to the current period presentation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make certain estimates that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Investment in Real Estate
Acquisitions and Initial Consolidation of VIEs
We accountAcquisitions of properties generally do not meet the definition of a business and are accounted for property acquisitions as asset acquisitions, andas substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. We include the acquired propertiesproperties' results of operations in our results of operations from the respective acquisition date. We allocate the purchase price for asset acquisitions, which includes the capitalized transaction costs, and for the properties upon the initial consolidation of VIEs not determined to be a business, on a relative fair value basis to: (i) land, (ii) buildings and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place at-market leases, (iv) acquired above- and below-market ground and tenant leases (including for renewal options), and if applicable (v) assumed debt and (vi) assumed interest rate swaps,swaps. The fair values are based upon comparable sales for land, and the income approach using our estimates of expected future cash flows and other valuation techniques, which include but are not limited to, our estimates of rental rates, revenue growth rates, capitalization rates and discount rates, for other assets and liabilities. We estimate the relative fair values of the tangible assets on an ‘‘as-if-vacant’’ basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the property to the occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We evaluate the time period over which we expect such occupancy level to be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period. Above- and below-market ground and tenant leases are recorded as an asset or liability based on the present value (using an interesta discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid or received pursuant to the in-place ground or tenant leases, respectively, and our estimate of the fair market rental rates for the corresponding in-place leases, over the remaining non-cancelable term of the lease. Assumed debt is recorded at fair value based upon the present value of the expected future payments and current interest rates. See Note 3 for our property acquisition disclosures.
Depreciation and Amortization
The assets and liabilities listed below are carried on our consolidated balance sheets net of the related accumulated depreciation or amortization/accretion, and any impairment charges. We accelerate depreciation for affected assets when we renovate our buildings or our buildings are impacted by new developments. When assets are sold or retired, their cost and related accumulated depreciation or amortization are removed from our consolidated balance sheets with the resulting gains or losses, if any, reflected in our results of operations for the respective period.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
•Buildings and improvements are depreciated on a straight-line basis using an estimated life of twenty-five to forty years for buildings and fifteen years for improvements, and are carried on our balance sheet, offset by the related accumulated depreciation and any impairment charges, until they are sold. improvements.
•Tenant improvements are depreciated on a straight-line basis over the life of the related lease, with any remaining balance depreciated in the period of any early lease termination.
•Acquired in-place leases are amortized on a straight linestraight-line basis over the weighted average remaining term of the acquired in-place leases, and are carried on our balance sheet, offset by the related accumulated amortization, until the related building is either sold or impaired. Leaseleases.
•Acquired lease intangibles are amortized on a straight-line basis over the related lease term, with any remaining balance amortized in the period of any early lease termination.
•Acquired above- and below-market tenant leases are amortized/accreted on a straight line basis over the life of the related lease and recorded as either an increase (for below-market leases) or a decrease (for above-market leases) to rental revenue.
•Acquired above- and below-market ground leases, from which we earn ground rent income, are amortized/accreted on a straight line basis over the life of the related lease and recorded either as an increase (for below-market leases) or a decrease (for above-market leases) to rental revenue.
•Acquired above- and below-market ground leases, for which we incur ground rent expense, are accreted/ amortized over the life of the related lease and recorded either as an increase (for below-market leases) or a decrease (for above-market leases) to expense.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We accelerate depreciation for affected assets when we renovate our buildings or existing buildings are impacted by new developments. When assets are sold or retired, their cost and related accumulated depreciation or amortization are removed from our balance sheet with the resulting gains or losses, if any, reflected in our results of operations for the respective period.
Real Estate Held for Sale
Properties are classified as held for sale inon our consolidated balance sheets when they meet certain requirements, including the approval of the sale of the property, the marketing of the property for sale, and our expectation that the sale will likely occur within the next 12 months. Properties classified as held for sale are carried at the lower of their carrying value or fair value less costs to sell, and we also cease to depreciate the property. As of December 31, 20192022 and 2018,2021, we did not have any properties held for sale.
Dispositions
Recognition of gains or losses from sales of investments in real estate requires that we meet certain revenue recognition criteria and transfer control of the real estate to the buyer. The gain or loss recorded is measured as the difference between the sales price, less costs to sell, and the carrying value of the real estate when we sell it. See Note 3 for our property disposition disclosures.
Cost capitalization
Costs incurred during the period of construction of real estate are capitalized. Cost capitalization of development and redevelopment activities begins during the predevelopment period, which we define as the activities that are necessary to begin the development of the property. We cease capitalization upon substantial completion of the project, but no later than one year from cessation of major construction activity. We also cease capitalization when activities necessary to prepare the property for its intended use have been suspended. Capitalized costs are included in Property under developmentInvestment in real estate, gross, on our consolidated balance sheets. Once major construction activity has ceased and the development or redevelopment property is in the lease-up phase, the capitalized costs are transferred to (i) Land, (ii) Building and improvements and (iii) Tenant improvements and lease intangibles on our consolidated balance sheets as the historical cost of the property. Demolition expenses and repairs and maintenance are recorded as expense when incurred. During 2019, 20182022, 2021 and 2017,2020, we capitalized $75.3$59.7 million, $78.7$185.4 million and $66.0$186.4 million of costs related to our developments, respectively, which included $3.8$9.1 million, $3.5$8.8 million and $2.7$4.8 million of capitalized interest, respectively.
Ground LeasesLease
We account for our ground lease, for which we are the lessee, in accordance with Topic 842 "Leases", which we adopted on January 1, 2019 on a prospective basis, see New Accounting Pronouncements further below. Upon adoption of. We classify the ASU, we continued to classify theground lease as an operating lease, and we recognizedrecognize a right-of-use asset for the land and a lease liability for the future lease payments of $10.9 million.payments. We calculated the carrying value of the right-of-use asset and lease liability by discounting the future lease payments using our incremental borrowing rate. We adjusted the right-of-use asset carrying value for a related above-market ground lease liability of $3.4 million, which reduced the carrying value of the asset to $7.5 million. We continued to recognize the lease payments as expense, which is included in Office expenses in our consolidated statements of operations. See Note 4 for more information regarding this ground lease. See Note 14 for the fair value disclosures related to the ground lease liability.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Investment in Unconsolidated FundsFund
As of December 31, 2022 and 2021, we managed and owned an equity interest in one unconsolidated Fund. See Note 6. We account for our investmentsinvestment in our unconsolidated FundsFund using the equity method because we have significant influence but not control over the Funds.Fund. Under the equity method, we initially recordrecorded our investment in our FundsFund at cost, which includes acquisition basis difference and additional basis for capital raising costs, and subsequently adjust the investment balance for: (i) our share of the FundsFund's net income or losses, (ii) our share of the FundsFund's other comprehensive income or losses, (iii) our cash contributions to the Fund and (iv) our distributions received from the Fund. We remove our investment in unconsolidated Funds from our consolidated balance sheet whenIf we sell our interest in the FundsFund, or if the Funds qualifyFund qualifies for consolidation. consolidation, we would remove our investment in our unconsolidated Fund from our consolidated balance sheets.
Our investment in our unconsolidated FundsFund is included in Investment in unconsolidated Funds inFund on the consolidated balance sheet and our share of net income or losses from the Funds is included in Income from unconsolidated Funds in the consolidated statements of operations.sheets. Our share of the Fundsour Fund's accumulated other comprehensive income or losses is included in Accumulated other comprehensive income (loss) inon our consolidated balance sheet.sheets. As of December 31, 20192022 and 2018,2021, the total investment basis difference included in our investment balance in our unconsolidated FundsFund was $27.8 million and $2.2$28.7 million, respectively. See Note 6 forOur share of the net income or losses from our Fund disclosures.is included in Income from unconsolidated Fund in our consolidated statements of operations.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Impairment of Long-Lived Assets
We periodically assess whether there has been any impairment in the carrying value of our properties and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. An impairment charge would be recorded if events or changes in circumstances indicate that a decline in the fair value below the carrying value has occurred and the decline is other-than-temporary.not recoverable. Recoverability of the carrying value of our properties is measured by a comparison of the carrying value to the undiscounted future cash flows expected to be generated by the property. If the carrying value exceeds the estimated undiscounted future cash flows, an impairment loss is recorded equal to the difference between the property's carrying value and its fair value based on the estimated discounted future cash flows. We also perform a similar periodic assessment for our investments in our Funds. Based upon such periodic assessments, 0no impairments occurred during 2019, 20182022, 2021 or 2017. In downtown Honolulu, at 1132 Bishop Street, we are converting a 25 story, 490,000 square foot office tower into approximately 500 apartments. We expect the conversion to occur in phases over a number of years as the office space is vacated. Due to the change in planned use of the property, we performed an impairment assessment by comparing the property's expected undiscounted cash flows to the property's carrying value plus the expected development costs and concluded that there was no impairment as of December 31, 2019. We determined the undiscounted cash flows using our estimates of the expected future cash flows which included, but were not limited to, our estimates of property's net operating income, and capitalization rates.2020.
Cash and Cash Equivalents
We consider short-term investments with maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Rental Revenues and Tenant Recoveries
We account for our rental revenues and tenant recoveries in accordance with Topic 842 "Leases", which we adopted on January 1, 2019 on a modified retrospective basis, see New Accounting Pronouncements further below. Topic 842 did not significantly change our accounting policy for recognizing rental revenues and tenant recoveries, and we842. We adopted a practical expedient which allows us to account for our rental revenues and tenant recoveries on a combined basis. Rental revenues and tenant recoveries from tenant leases are included in Rental revenues and tenant recoveries in theour consolidated statements of operations. All of our tenant leases are classified as operating leases. For lease terms exceeding one year, rental income is recognized on a straight-line basis over the lease term. Deferred rent receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. If a lease is canceled then the deferred rent is recognized over the new remaining lease term. We recognized straight line rent of $10.1 million, $18.8 million and $12.9 million during 2019, 2018 and 2017, respectively. Rental revenue from month-to-month leases or leases with no scheduled rent increases or other adjustments is recognized on a monthly basis when earned.
Lease termination fees, which are included in Rental revenues and tenant recoveries in the consolidated statements of operations, are recognized on a straight line basis over the new remaining lease term when the related lease is canceled. We recognized lease termination revenue of $0.5 million, $1.6 million and $2.1 million during 2019, 2018 and 2017, respectively.
Tenant improvements constructed, and owned by us, and reimbursed by tenants are recorded as our assets, and the related revenue, which are included in Rental revenues and tenant recoveries in the consolidated statements of operations, is recognized over the related lease term. We recognized revenue for reimbursement of tenant improvements of $5.8 million, $3.5 million and $2.6 million during 2019, 2018 and 2017, respectively.
Estimated tenant recoveries for real estate taxes, common area maintenance and other recoverable operating expenses, which are included in Rental revenues and tenant recoveries in theour consolidated statements of operations, are recognized as revenue on a gross basis in the period that the recoverable expenses are incurred. Subsequent to year-end, in accordance with our policy, we perform reconciliations on a lease-by-lease basis and bill or credit each tenant for any differences between the estimated expenses we billed to the tenant and the actual expenses incurred.
In accordance with Topic 842, if collectibility of the lease payments is not probable at the commencement date, then we limit the lease income to the lesser of the income recognized on a straight-line basis or cash basis. If our assessment of collectibility changes after the commencement date, we record the difference between the lease income that would have been recognized on a straight-line basis and cash basis as a current-period adjustment to lease income. We elected to adopt the complete impairment model guidance within Topic 842. Under this model, commencing on January 1, 2019, we no longer maintain a general reserve related to our receivables, and instead analyze, on a lease-by-lease basis, whether amounts due under the operating lease are deemed probable for collection. We write off tenant and deferred rent receivables as a charge against rental revenue in the period we determine the lease payments are not probable for collection.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Before the adoption of Topic 842, we presented our tenant receivables and deferred rent receivables net of allowances on our consolidated balance sheets. Tenant receivables consist primarily of amounts due for contractual lease payments and reimbursements of common area maintenance expenses, property taxes, and other costs recoverable from tenants. Deferred rent receivables represent the amount by which the cumulative straight-line rental revenue recorded to date exceeds the cumulative cash rents billed to date under the lease agreement.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Lease Terminations
Lease termination fees, which are included in Rental revenues and tenant recoveries in our consolidated statements of operations, are recognized on a straight line basis over the new remaining lease term when the related lease is canceled. We considered manyrecognized lease termination revenue of $1.3 million, $1.2 million and $1.0 million during 2022, 2021 and 2020, respectively.
Tenant Improvements
Tenant improvements constructed, and owned by us, and reimbursed by tenants are recorded as our assets, and the related revenue, which are included in Rental revenues and tenant recoveries in our consolidated statements of operations, is recognized over the related lease term. We recognized revenue for reimbursement of tenant improvements of $4.8 million, $5.8 million and $5.9 million during 2022, 2021 and 2020, respectively.
Collectibility
In accordance with Topic 842, we perform an assessment as to whether or not substantially all of the amounts due under a tenant’s lease agreement is deemed probable of collection. This assessment involves using a methodology that requires judgment and estimates about matters that are uncertain at the time the estimates are made, including tenant specific factors, when evaluatingspecific industry conditions, and general economic trends and conditions.
For leases where we have concluded it is probable that we will collect substantially all the levellease payments due under those leases, we continue to record lease income on a straight-line basis over the lease term. For leases where we have concluded that it is not probable that we will collect substantially all the lease payments due under those leases, we limit the lease income to the lesser of allowances necessary, including evaluationsthe income recognized on a straight-line basis or cash basis. If our conclusion of individualcollectibility changes, we will record the difference between the lease income that would have been recognized on a straight-line basis and cash basis as a current-period adjustment to rental revenues and tenant recoveries. We write-off tenant receivables historical loss activity, current economic conditions and other relevant factors. We generally obtain lettersdeferred rent receivables as a charge against rental revenues and tenant recoveries in the period we conclude that substantially all of credit or security deposits from our tenants. The table below presents our allowancesthe lease payments are not probable of collection. Charges for uncollectible tenant receivables and security obtained from our tenants before we adopted Topic 842:
|
| | | |
| (In thousands) | December 31, 2018 |
| | |
| Allowance for tenant receivables | $ | 5,215 |
|
| Allowance for deferred rent receivables | $ | 2,849 |
|
| Letters of credit from our tenants | $ | 27,749 |
|
| Cash security deposits from our tenants | $ | 50,733 |
|
The table below presentsdeferred rent receivables, which were primarily due to the impact of the changesCOVID-19 pandemic, reduced our office revenues by $0.6 million, $3.0 million, and $41.0 million in our allowances on our results of operations:2022, 2021, and 2020 respectively.
|
| | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 |
| | | | |
| Tenant receivables allowance - decrease in net income | $ | (2,154 | ) | | $ | (406 | ) |
| Deferred rent receivables allowance - increase in net income | $ | 556 |
| | $ | 1,739 |
|
If we subsequently collect amounts that were previously written off then the amounts collected are recorded as an increase to our rental revenues and tenant recoveries in the period they are collected. We restored accrual basis accounting for certain office tenants that were previously determined to be uncollectible and accounted for on a cash basis of accounting, which increased our office revenues by $3.6 million in 2022.
Lease Modifications
In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under the existing lease accounting guidance, we would be required to determine on a lease-by-lease basis if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows us, if certain criteria are met, to bypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. We have availed ourselves of the election to avoid performing a lease-by-lease analysis and we have elected to apply the lease modification accounting framework for the lease concessions that meet the criteria.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Office Parking Revenues
Office parking revenues, which are included in office Parking and other income in our consolidated statements of operations, are within the scope of Topic 606 "Revenue from Contracts with Customers", which we adopted on January 1, 2018 on a modified retrospective basis. Topic 606 did not significantly change our accounting policy for parking revenues.. Our lease contracts generally make a specified number of parking spaces available to the tenant, and we bill and recognize parking revenues on a monthly basis in accordance with the lease agreements, generally using the monthly parking rates in effect at the time of billing.
Office parking revenues were $108.7$84.9 million, $102.5$69.0 million and $96.2$76.1 million for the years ended December 31, 2019, 2018in 2022, 2021 and 2017,2020, respectively. Office parking receivables were $1.3$0.9 million and $1.1$0.8 million as of December 31, 20192022 and 2018,2021, respectively, and are included in Tenant receivables inon our consolidated balance sheets.
Insurance Recoveries
InsuranceThe amount by which insurance recoveries related to property damage exceeds any losses recognized from that damage are recorded as other income when payment is eitherhas been received or receiptconfirmation of the amount of proceeds has been received.
In January 2020, there was a fire in one of our residential property buildings. We carry comprehensive liability and property insurance covering all of the properties in our portfolio under blanket insurance policies to cover these kinds of losses. We recorded $3.9 million, $4.8 million, and $3.9 million of business interruption revenues during 2022, 2021 and 2020, respectively, which is determinedincluded in Multifamily rental - Parking and other income in our consolidated statements of operations. In addition, we recorded a gain related to be probable.property damage of $13.1 million during 2020, which is included in Other income in our consolidated statements of operations.
Interest Income
Interest income from our short-term money market fund investments is recognized on an accrual basis. Interest income is included in other income in theour consolidated statements of operations.
Leasing Costs
We account for our leasing costs in accordance with Topic 842 "Leases", which we adopted on January 1, 2019 on a modified retrospective basis, see New Accounting Pronouncements further below.842. In accordance with Topic 842, we capitalize initial direct costs of a lease, which are costs that would not have been incurred had the lease not been executed. Costs to negotiate a lease that would have been incurred regardless of whether the lease was executed, such as employee salaries, are not considered to be initial direct costs, and are expensed. Prior to January 1, 2019, we capitalized most of our leasing costs.expensed as incurred.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Loan Costs
Loan costs incurred directly with the issuance of secured notes payable and revolving credit facilities are deferred and amortized to interest expense over the respective loan or credit facility term. Any unamortized amounts are written off upon early repayment of the secured notes payable, and the related cost and accumulated amortization are removed from our consolidated balance sheet.sheets.
To the extent that a refinancing is considered an exchange of debt with the same lender, we account for loan costs based upon whether the old debt is determined to be modified or extinguished for accounting purposes. If the old debt is determined to be modified then we (i) continue to defer and amortize any unamortized deferred loan costs associated with the old debt at the time of the modification over the new term of the modified debt, (ii) defer and amortize the lender costs incurred in connection with the modification over the new term of the modified debt, and (iii) expense all other costs associated with the modification. If the old debt is determined to be extinguished then we (i) write off any unamortized deferred loan costs associated with the extinguished debt at the time of the extinguishment and remove the related cost and accumulated amortization from our consolidated balance sheet,sheets, (ii) expense all lender costs associated with the extinguishment, and (iii) defer and amortize all other costs incurred directly in connection with the extinguishment over the term of the new debt.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
In circumstances where we modify or exchange our revolving credit facility with the same lender, we account for the loan costs based upon whether the borrowing capacity of the new arrangement is (a) equal to or greater than the borrowing capacity of the old arrangement, or (b) less than the borrowing capacity of the old arrangement (borrowing capacity is defined as the product of the remaining term and the maximum available credit). If the borrowing capacity of the new arrangement is greater than or equal to the borrowing capacity of the old arrangement, then we (i) continue to defer and amortize the unamortized deferred loan costs from the old arrangement over the term of the new arrangement and (ii) defer all lender and other costs incurred directly in connection with the new arrangement over the term of the new arrangement. If the borrowing capacity of the new arrangement is less than the borrowing capacity of the old arrangement, then we (i) write off any unamortized deferred loan costs at the time of the transaction related to the old arrangement in proportion to the decrease in the borrowing capacity of the old arrangement and (ii) defer all lender and other costs incurred directly in connection with the new arrangement over the term of the new arrangement.
Deferred loan costs are presented on the consolidated balance sheetsheets as a deduction from the carrying amount of our secured notes payable and revolving credit facility. All loan costs expensed and deferred loan costs amortized are included in interest expense in our consolidated statements of operations. See Note 8 for our loan cost disclosures.
Debt Discounts and Premiums
Debt discounts and premiums related to recording debt assumed in connection with property acquisitions at fair value are generally amortized and accreted, respectively, over the remaining term of the related loan, which approximates the effective interest method. The amortization/accretion is included in interest expense in our consolidated statements of operations.
