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Item 7. Management’s Discussion and Analysis

2021-02-22 compared with 2020-02-14 · 169 added, 148 removed, 212 unchanged (60% of the section changed)

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The following discussion should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 15 of this Report.

Our results of operations for the years ended December 31, 2019 and 2018 were affected by a property acquisition, consolidation of a JV, development activity, repositionings and loan refinancings - see Acquisitions, Financings, Developments and Repositionings further below.

Business Description

Our results of operations for the year ended December 31, 2020 were affected by a property disposition, a loan refinancing, hedging, and development activity - see Dispositions, Financings and Hedging, Developments and Repositionings further below.

Douglas Emmett, Inc.

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Rentable Square Feet (in thousands) 17,807 18,192

Occupied rate

Leased rate 88.6% 88.6%

Occupancy rate 87.4% 87.4%

Properties 12 12

Units 4,287 4,287

Leased rate 98.2% 98.2%

Occupancy rate 94.2% 94.2%

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(1) Our Consolidated Portfolio includes the properties in our consolidated results.

Through our subsidiaries, we own 100% of these properties, except for seventeen office properties totaling 4.3 million square feet and one residential property with 350 apartments , which we own through four consolidated JVs.

Through our subsidiaries, we own 100% of these properties, except for sixteen office properties totaling 4.2 million square feet and one residential property with 350 apartments , which we own through three consolidated JVs.

Our Consolidated Portfolio also includes two land parcels from which we receive ground rent from ground leases to the owners of a Class A office building and a hotel.

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During the year ended December 31, 2020, revenues from our Consolidated Portfolio was derived as follows:

Acquisitions, Financings, Developments and Repositionings

On June 7, 2019, we acquired The Glendon, a residential community in Westwood with 350 apartments and approximately 50,000 square feet of retail, for $365.1 million .

On June 28, 2019, we completed the contribution of the property to a consolidated JV that we manage and in which we own a twenty percent capital interest.

The acquisition and related working capital was funded with a $160.0 million interest-only loan, a $44.0 million capital contribution by us and a $176.0 million capital contribution by other investors.

See second quarter financing transactions below for more information regarding the funding for this acquisition.

See Note 3 to our consolidated financial statements in Item 15 of this Report for more information regarding this acquisition.

On November 21, 2019, we acquired an additional 16.3% of the equity in one of our previously unconsolidated Funds, Fund X, in exchange for $76.9 million in cash and 332 thousand OP Units valued at $14.4 million , which increased our ownership in the Fund to 89.0% .

In connection with this transaction, we restructured the Fund with the one remaining institutional investor.

The new JV is a VIE, and as a result of the amended operating agreement, we became the primary beneficiary of the VIE and commenced consolidating the JV on November 21, 2019.

The JV owns six Class A office properties totaling 1.5 million square feet in the prime Los Angeles submarkets of Beverly Hills, Santa Monica, Sherman Oaks/Encino and Warner Center.

The JV also owns an interest of 9.4% in our remaining unconsolidated Fund, Partnership X, which owns two additional Class A office properties totaling 386,000 square feet in Beverly Hills and Brentwood.

The results of the consolidated JV are included in our operating results from November 21, 2019.

During the first quarter of 2019 :

In March 2019, we renewed our $400.0 million revolving credit facility, releasing two previously encumbered properties, lowering the borrowing rate and unused facility fees, and extending the maturity date.

The renewed facility bears interest at LIBOR + 1.15% and matures on August 21, 2023 .

During the second quarter of 2019 :

We closed a secured, non-recourse $255.0 million interest-only loan scheduled to mature in June 2029 .

The loan bears interest at LIBOR + 0.98% , which we have effectively fixed through an interest rate swap at 3.26% until June 2027 .

We used the proceeds to pay off a $145.0 million loan that was scheduled to mature in October 2019.

We closed a secured, non-recourse $125.0 million interest-only loan scheduled to mature in June 2029 .

The loan bears interest at LIBOR + 0.98% , which we have effectively fixed through interest rate swaps at 2.55% until December 2020 , which then increases to 3.25% until June 2027 .

We used the proceeds to pay off a $115.0 million loan that was scheduled to mature in December 2025.

We closed a secured, non-recourse $160.0 million interest-only loan scheduled to mature in June 2029 .

The loan bears interest at LIBOR + 0.98% , which we have effectively fixed through an interest rate swap at 3.25% until July 2027 .

We used the proceeds to partially fund the acquisition of The Glendon property.

This loan has been assumed by the consolidated JV to which we contributed The Glendon property.

