EDGAR 10-K Filing

Company CIK: 1364250
Filing Year: 2023
Filename: 1364250_10-K_2023_0001364250-23-000009.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
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 substantial 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, 2022, we owned a Consolidated Portfolio consisting of (i) a 17.7 million square foot office portfolio, (ii) 5,013 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, 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, 2022, our portfolio consisted of the following (including ancillary retail space and excluding two parcels of land from which we receive rent under ground leases):
Consolidated Portfolio Total
Portfolio
Office
Wholly-owned properties 53 53
Consolidated JV properties 16 16
Unconsolidated Fund properties - 2
Total 69 71
Multifamily
Wholly-owned properties 12 12
Consolidated JV properties 2 2
Total 14 14
Total 83 85
Business Strategy
We employ a focused business strategy that we have developed and implemented over the past four decades:
•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, 2022, our office portfolio median size tenant was approximately 2,500 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 2020, 2021 and 2022, no tenant accounted for more than 10% of our total revenues.
•Disciplined Strategy of Acquiring Substantial Market Share In Each Submarket.
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 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.
•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 four 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
At December 31, 2022, in addition to fifty-three office properties and twelve residential properties wholly-owned by our Operating Partnership, we manage and own equity interests in:
•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.
•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 34% at December 31, 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 Fund on an unconsolidated basis in accordance with GAAP. See "Basis of Presentation" in Note 1 to our consolidated financial statements in Item 15 of this Report for more information regarding the consolidation of our JVs. Most of the property data in this Report is presented for our Total Portfolio, which includes the properties owned by our JVs and our 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:
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:
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 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 an interest in a corporation which has elected to be treated as 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 our 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 activities of our tenants. Many of these factors are beyond our control. However, we can and do seek to make our buildings 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. As a result of our efforts, 89% of our stabilized eligible office space as of December 31, 2021 qualified for "ENERGY STAR Certification" by the EPA as having energy efficiency in the top 25% of buildings 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.
Hazardous Waste: Our operations only generate modest ancillary amounts of hazardous waste (mostly office supplies), which we dispose of in accordance with all applicable waste regulations. Similarly, our tenants are almost entirely limited by their leases to general office uses that prohibit the use of additional hazardous wastes and are required by their leases to comply with all applicable waste regulations.
•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 also 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 strategy 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 operations of our properties. As of December 31, 2022, we employed approximately 750 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

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ITEM 1A. RISK FACTORS
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
•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.
•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.
•Our operating performance is subject to risks associated with the real estate industry.
•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.
•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.
•In order to successfully compete against other properties, we need to maintain, repair, and renovate our properties, which reduces our cash flows.
•We face intense competition, which could adversely impact the occupancy and rental rates of our properties.
•Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by insurance.
•We may be unable to renew leases or lease vacant space.
•Our business strategy for our office portfolio focuses on leasing to smaller-sized tenants which may present greater credit risks.
•Real estate investments are generally illiquid.
•We may incur significant costs to comply with laws, regulations and covenants.
•Because we own real property, we are subject to extensive environmental regulations, which create uncertainty regarding future environmental expenditures and liabilities.
•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.
•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 may be unable to complete acquisitions that would grow our business, or successfully integrate and operate acquired properties.
•We may be unable to successfully expand our operations into new markets and submarkets.
•We are exposed to risks associated with property development.
•We are exposed to certain risks when we enter into JVs or issue securities of our subsidiaries, including our Operating Partnership.
•If we default on the ground lease to which one of our properties is subject, our business could be adversely affected.
•We may not have sufficient cash available for distribution to stockholders at expected levels in the future.
•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.
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.
•Our executive officers have significant influence over our affairs.
•Under their employment agreements, certain of our executive officers will receive severance if they are terminated without cause or resign for good reason.
•The loss of any of our executive officers or key senior personnel could significantly harm our business.
•Compensation awards to our management may not be tied to or correspond with improved financial results or the market price of our common stock.
•Our board of directors may change significant corporate policies without stockholder approval.
•Our growth depends on external sources of capital which are outside of our control.
•We face risks associated with short-term liquid investments.
•Our charter, the partnership agreement of our Operating Partnership, and Maryland law contain provisions that may delay or prevent a change of control transaction.
•Our fiduciary duties as the sole stockholder of the general partner of our Operating Partnership could create conflicts of interest.
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.
•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. New 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 three 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 one of our subsidiaries as 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 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 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, 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.
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, 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”. 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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
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, 2022
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 %
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(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 %
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(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.