Derivative Contracts
We make use of interest rate swap and cap contracts to manage the risk associated with changes in interest rates on our floating-rate debt.debt and to satisfy certain lender requirements. When we enter into a floating-rate term loan, we generally enter into an interest rate swap agreement for the equivalent principal amount, for a period covering the majority of the loan term, which effectively converts our floating-rate debt to a fixed-rate basis during that time. We may enter into derivative contracts that are intended to hedge certain economics risks, even though hedge accounting does not apply or we elect to not apply hedge accounting. We do not speculate in derivatives and we do not make use of any other derivative instruments.
When entering into derivative agreements, we generally elect to designate them as cash flow hedges for accounting purposes. Changes in fair value of hedging instruments designated as cash flow hedges are recorded in accumulated other comprehensive income (loss) (AOCI), which is a component of equity outside of earnings. For our Funds'Fund's hedging instruments designated as cash flow hedges, we record our share of the changes in fair value of the hedging instrument in AOCI. Amounts recorded in AOCI related to our designated hedges are reclassified to Interest expense as interest payments are made on the hedged floating rate debt. Amounts reported in AOCI related to our Funds'Fund's hedges are reclassified to Income from unconsolidated Funds,Fund, as interest payments are made by our FundsFund on theirits hedged floating rate debt.
We presentOur derivatives are presented on our derivatives on theconsolidated balance sheetsheets at fair value, on a gross basis.basis, excluding accrued interest. The accrued interest is included in Interest Payable, accounts payable and deferred revenue on our consolidated balance sheets. Our share of the fair value of our Funds'Fund's derivatives is included in our investmentInvestment in unconsolidated FundsFund on our consolidated balance sheet.sheets. See Note 10 for our derivative disclosures.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Stock-Based Compensation
We account for stock-based compensation, including stock optionswhich includes grants of LTIP Units to certain employees and LTIP Units,non-employee directors, using the fair value method of accounting. The estimated fair value of the awards is based upon the market value of our common stock optionson the grant date and a discount for post-vesting restrictions. The estimated fair value of LTIP Units granted, net of estimated forfeitures, is amortized over the vesting period, which is based upon service. See Note 13 for our stock-based compensation disclosures.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
EPS
We calculate basic EPS by dividing the net income attributable to common stockholders for the period by the weighted average number of common shares outstanding during the respective period. We calculate diluted EPS by dividing the net income attributable to common stockholders for the period by the weighted average number of common shares and dilutive instruments outstanding during the respective period using the treasury stock method. Unvested LTIP Units contain non-forfeitable rights to dividends and we account for them as participating securities and include them in the computation of basic and diluted EPS using the two-class method. See Note 12 for our EPS disclosures.
Segment Information
Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate 2two business segments: the acquisition, development, ownership and management of office real estate, and the acquisition, development, ownership and management of multifamily real estate. The services for our office segment include primarily rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily segment include primarily rental of apartments and other tenant services, including parking and storage space rental. See Note 15 for our segment disclosures.
Income Taxes
We have elected to be taxed as a REIT under the Code, commencing with our initial taxable year ended December 31, 2006. To qualify as a REIT, we are required (among other things) to distribute at least 90% of our REIT taxable income to our stockholders and meet various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided that we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at the regular corporate rate, including any applicable alternative minimum tax for taxable years prior to 2018. rate.
We have elected to treat severalone of our subsidiaries as TRSs,a TRS, which generally may engage in any business, including the provision of customary or non-customary services to our tenants. A TRS is treated as a regular corporation and is subject to federal income tax and applicable state income and franchise taxes at regular corporate rates. We had two TRSs in 2020. Our TRSs did not have significant tax provisions or deferred income tax items for 2019, 20182022, 2021 or 2017.2020. Our subsidiaries (other than our TRS), including our Operating Partnership, are partnerships, disregarded entities, QRSs or REITs, as applicable, for federal income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss from disregarded entities or flow-through entities is reportable in the income tax returns of the respective owners. Accordingly, no income tax provision is included in our consolidated financial statements for these entities.
New Accounting Pronouncements
Changes to US GAAP are implemented by the FASB in the form of ASUs. We consider the applicability and impact of all ASUs. Other than the ASUsASU discussed below, the FASB has not issued any other ASUs duringthat we expect to be applicable and
have a material impact on our consolidated financial statements.
Adoption of ASU 2022-06 (Topic 848 - "Reference Rate Reform")
In December 2022, the FASB issued ASU No. 2022-06 to defer the sunset date for ASU No. 2020-04, Topic 848 - "Reference Rate Reform" to December 31, 2024 from December 31, 2022. ASU 2020-04 included practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. In the first quarter of 2020 we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients maintains the presentation of derivatives consistent with past presentation. We adopted ASU 2022-06 in December 2022 and it did not impact our financial statements.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
ASUs Adopted
| | | | | | | | | | | |
| (In thousands) | December 31, 2022 | | December 31, 2021 |
| | | |
Land(1) | $ | 1,185,977 | | $ | 1,150,821 |
Buildings and improvements(1) | 10,055,499 | | 9,344,087 |
| Tenant improvements and lease intangibles | 981,460 | | 935,639 |
Property under development(1) | 70,037 | | 388,530 |
| Investment in real estate, gross | $ | 12,292,973 | | $ | 11,819,077 |
(1) During 2019 we adopted the ASU listed below:
ASU 2016-02 (Topic 842 - "Leases")
In February 2016, the FASB issued ASU No. 2016-02, (Topic 842 - "Leases"). The primary impact of the ASU is the recognition of lease assets2022, Property under development balances transferred to Land and liabilities on the balance sheet by lesseesBuilding and improvements for leases classified as operating leases. The accounting applied by lessors is largely unchanged. For example, the vast majority of operating leases remain classified as operating leases, and lessors continue to recognize lease payments for those leases on a straight-line basis over the lease term.
We adopted the ASU on January 1, 2019 using the modified retrospective transition method. We recorded cumulative adjustments of $2.1real estate placed into service were $13.1 million and $0.4$360.4 million, respectively. During 2021, Property under development balances transferred to Building and improvements for real estate placed into service were $51.2 million.
2022 Property Acquisition
Acquisition of 1221 Ocean Avenue
On April 26, 2022, we paid $330.0 million, excluding acquisition costs, to acquire a luxury multifamily apartment building with 120 units, located at 1221 Ocean Avenue in Santa Monica. We acquired the opening balances of accumulated deficitproperty through a new consolidated JV that we manage and noncontrolling interests, respectively, for leasing expenses related to leases that were entered into before the adoption date but commenced after the adoption date. The ASU provides a practical expedient package,in which we elected to use, that allows entities (a) not to reassess whether any expired or existing contracts as of the adoption date are considered or contain leases; (b) not to reassess the lease classification for any expired or existing leases as of the adoption date; and (c) not to reassess initial direct costs for any existing leases as of the adoption date. All leases entered into on or after the adoption date wereown a 55% interest. We accounted for under the ASU.
We lease space to tenants at our office and multifamily properties. Under the ASU, all of our tenant leases continue to be classifiedacquisition as operating leases. The ASU continues to require that lease payments for operating leases be recognized over the lease term on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which benefit is expected to be derived from the use of the underlying asset. If collectibility of the lease payments is not probable at the commencement date, then the lease income should be limited to the lesser of the income recognized on a straight-line basis or cash basis. If the assessment of collectibility changes after the commencement date, any difference between the lease income that would have been recognized on a straight-line basis and cash basis must be recognized as a current-period adjustment to lease income. We elected to adopt the complete impairment model guidance within ASC 842. Under this model we no longer maintain a general reserve related to our receivables, and instead analyze, on a lease-by-lease basis, whether amounts due under the operating lease are deemed probable for collection. We write off tenant and deferred rent receivables as a charge against rental revenue in the period we determine the lease payments are not probable for collection.
The ASU requires separation of the lease from the non-lease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Only the lease components are accounted for in accordance with the ASU. The consideration in the contract is allocated to the lease and non-lease components on a relative standalone selling price basisan asset acquisition and the non-lease component would be accounted for in accordance with ASC 606 ("Revenue from Contracts with Customers"). In July 2018, the FASB issued ASU No. 2018-11 which includes an optional practical expedient for lessors to elect, by class of underlying asset, to not separate the lease from the non-lease components if certain criteriaacquired property's operating results are met. Our office tenant leases include a lease component for the rental income and a non-lease component for the related tenant recoveries. We determined that our office tenant leases qualify for the single component presentation and we adopted the practical expedient. We account for the combined components under the ASU.
Rental revenues and tenant recoveries from our office tenant leases is included in Rental revenues and tenant recoveries under Office rental in our consolidated statementsoperating results from the date of operations. Rental revenues from our multifamily tenant leases is includedacquisition. The table below summarizes the purchase price allocation for the acquisition. The contract price and the purchase price allocation total in multifamily Rental revenuesthe table below differ due to acquisition costs, prorations and similar adjustments:
| | | | | |
| (In thousands) | Purchase Price Allocation |
| |
| Land | $ | 22,086 | |
| Buildings and improvements | 319,666 | |
| Tenant improvements and lease intangibles | 8,879 | |
| Acquired below-market leases | (18,542) | |
| Other liabilities assumed | (1,619) | |
| Net assets and liabilities acquired | $ | 330,470 | |
2020 Property Disposition
In December 2020, we closed on the sale of an 80,000 square foot office property in Honolulu for a contract price of $21.0 million in cash, resulting in a gain of $6.4 million after transaction costs. The property sold was held by one of our consolidated statements of operations. Rental revenue recognized onJVs in which we owned a straight-line basis in excess of billed rents is included in Deferred rent receivables in our consolidated balance sheets. See Note 16 for more information regarding the future lease rental receipts from our operating leases.
two-thirds capital interest. The ASU defines initial direct costs of a lease, which may be capitalized, as costs that would not have been incurred had the lease not been executed. CostsJV was subsequently dissolved prior to negotiate a lease that would have been incurred regardless of whether the lease was executed, such as employee salaries, are not considered to be initial direct costs, and may not be capitalized. We historically capitalized most of our leasing costs. We expensed $4.2 million during the year ended December 31, 2019, of leasing costs related to our tenant leases that did not qualify as initial direct costs of a lease, which are included in General and administrative expenses in our consolidated statements of operations.2020.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We pay rent under a ground lease which expires on December 31, 2086. Upon adoption of the ASU, we continued to classify the lease as an operating lease, and we recognized a right-of-use asset for the land and a lease liability for the future lease payments of $10.9 million. We calculated the carrying value of the right-of-use asset and lease liability by discounting the future lease payments using our incremental borrowing rate. We adjusted the right-of-use asset carrying value for a related above-market ground lease liability of $3.4 million, which reduced the carrying value of the asset to $7.5 million. We continued to recognize the lease payments as expense, which is included in Office expenses in our consolidated statements of operations. See Note 4 for more information regarding this ground lease. See Note 14 for the fair value disclosures related to the ground lease liability.
In December 2018, the FASB issued ASU 2018-20, an update to ASU 2016-02, which provides guidance on accounting for sales and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and nonlease components. We adopted the ASU and it did not have a material impact on our consolidated financial statements.
In March 2019, the FASB issued ASU 2019-01, an update to ASU 2016-02, which provides guidance on transition disclosures related to Topic 250 "Accounting Changes and Error Corrections" and other technical updates. We adopted the ASU and it did not have a material impact on our consolidated financial statements.
ASUs Not Yet Adopted
ASU 2016-13 (Topic 326 - "Financial Instruments-Credit Losses")
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" which amends "Financial Instruments-Credit Losses" (Topic 326). The ASU provides guidance for measuring credit losses on financial instruments. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, which for us would be the first quarter of 2020, and early adoption is permitted. The amendments in this ASU should be applied retrospectively. The ASU would impact our measurement of credit losses for our Office parking receivables, which were $1.3 million and $1.1 million as of December 31, 2019 and 2018, respectively, and are included in Tenant receivables in our consolidated balance sheets. We expect to adopt the ASU in the first quarter of 2020 and we do not expect the ASU to have a material impact on our consolidated financial statements.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
3. Investment in Real Estate
We account for our property acquisitions as asset acquisitions. The acquired property's results of operations are included in our results of operations from the respective acquisition dates.
2019 Acquisition and JV consolidation
Acquisition of The Glendon
On June 7, 2019, we acquired The Glendon, a residential community in Westwood, and on June 28, 2019, we contributed the property to a consolidated JV that we manage and in which we own a 20% capital interest. The table below summarizes the purchase price allocation for the acquisition. See Note 14 for our fair value disclosures. The contract and purchase prices differ due to prorations and similar adjustments:
|
| | | |
| (In thousands, except number of units) | The Glendon |
| | |
| Submarket | West Los Angeles |
| Acquisition date | June 7, 2019 |
| Contract price | $ | 365,100 |
|
| Number of multifamily units | 350 |
|
| Retail square footage | 50 |
|
| | |
| Land | $ | 32,773 |
|
| Buildings and improvements | 333,624 |
|
| Tenant improvements and lease intangibles | 2,301 |
|
| Acquired above- and below-market leases, net | (2,114 | ) |
| Net assets and liabilities acquired | $ | 366,584 |
|
Consolidation of JV
On November 21, 2019, we acquired an additional 16.3% of the equity in one of our previously unconsolidated Funds, Fund X, in exchange for $76.9 million in cash and 332 thousand OP Units valued at $14.4 million, which increased our ownership in the Fund to 89.0%. In connection with this transaction, we restructured the Fund with 1 remaining institutional investor. The new JV is a VIE, and as a result of the amended operating agreement, we became the primary beneficiary of the VIE and commenced consolidating the JV on November 21, 2019. The results of the consolidated JV are included in our operating results from November 21, 2019 (before November 21, 2019, our share of the Fund's net income was included in our statements of operations in Income from unconsolidated Funds).
The consolidation of the JV required us to recognize the JVs identifiable assets and liabilities at fair value in our consolidated financial statements, along with the fair value of the non-controlling interest of $61.4 million. We recognized a gain of $307.9 million to adjust the carrying value of our existing investment in the JV to its estimated fair value upon consolidation. See Note 14 for our fair value disclosures.
The gain was determined by taking the difference between: (a) the fair value of Fund X’s assets less its liabilities and (b) the sum of the fair value of the noncontrolling interest, carrying value of our existing investment in Fund X, and the amounts paid to acquire other Fund investors’ interests. We determined the fair value of Fund X’s assets and liabilities upon initial consolidation using our estimates of expected future cash flows and other valuation techniques. We estimated the fair values of Fund X’s properties by using the income and sales comparison valuation approaches which included, but are not limited to, our estimates of rental rates, comparable sales, revenue growth rates, capitalization rates and discount rates. Assumed debt was recorded at fair value based upon the present value of the expected future payments and current interest rates. Other acquired assets, including cash and assumed liabilities were recorded at cost due to the short-term nature of the balances.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
The JV owns 6 Class A office properties totaling 1.5 million square feet in the Los Angeles submarkets of Beverly Hills, Santa Monica, Sherman Oaks/Encino and Warner Center. The JV also owns an interest of 9.4% in our remaining unconsolidated Fund, Partnership X, which owns 2 additional Class A office properties totaling 386,000 square feet in Beverly Hills and Brentwood. The table below summarizes the purchase price allocation for the initial consolidation of the JV.
|
| | | |
| (In thousands) | JV Consolidation |
| | |
| Consolidation date | November 21, 2019 |
| Square footage | 1,454 |
|
| | |
| Land | $ | 52,272 |
|
| Buildings and improvements | 831,416 |
|
| Tenant improvements and lease intangibles | 40,890 |
|
| Acquired above- and below-market leases, net | (14,198 | ) |
| JV interest in unconsolidated Fund | 28,783 |
|
| Assumed debt | (403,016 | ) |
| Assumed interest rate swaps | (4,147 | ) |
| Other assets and liabilities, net | 26,256 |
|
| Net assets acquired and liabilities assumed | $ | 558,256 |
|
2018 Acquisitions
During 2018, we did not purchase any properties.
2017 Acquisitions
During 2017, (i) a consolidated JV that we manage and in which we own an equity interest acquired 3 Class A office properties (1299 Ocean Avenue, 429 Santa Monica Boulevard and 9665 Wilshire Boulevard), for which investors contributed $284.0 million directly to the JV, and (ii) we acquired 1 wholly-owned Class A office property (9401 Wilshire Boulevard). The table below summarizes the purchase price allocations for the acquisitions. The contract and purchase prices differ due to prorations and similar matters.
|
| | | | | | | | | | | | | | | |
| (In thousands) | 1299 Ocean | | 429 Santa Monica | | 9665 Wilshire | | 9401 Wilshire(1) |
| | | | | | | | |
| Submarket | Santa Monica | | Santa Monica | | Beverly Hills | | Beverly Hills |
| Acquisition date | April 25 | | April 25 | | July 20 | | December 20 |
| Contract price | $ | 275,800 |
| | $ | 77,000 |
| | $ | 177,000 |
| | $ | 143,647 |
|
| Building square footage | 206 | | 87 | | 171 | | 146 |
| | | | | | | | |
| Investment in real estate: | | | | | | | |
| Land | $ | 22,748 |
| | $ | 4,949 |
| | $ | 5,568 |
| | $ | 6,740 |
|
| Buildings and improvements | 260,188 |
| | 69,286 |
| | 175,960 |
| | 144,467 |
|
| Tenant improvements and lease intangibles | 5,010 |
| | 3,248 |
| | 1,112 |
| | 7,843 |
|
| Acquired above- and below-market leases, net | (10,683 | ) | | (722 | ) | | (4,339 | ) | | (11,559 | ) |
Assumed debt(2) | — |
| | — |
| | — |
| | (36,460 | ) |
| Net assets and liabilities acquired | $ | 277,263 |
| | $ | 76,761 |
| | $ | 178,301 |
| | $ | 111,031 |
|
| |
(1) | We issued OP Units to the seller in connection with the acquisition of 9401 Wilshire. See Note 11 for more information. |
| |
(2) | We assumed a loan from the seller in connection with the acquisition of 9401 Wilshire. At the date of acquisition, the loan had a fair value of $36.5 million and a principal balance of $32.3 million. See Note 8 for more information. |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
4. Ground Lease
We pay rent under a ground lease located in Honolulu, Hawaii, which expires on December 31, 2086. The rent is fixed at $733 thousand per year until February 28, 2029, after which it will reset to the greater of the existing ground rent or market. the market rent at that time.
As of December 31, 2019,2022, the ground lease right-of-use asset carrying value of this ground lease was $7.5 million, and the ground lease liability was $10.9$10.8 million. We incurred groundGround rent expense, of $733 thousand during 2019, 2018 and 2017, which is included in Office expenses in our consolidated statements of operations. operations, was $733 thousand during 2022, 2021 and 2020.