We entered into a forward interest rate swap to extend the fixed-rate period for a term loan with a principal balance of $102.4 million , scheduled to mature in April 2025 , for three years.

We also entered into forward interest rate swaps with an initial notional amount of $75.0 million, effective as of September 2019 and scheduled to mature in August 2025, fixing one-month LIBOR at 1.97%, to hedge the $415.0 million term-loan we closed in the third quarter - see third quarter financing transactions below.

We issued 4.9 million shares of our common stock under our ATM program for net proceeds of $201.0 million .

We used a portion of the funds to partially fund the acquisition of The Glendon property, and a portion of the funds to pay off a $220.0 million loan in the third quarter - see third quarter financing transactions below.

Other investors in the consolidated JV to which we contributed The Glendon property contributed $176.0 million to the JV to fund the acquisition of the property, and we contributed $44.0 million to the JV.

During the third quarter of 2019 :

We paid off a $220.0 million loan scheduled to mature in December 2023 and terminated the related interest rate swaps.

We closed a secured, non-recourse $415.0 million interest-only loan scheduled to mature in August 2026 .

The loan bears interest at LIBOR + 1.10% , which we have effectively fixed through interest rate swaps at 2.58% until

April 2020 , which then increases to 3.07% until August 2025 .

Part of the proceeds were used to pay-off a $340.0 million loan scheduled to mature in April 2022.

We closed a secured, non-recourse $400.0 million interest-only loan scheduled to mature in September 2026 .

The loan bears interest at LIBOR + 1.15% , which we have effectively fixed through interest rate swaps at 2.44% until September 2024 .

The proceeds were used to pay-off a $400.0 million loan scheduled to mature in November 2022.

We closed a secured, non-recourse $200.0 million interest-only loan scheduled to mature in September 2026 .

The loan bears interest at LIBOR + 1.20% , which we have effectively fixed through interest rate swaps at 2.77% until July 2020 , which then decreases to 2.36% until October 2024 .

Part of the proceeds were used to pay off a $180.0 million loan scheduled to mature in July 2022.

During the fourth quarter of 2019

We closed a secured, non-recourse $400.0 million interest-only loan scheduled to mature in November 2026 .

The loan bears interest at LIBOR + 1.15% , which we have effectively fixed through interest rate swaps at 2.18% until July 2021 , which increases to 2.31% until October 2024 .

Part of the proceeds were used to pay off a $360.0 million loan scheduled to mature in June 2023.

Impact of the COVID-19 Pandemic on our Business

Our buildings have remained open and available to our tenants throughout the pandemic.

Our rent collections continue to be negatively impacted by the pandemic and our markets' very tenant-oriented lease enforcement moratoriums, which are considerably out of sync with other gateway markets.

However, during the third and fourth quarters we did see some incremental improvements in rent collections and leasing activity.

The governmental authorities in the jurisdictions in which we primarily operate, Los Angeles, Beverly Hills and Santa Monica, have passed unusually punitive COVID-19 pandemic ordinances prohibiting evictions and allowing rent deferral for residential, retail, and office tenants, regardless of financial distress.

The ordinances cover our residential, retail and office tenants (with some carve outs for large tenants) and generally prohibit landlords not only from evicting tenants but also from imposing any late fees or interest and allow tenants to pay back the deferred rent over a certain period.

At the end of the second, third and fourth quarters, we wrote off certain tenant receivables and deferred rent receivables, and we had a significant decrease in our parking revenues due to lower utilization.

For the year ended December 31, 2020, charges for uncollectible amounts related to tenant receivables and deferred rent receivables, which were primarily due to the COVID-19 pandemic, reduced our office revenues by $41.0 million.

If we subsequently collect amounts that were previously written off, then the amounts collected will be recorded as an increase to our rental revenues and tenant recoveries in the period they are collected.

See "Rental Revenues and Tenant Recoveries" in Note 2 to our consolidated financial statements in Item 15 of this Report.

We cannot predict how the COVID-19 pandemic will impact our future collections.

During the second, third and fourth quarters, we had savings from variable expenses which partly offset the write-offs of tenant receivables and deferred rent receivables and the decrease in our parking revenues.

While our tenant retention was in-line with long-term averages, our total office portfolio leased percentage declined by 4.7% during 2020 to 88.6% as of December 31, 2020, as new leasing volume remained below pre-COVID-19 levels.

As of December 31, 2020, o ur multifamily portfolio remained essentially fully leased at 98%.

Other considerations that could impact our future leasing, rent collections, and revenue include:

• How long the pandemic continues.