Office Portfolio Percentage Leased and In-place Rents as of December 31, 2022
Region(1)
Percent
Leased
Annualized Rent(2)
Annualized Rent Per Leased Square Foot(2)
Monthly Rent Per Leased Square Foot(2)
Los Angeles
Westside 87.1 % $ 465,109,266 $ 56.75 $ 4.73
Valley 86.2 203,666,873 36.34 3.03
Honolulu 91.3 38,029,901 34.28 2.86
Total / Weighted Average 87.0 % $ 706,806,040 $ 47.41 $ 3.95
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(1)Regional data reflects the following underlying submarket data:
Region Submarket Percent
Leased Monthly Rent Per Leased Square Foot(2)
Westside Beverly Hills 94.9 % $ 4.76
Brentwood 83.0 4.01
Century City 91.6 4.50
Olympic Corridor 80.2 3.40
Santa Monica 92.5 7.00
Westwood 81.2 4.54
Valley Burbank 100.0 4.83
Sherman Oaks/Encino 88.9 3.09
Warner Center/Woodland Hills 80.7 2.58
Honolulu Honolulu 91.3 2.86
Weighted Average 87.0 % $ 3.95
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(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, 2022
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 %
Largest Office Tenants as of December 31, 2022
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
Warner Bros. Discovery(2)
4 3 2023-2024 483,412 2.7 % $ 27,477,617 3.9 %
UCLA(3)
22 10 2023-2027 261,179 1.4 14,209,652 2.0
William Morris Endeavor(4)
3 1 2023-2027 219,364 1.2 13,953,542 2.0
Morgan Stanley(5)
5 5 2025-2028 142,020 0.8 10,273,231 1.4
Equinox Fitness(6)
6 5 2029-2038 185,236 1.0 10,142,330 1.4
Macerich(7)
2 1 2023-2028 82,368 0.5 7,501,247 1.1
Total 42 25 1,373,579 7.6 % $ 83,557,619 11.8 %
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(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, 2022
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 %
Office Lease Expirations as of December 31, 2022 (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
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(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.
Office Tenant Improvements and Leasing Commissions
Year Ended December 31,
2022 2021 2020
Renewal leases
Number of leases 571 557 438
Square feet 2,416,521 2,553,056 1,990,974
Tenant improvement costs per square foot (1)
$ 11.06 $ 8.59 $ 8.98
Leasing commission costs per square foot (1)
5.86 5.88 6.99
Total costs per square foot (1)
$ 16.92 $ 14.47 $ 15.97
New leases
Number of leases 343 351 228
Square feet 1,225,024 1,105,297 700,509
Tenant improvement costs per square foot (1)
$ 27.68 $ 27.43 $ 25.46
Leasing commission costs per square foot (1)
9.26 9.81 9.41
Total costs per square foot (1)
$ 36.94 $ 37.24 $ 34.87
Total leases
Number of leases 914 908 666
Square feet 3,641,545 3,658,353 2,691,483
Tenant improvement costs per square foot (1)
$ 16.65 $ 14.28 $ 13.27
Leasing commission costs per square foot (1)
7.01 7.07 7.62
Total costs per square foot (1)
$ 23.66 $ 21.35 $ 20.89
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(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.
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.
Multifamily Portfolio as of December 31, 2022
Submarket Number of Properties Number of Units Units as a Percent of Total
Los Angeles
Santa Monica 3 940 19 %
West Los Angeles 7 1,676 33
Honolulu 4 2,397 48
Total 14 5,013 100 %
Submarket Percent Leased Annualized Rent(1)
Monthly Rent Per Leased Unit
Los Angeles
Santa Monica 99.0 % $ 48,792,756 $ 4,372
West Los Angeles(2)
99.0 44,809,560 3,133
Honolulu 99.8 61,607,256 2,151
Total / Weighted Average 99.4 % $ 155,209,572 $ 2,869
_______________________________________________________
(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.
(2) Calculations exclude 94 units temporarily unoccupied as a result of a fire and 376 units at a newly constructed property undergoing lease up.
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.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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 30, 2022, the closing price of our common stock was $15.68.
The table below presents the dividends declared for our common stock as reported by the NYSE:
First Quarter Second Quarter Third Quarter Fourth Quarter
Dividend declared $ 0.28 $ 0.28 $ 0.28 $ 0.19
Dividend declared $ 0.28 $ 0.28 $ 0.28 $ 0.28
Holders of Record
We had 11 holders of record of our common stock on February 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
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, 2017 to December 31, 2022 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, 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 12/31/17 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).

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Item 15 of this Report. During 2022, our results of operations were impacted by the COVID-19 pandemic, inflation and capital transactions - see "Impact of the COVID-19 Pandemic on our Business" and "Acquisitions, Financings, Developments and Repositionings" further below.
Overview
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, 2022, our portfolio consisted of the following (including ancillary retail 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 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 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.
Revenues by Segment and Location
During 2022, revenues from our Consolidated Portfolio were 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 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 property through a new consolidated JV that we manage and in which we own a 55% 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 with a $175.0 million secured, non-recourse interest-only term loan that matures in April 2029. We swap-fixed the interest 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 the purchase price allocation.