The table below, which assumes that the ground rent payments will continue to be $733 thousand per year after February 28, 2029, presents the future minimum ground lease payments as of December 31, 2019:2022:
|
| | | |
| Year ending December 31: | (In thousands) |
| | |
| 2020 | $ | 733 |
|
| 2021 | 733 |
|
| 2022 | 733 |
|
| 2023 | 733 |
|
| 2024 | 733 |
|
| Thereafter | 45,445 |
|
| Total future minimum lease payments | $ | 49,110 |
|
| | | | | |
| Year ending December 31: | (In thousands) |
| |
| 2023 | $ | 733 | |
| 2024 | 733 | |
| 2025 | 733 | |
| 2026 | 733 | |
| 2027 | 733 | |
| Thereafter | 43,246 | |
| Total future minimum lease payments | $ | 46,911 | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
5. Acquired Lease Intangibles
Summary of our Acquired Lease Intangibles
|
| | | | | | | | |
| (In thousands) | | December 31, 2019 | | December 31, 2018 |
| | | | | |
| Above-market tenant leases | | $ | 7,220 |
| | $ | 5,595 |
|
| Above-market tenant leases - accumulated amortization | | (1,741 | ) | | (3,289 | ) |
| Above-market ground lease where we are the lessor | | 1,152 |
| | 1,152 |
|
| Above-market ground lease - accumulated amortization | | (224 | ) | | (207 | ) |
| Acquired lease intangible assets, net | | $ | 6,407 |
| | $ | 3,251 |
|
| | | | | |
| Below-market tenant leases | | $ | 102,583 |
| | $ | 112,175 |
|
| Below-market tenant leases - accumulated accretion | | (50,216 | ) | | (63,013 | ) |
Above-market ground lease where we are the tenant(1) | | — |
| | 4,017 |
|
Above-market ground lease - accumulated accretion(1) | | — |
| | (610 | ) |
| Acquired lease intangible liabilities, net | | $ | 52,367 |
| | $ | 52,569 |
|
(1) Upon adoption of ASU 2016-02 on January 1, 2019 we adjusted the ground lease right-of-use asset carrying value with the carrying value of the above-market ground lease - see Notes 2 and 4. | | | | | | | | | | | | | | |
| (In thousands) | | December 31, 2022 | | December 31, 2021 |
| | | | |
| Above-market tenant leases | | $ | 4,968 | | | $ | 6,406 | |
| Above-market tenant leases - accumulated amortization | | (2,309) | | | (3,132) | |
| Above-market ground lease where we are the lessor | | 1,152 | | | 1,152 | |
| Above-market ground lease - accumulated amortization | | (275) | | | (258) | |
| Acquired lease intangible assets, net | | $ | 3,536 | | | $ | 4,168 | |
| | | | |
| Below-market tenant leases | | $ | 64,851 | | | $ | 58,209 | |
| Below-market tenant leases - accumulated accretion | | (33,487) | | | (33,499) | |
| Acquired lease intangible liabilities, net | | $ | 31,364 | | | $ | 24,710 | |
Impact on the Consolidated Statements of Operations
The table below summarizes the net amortization/accretion related to our above- and below-market leases:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Net accretion of above- and below-market tenant lease assets and liabilities(1) | $ | 11,272 | | | $ | 9,558 | | | $ | 15,895 | |
Amortization of an above-market ground lease asset(2) | (17) | | | (17) | | | (17) | |
| Total | $ | 11,255 | | | $ | 9,541 | | | $ | 15,878 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
Net accretion of above- and below-market tenant lease assets and liabilities(1) | $ | 16,282 |
| | $ | 21,992 |
| | $ | 17,973 |
|
Amortization of an above-market ground lease asset(2) | (18 | ) | | (17 | ) | | (17 | ) |
Accretion of an above-market ground lease liability(3) | — |
| | 50 |
| | 50 |
|
| Total | $ | 16,264 |
| | $ | 22,025 |
| | $ | 18,006 |
|
(2) Recorded as a decrease to office parking and other income.
| |
(1) | Recorded as a net increase to office and multifamily rental revenues. |
| |
(2) | Recorded as a decrease to office parking and other income. |
| |
(3) | Recorded as a decrease to office expense. Upon adoption of ASU 2016-02 on January 1, 2019 we adjusted the ground lease right-of-use asset carrying value with the carrying value of the above-market ground lease - see Notes 2 and 4. |
The table below presents the future net accretion related to our above- and below-market leases at December 31, 2019.2022.
|
| | | | |
| Year ending December 31: | | Net increase to revenues |
| | | |
| | | (In thousands) |
| 2020 | | $ | 15,339 |
|
| 2021 | | 9,371 |
|
| 2022 | | 6,674 |
|
| 2023 | | 4,576 |
|
| 2024 | | 3,702 |
|
| Thereafter | | 6,298 |
|
| Total | | $ | 45,960 |
|
| | | | | | | | |
| Year ending December 31: | | Net increase to revenues |
| | |
| | (In thousands) |
| 2023 | | $ | 10,564 | |
| 2024 | | 7,993 | |
| 2025 | | 5,466 | |
| 2026 | | 2,665 | |
| 2027 | | 1,392 | |
| Thereafter | | (252) | |
| Total | | $ | 27,828 | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
6. InvestmentsInvestment in Unconsolidated FundsFund
Description of our FundsFund
As of December 31, 2019,2022 and 2021, we managemanaged and ownowned an equity interest of 29.9%33.5% in an unconsolidated Fund, Partnership X, through which we and other investors in the Fund own 2owned two office properties totaling 0.4 million square feet. Before November 21, 2019, we managed and owned equity interests in 3 unconsolidated Funds, consistingWe purchased an additional interest of 6.2% of the Opportunity Fund, 72.7% of Fund X and 28.4% of Partnership X, through which we and other investors in the Funds owned 8 office properties totaling 1.8 million square feet. On November 21, 2019, we acquired additional interests of 16.3% in Fund X and 1.5%3.6% in Partnership X and restructured Fundfor $6.6 million during 2020.
Partnership X which resulted in Fund X being treated as a consolidated JV from November 21, 2019. See Note 3 for more information regarding the consolidation of the JV. We also acquired all of the investors’ ownership interests in the Opportunity Fund (The Opportunity Fund’s only investment was an ownership interest in Fund X) and closed the Opportunity Fund. During the period January 1, 2019 to November 20, 2019 we purchased additional interests of 1.4% in Fund X and 3.9% in Partnership X. Our Funds paypays us fees and reimbursereimburses us for certain expenses related to property management and other services we provide, which are included in Other income in our consolidated statements of operations. We also receive distributions based on invested capital and on any profits that exceed certain specified cash returns to the investors. The table below presents the cash distributions we received from our Funds:Partnership X:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| Operating distributions received | $ | 1,224 | | | $ | 943 | | | $ | 394 | |
| Capital distributions received | 1,919 | | | 1,342 | | | 1,236 | |
| Total distributions received | $ | 3,143 | | | $ | 2,285 | | | $ | 1,630 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
Operating distributions received(1) | $ | 6,820 |
| | $ | 6,400 |
| | $ | 5,905 |
|
Capital distributions received(1) | 5,853 |
| | 7,349 |
| | 43,560 |
|
Total distributions received(1) | $ | 12,673 |
| | $ | 13,749 |
| | $ | 49,465 |
|
| |
(1) | The balances reflect the combined balances for Partnership X, Fund X and the Opportunity Fund through November 20, 2019 and the balances for Partnership X from November 21, 2019 through December 31, 2019. |
Summarized Financial Information for our Funds
The tables below present selected financial information for the Funds.Partnership X. The amounts presented reflect 100% (not our pro-rata share) of amounts related to the Funds,Fund, and are based upon historical acquired book value:
|
| | | | | | | |
| (In thousands) | December 31, 2019 | | December 31, 2018 |
| | | | |
Total assets(1) | $ | 136,479 |
| | $ | 694,713 |
|
Total liabilities(1) | $ | 113,330 |
| | $ | 525,483 |
|
Total equity(1) | $ | 23,149 |
| | $ | 169,230 |
|
(1) The balances as of December 31, 2019 reflect the balances for Partnership X. The balances as of December 31, 2018 reflect the combined balances for Partnership X, Fund X and the Opportunity Fund.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
Total revenues(1) | $ | 75,952 |
| | $ | 79,590 |
| | $ | 75,896 |
|
Operating income(1) | $ | 22,269 |
| | $ | 22,959 |
| | $ | 20,640 |
|
Net income(1) | $ | 7,350 |
| | $ | 6,260 |
| | $ | 5,085 |
|
| |
(1) | The balances reflect the combined balances for Partnership X, Fund X and the Opportunity Fund through November 20, 2019 and the balances for Partnership X from November 21, 2019 through December 31, 2019. |
| | | | | | | | | | | |
| (In thousands) | December 31, 2022 | | December 31, 2021 |
| | | |
| Total assets | $ | 147,853 | | | $ | 139,171 | |
| Total liabilities | $ | 119,038 | | | $ | 117,668 | |
| Total equity | $ | 28,815 | | | $ | 21,503 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| Total revenues | $ | 18,561 | | | $ | 17,185 | | | $ | 15,744 | |
| Operating income | $ | 5,722 | | | $ | 4,921 | | | $ | 3,614 | |
| Net income | $ | 3,158 | | | $ | 2,333 | | | $ | 887 | |
7. Other Assets
| | | | | | | | | | | |
| (In thousands) | December 31, 2022 | | December 31, 2021 |
| | | |
| Restricted cash | $ | 101 | | | $ | 101 | |
| Prepaid expenses | 19,871 | | | 15,936 | |
| Indefinite-lived intangibles | 1,988 | | | 1,988 | |
| | | |
| Furniture, fixtures and equipment, net | 7,144 | | | 2,499 | |
| Other | 4,837 | | | 5,197 | |
| Total other assets | $ | 33,941 | | | $ | 25,721 | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
7. Other Assets
|
| | | | | | | |
| (In thousands) | December 31, 2019 | | December 31, 2018 |
| | | | |
| Restricted cash | $ | 121 |
| | $ | 121 |
|
| Prepaid expenses | 8,711 |
| | 7,830 |
|
| Other indefinite-lived intangibles | 1,988 |
| | 1,988 |
|
| Furniture, fixtures and equipment, net | 2,368 |
| | 1,101 |
|
| Other | 3,233 |
| | 3,719 |
|
| Total other assets | $ | 16,421 |
| | $ | 14,759 |
|
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
8. Secured Notes Payable and Revolving Credit Facility, Net
|
| | | | | | | | | | | | | | | | |
Description | | Maturity Date (1) | | Principal Balance as of December 31, 2019 | | Principal Balance as of December 31, 2018 | | Variable Interest Rate | | Fixed Interest Rate (2) | | Swap Maturity Date |
| | | | | | | | | | | | | |
| | | | | (In thousands) | | | | | | |
| | | | | | | | | | | | | |
| Wholly-Owned Subsidiaries |
Fannie Mae loan(3) | | — | | $ | — |
| | $ | 145,000 |
| | — | | — | | — |
Fannie Mae loan(3) | | — | | — |
| | 115,000 |
| | — |
| — |
| — |
Term loan(3) | | — | | — |
| | 220,000 |
| | — | | — | | — |
Term loan(3) | | — | | — |
| | 340,000 |
| | — | | — | | — |
Term loan(3) | | — | | — |
| | 400,000 |
| | — | | — | | — |
Term loan(3) | | — | | — |
| | 180,000 |
| | — | | — | | — |
Term loan(3) | | — | | — |
| | 360,000 |
| | — | | — | | — |
Term loan(4) | | 1/1/2024 | | 300,000 |
| | 300,000 |
| | LIBOR + 1.55% | | 3.46% | | 1/1/2022 |
Term loan(4) | | 3/3/2025 | | 335,000 |
| | 335,000 |
| | LIBOR + 1.30% | | 3.84% | | 3/1/2023 |
Fannie Mae loan(4)(5) | | 4/1/2025 | | 102,400 |
| | 102,400 |
| | LIBOR + 1.25% |
| 2.84% |
| 3/1/2023 |
Term loan(4)(6)(7) | | 8/15/2026 | | 415,000 |
| | — |
| | LIBOR + 1.10% |
| 2.58% |
| 8/1/2025 |
Term loan(4)(6) | | 9/19/2026 | | 400,000 |
| | — |
| | LIBOR + 1.15% |
| 2.44% |
| 9/1/2024 |
Term loan(4)(6)(8) | | 9/26/2026 | | 200,000 |
| | — |
| | LIBOR + 1.20% |
| 2.77% |
| 10/1/2024 |
Term loan(4)(6)(9) | | 11/1/2026 | | 400,000 |
| | — |
| | LIBOR + 1.15% | | 2.18% | | 10/1/2024 |
Fannie Mae loan(4) | | 6/1/2027 | | 550,000 |
| | 550,000 |
| | LIBOR + 1.37% | | 3.16% | | 6/1/2022 |
Fannie Mae loan(4)(6) | | 6/1/2029 | | 255,000 |
| | — |
| | LIBOR + 0.98% | | 3.26% | | 6/1/2027 |
Fannie Mae loan(4)(6)(10) | | 6/1/2029 | | 125,000 |
| | — |
| | LIBOR + 0.98% | | 2.55% | | 6/1/2027 |
Term loan(11) | | 6/1/2038 | | 30,864 |
| | 31,582 |
| | N/A | | 4.55% | | N/A |
Revolving credit facility(12) | | 8/21/2023 | | — |
| | 105,000 |
| | LIBOR + 1.15% | | N/A | | N/A |
| Total Wholly-Owned Subsidiary Debt | | 3,113,264 |
| | 3,183,982 |
| |
|
|
|
|
|
| | | | | | | | | | | | | |
| Consolidated JVs |
Term loan(4) | | 2/28/2023 | | 580,000 |
| | 580,000 |
| | LIBOR + 1.40% | | 2.37% | | 3/1/2021 |
Term loan(4)(13) | | 7/1/2024 | | 400,000 |
| | — |
| | LIBOR + 1.65% | | 3.44% | | 7/1/2022 |
Term loan(4) | | 12/19/2024 | | 400,000 |
| | 400,000 |
| | LIBOR + 1.30% | | 3.47% | | 1/1/2023 |
Term loan(4)(6) | | 6/1/2029 | | 160,000 |
| | — |
| | LIBOR + 0.98% | | 3.25% | | 7/1/2027 |
Total Consolidated Debt(14) | | 4,653,264 |
| | 4,163,982 |
| | | | | | |
| Unamortized loan premium, net | | 6,741 |
| | 3,986 |
| | | | | | |
| Unamortized deferred loan costs, net | | (40,947 | ) | | (33,938 | ) | |
|
|
|
|
|
| Total Consolidated Debt, net | | $ | 4,619,058 |
| | $ | 4,134,030 |
| |
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Maturity Date (1) | | Principal Balance as of December 31, 2022 | | Principal Balance as of December 31, 2021 | | Variable Interest Rate | | Fixed Interest Rate (2) | | Swap Maturity Date |
| | | | | | | | | | | | |
| | | | (In thousands) | | | | | | |
| | | | | | | | | | | | |
| Consolidated Wholly-Owned Subsidiaries |
Term loan(3) | | 3/3/2025 | | $ | 335,000 | | | $ | 335,000 | | | LIBOR + 1.30% | | 3.84% | | 3/1/2023 |
Fannie Mae loan(3) | | 4/1/2025 | | 102,400 | | | 102,400 | | | LIBOR + 1.25% | | 2.76% | | 3/1/2023 |
Term loan(3) | | 8/15/2026 | | 415,000 | | | 415,000 | | | LIBOR + 1.10% | | 3.07% | | 8/1/2025 |
Term loan(3) | | 9/19/2026 | | 400,000 | | | 400,000 | | | LIBOR + 1.15% | | 2.44% | | 9/1/2024 |
Term loan(3) | | 9/26/2026 | | 200,000 | | | 200,000 | | | LIBOR + 1.20% | | 2.36% | | 10/1/2024 |
Term loan(3) | | 11/1/2026 | | 400,000 | | | 400,000 | | | LIBOR + 1.15% | | 2.31% | | 10/1/2024 |
Fannie Mae loan(3)(4) | | 6/1/2027 | | 550,000 | | | 550,000 | | | LIBOR + 1.37% | | N/A | | N/A |
Term loan(3) | | 5/18/2028 | | 300,000 | | | 300,000 | | | LIBOR + 1.40% | | 2.21% | | 6/1/2026 |
Term loan(3)(5) | | 1/1/2029 | | 300,000 | | | 300,000 | | | SOFR + 1.56% | | 2.66% | | 1/1/2027 |
Fannie Mae loan(3) | | 6/1/2029 | | 255,000 | | | 255,000 | | | LIBOR + 0.98% | | 3.26% | | 6/1/2027 |
Fannie Mae loan(3) | | 6/1/2029 | | 125,000 | | | 125,000 | | | LIBOR + 0.98% | | 3.25% | | 6/1/2027 |
Term loan(6) | | 6/1/2038 | | 28,502 | | | 29,325 | | | N/A | | 4.55% | | N/A |
Revolving credit facility(7) | | 8/21/2023 | | — | | | — | | | LIBOR + 1.15% | | N/A | | N/A |
| Total Wholly-Owned Subsidiary Debt | | 3,410,902 | | | 3,411,725 | | | | | | | |
| | | | | | | | | | | | |
| Consolidated JVs |
Term loan(3) | | 12/19/2024 | | 400,000 | | | 400,000 | | | LIBOR + 1.30% | | 3.47% | | 1/1/2023 |
Term loan(3)(8) | | 5/15/2027 | | 450,000 | | | 450,000 | | | LIBOR + 1.35% | | 2.26% | | 4/1/2025 |
Term loan(3) | | 8/19/2028 | | 625,000 | | | 625,000 | | | LIBOR + 1.35% | | 2.12% | | 6/1/2025 |
Term loan(3)(9) | | 4/26/2029 | | 175,000 | | | — | | | SOFR + 1.25% | | 3.90% | | 5/1/2026 |
Fannie Mae loan(3) | | 6/1/2029 | | 160,000 | | | 160,000 | | | LIBOR + 0.98% | | 3.25% | | 7/1/2027 |
Total Consolidated Debt(10) | | 5,220,902 | | | 5,046,725 | | | | | | | |
Unamortized loan premium, net(11) | | 3,547 | | | 4,007 | | | | | | | |
Unamortized deferred loan costs, net(12) | | (32,556) | | | (38,656) | | | | | | | |
| Total Consolidated Debt, net | | $ | 5,191,893 | | | $ | 5,012,076 | | | | | | | |
Except as noted below, each loan (including our loans and revolving credit facility) isfacility: (i) are non-recourse, and(ii) are secured by 1 or more separate collateral pools consisting of 1 one or more properties, and requires(iii) require interest-only monthly payments of interest only with the outstanding principal due upon maturity. Certain of our loansmaturity, and (iv) contain certain financial covenants which could require us to deposit excess cash flow with the lender under certain circumstances unless we (at our option) either provide a guarantee or additional collateral or pay down the loan if necessary forwithin certain parameters set forth in the properties involvedloan documents. Certain loans with maturity date extension options require us to meet minimum financial thresholds although we have never hadin order to makeextend the loan maturity date.
(1)Maturity dates include extension options.
(2)Effective rate as of December 31, 2022. Includes the effect of interest rate swaps, and excludes the effect of prepaid loan fees and loan premiums. See Note 10 for details of our interest rate swaps. See further below for details of our loan costs and loan premiums.
(3)The loan agreement includes a zero-percent LIBOR or SOFR floor. If the loan is swap-fixed then the related swaps do not include such a payment.floor.
| |
(1) | Maturity dates include the effect of extension options. |
| |
(2) | Includes the effect of interest rate swaps and excludes the effect of prepaid loan fees. See Note 10 for details of our interest rate swaps. See below for details of our loan costs. |
| |
(3) | At December 31, 2019, these loans have been paid off. |
| |
(4) | Loan agreement includes a 0-percent LIBOR floor. The corresponding swaps do not include such a floor. |
| |
(5) | The effective rate will decrease to 2.76% on March 2, 2020. |
(5)The effective rate decreased from 3.42% to 2.66% on January 1, 2022 when a new swap replaced old swaps that expired.
(6)The loan requires monthly payments of principal and interest. Principal amortization is based upon a 30-year amortization schedule.
(7)$400.0 million revolving credit facility. Unused commitment fees range from 0.10% to 0.15%. The facility has a zero-percent LIBOR floor.
(8)The effective rate decreased from 3.04% to 2.26% on July 1, 2022 when existing swaps were upsized to replace swaps that expired.
(9)We closed this loan during the second quarter of 2022 in connection with the acquisition of a residential property, see Note 3.
(10)The table does not include our unconsolidated Fund's loan - see Note 17. See Note 14 for our debt fair value disclosures.
(11)Balances are net of accumulated amortization of $3.7 million and $3.2 million at December 31, 2022 and December 31, 2021, respectively.