• Whether the local governments that have authorized rent deferrals in our markets modify or extend the deferral terms, or alternatively allow them to expire as written.

• Whether more tenants stop paying rent if the impact to their business grows.

• How attendance in our buildings changes and drives parking revenue or rent collection.

• How leasing activity and occupancy will evolve.

On the capital front, construction is continuing on our two large multifamily development projects, although the projects may take a little longer under current conditions.

Overall, we expect the COVID-19 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 of the risks to our business, please see Item 1A "Risk Factors" in this Report.

Dispositions, Financings and Hedging, Developments and Repositionings

In December 2020, we closed on the sale of an 80,000 square foot office property in Honolulu, which was held by a consolidated JV in which we owned a two-thirds capital interest, for a contract price of $21.0 million in cash, resulting in a gain of $6.4 million after transaction costs.

We closed a health club that we owned and operated at the respective property shortly before we sold the property.

Financings and Hedging

• During the first quarter of 2020, we entered into forward interest rate swaps to hedge future term-loan refinancings.

The forward swaps have an initial notional amount of $495.0 million, with effective dates ranging from June 2020 to March 2021, and maturity dates ranging from April 2025 to June 2025, fixing the one-month LIBOR interest rate in a range of 0.74% to 0.91%.

• During the second quarter of 2020, we refinanced a loan for one of our consolidated JVs.

We closed a secured, non-recourse $450.0 million interest-only loan, which is scheduled to mature in May 2027.

The loan bears interest at LIBOR + 1.35%, which was effectively fixed at 2.26% following the expiration of the current swaps, for an average fixed interest rate of 2.6% per annum through April 2025.

We used part of the proceeds to pay off a $400.0 million loan, secured by the same properties, that was scheduled to mature in July 2024.

See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and derivatives, respectively.

• Residential High-Rise Tower, Brentwood, California

In West Los Angeles, we are building a 34 story high-rise apartment building with 376 apartments.

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As part of the project, we are investing additional capital to build a one acre park on Wilshire Boulevard that will be available to the public and provide a valuable amenity to our surrounding properties and community.

We expect construction to take about three years.

At our Moanalua Hillside Apartments in Honolulu, we completed the construction of an additional 491 new apartments on 28 acres which now join our existing 680 apartments.

We also invested additional capital to upgrade the existing buildings, improve the parking and landscaping, build a new leasing and management office, and construct a new fitness center and two pools.

Construction continues on the project, although we may face some delays as a result of the impact of the COVID-19 pandemic on permitting and other logistics.

We currently expect the first units to be delivered in 2022.

• 1132 Bishop Street, Honolulu, Hawaii

In downtown Honolulu, we are converting a 25 story, 490 thousand square foot office tower into approximately 500 apartments.

We expect the conversion to occur in phases over a number of years as the office space is vacated.

We currently estimate the construction costs to be approximately $80 million to $100.0 million , although the inherent uncertainties of development are compounded by the multi-year and phased nature of the conversion.

Assuming timely city approvals, we expect the first units to be delivered in 2020.

This project will help address the severe shortage of rental housing in Honolulu and revitalize the central business district.

The conversion is occurring in phases over a number of years as the office space is vacated.

We currently estimate the construction costs to be approximately $80 million to $100 million, although the inherent uncertainties of development are compounded by the multi-year and phased nature of the conversion and potential impacts from the COVID-19 pandemic.

We began leasing the new units during the second quarter of 2020.

Repositionings

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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.

We have temporarily suspended work on new office repositioning projects due to the COVID-19 pandemic.

Rental Rate Trends - Total Portfolio

Office Rental Rates

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:

Our office rental rates for 2020 were primarily impacted by the COVID-19 pandemic.

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,

2020 2019 2018 2017 2016

Average straight-line rental rate (1)(2)

$45.26 $49.65 $48.77 $44.48 $43.21

Annualized lease transaction costs (3)

$5.11 $6.02 $5.80 $5.68 $5.74

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(1) These average rental rates are not directly comparable from year to year because the averages are significantly affected from period to period by factors such as the buildings, submarkets, and types of space and terms involved in the leases executed during the respective reporting period.

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(3) Reflects the weighted average leasing commissions and tenant improvement allowances divided by the weighted average number of years for the leases.

Excludes leases substantially negotiated by the seller in the case of acquired properties and leases for tenants relocated from space being taken out of service.

Excludes leases substantially negotiated by the seller in the case of acquired properties and leases for tenants relocated from space at the landlords request.