Financings
During the first quarter of 2022:
•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 2022:
•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 2022:
•Interest rate swaps which hedged a $450.0 million interest-only term loan for one of our consolidated JV's expired, and were replaced with existing interest rate swaps that were upsized. This reduced the term-loan swap-fixed interest rate to 2.26% from 3.04%.
During the fourth quarter of 2022:
•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 completed the construction of a 34-story high-rise apartment building with 376 apartments and placed it in service in 2022. The tower was built on a site that is directly adjacent to a 394 thousand square foot office building, a one acre park, and a 712 unit residential property, all of which we own.
•1132 Bishop Street, Honolulu, Hawaii - "The Residences at Bishop Place"
In downtown Honolulu, we are converting a 25-story, 493 thousand square foot office tower into 493 rental apartments. This project is helping to address the severe shortage of rental housing in Honolulu and revitalize the central business 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 during the respective periods:
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
___________________________________________________
(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:
Year Ended December 31, 2022
Rent Roll(1)(2)
Expiring
Rate(2)
New/Renewal Rate(2)
Percentage Change
Cash Rent $49.19 $45.66 (7.2)%
Straight-line Rent $44.21 $46.78 5.8%
___________________________________________________
(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.
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:
Year Ended December 31,
2022 2021 2020 2019 2018
Average annual rental rate - new tenants(1)(2)
$ 31,763 $ 29,837 $ 28,416 $ 28,350 $ 27,542
_____________________________________________________
(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 2022 (new tenants and existing tenants undergoing annual rent review) was 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:
December 31,
Occupancy Rates(1) as of:
2022 2021 2020 2019 2018
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 %
Year Ended December 31,
Average Occupancy Rates(1)(3):
2022 2021 2020 2019 2018
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 %
___________________________________________________
(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.
Office Lease Expirations
As of December 31, 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, 2019, 2020, and 2021 with the same remaining duration as the leases for the labeled year had at December 31, 2022. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
Results of Operations
Comparison of 2022 to 2021
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.
Year Ended December 31, Favorable (Unfavorable)
2022 2021 Change % Commentary
(In thousands)
Revenues
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.
Operating expenses
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.
Year Ended December 31, Favorable (Unfavorable)
2022 2021 Change % Commentary
(In thousands)
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.
Non-Operating Income and Expenses
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.
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.
Comparison of 2021 to 2020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our results of operations for 2021 compared to 2020.
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 2022 to 2021
During 2022, FFO increased by $36.2 million, or 9.4%, to $419.7 million, compared to $383.5 million for 2021. The increase was primarily due to an increase in NOI 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 our Bishop Place conversion project, and (iv) better collections. The increase in NOI from 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 parking income.
Comparison of 2021 to 2020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our FFO for 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 Fund's FFO) to net income attributable to common stockholders (the most directly comparable GAAP measure):
Year Ended December 31,
(In thousands) 2022 2021
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)
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 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 2022 to 2021:
Our Same Properties for 2022 included 67 office properties, aggregating 17.6 million Rentable Square Feet, and 10 multifamily properties with an aggregate 3,449 units. The amounts presented below 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
(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 (the most directly comparable GAAP measure):
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 2021 to 2020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our same property NOI for 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 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.
Long-term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to REIT federal tax rules which require that we distribute at least 90% of our income on an annual basis. We plan to meet our long-term liquidity needs through long-term secured non-recourse 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 $400.0 million of shares of common stock.
We only use non-recourse debt, secured by our properties. As of December 31, 2022, approximately 46% of 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 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
See the following notes to our consolidated financial statements in Item 15 of this 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.
Off-Balance Sheet Arrangements
Unconsolidated Fund Debt
Our Fund, Partnership X, has its own secured non-recourse debt and interest rate swaps. We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to that loan, and we have also guaranteed the interest rate swaps. Partnership X has agreed to indemnify us for any amounts that we would be required to pay under these agreements. As of December 31, 2022, all of the obligations under the respective loan and swap agreements have been performed in accordance with the terms of those agreements. See "Guarantees" in Note 17 to our consolidated financial statements in Item 15 of this Report for more information about our Fund's debt and swaps, and the respective guarantees.
Cash Flows
Comparison of 2022 to 2021
Our operating cash flows in both periods were adversely impacted by the COVID-19 pandemic, and in 2022 by the effects of inflation.
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 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 2021 to 2020
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our cash flows for 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 $59.7 million, $185.4 million and $186.4 million during 2022, 2021 and 2020, respectively.
Impairment of Long-Lived Assets
We assess our investment in real estate 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 revenues 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 2022, 2021 or 2020.