(12)Balances are net of accumulated amortization of $54.1 million and $46.3 million at December 31, 2022 and December 31, 2021, respectively.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
| |
(6) | These loans were closed during the twelve months ended December 31, 2019. |
| |
(7) | Effective rate will increase to 3.07% on April 1, 2020. |
| |
(8) | Effective rate will decrease to 2.36% on July 1, 2020. |
| |
(9) | Effective rate will increase to 2.31% on July 1, 2021. |
| |
(10) | Effective rate will increase to 3.25% on December 1, 2020. |
| |
(11) | Requires monthly payments of principal and interest. Principal amortization is based upon a 30-year amortization schedule. |
| |
(12) | In March 2019, we renewed our $400.0 million revolving credit facility, releasing two previously encumbered properties, lowering the borrowing rate and unused facility fees, and extending the maturity date. Unused commitment fees range from 0.10% to 0.15% . The loan agreement includes a zero-percent LIBOR floor. |
| |
(13) | A previously unconsolidated Fund is now treated as a consolidated JV. See Note 3. |
| |
(14) | The table does not include our unconsolidated Funds' loans - see Note 17. See Note 14 for our fair value disclosures. |
Debt Statistics
The following table below summarizes our consolidated fixed and floating rate debt:
|
| | | | | | | | |
| (In thousands) | | Principal Balance as of December 31, 2019 | | Principal Balance as of December 31, 2018 |
| | | | | |
| Aggregate swapped to fixed rate loans | | $ | 4,622,400 |
| | $ | 3,882,400 |
|
| Aggregate fixed rate loans | | 30,864 |
| | 31,582 |
|
| Aggregate floating rate loans | | — |
| | 250,000 |
|
| Total Debt | | $ | 4,653,264 |
| | $ | 4,163,982 |
|
| | | | | | | | | | | | | | |
| (In thousands) | | Principal Balance as of December 31, 2022 | | Principal Balance as of December 31, 2021 |
| | | | |
| Aggregate swapped to fixed rate loans | | $ | 4,642,400 | | | $ | 5,017,400 | |
| Aggregate fixed rate loans | | 28,502 | | | 29,325 | |
| Aggregate floating rate loans | | 550,000 | | | — | |
| Total Debt | | $ | 5,220,902 | | | $ | 5,046,725 | |
The following table below summarizes certain consolidated debt statistics as of December 31, 2019:2022:
|
| | | | |
| Statistics for consolidated loans with interest fixed under the terms of the loan or a swap |
| |
| Principal balance (in billions) | $4.654.67 |
| Weighted average remaining life (including extension options) | 6.14.5 years |
| Weighted average remaining fixed interest period | 3.92.4 years |
| Weighted average annual interest rate | 3.00%2.82% |
Future Principal Payments
At December 31, 2019,2022, the minimum future principal payments due on our consolidated secured notes payable and revolving credit facility were as follows:
| | | | | | | | |
| Year ending December 31: | | Including Maturity Extension Options(1) |
| | |
| | (In thousands) |
| | |
| 2023 | | $ | 862 | |
| 2024 | | 400,902 | |
| 2025 | | 438,343 | |
| 2026 | | 1,415,987 | |
| 2027 | | 1,001,033 | |
| Thereafter | | 1,963,775 | |
| Total future principal payments | | $ | 5,220,902 | |
|
| | | | | | | | |
| Year ending December 31: | | Excluding Maturity Extension Options | | Including Maturity Extension Options(1) |
| | | | | |
| | | (In thousands) |
| | | | | |
| 2020 | | $ | 752 |
| | $ | 752 |
|
| 2021 | | 787 |
| | 787 |
|
| 2022 | | 300,823 |
| | 823 |
|
| 2023 | | 915,862 |
| | 580,862 |
|
| 2024 | | 800,902 |
| | 1,100,902 |
|
| Thereafter | | 2,634,138 |
| | 2,969,138 |
|
| Total future principal payments | | $ | 4,653,264 |
| | $ | 4,653,264 |
|
| |
(1) | Some of our loan agreements require that we meet certain minimum financial thresholds to be able to extend the loan maturity. |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Loan Premium and Loan Costs
Deferred loan costs are net of accumulated amortization of $30.7 million and $24.2 million at December 31, 2019 and December 31, 2018, respectively. The table below presents loan premium and loan costs, which are included in interestInterest expense in our consolidated statements of operations:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| Loan premium amortized and written off | $ | (460) | | | $ | (460) | | | $ | (2,274) | |
| Deferred loan costs amortized and written off | 7,943 | | | 10,902 | | | 7,832 | |
| Loan costs expensed | 117 | | | 408 | | | 1,008 | |
| Total | $ | 7,600 | | | $ | 10,850 | | | $ | 6,566 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
| Loan costs expensed | $ | 1,318 |
| | $ | 58 |
| | $ | 557 |
|
| Deferred loan costs written off | 6,865 |
| | 360 |
| | 1,802 |
|
| Deferred loan cost amortization | 7,449 |
| | 7,874 |
| | 9,033 |
|
| Total | $ | 15,632 |
| | $ | 8,292 |
| | $ | 11,392 |
|
9. Interest Payable, Accounts Payable and Deferred Revenue
|
| | | | | | | | |
| (In thousands) | | December 31, 2019 | | December 31, 2018 |
| | | | | |
| Interest payable | | $ | 11,707 |
| | $ | 10,657 |
|
| Accounts payable and accrued liabilities | | 66,437 |
| | 75,111 |
|
| Deferred revenue | | 53,266 |
| | 44,386 |
|
| Total interest payable, accounts payable and deferred revenue | | $ | 131,410 |
| | $ | 130,154 |
|
| | | | | | | | | | | | | | |
| (In thousands) | | December 31, 2022 | | December 31, 2021 |
| | | | |
| Interest payable | | $ | 13,529 | | | $ | 12,254 | |
| Accounts payable and accrued liabilities | | 80,244 | | | 83,150 | |
| Deferred revenue | | 47,152 | | | 50,056 | |
| Total interest payable, accounts payable and deferred revenue | | $ | 140,925 | | | $ | 145,460 | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
10. Derivative Contracts
Derivative Summary
AsThe table below summarizes our derivative contracts as of December 31, 2019, all of2022:
| | | | | | | | | | | | | | |
| | Number of Interest Rate Swaps | | Notional
(In thousands) |
| | | | |
| Derivatives Designated as Cash Flow Hedges: | | | | |
Consolidated derivatives - swaps(1)(3)(5) | | 30 | | $ | 4,642,400 | |
Unconsolidated Fund's derivatives - swaps(2)(3)(5) | | 2 | | $ | 115,000 | |
| | | | |
| Derivatives Not Designated as Cash Flow Hedges: | | | | |
Consolidated derivatives - caps(3)(4)(5) | | 5 | | $ | 1,100,000 | |
(1)The notional amount includes 100%, not our interest rate swaps, which include the interest rate swapspro-rata share, of our consolidated JVs andJVs' derivatives.
(2)The notional amount reflects 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. For more information about our Fund, were designated as cash flow hedges:including our equity interest percentage, see Note 6.
(3)Our derivative contracts do not provide for right of offset between derivative contracts.
(4)Includes four interest rate caps purchased with a notional amount of $550.0 million and one interest rate cap sold with a notional amount of $550.0 million.
(5)See Note 14 for our derivative fair value disclosures.
|
| | | | | | |
| | | Number of Interest Rate Swaps | | Notional (In thousands) |
| | | | | |
Consolidated derivatives(1)(2)(4)(5) | | 43 | | $ | 5,124,800 |
|
Unconsolidated Fund's derivative(3)(4)(5) | | 1 | | $ | 110,000 |
|
| |
(1) | The notional amount reflects 100%, not our pro-rata share, of our consolidated JVs' derivatives. |
| |
(2) | Includes forward swaps with a total notional of $502.4 million. |
| |
(3) | The notional amount reflects 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. |
| |
(4) | Our derivative contracts do not provide for right of offset between derivative contracts. |
| |
(5) | See Note 14 for our derivative fair value disclosures. |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Credit-risk-related Contingent Features
OurCertain of our swaps include credit-risk related contingent features. For example, we have agreements with certain of our interest rate swap counterparties that contain a provision under which we could be declared in default on our derivative obligations if repayment of the underlying indebtedness that we are hedging is accelerated by the lender due to our default on the indebtedness. As of December 31, 2019,2022, there have been no events of default with respect to our interest rate swaps, our consolidated JVs' interest rate swaps, or our unconsolidated Fund's interest rate swap.swaps. We do not post collateral for our interest rate swap contract liabilities. The fair value of our interest rate swap contract liabilities, including accrued interest and excluding credit risk adjustments, was as follows:
|
| | | | | | | | |
| (In thousands) | | December 31, 2019 | | December 31, 2018 |
| | | | | |
Consolidated derivatives(1) | | $ | 56,896 |
| | $ | 1,681 |
|
Unconsolidated Fund's derivatives(2) | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | |
(1)(In thousands) | Includes 100%, not our pro-rata share, of our consolidated JVs' derivatives. | December 31, 2022 | | December 31, 2021 |
| | | | |
Consolidated derivatives(1)(2) | | $ | — | | | $ | 77,760 | |
Our unconsolidateUnconsolidated Fund's derivativesd Fund did not have any derivatives in a liability position.(3)
| | $ | — | | | $ | — | |
(2)We did not have any consolidated swaps in a liability position as of December 31, 2022.
(3)Our unconsolidated Fund did not have any swaps in a liability position for the periods presented. For more information about our Fund, including our equity interest percentage, see Note 6.
Counterparty Credit Risk
We are subject to credit risk from the counterparties on our interest rate swap and cap contract assets because we do not receive collateral. We seek to minimize that risk by entering into agreements with a variety of high quality counterparties with investment grade ratings. The fair value of our interest rate swap and cap contract assets, including accrued interest and excluding credit risk adjustments, was as follows:
| | | (In thousands) | | December 31, 2019 | | December 31, 2018 | (In thousands) | | December 31, 2022 | | December 31, 2021 |
| | | | | | | |
Consolidated derivatives(1) | | $ | 23,275 |
| | $ | 76,021 |
| Consolidated derivatives(1) | | $ | 281,982 | | | $ | 14,927 | |
Unconsolidated Fund's derivative(2) | | $ | 963 |
| | $ | 12,576 |
| |
Unconsolidated Fund's derivatives(2) | | Unconsolidated Fund's derivatives(2) | | $ | 12,863 | | | $ | 1,889 | |
| |
(1) | Includes 100%, not our pro-rata share, of our consolidated JVs' derivatives. |
| |
(2) | The amounts reflect 100%, not our pro-rata share, of our unconsolidated Fund's derivative. |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Impact of Hedges on AOCI and the Consolidated Statements of Operations
The table below presents the effect of our derivatives on our AOCI and the consolidated statements of operations:
|
| | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Derivatives Designated as Cash Flow Hedges: | | | | | |
| | | | | | |
| Consolidated derivatives: | | | | | |
Gain recorded in AOCI - adoption of ASU 2017-12(1) | $ | — |
| | $ | 211 |
| | $ | — |
|
(Loss) gain recorded in AOCI before reclassifications(1) | $ | (76,273 | ) | | $ | 22,723 |
| | $ | 16,512 |
|
(Gain) loss reclassified from AOCI to Interest Expense(1) | $ | (24,298 | ) | | $ | (10,103 | ) | | $ | 13,976 |
|
| Interest Expense presented in the consolidated statements of operations | $ | (143,308 | ) | | $ | (133,402 | ) | | $ | (145,176 | ) |
| Loss (gain) related to ineffectiveness recorded in Interest Expense | $ | — |
| | $ | — |
| | $ | 51 |
|
Unconsolidated Funds' derivatives (our share)(2): | |
| | |
| | |
(Loss) gain recorded in AOCI before reclassifications(1) | $ | (5,023 | ) | | $ | 3,052 |
| | $ | 3,275 |
|
(Gain) loss reclassified from AOCI to Income from unconsolidated Funds(1) | $ | (1,698 | ) | | $ | (813 | ) | | $ | 527 |
|
| Income from unconsolidated Funds presented in the consolidated statements of operations | $ | 6,923 |
| | $ | 6,400 |
| | $ | 5,905 |
|
| | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Derivatives Designated as Cash Flow Hedges: | | | | | |
| | | | | |
| Consolidated derivatives: | | | | | |
Gains (losses) recorded in AOCI before reclassifications(1) | $ | 326,396 | | | $ | 82,876 | | | $ | (232,652) | |
(Gains) losses reclassified from AOCI to Interest Expense(1) | $ | (4,287) | | | $ | 75,358 | | | $ | 49,435 | |
| Interest Expense presented in the consolidated statements of operations | $ | (150,185) | | | $ | (147,496) | | | $ | (142,872) | |
Unconsolidated Fund's derivatives (our share)(2): | | | | | |
Gains (losses) recorded in AOCI before reclassifications(1) | $ | 3,780 | | | $ | 569 | | | $ | (410) | |
(Gains) losses reclassified from AOCI to Income from unconsolidated Fund(1) | $ | (341) | | | $ | 120 | | | $ | 106 | |
| Income from unconsolidated Fund presented in the consolidated statements of operations | $ | 1,224 | | | $ | 946 | | | $ | 430 | |
| Derivatives Not Designated as Cash Flow Hedges: | | | | | |
| Consolidated derivatives: | | | | | |
| Loss recorded as interest expense | $ | 38 | | | $ | — | | | $ | — | |
| |
(1) | See Note 11 for our AOCI reconciliation. |
| |
(2) | We calculate our share by multiplying the total amount for each Fund by our equity interest in the respective Fund. |
(2)We calculate our share by multiplying the total amount for the Fund by our equity interest in the Fund. For more information about our Fund, including our equity interest percentage, see Note 6.
Future Reclassifications from AOCI
At December 31, 2019,2022, our estimate of the AOCI related to derivatives designated as cash flow hedges that will be reclassified to earnings during the next year as interest rate swap payments are made, is as follows:
|
| | | |
| | (In thousands) |
| | |
| Consolidated derivatives: | |
| Losses to be reclassified from AOCI to Interest Expense | $ | (2,461 | ) |
| Unconsolidated Fund's derivatives (our share): | |
| Gains to be reclassified from AOCI to Income from unconsolidated Funds | $ | 235 |
|
| | | | | |
| (In thousands) |
| |
| Consolidated derivatives: | |
| Gains to be reclassified from AOCI to Interest Expense | $ | 132,805 | |
Unconsolidated Fund's derivatives (our share)(1): | |
| Gains to be reclassified from AOCI to Income from unconsolidated Fund | $ | 1,535 | |
(1) We calculate our share by multiplying the total amount for our Fund by our equity interest in the Fund. For more information about our Fund, including our equity interest percentage, see Note 6.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
11. Equity
Transactions
2019 Transactions
During the year ended December 31, 2019, (i) we2022:
•We acquired 222281 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, (ii) weUnits.
•We acquired 1910 thousand OP Units and fully-vested LTIP Units for $734$337 thousand in cash,cash.
•We acquired a multifamily apartment building through a new consolidated JV that we manage and (iii) we issued 4.9 million shares of our common stock under our ATM program for net proceeds of $201.0 million.
We purchased a property on June 7, 2019 for a contract price of $365.1 million,in which we subsequently contributed to one of our consolidated JVs on June 28, 2019. We manage and own a 20 percent capital interest in the JV. The acquisition and related working capital was funded with (i) a secured, non-recourse $160.0 million interest-only loan scheduled to mature in June 2029, which was assumed by the consolidated JV to which we contributed the property, (ii) a $44.0 million capital contribution by us to the JV, and (iii) a $176.0 million capital contribution by Noncontrolling interests in the JV.55% interest. See Note 3 for more information regarding the property acquisition and Note 8 for more information regarding the loan.
On November 21, 2019, we acquired an additional 16.3% of the equity in one of our previously unconsolidated Funds, Fund X, in exchange for $76.9purchased. We contributed $99.0 million in cash and 332 thousand OP Units valued at $14.4 million, which increased our ownership in the Fund to 89.0%. See Note 3 for more information regarding the consolidation of the JV and note 6 for more information regarding our Funds.an outside investor contributed $81.0 million to the JV.
2018 Transactions
During 2018, we (i)2021:
•We acquired 62965 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, (ii)Units.
•We acquired 34 thousand OP Units for $108$122 thousand in cash and (iii) issued 21 thousand shares of our common stock for the exercise of 49 thousand stock options on a net settlement basis (net of the exercise price and related taxes).cash.
2017 Transactions
During 2017, we or our Operating Partnership, (i)2020:
•We acquired 1.1 million94 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, (ii) issued 1.3 million shares of our common stock for the exercise of 3.9 million stock options on a net settlement basis (net of the exercise price and related taxes), (iii) issued 15.7 million shares of our common stock under our ATM program for net proceeds of $593.3 million, and (iv) issued 2.6 million OP Units valued at $105.7 million in connection with the acquisition of the 9401 Wilshire office property, of which we subsequentlyUnits.
•We acquired 248 thousand150 OP Units for $10.1 million$7 thousand in cash. One of our JVs acquired 3 office properties, 1299 Ocean Avenue, 429 Santa Monica and 9665 Wilshire, for which investors contributed $284.0 million directly to the JV.
Noncontrolling Interests
Our noncontrolling interests consist of interests in our Operating Partnership and consolidated JVs which are not owned by us. NoncontrollingAs of December 31, 2022, noncontrolling interests in our Operating Partnership owned 29.132.5 million OP Units and fully-vested LTIP Units, andwhich represented approximately 14%15.6% of our Operating Partnership's total outstanding interests, as of December 31, 2019 whenand we owned 175.4175.8 million OP Units (to match our 175.4175.8 million shares of outstanding common stock).