Office Rent Roll

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Percentage Change

Cash Rent $43.02 $44.16 2.6%

Straight-line Rent $38.71 $45.26 16.9%

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(1) Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the year compared to the prior leases for the same space.

Excludes Short Term Leases, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated from space being taken out of service, and leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe base rent reflects other off-market inducements to the tenant that are not reflected in the prior lease document.

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 from space at landlord's request, leases modified by workout agreements, retail leases, and leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe base rent reflects other off-market inducements to the tenant.

(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 for 2020 were primarily impacted by the COVID-19 pandemic.

The table below presents the average annual rental rate per leased unit for new tenants:

Year Ended December 31,

2020 2019 2018 2017 2016

Average annual rental rate - new tenants (1)

$ 28,416 $ 28,350 $ 27,542 $ 28,501 $ 28,435

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(1) These average rental rates are not directly comparable from year to year because of changes in the properties and units included.

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Multifamily Rent Roll

The rent on leases subject to rent change during the year ended December 31, 2019 (new tenants and existing tenants undergoing annual rent review) was 0.9% higher than the prior rent on the same unit.

The rent on leases subject to rent change during the year ended December 31, 2020 (new tenants and existing tenants undergoing annual rent review) was 3.4% lower than the prior rent on the same unit.

Occupancy Rates - Total Portfolio

Our occupancy rates for 2020 were primarily impacted by the COVID-19 pandemic.

The tables below present the occupancy rates for our total office portfolio and multifamily portfolio:

Occupancy Rates (1) as of:

2020 2019 2018 2017 2016

Office portfolio 87.4 % 91.4 % 90.3 % 89.8 % 90.4 %

Multifamily portfolio (2)

94.2 % 95.2 % 97.0 % 96.4 % 97.9 %

Year Ended December 31,

Average Occupancy Rates (1)(3) :

2020 2019 2018 2017 2016

Office portfolio 89.5 % 90.7 % 89.4 % 89.5 % 90.6 %

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94.2 % 96.5 % 96.6 % 97.2 % 97.6 %

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(1) Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were below that of our existing portfolio.

The Occupancy Rate for our multifamily portfolio was impacted by an acquisition in 2019 and by new units at our Moanalua Hillside Apartments development in Honolulu in 2019 and 2018 - see "Acquisitions, Financings, Developments and Repositionings" above.

(2) The Occupancy Rate for our multifamily portfolio was impacted by our acquisition of The Glendon property in 2019 and by new units at our Moanalua Hillside Apartments development in Honolulu in 2019 and 2018.

(3) Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period.

Office Lease Expirations

As of December 31, 2019 , assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio as follows:

As of December 31, 2020, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio is as follows:

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Comparison of 2020 to 2019

Year Ended December 31,

(Unfavorable)

Year Ended December 31, Favorable

2020 2019 (Unfavorable) % Commentary

(In thousands)

Office rental revenue and tenant recoveries

The increase was due to (i) an increase of $25.4 million of rental revenue and tenant recoveries from properties that we owned throughout both periods, due to higher rental and occupancy rates, (ii) $6.6 million of rental revenue and tenant recoveries from a JV we consolidated in November 2019, and (iii) $2.5 million of rental revenue and tenant recoveries from retail space at the residential community we acquired in June 2019, partly offset by (iv) a decrease of $1.3 million of rental revenue and tenant recoveries at an office building we are converting to a residential building in Hawaii.

Office parking and other income

The increase was due to (i) an increase in parking and other income of $3.9 million from properties we owned throughout both periods, due to higher occupancy and rates, (ii) $1.2 million of parking and other income from a JV we consolidated in November 2019, and (iii) $0.8 million of parking and other income from retail space at the residential community we acquired in June 2019, partly offset by (iv) a decrease of $0.3 million in parking and other income at an office building we are converting to a residential building in Hawaii.

Multifamily revenue

The increase was due to (i) revenues of $9.7 million from the residential community we acquired in June 2019, (ii) an increase in revenues of $4.8 million from the new apartments at our Moanalua Hillside Apartments development, and (iii) an increase in revenues of $2.0 million at our other residential properties, which was primarily due to an increase in rental revenues due to higher rental rates.

Office rental revenue and tenant recoveries $ 680,359 $ 694,315 $ (13,956) (2.0) % The decrease was primarily due to:

(i) a decrease of $58.4 million in rental revenue and tenant recoveries from properties that we owned throughout both periods and (ii) a decrease of $3.5 million in rental revenues and tenant recoveries from a building we are converting from an office building to residential building in Hawaii, partly offset by (a) an increase of $46.4 million of rental revenues and tenant recoveries from a JV we consolidated in November 2019 and (b) an increase of $1.5 million in rental revenues and tenant recoveries from a property that we purchased in June 2019.