Revenue Recognition - Collectibility of lease payments from office tenants
In accordance with Topic 842, if collectibility of 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 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 increase 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 the COVID-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 COVID-19 pandemic, reduced our rental revenues and tenant 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 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.
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 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 $2.2 million, $2.4 million and $2.6 million during 2022, 2021 and 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 would result in our net income being overstated or understated, respectively. Stock-based compensation expense was $21.0 million, $20.9 million and $21.4 million for 2022, 2021 and 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 $1.1 million, $1.0 million and $1.1 million during 2022, 2021 and 2020, respectively.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Hedging 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 swaps. 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 financial 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 interest rate swaps.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
See the Index to our Financial Statements in Item 15.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
As of December 31, 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, 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 and, respectively, and are incorporated herein by reference.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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, 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)
(a) (b) (c)
Stock-based compensation plans approved by stockholders (1) 3,961 (2) $- (3) 2,276
___________________________________________________________
(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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Our 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2022.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedule
(a)(1) and (2) Financial Statements and Schedules
Index
Page
Exhibits
Signatures
Report of Management on Internal Control Over Financial Reporting
F- 1
Report of Independent Registered Public Accounting Firm
F- 2
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
F- 5
Consolidated Balance Sheets
F- 6
Consolidated Statements of Operations
F- 7
Consolidated Statements of Comprehensive Income (Loss)
F- 8
Consolidated Statements of Equity
F- 9
Consolidated Statements of Cash Flows
F- 11
Notes to Consolidated Financial Statements
F- 12
Overview
F- 12
Summary of Significant Accounting Policies
F- 13
Investment in Real Estate
F- 20
Ground Lease
F- 21
Acquired Lease Intangibles
F- 22
Investments in Unconsolidated Fund
F- 23
Other Assets
F- 23
Secured Notes Payable & Revolving Credit Facility, Net
F- 24
Interest Payable, Accounts Payable and Deferred Revenue
F- 26
Derivative Contracts
F- 26
Equity
F- 29
EPS
F- 31
Stock-Based Compensation
F- 32
Fair Value of Financial Instruments
F- 34
Segment Reporting
F- 36
Future Minimum Lease Receipts
F- 37
Commitments, Contingencies and Guarantees
F- 37
Schedule III - Consolidated Real Estate and Accumulated Depreciation
F- 39
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
Number Description Footnote
3.1 Articles of Amendment and Restatement of Douglas Emmett, Inc.
(1)
3.2 Bylaws of Douglas Emmett, Inc.
(2)
3.3 Certificate of Correction to Articles of Amendment and Restatement of Douglas Emmett, Inc.
(3)
3.4 Bylaws Amendment
(4)
4.1 Form of Certificate of Common Stock of Douglas Emmett, Inc.
(5)
4.2 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
(6)
10.1 Form of Agreement of Limited Partnership of Douglas Emmett Properties, LP.
(5)
10.2 Registration Rights Agreement among Douglas Emmett, Inc. and the Initial Holders named therein. +
(7)
10.3 Form of Indemnification Agreement between Douglas Emmett, Inc. and its directors and officers. +
(8)
10.4 Douglas Emmett, Inc. 2016 Omnibus Stock Incentive Plan. +
(9)
10.5 Form of Douglas Emmett Properties, LP Partnership Unit Designation - 2016 LTIP Units. +
(10)
10.6 Form of Douglas Emmett, Inc. 2016 Omnibus Stock Incentive Plan LTIP Unit Award Agreement. +
(11)
10.7 Employment agreement dated January 1, 2019 between Douglas Emmett, Inc., Douglas Emmett Properties, LP and Jordan L. Kaplan. +
(12)
10.8 Employment agreement dated January 1, 2019 between Douglas Emmett, Inc., Douglas Emmett Properties, LP and Kenneth Panzer. +
(12)
10.9 Employment agreement dated January 1, 2019 between Douglas Emmett, Inc., Douglas Emmett Properties, LP and Kevin A. Crummy. +
(12)
21.1 List of Subsidiaries of the Registrant. *
23.1 Consent of Independent Registered Public Accounting Firm. *
31.1 Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certificate of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
(13)
32.2 Certificate of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
(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)*
* 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)
Douglas Emmett, Inc.
Exhibits (continued)
(5) Filed with Amendment No. 3 to Form S-11 on October 3, 2006 and incorporated herein by this reference. (File number 333-135082)
(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)
(8) Filed with Amendment No. 2 to Form S-11 on September 20, 2006 and incorporated herein by this reference. (File number 333-135082)
(9) Filed with Definitive Proxy Statement on April 17, 2020 and incorporated herein by this reference. (File number 001-33106)
(10) Filed with Form 8-K on December 12, 2016 and incorporated herein by this reference. (File number 001-33106)
(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 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.