A share of our common stock, an OP Unit and an LTIP Unit (once vested and booked up) have essentially the same economic characteristics, sharing equally in the distributions from our Operating Partnership. Investors who own OP Units have the right to cause our Operating Partnership to acquire their OP Units for an amount of cash per unit equal to the market value of 1one share of our common stock at the date of acquisition, or, at our election, exchange their OP Units for shares of our common stock on aone-for-one basis. LTIP Units have been granted to our employees and non-employee directors as part of their compensation. These awards generally vest over a service period and once vested can generally be converted to OP Units provided our stock price increases by more than a specified hurdle.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Changes in our Ownership Interest in our Operating Partnership
The table below presents the effect on our equity from net income attributable to common stockholders and changes in our ownership interest in our Operating Partnership:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| Net income attributable to common stockholders | $ | 97,145 | | | $ | 65,267 | | | $ | 50,421 | |
| | | | | |
| Transfers from noncontrolling interests: | | | | | |
| Exchange of OP Units with noncontrolling interests | 4,600 | | | 1,056 | | | 1,535 | |
| Repurchase of OP Units from noncontrolling interests | (176) | | | (57) | | | (4) | |
| Net transfers from noncontrolling interests | 4,424 | | | 999 | | | 1,531 | |
| | | | | |
| Change from net income attributable to common stockholders and transfers from noncontrolling interests | $ | 101,569 | | | $ | 66,266 | | | $ | 51,952 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
| Net income attributable to common stockholders | $ | 363,713 |
| | $ | 116,086 |
| | $ | 94,443 |
|
| | | | | | |
| Transfers from noncontrolling interests: | | | | | |
| Exchange of OP Units with noncontrolling interests | 3,540 |
| | 10,292 |
| | 14,242 |
|
| Repurchase of OP Units from noncontrolling interests | (431 | ) | | (59 | ) | | (6,764 | ) |
| Net transfers from noncontrolling interests | 3,109 |
| | 10,233 |
| | 7,478 |
|
| | | | | | |
| Change from net income attributable to common stockholders and transfers from noncontrolling interests | $ | 366,822 |
| | $ | 126,319 |
| | $ | 101,921 |
|
AOCI Reconciliation(1)
The table below presents a reconciliation of our AOCI, which consists solely of adjustments related to derivatives designated as cash flow hedges:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
| Beginning balance | $ | 53,944 |
| | $ | 43,099 |
| | $ | 15,156 |
|
| Adoption of ASU 2017-12 - cumulative opening balance adjustment | — |
| | 211 |
| | — |
|
| Consolidated derivatives: | | | | | |
| Other comprehensive (loss) gain before reclassifications | (76,273 | ) | | 22,723 |
| | 16,512 |
|
| Reclassification of (gain) loss from AOCI to Interest Expense | (24,298 | ) | | (10,103 | ) | | 13,976 |
|
Unconsolidated Funds' derivatives (our share)(2): | | | | | |
| Other comprehensive (loss) gain before reclassifications | (5,023 | ) | | 3,052 |
| | 3,275 |
|
| Reclassification of (gain) loss from AOCI to Income from unconsolidated Funds | (1,698 | ) | | (813 | ) | | 527 |
|
| Net current period OCI | (107,292 | ) | | 15,070 |
| | 34,290 |
|
| OCI attributable to noncontrolling interests | 35,886 |
| | (4,225 | ) | | (6,347 | ) |
| OCI attributable to common stockholders | (71,406 | ) | | 10,845 |
| | 27,943 |
|
| | | | | | |
| Ending balance | $ | (17,462 | ) | | $ | 53,944 |
| | $ | 43,099 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| Accumulated Other Comprehensive Loss - Beginning balance | $ | (38,774) | | | $ | (148,035) | | | $ | (17,462) | |
| Consolidated derivatives: | | | | | |
| Other comprehensive income (loss) before reclassifications | 326,396 | | | 82,876 | | | (232,652) | |
| Reclassification of (gains) losses from AOCI to Interest Expense | (4,287) | | | 75,358 | | | 49,435 | |
Unconsolidated Fund's derivatives (our share)(2): | | | | | |
| Other comprehensive income (loss) before reclassifications | 3,780 | | | 569 | | | (410) | |
| Reclassification of (gains) losses from AOCI to Income from unconsolidated Fund | (341) | | | 120 | | | 106 | |
| Net current period OCI | 325,548 | | | 158,923 | | | (183,521) | |
| OCI attributable to noncontrolling interests | (99,711) | | | (49,662) | | | 52,948 | |
| OCI attributable to common stockholders | 225,837 | | | 109,261 | | | (130,573) | |
| | | | | |
| Accumulated Other Comprehensive Income (Loss) - Ending balance | $ | 187,063 | | | $ | (38,774) | | | $ | (148,035) | |
| |
(1) | See Note 10 for the details of our derivatives and Note 14See Note 10 for the details of our derivatives and Note 14 for our derivative fair value disclosures.
|
| |
(2) | We calculate our share by multiplying the total amount for each Fund by our equity interest in the respective Fund. |
(2)We calculate our share by multiplying the total amount for our Fund by our equity interest in the Fund. For more information about our Fund, including our equity interest percentage, see Note 6.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Dividends (unaudited)
Our common stock dividends paid during 20192022 are classified for federal income tax purposes as follows:
|
| | | | | | | | | | | | | | | | | | |
| Record Date | | Paid Date | | Dividend Per Share | | Ordinary Income % | | Capital Gain % | | Return of Capital % | | Section 199A Dividend % |
| | | | | | | | | | | | | |
| 12/31/2018 | | 1/15/2019 | | $ | 0.26 |
| | 51.8 | % | | — | % | | 48.2 | % | | 51.8 | % |
| 3/29/2019 | | 4/16/2019 | | 0.26 |
| | 51.8 | % | | — | % | | 48.2 | % | | 51.8 | % |
| 6/28/2019 | | 7/12/2019 | | 0.26 |
| | 51.8 | % | | — | % | | 48.2 | % | | 51.8 | % |
| 9/30/2019 | | 10/16/2019 | | 0.26 |
| | 51.8 | % | | — | % | | 48.2 | % | | 51.8 | % |
| Total / Weighted Average | | $ | 1.04 |
| | 51.8 | % | | — | % | | 48.2 | % | | 51.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Record Date | | Paid Date | | Dividend Per Share | | Ordinary Income % | | Capital Gain % | | Return of Capital % | | Section 199A Dividend % |
| | | | | | | | | | | | |
| 12/31/2021 | | 1/19/2022 | | $ | 0.28 | | | 44.5 | % | | — | % | | 55.5 | % | | 44.5 | % |
| 3/31/2022 | | 4/19/2022 | | 0.28 | | | 44.5 | % | | — | % | | 55.5 | % | | 44.5 | % |
| 6/30/2022 | | 7/15/2022 | | 0.28 | | | 44.5 | % | | — | % | | 55.5 | % | | 44.5 | % |
| 9/30/2022 | | 10/18/2022 | | 0.28 | | | 44.5 | % | | — | % | | 55.5 | % | | 44.5 | % |
| Total / Weighted Average | | $ | 1.12 | | | 44.5 | % | | — | % | | 55.5 | % | | 44.5 | % |
12. EPS
The table below presents the calculation of basic and diluted EPS:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Numerator (In thousands): | | | | | |
| Net income attributable to common stockholders | $ | 363,713 |
| | $ | 116,086 |
| | $ | 94,443 |
|
| Allocation to participating securities: Unvested LTIP Units | (1,594 | ) | | (546 | ) | | (626 | ) |
| Net income attributable to common stockholders - basic and diluted | $ | 362,119 |
| | $ | 115,540 |
| | $ | 93,817 |
|
| | | | | | |
| Denominator (In thousands): | | | | | |
| Weighted average shares of common stock outstanding - basic | 173,358 |
| | 169,893 |
| | 160,905 |
|
Effect of dilutive securities: Stock options(1) | — |
| | 9 |
| | 325 |
|
| Weighted average shares of common stock and common stock equivalents outstanding - diluted | 173,358 |
| | 169,902 |
| | 161,230 |
|
| | | | | | |
| Net income per common share - basic | $ | 2.09 |
| | $ | 0.68 |
| | $ | 0.58 |
|
| | | | | | |
| Net income per common share - diluted | $ | 2.09 |
| | $ | 0.68 |
| | $ | 0.58 |
|
| |
(1) | There were no outstanding options during the year ended December 31, 2019. Outstanding OP Units and vested LTIP Units are not included in the denominator in calculating diluted EPS, even though they may be exchanged under certain conditions for common stock on a one-for-one basis, because their associated net income (equal on a per unit basis to the Net income per common share - diluted) was already deducted in calculating Net income attributable to common stockholders. Accordingly, any exchange would not have any effect on diluted EPS. The following table presents the OP Units and vested LTIP Units outstanding for the respective periods: |
|
| | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
| OP Units | 26,465 |
| | 26,661 |
| | 24,810 |
|
| Vested LTIP Units | 1,652 |
| | 813 |
| | 274 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Numerator (In thousands): | | | | | |
| Net income attributable to common stockholders | $ | 97,145 | | | $ | 65,267 | | | $ | 50,421 | |
| Allocation to participating securities: Unvested LTIP Units | (912) | | | (876) | | | (830) | |
| Net income attributable to common stockholders - basic and diluted | $ | 96,233 | | | $ | 64,391 | | | $ | 49,591 | |
| | | | | |
| Denominator (In thousands): | | | | | |
| | | | | |
| | | | | |
Weighted average shares of common stock outstanding - basic and diluted(1) | 175,756 | | | 175,478 | | | 175,380 | |
| | | | | |
| Net income per common share - basic and diluted | $ | 0.55 | | | $ | 0.37 | | | $ | 0.28 | |
| | | | | |
| | | | | |
(1) Outstanding OP Units and vested LTIP Units are not included in the denominator in calculating diluted EPS, even though they may be exchanged under certain conditions for common stock on a one-for-one basis, because their associated net income (equal on a per unit basis to the Net income per common share - diluted) was already deducted in calculating Net income attributable to common stockholders. Accordingly, any exchange would not have any effect on diluted EPS. The table below presents the weighted average OP Units and vested LTIP Units outstanding for the respective periods:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| OP Units | 29,756 | | | 28,643 | | | 28,288 | |
| Vested LTIP Units | 1,120 | | | 1,439 | | | 815 | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
13. Stock-Based Compensation
2016 Omnibus Stock Incentive Plan
Plan description
The Douglas Emmett, Inc. 2016 Omnibus Stock Incentive Plan, as amended, our stock incentive plan (our "2016 Plan"), permits us to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights and other stock-based awards. On May 28, 2020, our stockholders approved an amendment to the 2016 Plan to, among other things, increase the number of common shares for future awards by 9.5 million. We had an aggregate of 1.82.3 million shares available for grant as of December 31, 2019.2022. Awards such as LTIP Units, deferred stock and restricted stock, which deliver the full value of the underlying shares, are counted against the Plan limits as 2two shares. Awards such as stock options and stock appreciation rights are counted as 1one share. The number of shares reserved under our 2016 Plan is also subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Shares of stock underlying any awards that are forfeited, canceled or otherwise terminated (other than by exercise) are added back to the shares of stock available for future issuance under the 2016 Plan. For options exercised, our policy is to issue common stock on a net settlement basis - net of the exercise price and related taxes.
Until it expired in 2016, we made grants under our 2006 Omnibus Stock Incentive Plan (our "2006 Plan"), which was substantially similar to our 2016 Plan. No further awards may be granted under our 2006 Plan, although awards granted under the 2006 Plan in the past and which are still outstanding will continue to be governed by the terms of our 2006 Plan.
Our 2016 and 2006 Plans (the "Plans") arePlan is administered by the compensation committee of our board of directors. The compensation committee may interpret our PlansPlan and make all determinations necessary or desirable for the administration of our Plans.Plan. The committee has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of our 2016 Plan. All officers, employees, directors and other key personnel (including consultants and prospective employees) are eligible to participate in our 2016 Plan.
LTIP Units
We have made certain awards in the form of a separate series of units of limited partnership interests in our Operating Partnership called LTIP Units, which can be granted either as free-standing awards or in tandem with other awards under our 2016 Plan. Our LTIP Units are valued by reference to the value of our common stock at the time of grant, and are subject to such conditions and restrictions as the compensation committee may determine, including continued employment or service, and/or achievement of pre-established performance goals, financial metrics and other objectives. Once vested, LTIP Units can generally be converted to OP Units on a one for one basis, provided our stock price increases by more than a specified hurdle.
Employee Awards
We grant stock-based compensation in the form of LTIP Units as a part of our annual incentive compensation to various employees each year, a portion which vests at the date of grant, and the remainder which vests in 3three equal annual installments over the 3three calendar years following the grant date. Compensation expense for LTIP Units which are not vested at the grant date is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. We have also made long-term grants in the form of LTIP Units to certain employees, which generally vest in equal annual installments over four to five calendar years following the grant date, and some of these grants include a portion which vests at the date of grant. In aggregate, we granted 802 thousand, 898 thousand2.2 million, 1.1 million, and 800 thousand1.1 million LTIP Units to employees during 2019, 20182022, 2021 and 2017,2020, respectively.
Non-Employee Director Awards
As annual fees for their services, each of our non-employee directors receives a grant of LTIP Units that vests on a quarterly basis during the year the services are rendered, which is the calendar year following the grant date. WeIn aggregate, we granted 38134 thousand, 3752 thousand, and 2855 thousand LTIP Units to our non-employee directors during 2019, 20182022, 2021 and 2017,2020, respectively.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Compensation Expense
See Note 2 regarding our accounting policy for stock based compensation. At December 31, 2019,2022, the total unrecognized stock-based compensation expense for unvested LTIP Unit awards was $22.0$19.2 million, which will be recognized over a weighted-average term of two2 years. The table below presents our stock-based compensation expense:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
| Stock-based compensation expense, net | $ | 18,359 |
| | $ | 22,299 |
| | $ | 18,478 |
|
| Capitalized stock-based compensation | $ | 4,698 |
| | $ | 5,006 |
| | $ | 2,537 |
|
| Intrinsic value of options exercised | $ | — |
| | $ | 1,196 |
| | $ | 102,963 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| Stock-based compensation expense, net | $ | 21,025 | | | $ | 20,887 | | | $ | 21,365 | |
| Capitalized stock-based compensation | $ | 5,479 | | | $ | 6,183 | | | $ | 5,448 | |
Stock-Based Award Activity
The table below presents our outstanding stock options activity(1):
|
| | | | | | | | | | | | | | | | | |
| Fully Vested Stock Options: | | Number of Stock Options (Thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Contract Life (Months) | | Total Intrinsic Value (Thousands) | | Intrinsic Value of Options Exercised (Thousands) |
| | | | | | | | | | | |
| Outstanding at December 31, 2016 | | 3,969 |
| | $ | 12.43 |
| | 27 | | $ | 95,770 |
| | |
| Exercised | | (3,920 | ) | | $ | 12.43 |
| | | | | | $ | 102,963 |
|
| Outstanding at December 31, 2017 | | 49 |
| | $ | 12.66 |
| | 16 | | $ | 1,375 |
| | |
| Exercised | | (49 | ) | | $ | 12.66 |
| | | | | | $ | 1,196 |
|
| Outstanding at December 31, 2018 | | — |
| | $ | — |
| | 0 | | $ | — |
| | |
| | | | | | | | | | | |
(1) There were 0 outstanding options during the year ended December 31, 2019
The table below presents our unvested LTIP Units activity:
|
| | | | | | | | | | | |
| Unvested LTIP Units: | | Number of Units (Thousands) | | Weighted Average Grant Date Fair Value | | Grant Date Fair Value (Thousands) |
| | | | | | | |
| Outstanding at December 31, 2016 | | 1,040 |
| | $ | 23.46 |
| | |
| Granted | | 828 |
| | $ | 29.89 |
| | $ | 24,745 |
|
| Vested | | (807 | ) | | $ | 25.40 |
| | $ | 20,497 |
|
| Forfeited | | (5 | ) | | $ | 31.36 |
| | $ | 172 |
|
| Outstanding at December 31, 2017 | | 1,056 |
| | $ | 26.98 |
| | |
| Granted | | 935 |
| | $ | 27.01 |
| | $ | 25,247 |
|
| Vested | | (1,036 | ) | | $ | 25.82 |
| | $ | 26,740 |
|
| Forfeited | | (10 | ) | | $ | 34.18 |
| | $ | 333 |
|
| Outstanding at December 31, 2018 | | 945 |
| | $ | 28.20 |
| | |
| Granted | | 840 |
| | $ | 31.92 |
| | $ | 26,821 |
|
| Vested | | (826 | ) | | $ | 29.13 |
| | $ | 24,061 |
|
| Forfeited | | (35 | ) | | $ | 35.41 |
| | $ | 1,234 |
|
| Outstanding at December 31, 2019 | | 924 |
| | $ | 30.48 |
| | |
| | | | | | | | | | | | | | | | | | | | |
| Unvested LTIP Units: | | Number of Units (Thousands) | | Weighted Average Grant Date Fair Value | | Grant Date Fair Value (Thousands) |
| | | | | | |
| Outstanding at December 31, 2019 | | 924 | | | $ | 30.48 | | | |
| Granted | | 1,190 | | | $ | 21.12 | | | $ | 25,175 | |
| Vested | | (1,073) | | | $ | 24.58 | | | $ | 26,369 | |
| Forfeited | | (57) | | | $ | 28.20 | | | $ | 1,623 | |
| Outstanding at December 31, 2020 | | 984 | | | $ | 25.71 | | | |
| Granted | | 1,121 | | | $ | 24.64 | | | $ | 27,631 | |
| Vested | | (1,073) | | | $ | 25.05 | | | $ | 26,871 | |
| Forfeited | | (17) | | | $ | 28.69 | | | $ | 501 | |
| Outstanding at December 31, 2021 | | 1,015 | | | $ | 25.17 | | | |
| Granted | | 2,310 | | | $ | 11.69 | | | $ | 26,987 | |
| Vested | | (1,705) | | | $ | 15.72 | | | $ | 26,794 | |
| Forfeited | | (20) | | | $ | 29.20 | | | $ | 587 | |
| Outstanding at December 31, 2022 | | 1,600 | | | $ | 15.73 | | | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
14. Fair Value of Financial Instruments
Our estimates of the fair value of financial instruments were determined using available market information and widely used valuation methods. Considerable judgment is necessary to interpret market data and determine an estimated fair value. The use of different market assumptions or valuation methods may have a material effect on the estimated fair values. The FASB fair value framework hierarchy distinguishes between assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market-based inputs. The hierarchy is as follows:
Level 1 - inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - inputs are observable either directly or indirectly for similar assets and liabilities in active markets.
Level 3 - inputs are unobservable assumptions generated by the reporting entityentity.
As of December 31, 2019,2022, we did not have any fair value estimates of financial instruments using Level 3 inputs.
Financial instruments disclosed at fair value
Short term financial instruments:instruments
The carrying amounts for cash and cash equivalents, tenant receivables, revolving credit line, interest payable, accounts payable, security deposits and dividends payable approximate fair value because of the short-term nature of these instruments.
Secured notes payable:payable
See Note 8 for the details of our secured notes payable. We estimate the fair value of our consolidated secured notes payable by calculating the credit-adjusted present value of the principal and interest payments for each secured note payable. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs, assumes that the loans will be outstanding through maturity, and excludesincludes any maturity extension options. The table below presents the estimated fair value and carrying value of our secured notes payable (excluding our revolving credit facility), the carrying value includes unamortized loan premium and excludes unamortized deferred loan fees:
|
| | | | | | | | |
| (In thousands) | | December 31, 2019 | | December 31, 2018 |
| | | | | |
| Fair value | | $ | 4,678,623 |
| | $ | 4,087,979 |
|
| Carrying value | | $ | 4,653,264 |
| | $ | 4,062,968 |
|
| | | | | | | | | | | | | | |
| (In thousands) | | December 31, 2022 | | December 31, 2021 |
| | | | |
| Fair value | | $ | 5,115,548 | | | $ | 5,017,494 | |
| Carrying value | | $ | 5,224,449 | | | $ | 5,050,732 | |
Ground lease liability:liability
See Note 4 for the details of our ground lease. We estimate the fair value of our ground lease liability by calculating the present value of the future lease payments disclosed in Note 4 using our incremental borrowing rate. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs. The table below presents the estimated fair value and carrying value of our ground lease liability:
|
| | | |
| (In thousands) | December 31, 2019 |
| | |
| Fair value | $ | 12,218 |
|
| Carrying value | $ | 10,882 |
|
| | | | | | | | | | | | | | |
| (In thousands) | | December 31, 2022 | | December 31, 2021 |
| | | | |
| Fair value | | $ | 4,466 | | | $ | 8,861 | |
| Carrying value | | $ | 10,848 | | | $ | 10,860 | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Financial instruments measured at fair value
Derivative instruments
Derivative instruments:
See Note 10 for the details of our derivatives. We present our derivatives on theour consolidated balance sheetsheets at fair value, on a gross basis, excluding accrued interest. We estimate the fair value of our derivative instruments by calculating the credit-adjusted present value of the expected future cash flows of each derivative. The calculation incorporates the contractual terms of the derivatives, observable market interest rates which we consider to be Level 2 inputs, and credit risk adjustments to reflect the counterparty's as well as our own nonperformance risk. Our derivatives are not subject to master netting arrangements. See Note 2 for our accounting policy for derivative instruments regarding the impact of the changes in fair value measurements on our financial statements.
The table below presents the estimated fair value of our derivatives:
| | | (In thousands) | December 31, 2019 | | December 31, 2018 | (In thousands) | | December 31, 2022 | | December 31, 2021 |
| Derivative Assets: | | | | Derivative Assets: | | | | |
Fair value - consolidated derivatives(1) | $ | 22,381 |
| | $ | 73,414 |
| Fair value - consolidated derivatives(1) | | $ | 270,234 | | | $ | 15,473 | |
Fair value - unconsolidated Funds' derivatives(2) | $ | 889 |
| | $ | 12,228 |
| |
Fair value - unconsolidated Fund's derivatives(2) | | Fair value - unconsolidated Fund's derivatives(2) | | $ | 12,426 | | | $ | 1,963 | |
| | | | | |
| Derivative Liabilities: | | | | Derivative Liabilities: | |
Fair value - consolidated derivatives(1) | $ | 54,616 |
| | $ | 1,530 |
| Fair value - consolidated derivatives(1) | | $ | 1,790 | | | $ | 69,930 | |
Fair value - unconsolidated Funds' derivatives(2) | $ | — |
| | $ | — |
| |
Fair value - unconsolidated Fund's derivatives(2) | | Fair value - unconsolidated Fund's derivatives(2) | | $ | — | | | $ | — | |
| |
(1) | Consolidated derivatives, which include 100%, not our pro-rata share, of our consolidated JVs' derivatives, are included in interest rate contracts in our consolidated balance sheets. The fair values exclude accrued interest which is included in interest payable in the consolidated balance sheets. |
| |
(2) | (1) Consolidated derivatives, which include 100%, not our pro-rata share, of our consolidated JVs' derivatives, are included in interest rate contracts on our consolidated balance sheets. The fair values exclude accrued interest which is included in interest payable on our consolidated balance sheets. (2) The amounts reflect 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. Our pro-rata share of the amounts related to the unconsolidated Fund's derivatives is included in our Investment in unconsolidated Fund on our consolidated balance sheets. Our unconsolidated Fund did not have any derivatives in a liability position for the periods presented. See Note 6 for more information about our Fund, including our equity interest percentage, and see "Guarantees" in Note 17 regarding our Fund's derivatives. Reflects 100%, not our pro-rata share, of our unconsolidated Funds' derivatives. Our pro-rata share of the amounts related to the unconsolidated Funds' derivatives is included in our Investment in unconsolidated Funds in our consolidated balance sheets. See Note 17 regarding our unconsolidated Funds debt and derivatives. Our unconsolidated Funds' did not have any derivatives in a liability position for the periods presented.
|
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
15. Segment Reporting
Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate in 2two business segments: (i) the acquisition, development, ownership and management of office real estate and (ii) the acquisition, development, ownership and management of multifamily real estate. The services for our office segment primarily include rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses and interest expense are not included in segment profit as our internal reporting addresses these items on a corporate level.
The table below presents the operating activity of our reportable segments:
|
| | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Office Segment | | | | | |
| Total office revenues | $ | 816,755 |
| | $ | 777,931 |
| | $ | 715,546 |
|
| Office expenses | (264,482 | ) | | (252,751 | ) | | (233,633 | ) |
| Office segment profit | 552,273 |
| | 525,180 |
| | 481,913 |
|
| | | | | | |
| Multifamily Segment | | | | | |
| Total multifamily revenues | 119,927 |
| | 103,385 |
| | 96,506 |
|
| Multifamily expenses | (33,681 | ) | | (28,116 | ) | | (24,401 | ) |
| Multifamily segment profit | 86,246 |
| | 75,269 |
| | 72,105 |
|
| | | | | | |
| Total profit from all segments | $ | 638,519 |
| | $ | 600,449 |
| | $ | 554,018 |
|
| | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Office Segment | | | | | |
| Total office revenues | $ | 824,573 | | | $ | 786,870 | | | $ | 771,169 | |
| Office expenses | (284,522) | | | (265,376) | | | (268,259) | |
| Office segment profit | 540,051 | | | 521,494 | | | 502,910 | |
| | | | | |
| Multifamily Segment | | | | | |
| Total multifamily revenues | 169,079 | | | 131,527 | | | 120,354 | |
| Multifamily expenses | (49,299) | | | (38,025) | | | (37,154) | |
| Multifamily segment profit | 119,780 | | | 93,502 | | | 83,200 | |
| | | | | |
| Total profit from all segments | $ | 659,831 | | | $ | 614,996 | | | $ | 586,110 | |
The table below presents a reconciliation of the total profit from all segments to net income attributable to common stockholders:
|
| | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
| Total profit from all segments | $ | 638,519 |
| | $ | 600,449 |
| | $ | 554,018 |
|
| General and administrative expenses | (38,068 | ) | | (38,641 | ) | | (36,234 | ) |
| Depreciation and amortization | (357,743 | ) | | (309,864 | ) | | (276,761 | ) |
| Other income | 11,653 |
| | 11,414 |
| | 9,712 |
|
| Other expenses | (7,216 | ) | | (7,744 | ) | | (7,037 | ) |
| Income from unconsolidated Funds | 6,923 |
| | 6,400 |
| | 5,905 |
|
| Interest expense | (143,308 | ) | | (133,402 | ) | | (145,176 | ) |
| Gain from consolidation of JV | 307,938 |
| | — |
| | — |
|
| Net income | 418,698 |
| | 128,612 |
| | 104,427 |
|
| Less: Net income attributable to noncontrolling interests | (54,985 | ) | | (12,526 | ) | | (9,984 | ) |
| Net income attributable to common stockholders | $ | 363,713 |
| | $ | 116,086 |
| | $ | 94,443 |
|
| | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Total profit from all segments | $ | 659,831 | | | $ | 614,996 | | | $ | 586,110 | |
| General and administrative expenses | (45,405) | | | (42,554) | | | (39,601) | |
| Depreciation and amortization | (372,798) | | | (371,289) | | | (385,248) | |
| Other income | 4,587 | | | 2,465 | | | 16,288 | |
| Other expenses | (714) | | | (937) | | | (2,947) | |
| Income from unconsolidated Fund | 1,224 | | | 946 | | | 430 | |
| Interest expense | (150,185) | | | (147,496) | | | (142,872) | |
| | | | | |
| Gain on sale of investment in real estate | — | | | — | | | 6,393 | |
| | | | | |
| Net income | 96,540 | | | 56,131 | | | 38,553 | |
| Net loss attributable to noncontrolling interests | 605 | | | 9,136 | | | 11,868 | |
| Net income attributable to common stockholders | $ | 97,145 | | | $ | 65,267 | | | $ | 50,421 | |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
16. Future Minimum Lease Rental Receipts
We lease space to tenants primarily under non-cancelable operating leases that generally contain provisions for a base rent plus reimbursement of certain operating expenses, and we own fee interests in 2two parcels of land from which we receive rent under ground leases. The table below presents the future minimum base rentals on our non-cancelable office tenant and ground leases for our consolidated properties at December 31, 2019:2022:
|
| | | |
| Year Ending December 31, | (In thousands) |
| | |
| 2020 | $ | 658,016 |
|
| 2021 | 572,372 |
|
| 2022 | 484,611 |
|
| 2023 | 384,866 |
|
| 2024 | 294,137 |
|
| Thereafter | 691,145 |
|
Total future minimum base rentals(1) | $ | 3,085,147 |
|
| | | | | |
| Year ending December 31: | (In thousands) |
| |
| 2023 | $ | 622,166 | |
| 2024 | 534,721 | |
| 2025 | 432,079 | |
| 2026 | 332,733 | |
| 2027 | 253,997 | |
| Thereafter | 714,360 | |
Total future minimum base rentals(1) | $ | 2,890,056 | |
| |
(1) | (1) Does not include (i) residential leases, which typically have a term of one year or less, (ii) holdover rent, (ii) other types of rent such as storage and antenna rent, (iv) tenant reimbursements, (v) straight line rent, (vi) amortization/accretion of acquired above/below-market lease intangibles and (vii) percentage rents. The amounts assume that early termination options held by tenants are not include (i) residential leases, which typically have a term of one year or less, (ii) holdover rent, (iii) other types of rent such as storage and antenna rent, (iv) tenant reimbursements, (v) straight line rent, (vi) amortization/accretion of acquired above/below-market lease intangibles, and (vii) percentage rents. The amounts assume that early termination options held by tenants will not be exercised. |
17. Commitments, Contingencies and Guarantees
Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results of operations.
Concentration of Risk
Tenant Receivables
We are subject to credit risk with respect to our tenant receivables and deferred rent receivables related to our tenant leases. Our tenants' ability to honor the terms of their respective leases remains dependent upon economic, regulatory and social factors. We seek to minimize our credit risk from our tenant leases byby: (i) targeting smaller, more affluent office tenants, from a diverse mix of industries, (ii) performing credit evaluations of prospective tenants, and (iii) obtaining security deposits or letters of credit from our tenants. In 2019, 2018During 2022, 2021 and 2017,2020, no tenant accounted for more than 10% of our total revenues. See our "Rental Revenues and Tenant Recoveries" accounting policy inNote 2 for the details of our allowancescharges to revenue for uncollectible amounts for tenant receivables and deferred rent receivables.
Geographic Risk
All of our properties, including the properties of our consolidated JVs and our unconsolidated Fund,Fund's properties, are located in Los Angeles County, California and Honolulu, Hawaii, and we are therefore susceptible to adverse economic and regulatory developments, as well as natural disasters, in those markets.
Derivative Counterparty Credit Risk
We are subject to credit risk with respect to our interest rate swap counterparties that we use to manage the risk associated with our floating rate debt.derivative counterparties. We do not post or receive collateral with respect to our swapderivative transactions. Our derivative contracts do not provide for right of offset between derivative contracts. See Note 10 for the details of our interest ratederivative contracts. We seek to minimize our credit risk by entering into agreements with a variety of high quality counterparties with investment grade ratings.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Cash Balances
We have significant cash balances invested in a variety of short-term money market funds that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments are not insured against loss of principal and there is no guarantee that our investments in these funds will be redeemable at par value. We also have significant cash balances in bank accounts with high quality financial institutions with investment grade ratings. Interest bearing bank accounts at each U.S. banking institution are insured by the FDIC up to $250 thousand.
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Asset Retirement Obligations
Conditional asset retirement obligations represent a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within our control. A liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. Environmental site assessments have identified NaNthirty-three buildings in our Consolidated Portfolio which contain asbestos, and would have to be removed in compliance with applicable environmental regulations if these properties are demolished or undergo major renovations.
As of December 31, 2019,2022, the obligations to remove the asbestos from properties which are currently undergoing major renovations, or that we plan to renovate in the future, are not material to our consolidated financial statements. As of December 31, 2019,2022, the obligations to remove the asbestos from our other properties have indeterminable settlement dates, and we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligations.
Contractual Commitments
Development and Other ContractsProjects
In West Los Angeles, we are building a high-rise apartment building with 376 apartments. We expect construction to take about three years. In downtown Honolulu, at 1132 Bishop Street, we are converting a 25 story, 490,000493,000 square foot office tower into approximately 500 apartments. We expect the conversion to occur493 apartments in phases over a number of years as the office space is vacated. As of December 31, 2019,2022, we had an aggregate remaining contractual commitment for thesethis development project and other development projects of approximately $233.3$42.5 million.
Other Contractual Commitments
As of December 31, 2019,2022, we had an aggregate remaining contractual commitment for repositionings, capital expenditure projects and tenant improvements of approximately $24.6$26.5 million.
Guarantees
Unconsolidated Fund Guarantees
Our unconsolidated Fund, Partnership X, has a $115.0 million floating-rate term loan that matures on September 14, 2028. Starting on October 1, 2021, the loan carries interest at LIBOR + 1.35% (with a zero-percent LIBOR floor), which has been effectively fixed at 2.19% until October 1, 2026 with interest rate swaps (which do not have zero-percent LIBOR floors). The loan is secured by two properties held by Partnership X and is non-recourse.
We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve- outscarve-outs for our unconsolidated Fund's debt. WePartnership X's loan, and we have also guaranteed the related swap. Our Fundswaps. Partnership X has agreed to indemnify us for any amounts that we would be required to pay under these agreements. As of December 31, 2019,2022, assuming that LIBOR does not decrease below zero-percent, the maximum future interest payments for the swaps were $3.7 million.
As of December 31, 2022, all of the obligations under the related debtloan and swap agreements have been performed in accordance with the terms of those agreements. The table below summarizes our Fund's debt as of December 31, 2019. The amounts represent 100% (not our pro-rata share) of the amounts related to our Funds:See Note 6 for more information regarding Partnership X.
|
| | | | | | | | | | | | |
Fund(1) | | Loan Maturity Date | | Principal Balance (In thousands) | | Variable Interest Rate | | Swap Fixed Interest Rate | | Swap Maturity Date |
| | | | | | | | | | | |
Partnership X(2)(3) | | 3/1/2023 | | $ | 110,000 |
| | LIBOR + 1.40% | | 2.30% | | 3/1/2021 |
| | | | | | | | | | | |
| |
(1) | See Note 6 for more information regarding our unconsolidated Fund. |
| |
(2) | Floating rate term loan, swapped to fixed, which is secured by 2 properties and requires monthly payments of interest only, with the outstanding principal due upon maturity. As of December 31, 2019, assuming a 0-percent LIBOR interest rate during the remaining life of the swap, the maximum future payments under the swap agreement were $1.2 million. |
| |
(3) | Loan agreement includes a 0-percent LIBOR floor. The corresponding swap does not include such a floor. |
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
18. Quarterly Financial Information (unaudited)
The tables below present selected quarterly information for 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands, except per share amounts) | March 31,
2019 | | June 30, 2019 | | September 30, 2019 | | December 31, 2019 |
| | | | | | | | |
| Total revenue | $ | 224,186 |
| | $ | 230,534 |
| | $ | 238,069 |
| | $ | 243,893 |
|
| Net income before noncontrolling interests | $ | 32,788 |
| | $ | 39,860 |
| | $ | 23,421 |
| | $ | 322,629 |
|
| Net income attributable to common stockholders | $ | 28,701 |
| | $ | 33,966 |
| | $ | 22,488 |
| | $ | 278,558 |
|
| Net income per common share - basic | $ | 0.17 |
| | $ | 0.20 |
| | $ | 0.13 |
| | $ | 1.58 |
|
| Net income per common share - diluted | $ | 0.17 |
| | $ | 0.20 |
| | $ | 0.13 |
| | $ | 1.58 |
|
| Weighted average shares of common stock outstanding - basic | 170,221 |
| | 172,498 |
| | 175,278 |
| | 175,356 |
|
| Weighted average shares of common stock and common stock equivalents outstanding - diluted | 170,221 |
| | 172,498 |
| | 175,278 |
| | 175,356 |
|
| | | | | | | | |
| | Three Months Ended |
| (In thousands, except per share amounts) | March 31,
2018 | | June 30, 2018 | | September 30, 2018 | | December 31, 2018 |
| | | | | | | | |
| Total revenue | $ | 212,247 |
| | $ | 219,469 |
| | $ | 223,308 |
| | $ | 226,292 |
|
| Net income before noncontrolling interests | $ | 32,631 |
| | $ | 37,033 |
| | $ | 35,416 |
| | $ | 23,532 |
|
| Net income attributable to common stockholders | $ | 28,206 |
| | $ | 31,684 |
| | $ | 30,561 |
| | $ | 25,635 |
|
| Net income per common share - basic | $ | 0.17 |
| | $ | 0.19 |
| | $ | 0.18 |
| | $ | 0.15 |
|
| Net income per common share - diluted | $ | 0.17 |
| | $ | 0.19 |
| | $ | 0.18 |
| | $ | 0.15 |
|
| Weighted average shares of common stock outstanding - basic | 169,601 |
| | 169,916 |
| | 169,926 |
| | 170,121 |
|
| Weighted average shares of common stock and common stock equivalents outstanding - diluted | 169,625 |
| | 169,926 |
| | 169,931 |
| | 170,121 |
|
19. Subsequent Events
In January 2020, there was a fire in one of our buildings at our Barrington Plaza apartment property. We carry comprehensive liability and property insurance covering all of the properties in our portfolio under blanket insurance policies and we do not currently expect the event to have a material impact on our financial position and results of operations.
Douglas Emmett, Inc.
Schedule III - Consolidated Real Estate and Accumulated Depreciation and Amortization
As of December 31, 20192022
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost | | Cost Capitalized Subsequent to Acquisition | | Gross Carrying Amount | | | | | | |
| Property Name | | Encumb-rances | | Land | | Building & Improve-ments(2) | | Improve-ments(2)(3) | | Land | | Building & Improve-ments(2)(3) | | Total(4) | | Accumulated Depreciation & Amortization(3) (5) | | Year Built / Renovated | | Year Acquired |
| Office Properties |
| 100 Wilshire | | $ | 252,034 | | | $ | 12,769 | | | $ | 78,447 | | | $ | 155,949 | | | $ | 27,108 | | | $ | 220,057 | | | $ | 247,165 | | | $ | 90,389 | | | 1968/2002/2019 | | 1999 |
| 233 Wilshire | | 62,962 | | | 9,263 | | | 130,426 | | | 3,555 | | | 9,263 | | | 133,981 | | | 143,244 | | | 24,162 | | | 1975/2008-2009 | | 2016 |
| 401 Wilshire | | — | | | 9,989 | | | 29,187 | | | 136,696 | | | 21,787 | | | 154,085 | | | 175,872 | | | 63,751 | | | 1981/2000/2020 | | 1996 |
| 429 Santa Monica | | 33,691 | | | 4,949 | | | 72,534 | | | 3,760 | | | 4,949 | | | 76,294 | | | 81,243 | | | 13,176 | | | 1982/2016 | | 2017 |
| 1132 Bishop Place | | — | | | 8,317 | | | 105,651 | | | (49,831) | | | 8,833 | | | 55,304 | | | 64,137 | | | 31,687 | | | 1992 | | 2004 |
| 1299 Ocean | | 124,699 | | | 22,748 | | | 265,198 | | | 20,377 | | | 22,748 | | | 285,575 | | | 308,323 | | | 46,519 | | | 1980/2006/2020 | | 2017 |
| 1901 Avenue of the Stars | | 193,502 | | | 18,514 | | | 131,752 | | | 117,319 | | | 26,163 | | | 241,422 | | | 267,585 | | | 104,252 | | | 1968/2001 | | 2001 |
| 2001 Wilshire | | 37,411 | | | 5,711 | | | 81,622 | | | 4,034 | | | 5,711 | | | 85,656 | | | 91,367 | | | 8,765 | | | 1980/2013 | | 2008 |
| 8383 Wilshire | | 175,314 | | | 18,004 | | | 328,118 | | | 5,424 | | | 18,005 | | | 333,541 | | | 351,546 | | | 35,160 | | | 1971/2009 | | 2008 |
| 8484 Wilshire(1) | | — | | | 8,846 | | | 77,780 | | | 15,656 | | | 8,846 | | | 93,436 | | | 102,282 | | | 29,586 | | | 1972/2013 | | 2013 |
| 9100 Wilshire | | 142,264 | | | 13,455 | | | 258,329 | | | 6,784 | | | 13,455 | | | 265,113 | | | 278,568 | | | 27,120 | | | 1971/2016 | | 2008 |
| 9401 Wilshire | | 28,502 | | | 6,740 | | | 152,310 | | | 16,462 | | | 6,740 | | | 168,772 | | | 175,512 | | | 26,602 | | | 1971/2020 | | 2017 |
| 9601 Wilshire | | — | | | 16,597 | | | 54,774 | | | 108,431 | | | 17,658 | | | 162,144 | | | 179,802 | | | 71,306 | | | 1962/2004 | | 2001 |
| 9665 Wilshire | | 77,445 | | | 5,568 | | | 177,072 | | | 23,637 | | | 5,568 | | | 200,709 | | | 206,277 | | | 31,973 | | | 1971/2020 | | 2017 |
| 10880 Wilshire | | 207,712 | | | 29,995 | | | 437,514 | | | 34,498 | | | 29,988 | | | 472,019 | | | 502,007 | | | 94,377 | | | 1970/2009/2020 | | 2016 |
| 10960 Wilshire | | 209,575 | | | 45,844 | | | 429,769 | | | 33,768 | | | 45,852 | | | 463,529 | | | 509,381 | | | 98,257 | | | 1971/2006 | | 2016 |
| 11777 San Vicente | | 44,412 | | | 5,032 | | | 15,768 | | | 29,485 | | | 6,714 | | | 43,571 | | | 50,285 | | | 19,499 | | | 1974/1998 | | 1999 |
| 12100 Wilshire | | 101,203 | | | 20,164 | | | 208,755 | | | 9,512 | | | 20,164 | | | 218,267 | | | 238,431 | | | 42,498 | | | 1985 | | 2016 |
| 12400 Wilshire | | — | | | 5,013 | | | 34,283 | | | 76,042 | | | 8,828 | | | 106,510 | | | 115,338 | | | 45,323 | | | 1985 | | 1996 |
| 15250 Ventura | | 22,369 | | | 2,130 | | | 48,908 | | | 1,956 | | | 2,130 | | | 50,864 | | | 52,994 | | | 5,544 | | | 1970/2012 | | 2008 |
| 16000 Ventura | | 37,971 | | | 1,936 | | | 89,531 | | | 2,216 | | | 1,936 | | | 91,747 | | | 93,683 | | | 9,705 | | | 1980/2011 | | 2008 |
| 16501 Ventura | | 42,944 | | | 6,759 | | | 53,112 | | | 13,083 | | | 6,759 | | | 66,195 | | | 72,954 | | | 19,516 | | | 1986/2012 | | 2013 |
| Beverly Hills Medical Center | | 46,180 | | | 4,955 | | | 27,766 | | | 30,501 | | | 6,435 | | | 56,787 | | | 63,222 | | | 24,931 | | | 1964/2004 | | 2004 |
| Bishop Square | | 200,000 | | | 16,273 | | | 213,793 | | | 50,268 | | | 16,273 | | | 264,061 | | | 280,334 | | | 90,495 | | | 1972/1983 | | 2010 |
| Brentwood Court | | — | | | 2,564 | | | 8,872 | | | 804 | | | 2,563 | | | 9,677 | | | 12,240 | | | 4,163 | | | 1984 | | 2006 |
| Brentwood Executive Plaza | | — | | | 3,255 | | | 9,654 | | | 34,222 | | | 5,921 | | | 41,210 | | | 47,131 | | | 18,106 | | | 1983/1996 | | 1995 |
| Brentwood Medical Plaza | | — | | | 5,934 | | | 27,836 | | | 2,133 | | | 5,933 | | | 29,970 | | | 35,903 | | | 13,329 | | | 1975 | | 2006 |
| Brentwood San Vicente Medical | | — | | | 5,557 | | | 16,457 | | | 2,575 | | | 5,557 | | | 19,032 | | | 24,589 | | | 7,943 | | | 1957/1985 | | 2006 |
| Brentwood/Saltair | | — | | | 4,468 | | | 11,615 | | | 11,425 | | | 4,775 | | | 22,733 | | | 27,508 | | | 10,496 | | | 1986 | | 2000 |
| Bundy/Olympic | | — | | | 4,201 | | | 11,860 | | | 28,861 | | | 6,030 | | | 38,892 | | | 44,922 | | | 16,915 | | | 1991/1998 | | 1994 |
| Camden Medical Arts | | 42,276 | | | 3,102 | | | 12,221 | | | 29,125 | | | 5,298 | | | 39,150 | | | 44,448 | | | 16,929 | | | 1972/1992 | | 1995 |
| Carthay Campus | | — | | | 6,595 | | | 70,454 | | | 5,156 | | | 6,594 | | | 75,611 | | | 82,205 | | | 20,689 | | | 1965/2008 | | 2014 |
| Century Park Plaza | | 173,000 | | | 10,275 | | | 70,761 | | | 140,910 | | | 16,153 | | | 205,793 | | | 221,946 | | | 80,946 | | | 1972/1987/2020 | | 1999 |
| Century Park West(1) | | — | | | 3,717 | | | 29,099 | | | 419 | | | 3,667 | | | 29,568 | | | 33,235 | | | 13,137 | | | 1971 | | 2007 |
| Columbus Center | | — | | | 2,096 | | | 10,396 | | | 9,592 | | | 2,333 | | | 19,751 | | | 22,084 | | | 8,572 | | | 1987 | | 2001 |
| Coral Plaza | | — | | | 4,028 | | | 15,019 | | | 19,159 | | | 5,366 | | | 32,840 | | | 38,206 | | | 14,465 | | | 1981 | | 1998 |
| Cornerstone Plaza(1) | | — | | | 8,245 | | | 80,633 | | | 5,538 | | | 8,263 | | | 86,153 | | | 94,416 | | | 35,151 | | | 1986 | | 2007 |
| Encino Gateway | | — | | | 8,475 | | | 48,525 | | | 54,788 | | | 15,653 | | | 96,135 | | | 111,788 | | | 42,330 | | | 1974/1998 | | 2000 |
| Encino Plaza | | — | | | 5,293 | | | 23,125 | | | 48,214 | | | 6,165 | | | 70,467 | | | 76,632 | | | 31,302 | | | 1971/1992 | | 2000 |
| Encino Terrace | | 105,565 | | | 12,535 | | | 59,554 | | | 102,406 | | | 15,533 | | | 158,962 | | | 174,495 | | | 67,774 | | | 1986 | | 1999 |
| Executive Tower(1) | | — | | | 6,660 | | | 32,045 | | | 58,220 | | | 9,471 | | | 87,454 | | | 96,925 | | | 38,025 | | | 1989 | | 1995 |
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost | | Cost Capitalized Subsequent to Acquisition | | Gross Carrying Amount | | | | | | |
| Property Name | | Encumb-rances | | Land | | Building & Improve-ments(2) | | Improve-ments(2)(3) | | Land | | Building & Improve-ments(2) | | Total(5) | | Accumulated Depreciation & Amortization | | Year Built / Renovated | | Year Acquired |
| Office Properties |
| 100 Wilshire | | $ | 252,034 |
| | $ | 12,769 |
| | $ | 78,447 |
| | $ | 151,175 |
| | $ | 27,108 |
| | $ | 215,283 |
| | $ | 242,391 |
| | $ | 73,429 |
| | 1968/2002/2019 | | 1999 |
| 233 Wilshire | | 62,962 |
| | 9,263 |
| | 130,426 |
| | 3,549 |
| | 9,263 |
| | 133,975 |
| | 143,238 |
| | 14,268 |
| | 1975/2008-2009 | | 2016 |
| 401 Wilshire | | — |
| | 9,989 |
| | 29,187 |
| | 129,932 |
| | 21,787 |
| | 147,321 |
| | 169,108 |
| | 47,259 |
| | 1981/2000/2019 | | 1996 |
| 429 Santa Monica | | 33,691 |
| | 4,949 |
| | 72,534 |
| | 3,086 |
| | 4,949 |
| | 75,620 |
| | 80,569 |
| | 6,978 |
| | 1982/2016 | | 2017 |
| 1132 Bishop Street | | — |
| | 8,317 |
| | 105,651 |
| | 55,172 |
| | 8,833 |
| | 160,307 |
| | 169,140 |
| | 87,669 |
| | 1992 | | 2004 |
| 1299 Ocean | | 124,699 |
| | 22,748 |
| | 265,198 |
| | 15,300 |
| | 22,748 |
| | 280,498 |
| | 303,246 |
| | 22,015 |
| | 1980/2006/2019 | | 2017 |
| 1901 Avenue of the Stars | | — |
| | 18,514 |
| | 131,752 |
| | 114,260 |
| | 26,163 |
| | 238,363 |
| | 264,526 |
| | 86,611 |
| | 1968/2001 | | 2001 |
2001 Wilshire(4) | | 36,000 |
| | 5,711 |
| | 81,622 |
| | 151 |
| | 5,711 |
| | 81,773 |
| | 87,484 |
| | 273 |
| | 1980/2013 | | 2008 |
8383 Wilshire(4) | | 138,000 |
| | 18,005 |
| | 328,118 |
| | 695 |
| | 18,005 |
| | 328,813 |
| | 346,818 |
| | 1,076 |
| | 1971/2009 | | 2008 |
8484 Wilshire(1) | | — |
| | 8,846 |
| | 77,780 |
| | 16,101 |
| | 8,846 |
| | 93,881 |
| | 102,727 |
| | 21,021 |
| | 1972/2013 | | 2013 |
9100 Wilshire(4) | | 115,000 |
| | 13,455 |
| | 258,329 |
| | 518 |
| | 13,455 |
| | 258,847 |
| | 272,302 |
| | 807 |
| | 1971/2016 | | 2008 |
| 9401 Wilshire | | 30,864 |
| | 6,740 |
| | 152,310 |
| | 12,743 |
| | 6,740 |
| | 165,053 |
| | 171,793 |
| | 10,617 |
| | 1971/2019 | | 2017 |
| 9601 Wilshire | | — |
| | 16,597 |
| | 54,774 |
| | 105,395 |
| | 17,658 |
| | 159,108 |
| | 176,766 |
| | 57,708 |
| | 1962/2004 | | 2001 |
| 9665 Wilshire | | 77,445 |
| | 5,568 |
| | 177,072 |
| | 18,550 |
| | 5,568 |
| | 195,622 |
| | 201,190 |
| | 12,887 |
| | 1971/2019 | | 2017 |
| 10880 Wilshire | | 198,794 |
| | 29,995 |
| | 437,514 |
| | 31,763 |
| | 29,988 |
| | 469,284 |
| | 499,272 |
| | 53,543 |
| | 1970/2009/2019 | | 2016 |
| 10960 Wilshire | | 201,893 |
| | 45,844 |
| | 429,769 |
| | 27,072 |
| | 45,852 |
| | 456,833 |
| | 502,685 |
| | 54,210 |
| | 1971/2006 | | 2016 |
| 11777 San Vicente | | 44,412 |
| | 5,032 |
| | 15,768 |
| | 29,600 |
| | 6,714 |
| | 43,686 |
| | 50,400 |
| | 16,119 |
| | 1974/1998 | | 1999 |
| 12100 Wilshire | | 101,203 |
| | 20,164 |
| | 208,755 |
| | 8,255 |
| | 20,164 |
| | 217,010 |
| | 237,174 |
| | 26,206 |
| | 1985 | | 2016 |
| 12400 Wilshire | | — |
| | 5,013 |
| | 34,283 |
| | 76,442 |
| | 8,828 |
| | 106,910 |
| | 115,738 |
| | 38,680 |
| | 1985 | | 1996 |
15250 Ventura(4) | | 26,000 |
| | 2,130 |
| | 48,907 |
| | 139 |
| | 2,130 |
| | 49,046 |
| | 51,176 |
| | 211 |
| | 1970/2012 | | 2008 |
16000 Ventura(4) | | 42,000 |
| | 1,936 |
| | 89,531 |
| | 301 |
| | 1,936 |
| | 89,832 |
| | 91,768 |
| | 325 |
| | 1980/2011 | | 2008 |
| 16501 Ventura | | 42,944 |
| | 6,759 |
| | 53,112 |
| | 11,387 |
| | 6,759 |
| | 64,499 |
| | 71,258 |
| | 15,359 |
| | 1986/2012 | | 2013 |
| Beverly Hills Medical Center | | — |
| | 4,955 |
| | 27,766 |
| | 28,814 |
| | 6,435 |
| | 55,100 |
| | 61,535 |
| | 20,186 |
| | 1964/2004 | | 2004 |
| Bishop Square | | 200,000 |
| | 16,273 |
| | 213,793 |
| | 31,072 |
| | 16,273 |
| | 244,865 |
| | 261,138 |
| | 70,903 |
| | 1972/1983 | | 2010 |
| Brentwood Court | | — |
| | 2,564 |
| | 8,872 |
| | 524 |
| | 2,563 |
| | 9,397 |
| | 11,960 |
| | 3,653 |
| | 1984 | | 2006 |
| Brentwood Executive Plaza | | — |
| | 3,255 |
| | 9,654 |
| | 32,710 |
| | 5,921 |
| | 39,698 |
| | 45,619 |
| | 14,519 |
| | 1983/1996 | | 1995 |
| Brentwood Medical Plaza | | — |
| | 5,934 |
| | 27,836 |
| | 1,285 |
| | 5,933 |
| | 29,122 |
| | 35,055 |
| | 11,088 |
| | 1975 | | 2006 |
| Brentwood San Vicente Medical | | — |
| | 5,557 |
| | 16,457 |
| | 1,180 |
| | 5,557 |
| | 17,637 |
| | 23,194 |
| | 6,782 |
| | 1957/1985 | | 2006 |
| Brentwood/Saltair | | — |
| | 4,468 |
| | 11,615 |
| | 11,766 |
| | 4,775 |
| | 23,074 |
| | 27,849 |
| | 8,845 |
| | 1986 | | 2000 |
| Bundy/Olympic | | — |
| | 4,201 |
| | 11,860 |
| | 29,078 |
| | 6,030 |
| | 39,109 |
| | 45,139 |
| | 14,450 |
| | 1991/1998 | | 1994 |
| Camden Medical Arts | | 42,276 |
| | 3,102 |
| | 12,221 |
| | 27,853 |
| | 5,298 |
| | 37,878 |
| | 43,176 |
| | 13,704 |
| | 1972/1992 | | 1995 |
| Carthay Campus | | — |
| | 6,595 |
| | 70,454 |
| | 6,241 |
| | 6,594 |
| | 76,696 |
| | 83,290 |
| | 15,396 |
| | 1965/2008 | | 2014 |
| Century Park Plaza | | 173,000 |
| | 10,275 |
| | 70,761 |
| | 132,532 |
| | 16,153 |
| | 197,415 |
| | 213,568 |
| | 60,946 |
| | 1972/1987/2019 | | 1999 |
Century Park West(1) | | — |
| | 3,717 |
| | 29,099 |
| | (1,050 | ) | | 3,667 |
| | 28,099 |
| | 31,766 |
| | 10,038 |
| | 1971 | | 2007 |
| Columbus Center | | — |
| | 2,096 |
| | 10,396 |
| | 9,569 |
| | 2,333 |
| | 19,728 |
| | 22,061 |
| | 7,439 |
| | 1987 | | 2001 |
| Coral Plaza | | — |
| | 4,028 |
| | 15,019 |
| | 18,918 |
| | 5,366 |
| | 32,599 |
| | 37,965 |
| | 12,051 |
| | 1981 | | 1998 |
Cornerstone Plaza(1) | | — |
| | 8,245 |
| | 80,633 |
| | 7,135 |
| | 8,263 |
| | 87,750 |
| | 96,013 |
| | 30,052 |
| | 1986 | | 2007 |
| Encino Gateway | | — |
| | 8,475 |
| | 48,525 |
| | 55,246 |
| | 15,653 |
| | 96,593 |
| | 112,246 |
| | 35,614 |
| | 1974/1998 | | 2000 |
| Encino Plaza | | — |
| | 5,293 |
| | 23,125 |
| | 47,991 |
| | 6,165 |
| | 70,244 |
| | 76,409 |
| | 26,809 |
| | 1971/1992 | | 2000 |
| Encino Terrace | | 105,565 |
| | 12,535 |
| | 59,554 |
| | 94,108 |
| | 15,533 |
| | 150,664 |
| | 166,197 |
| | 53,418 |
| | 1986 | | 1999 |
Executive Tower(1) | | — |
| | 6,660 |
| | 32,045 |
| | 59,549 |
| | 9,471 |
| | 88,783 |
| | 98,254 |
| | 34,753 |
| | 1989 | | 1995 |
| | | | | | | | | | | | | | | | | | | | | |
Douglas Emmett, Inc.
Schedule III - Consolidated Real Estate and Accumulated Depreciation and Amortization
As of December 31, 20192022
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost | | Cost Capitalized Subsequent to Acquisition | | Gross Carrying Amount | | | | | | |
| Property Name | | Encumb-rances | | Land | | Building & Improve-ments(2) | | Improve-
ments(2)(3) | | Land | | Building & Improve-ments(2)(3) | | Total(4) | | Accumulated Depreciation & Amortization(3) (5) | | Year Built / Renovated | | Year Acquired |
| Office Properties (continued) |
| First Financial Plaza | | 54,077 | | | 12,092 | | | 81,104 | | | 5,627 | | | 12,092 | | | 86,731 | | | 98,823 | | | 20,878 | | | 1986 | | 2015 |
| Gateway Los Angeles | | — | | | 2,376 | | | 15,302 | | | 61,022 | | | 5,119 | | | 73,581 | | | 78,700 | | | 26,949 | | | 1987/2022 | | 1994 |
| Harbor Court | | — | | | 51 | | | 41,001 | | | 52,683 | | | 12,060 | | | 81,675 | | | 93,735 | | | 31,744 | | | 1994 | | 2004 |
| Landmark II | | — | | | 6,086 | | | 109,259 | | | 68,338 | | | 13,070 | | | 170,613 | | | 183,683 | | | 74,944 | | | 1989 | | 1997 |
| Lincoln/Wilshire | | — | | | 3,833 | | | 12,484 | | | 26,953 | | | 7,475 | | | 35,795 | | | 43,270 | | | 14,245 | | | 1996 | | 2000 |
| MB Plaza | | — | | | 4,533 | | | 22,024 | | | 34,519 | | | 7,503 | | | 53,573 | | | 61,076 | | | 23,359 | | | 1971/1996 | | 1998 |
| Olympic Center | | 52,000 | | | 5,473 | | | 22,850 | | | 35,110 | | | 8,247 | | | 55,186 | | | 63,433 | | | 24,750 | | | 1985/1996 | | 1997 |
| One Westwood(1) | | — | | | 10,350 | | | 29,784 | | | 65,082 | | | 9,194 | | | 96,022 | | | 105,216 | | | 40,735 | | | 1987/2004 | | 1999 |
| Palisades Promenade | | 60,318 | | | 5,253 | | | 15,547 | | | 53,321 | | | 9,664 | | | 64,457 | | | 74,121 | | | 28,758 | | | 1990 | | 1995 |
| Saltair/San Vicente | | 21,533 | | | 5,075 | | | 6,946 | | | 18,344 | | | 7,557 | | | 22,808 | | | 30,365 | | | 10,495 | | | 1964/1992 | | 1997 |
| San Vicente Plaza | | — | | | 7,055 | | | 12,035 | | | 523 | | | 7,055 | | | 12,558 | | | 19,613 | | | 5,575 | | | 1985 | | 2006 |
| Santa Monica Square | | 48,500 | | | 5,366 | | | 18,025 | | | 21,445 | | | 6,863 | | | 37,973 | | | 44,836 | | | 16,231 | | | 1983/2004 | | 2001 |
| Second Street Plaza | | — | | | 4,377 | | | 15,277 | | | 36,024 | | | 7,421 | | | 48,257 | | | 55,678 | | | 21,518 | | | 1991 | | 1997 |
| Sherman Oaks Galleria | | 300,000 | | | 33,213 | | | 17,820 | | | 423,532 | | | 48,328 | | | 426,237 | | | 474,565 | | | 182,462 | | | 1981/2002 | | 1997 |
| Studio Plaza | | — | | | 9,347 | | | 73,358 | | | 122,001 | | | 15,015 | | | 189,691 | | | 204,706 | | | 86,186 | | | 1988/2004 | | 1995 |
| The Tower | | 67,064 | | | 9,643 | | | 160,602 | | | 5,085 | | | 9,643 | | | 165,687 | | | 175,330 | | | 33,924 | | | 1988/1998 | | 2016 |
| The Trillium(1)(6) | | — | | | 20,688 | | | 143,263 | | | 83,788 | | | 21,989 | | | 225,750 | | | 247,739 | | | 94,195 | | | 1988/2021 | | 2005 |
| Valley Executive Tower | | 104,000 | | | 8,446 | | | 67,672 | | | 109,131 | | | 11,737 | | | 173,512 | | | 185,249 | | | 73,320 | | | 1984 | | 1998 |
| Valley Office Plaza | | — | | | 5,731 | | | 24,329 | | | 49,353 | | | 8,957 | | | 70,456 | | | 79,413 | | | 30,467 | | | 1966/2002 | | 1998 |
| Verona | | — | | | 2,574 | | | 7,111 | | | 15,365 | | | 5,111 | | | 19,939 | | | 25,050 | | | 8,631 | | | 1991 | | 1997 |
| Village on Canon | | 61,745 | | | 5,933 | | | 11,389 | | | 51,518 | | | 13,303 | | | 55,537 | | | 68,840 | | | 23,789 | | | 1989/1995 | | 1994 |
| Warner Center Towers | | 335,000 | | | 43,110 | | | 292,147 | | | 417,949 | | | 59,418 | | | 693,788 | | | 753,206 | | | 305,790 | | | 1982-1993/2004 | | 2002 |
| Warner Corporate Center | | 34,671 | | | 11,035 | | | 65,799 | | | 2,874 | | | 11,035 | | | 68,673 | | | 79,708 | | | 8,992 | | | 1988/2015 | | 2008 |
| Westside Towers | | 141,915 | | | 8,506 | | | 79,532 | | | 79,586 | | | 14,568 | | | 153,056 | | | 167,624 | | | 65,702 | | | 1985 | | 1998 |
| Westwood Center | | 140,648 | | | 9,512 | | | 259,341 | | | 10,533 | | | 9,513 | | | 269,873 | | | 279,386 | | | 55,970 | | | 1965/2000 | | 2016 |
| Westwood Place | | 71,000 | | | 8,542 | | | 44,419 | | | 66,176 | | | 11,448 | | | 107,689 | | | 119,137 | | | 39,916 | | | 1987 | | 1999 |
| | | | | | | | | | | | | | | | | | | | |
| Multifamily Properties |
| 555 Barrington | | 50,000 | | | 6,461 | | | 27,639 | | | 41,555 | | | 14,903 | | | 60,752 | | | 75,655 | | | 26,457 | | | 1989 | | 1999 |
| 1221 Ocean Avenue | | 175,000 | | | 22,086 | | | 328,545 | | | 700 | | | 22,086 | | | 329,245 | | | 351,331 | | | 11,413 | | | 1971/2000 | | 2022 |
| Barrington Plaza | | 210,000 | | | 28,568 | | | 81,485 | | | 147,705 | | | 58,208 | | | 199,550 | | | 257,758 | | | 88,534 | | | 1963/1998 | | 1998 |
| Barrington/Kiowa | | 13,940 | | | 5,720 | | | 10,052 | | | 1,095 | | | 5,720 | | | 11,147 | | | 16,867 | | | 4,854 | | | 1974 | | 2006 |
| Barry | | 11,370 | | | 6,426 | | | 8,179 | | | 841 | | | 6,426 | | | 9,020 | | | 15,446 | | | 4,033 | | | 1973 | | 2006 |
| Kiowa | | 5,470 | | | 2,605 | | | 3,263 | | | 930 | | | 2,605 | | | 4,193 | | | 6,798 | | | 1,711 | | | 1972 | | 2006 |
| Moanalua Hillside Apartments | | 255,000 | | | 24,791 | | | 157,353 | | | 126,198 | | | 35,365 | | | 272,977 | | | 308,342 | | | 69,509 | | | 1968/2004/2019 | | 2005 |
| The Residences at Bishop Place | | — | | | — | | | — | | | 128,998 | | | — | | | 128,998 | | | 128,998 | | | 7,445 | | | 2020-2022 | | 2004 |
| Pacific Plaza | | 78,000 | | | 10,091 | | | 16,159 | | | 76,945 | | | 27,816 | | | 75,379 | | | 103,195 | | | 31,734 | | | 1963/1998 | | 1999 |
| The Glendon | | 160,000 | | | 32,773 | | | 335,925 | | | 2,890 | | | 32,775 | | | 338,813 | | | 371,588 | | | 33,951 | | | 2008 | | 2019 |
| The Landmark Los Angeles | | — | | | 13,070 | | | — | | | 317,986 | | | 13,070 | | | 317,986 | | | 331,056 | | | 2,448 | | | 2018-2022 | | N/A |
| The Shores | | 212,000 | | | 20,809 | | | 74,191 | | | 204,885 | | | 60,555 | | | 239,330 | | | 299,885 | | | 100,194 | | | 1965-67/2002 | | 1999 |
| Villas at Royal Kunia | | 94,220 | | | 42,887 | | | 71,376 | | | 16,852 | | | 35,163 | | | 95,952 | | | 131,115 | | | 46,345 | | | 1990/1995 | | 2006 |
| Waena Apartments | | 102,400 | | | 26,864 | | | 119,273 | | | 2,190 | | | 26,864 | | | 121,463 | | | 148,327 | | | 26,347 | | | 1970/2009-2014 | | 2014 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost | | Cost Capitalized Subsequent to Acquisition | | Gross Carrying Amount | | | | | | |
| Property Name | | Encumb-rances | | Land | | Building & Improve-ments(2) | | Improve-
ments(2)(3) | | Land | | Building & Improve-ments(2) | | Total(5) | | Accumulated Depreciation & Amortization | | Year Built / Renovated | | Year Acquired |
| Office Properties (continued) |
| First Financial Plaza | | 54,077 |
| | 12,092 |
| | 81,104 |
| | 3,635 |
| | 12,092 |
| | 84,739 |
| | 96,831 |
| | 13,474 |
| | 1986 | | 2015 |
| Gateway Los Angeles | | — |
| | 2,376 |
| | 15,302 |
| | 49,327 |
| | 5,119 |
| | 61,886 |
| | 67,005 |
| | 23,283 |
| | 1987 | | 1994 |
| Harbor Court | | — |
| | 51 |
| | 41,001 |
| | 48,087 |
| | 12,060 |
| | 77,079 |
| | 89,139 |
| | 24,518 |
| | 1994 | | 2004 |
| Honolulu Club | | — |
| | 1,863 |
| | 16,766 |
| | 5,896 |
| | 1,863 |
| | 22,662 |
| | 24,525 |
| | 9,089 |
| | 1980 | | 2008 |
| Landmark II | | — |
| | 6,086 |
| | 109,259 |
| | 67,669 |
| | 13,070 |
| | 169,944 |
| | 183,014 |
| | 61,622 |
| | 1989 | | 1997 |
| Lincoln/Wilshire | | — |
| | 3,833 |
| | 12,484 |
| | 23,598 |
| | 7,475 |
| | 32,440 |
| | 39,915 |
| | 10,883 |
| | 1996 | | 2000 |
| MB Plaza | | — |
| | 4,533 |
| | 22,024 |
| | 33,600 |
| | 7,503 |
| | 52,654 |
| | 60,157 |
| | 18,784 |
| | 1971/1996 | | 1998 |
| Olympic Center | | 52,000 |
| | 5,473 |
| | 22,850 |
| | 34,804 |
| | 8,247 |
| | 54,880 |
| | 63,127 |
| | 19,807 |
| | 1985/1996 | | 1997 |
One Westwood(1) | | — |
| | 10,350 |
| | 29,784 |
| | 63,393 |
| | 9,194 |
| | 94,333 |
| | 103,527 |
| | 34,093 |
| | 1987/2004 | | 1999 |
| Palisades Promenade | | — |
| | 5,253 |
| | 15,547 |
| | 54,541 |
| | 9,664 |
| | 65,677 |
| | 75,341 |
| | 23,435 |
| | 1990 | | 1995 |
| Saltair/San Vicente | | 21,533 |
| | 5,075 |
| | 6,946 |
| | 16,739 |
| | 7,557 |
| | 21,203 |
| | 28,760 |
| | 8,044 |
| | 1964/1992 | | 1997 |
| San Vicente Plaza | | — |
| | 7,055 |
| | 12,035 |
| | (61 | ) | | 7,055 |
| | 11,974 |
| | 19,029 |
| | 4,798 |
| | 1985 | | 2006 |
| Santa Monica Square | | 48,500 |
| | 5,366 |
| | 18,025 |
| | 21,723 |
| | 6,863 |
| | 38,251 |
| | 45,114 |
| | 13,974 |
| | 1983/2004 | | 2001 |
| Second Street Plaza | | — |
| | 4,377 |
| | 15,277 |
| | 36,308 |
| | 7,421 |
| | 48,541 |
| | 55,962 |
| | 17,963 |
| | 1991 | | 1997 |
| Sherman Oaks Galleria | | 300,000 |
| | 33,213 |
| | 17,820 |
| | 410,836 |
| | 48,328 |
| | 413,541 |
| | 461,869 |
| | 150,971 |
| | 1981/2002 | | 1997 |
| Studio Plaza | | — |
| | 9,347 |
| | 73,358 |
| | 122,044 |
| | 15,015 |
| | 189,734 |
| | 204,749 |
| | 68,366 |
| | 1988/2004 | | 1995 |
| The Tower | | 65,969 |
| | 9,643 |
| | 160,602 |
| | 4,196 |
| | 9,643 |
| | 164,798 |
| | 174,441 |
| | 20,889 |
| | 1988/1998 | | 2016 |
The Trillium(1) | | — |
| | 20,688 |
| | 143,263 |
| | 85,509 |
| | 21,989 |
| | 227,471 |
| | 249,460 |
| | 80,180 |
| | 1988 | | 2005 |
| Valley Executive Tower | | 104,000 |
| | 8,446 |
| | 67,672 |
| | 104,500 |
| | 11,737 |
| | 168,881 |
| | 180,618 |
| | 60,805 |
| | 1984 | | 1998 |
| Valley Office Plaza | | — |
| | 5,731 |
| | 24,329 |
| | 46,172 |
| | 8,957 |
| | 67,275 |
| | 76,232 |
| | 24,902 |
| | 1966/2002 | | 1998 |
| Verona | | — |
| | 2,574 |
| | 7,111 |
| | 15,131 |
| | 5,111 |
| | 19,705 |
| | 24,816 |
| | 7,106 |
| | 1991 | | 1997 |
| Village on Canon | | 61,745 |
| | 5,933 |
| | 11,389 |
| | 50,012 |
| | 13,303 |
| | 54,031 |
| | 67,334 |
| | 19,444 |
| | 1989/1995 | | 1994 |
| Warner Center Towers | | 335,000 |
| | 43,110 |
| | 292,147 |
| | 421,607 |
| | 59,418 |
| | 697,446 |
| | 756,864 |
| | 256,107 |
| | 1982-1993/2004 | | 2002 |
Warner Corporate Center(4) | | 43,000 |
| | 11,035 |
| | 65,799 |
| | 335 |
| | 11,035 |
| | 66,134 |
| | 77,169 |
| | 298 |
| | 1988/2015 | | 2008 |
| Westside Towers | | 141,915 |
| | 8,506 |
| | 79,532 |
| | 82,034 |
| | 14,568 |
| | 155,504 |
| | 170,072 |
| | 56,383 |
| | 1985 | | 1998 |
| Westwood Center | | 113,343 |
| | 9,512 |
| | 259,341 |
| | 12,344 |
| | 9,513 |
| | 271,684 |
| | 281,197 |
| | 33,966 |
| | 1965/2000 | | 2016 |
| Westwood Place | | 71,000 |
| | 8,542 |
| | 44,419 |
| | 52,040 |
| | 11,448 |
| | 93,553 |
| | 105,001 |
| | 33,866 |
| | 1987 | | 1999 |
| | | | | | | | | | | | | | | | | | | | | |
| Multifamily Properties |
| 555 Barrington | | 50,000 |
| | 6,461 |
| | 27,639 |
| | 40,435 |
| | 14,903 |
| | 59,632 |
| | 74,535 |
| | 21,850 |
| | 1989 | | 1999 |
| Barrington Plaza | | 210,000 |
| | 28,568 |
| | 81,485 |
| | 153,858 |
| | 58,208 |
| | 205,703 |
| | 263,911 |
| | 75,202 |
| | 1963/1998 | | 1998 |
| Barrington/Kiowa | | 13,940 |
| | 5,720 |
| | 10,052 |
| | 656 |
| | 5,720 |
| | 10,708 |
| | 16,428 |
| | 3,979 |
| | 1974 | | 2006 |
| Barry | | 11,370 |
| | 6,426 |
| | 8,179 |
| | 549 |
| | 6,426 |
| | 8,728 |
| | 15,154 |
| | 3,340 |
| | 1973 | | 2006 |
| Kiowa | | 5,470 |
| | 2,605 |
| | 3,263 |
| | 421 |
| | 2,605 |
| | 3,684 |
| | 6,289 |
| | 1,378 |
| | 1972 | | 2006 |
| Moanalua Hillside Apartments | | 255,000 |
| | 24,791 |
| | 157,353 |
| | 119,348 |
| | 35,365 |
| | 266,127 |
| | 301,492 |
| | 47,725 |
| | 1968/2004/2019 | | 2005 |
| Pacific Plaza | | 78,000 |
| | 10,091 |
| | 16,159 |
| | 74,021 |
| | 27,816 |
| | 72,455 |
| | 100,271 |
| | 25,820 |
| | 1963/1998 | | 1999 |
| The Glendon | | 160,000 |
| | 32,773 |
| | 335,925 |
| | 467 |
| | 32,775 |
| | 336,390 |
| | 369,165 |
| | 6,028 |
| | 2008 | | 2019 |
| The Shores | | 212,000 |
| | 20,809 |
| | 74,191 |
| | 199,491 |
| | 60,555 |
| | 233,936 |
| | 294,491 |
| | 82,309 |
| | 1965-67/2002 | | 1999 |
| Villas at Royal Kunia | | 94,220 |
| | 42,887 |
| | 71,376 |
| | 14,961 |
| | 35,163 |
| | 94,061 |
| | 129,224 |
| | 38,965 |
| | 1990/1995 | | 2006 |
| Waena Apartments | | 102,400 |
| | 26,864 |
| | 119,273 |
| | 1,502 |
| | 26,864 |
| | 120,775 |
| | 147,639 |
| | 16,852 |
| | 1970/2009-2014 | | 2014 |
| | | | | | | | | | | | | | | | | | | | | |
Douglas Emmett, Inc.
Schedule III - Consolidated Real Estate and Accumulated Depreciation and Amortization
As of December 31, 20192022
(In thousands)
| | | | | | | Initial Cost | | Cost Capitalized Subsequent to Acquisition | | Gross Carrying Amount | | | | | | | | | | | Initial Cost | | Cost Capitalized Subsequent to Acquisition | | Gross Carrying Amount | | | | | | |
| Property Name | | Encumb-rances | | Land | | Building & Improve-ments(2) | | Improve-
ments(2)(3) | | Land | | Building & Improve-ments(2) | | Total(5) | | Accumulated Depreciation & Amortization | | Year Built / Renovated | | Year Acquired | Property Name | | Encumb-rances | | Land | | Building & Improve-ments(2) | | Improve-
ments(2)(3) | | Land | | Building & Improve-ments(2)(3) | | Total(4) | | Accumulated Depreciation & Amortization(3) (5) | | Year Built / Renovated | | Year Acquired |
| Ground Lease | Ground Lease | Ground Lease |
Owensmouth/Warner (1) | | — |
| | 23,848 |
| | — |
| | — |
| | 23,848 |
| | — |
| | 23,848 |
| | — |
| | N/A | | 2006 | |
| Owensmouth/Warner(6) | | Owensmouth/Warner(6) | | — | | | 23,848 | | | — | | | — | | | 23,848 | | | — | | | 23,848 | | | — | | | N/A | | 2006 |
| Total Operating Properties | | $ | 4,653,264 |
| | $ | 878,478 |
| | $ | 6,610,605 |
| | $ | 3,877,835 |
| | $ | 1,152,684 |
| | $ | 10,214,234 |
| | $ | 11,366,918 |
| | $ | 2,518,415 |
| | Total Operating Properties | | $ | 5,220,902 | | | $ | 911,770 | | | $ | 6,922,385 | | | $ | 4,388,781 | | | $ | 1,185,977 | | | $ | 11,036,959 | | | $ | 12,222,936 | | | $ | 3,299,365 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property Under Development | Property Under Development | Property Under Development |
| 1132 Bishop Street Conversion | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 16,818 |
| | $ | — |
| | $ | 16,818 |
| | $ | 16,818 |
| | $ | — |
| | N/A | | N/A | |
| Landmark II Development | | — |
| | 13,070 |
| | — |
| | 79,703 |
| | 13,070 |
| | 79,703 |
| | 92,773 |
| | — |
| | N/A | | N/A | |
| The Residences at Bishop Place | | The Residences at Bishop Place | | $ | — | | | $ | — | | | $ | — | | | $ | 38,072 | | | $ | — | | | $ | 38,072 | | | $ | 38,072 | | | N/A | | N/A |
| Other Developments | | — |
| | — |
| | — |
| | 2,124 |
| | — |
| | 2,124 |
| | 2,124 |
| | — |
| | N/A | | N/A | Other Developments | | 31,965 | | | 31,965 | | | 31,965 | | | N/A | | N/A |
| Total Property Under Development | | $ | — |
| | $ | 13,070 |
| | $ | — |
| | $ | 98,645 |
| | $ | 13,070 |
| | $ | 98,645 |
| | $ | 111,715 |
| | $ | — |
| | | | | Total Property Under Development | | $ | — | | | $ | — | | | $ | — | | | $ | 70,037 | | | $ | — | | | $ | 70,037 | | | $ | 70,037 | | | $ | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 4,653,264 |
| | $ | 891,548 |
| | $ | 6,610,605 |
| | $ | 3,976,480 |
| | $ | 1,165,754 |
| | $ | 10,312,879 |
| | $ | 11,478,633 |
| | $ | 2,518,415 |
| | | | | Total | | $ | 5,220,902 | | | $ | 911,770 | | | $ | 6,922,385 | | | $ | 4,458,818 | | | $ | 1,185,977 | | | $ | 11,106,996 | | | $ | 12,292,973 | | | $ | 3,299,365 | | | | | |
| |
(1) | These properties are encumbered by our revolving credit facility, which had a 0 balance as of December 31, 2019. |
| |
(2) | Includes tenant improvements and lease intangibles. |
| |
(3) | Net of fully depreciated and amortized tenant improvements and lease intangibles removed from our books. |
| |
(4) | A previously unconsolidated Fund is now treated as a consolidated JV. |
| |
(5) | At December 31, 2019, the aggregate federal income tax cost basis for consolidated real estate was $7.91 billion (unaudited). |
(2)Includes tenant improvements and lease intangibles.
(3)Net of fully depreciated and amortized buildings, building improvements, tenant improvements and lease intangibles removed from our books.
(4)At December 31, 2022, the aggregate federal income tax cost basis for consolidated real estate was $8.76 billion (unaudited).
(5)See our depreciation and amortization policy in Note 2 to our consolidated financial statements.
(6)The property includes a parcel of land from which we receive rent under a ground lease.
The table below presents a reconciliation of our investment in real estate:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Investment in real estate, gross | | | | | | |
| | | | | | |
| Beginning balance | | $ | 11,819,077 | | | $ | 11,678,638 | | | $ | 11,478,633 | |
| Property acquisitions | | 350,631 | | | — | | | — | |
| | | | | | |
| Improvements and developments | | 223,315 | | | 297,764 | | | 297,558 | |
| Properties sold | | — | | | — | | | (24,508) | |
| Removal of fully depreciated and amortized buildings, building improvements, tenant improvements and lease intangibles | | (100,050) | | | (157,325) | | | (73,045) | |
| Ending balance | | $ | 12,292,973 | | | $ | 11,819,077 | | | $ | 11,678,638 | |
| | | | | | |
| Accumulated depreciation and amortization | | | | | | |
| | | | | | |
| Beginning balance | | $ | (3,028,645) | | | $ | (2,816,193) | | | $ | (2,518,415) | |
| Depreciation and amortization | | (372,798) | | | (371,289) | | | (385,248) | |
| Properties sold | | — | | | — | | | 10,002 | |
| Other accumulated depreciation and amortization | | 2,028 | | | 1,512 | | | 4,423 | |
| Removal of fully depreciated and amortized buildings, building improvements, tenant improvements and lease intangibles | | 100,050 | | | 157,325 | | | 73,045 | |
| Ending balance | | $ | (3,299,365) | | | $ | (3,028,645) | | | $ | (2,816,193) | |
| | | | | | |
| Investment in real estate, net | | $ | 8,993,608 | | | $ | 8,790,432 | | | $ | 8,862,445 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Investment in real estate, gross | | | | | |
| Beginning balance | $ | 10,030,708 |
| | $ | 9,829,208 |
| | $ | 8,998,120 |
|
| Property acquisitions | 368,698 |
| | — |
| | 707,120 |
|
| Consolidation of JV | 924,578 |
| | — |
| | — |
|
| Improvements and developments | 242,854 |
| | 277,229 |
| | 177,655 |
|
| Removal of fully depreciated and amortized tenant improvements and lease intangibles | (88,205 | ) | | (75,729 | ) | | (53,687 | ) |
| Ending balance | $ | 11,478,633 |
| | $ | 10,030,708 |
| | $ | 9,829,208 |
|
| | | | | | |
| Accumulated depreciation and amortization | | | | | |
| Beginning balance | $ | (2,246,887 | ) | | $ | (2,012,752 | ) | | $ | (1,789,678 | ) |
| Depreciation and amortization | (357,743 | ) | | (309,864 | ) | | (276,761 | ) |
| Other accumulated depreciation and amortization | (1,990 | ) | | — |
| | — |
|
| Removal of fully depreciated and amortized tenant improvements and lease intangibles | 88,205 |
| | 75,729 |
| | 53,687 |
|
| Ending balance | $ | (2,518,415 | ) | | $ | (2,246,887 | ) | | $ | (2,012,752 | ) |
| | | | | | |
| Investment in real estate, net | $ | 8,960,218 |
| | $ | 7,783,821 |
| | $ | 7,816,456 |
|