The decrease in properties that we owned throughout both periods was primarily due to write-offs of uncollectible receivables and deferred rent receivables and lower collections, both as a result of the COVID-19 pandemic.

Office parking and other income $ 90,810 $ 122,440 $ (31,630) (25.8) % The decrease was due to a decrease of $37.5 million in parking and other income from properties we owned throughout both periods, primarily due to a decrease in parking activity as a result of the COVID-19 pandemic, partly offset by an increase of $6.0 million in parking and other income from a JV we consolidated in November 2019.

Multifamily revenue $ 120,354 $ 119,927 $ 427 0.4 % The increase was due to an increase of:

(i) $5.0 million in revenue from a property that we purchased in June 2019, (ii) an increase of $1.9 million in revenue from the new apartments at our Moanalua Hillside Apartments development, and (iii) an increase of $1.0 million in revenues from an office building we are converting to a residential building in Hawaii, partly offset by (a) a decrease of $4.7 million in revenues at a property where units are temporarily unoccupied as a result of a fire, and (b) a decrease of $2.8 million in revenues from our other properties, which was primarily due to lower occupancy and collections, both as a result of the COVID-19 pandemic.

Multifamily revenues for 2020 included $3.9 million of insurance proceeds related to the fire at one of our properties in January 2020.

Operating expenses

Office rental expenses

The increase was due to (i) an increase of $9.0 million of rental expenses from properties that we owned throughout both periods, (ii) $2.4 million of rental expenses from a JV we consolidated in November 2019, and (iii) $0.8 million of rental expenses from retail space at the residential community we acquired in June 2019, partly offset by (iv) a decrease of $0.5 million in rental expenses at an office building we are converting to a residential building in Hawaii.

The increase in rental expenses from properties that we owned throughout both periods was due to an increase in utility expenses, property taxes, personnel expenses, repairs and maintenance expenses, scheduled services expenses and insurance expense.

Year Ended December 31,

(Unfavorable)

Office rental expenses $ 268,259 $ 264,482 $ (3,777) (1.4) % The increase was due to:

(i) $17.4 million in rental expenses from a JV we consolidated in November 2019, and (ii) an increase of $0.7 million in rental expenses from a property we purchased in June 2019, partly offset by (a) a decrease of $1.6 million in rental expenses from an office building we are converting to a residential building in Hawaii, and (b) a decrease of $12.7 million in rental expenses from our other properties, which was primarily due to a decrease in scheduled services expenses, utility expenses, and repairs and maintenance expenses, as a result of lower utilization caused by the COVID-19 pandemic.

Year Ended December 31, Favorable

2020 2019 (Unfavorable) % Commentary

(In thousands)

Multifamily rental expenses

The increase was due to (i) $3.2 million of rental expenses from the residential community we acquired in June 2019, (ii) an increase in rental expenses of $1.3 million at our residential properties that we owned throughout both periods, and (iii) an increase in rental expenses of $1.1 million from the new apartments at our Moanalua Hillside Apartments development.

The increase in rental expenses from properties that we owned throughout both periods was due to an increase in property taxes, scheduled services expenses, personnel expenses and repairs and maintenance expenses.

General and administrative expenses

The decrease was primarily due to a decrease in personnel expenses.

Depreciation and amortization

The increase was due to (i) an increase in depreciation and amortization of $28.0 million from an office building we are converting to a residential building in Hawaii, due to accelerated depreciation of the building, (ii) $6.0 million of depreciation and amortization from the residential community that we acquired in June 2019, (iii) $3.0 million from a JV we consolidated in November 2019, (iv) an increase in depreciation and amortization of $2.3 million from the new apartments at our Moanalua Hillside Apartments development, and (v) an increase of $8.7 million at our other properties, which reflects activity at our repositioning properties and an increase in investment in real estate balances.

Multifamily rental expenses $ 37,154 $ 33,681 $ (3,473) (10.3) % The increase was primarily due to an increase of $2.8 million in rental expenses from the property we purchased in June 2019, and an increase of $0.2 million in rental expenses from the new apartments at our Moanalua Hillside Apartments development.

General and administrative expenses $ 39,601 $ 38,068 $ (1,533) (4.0) % The increase was primarily due to an increase in personnel expenses.

Depreciation and amortization $ 385,248 $ 357,743 $ (27,505) (7.7) % The increase was due to:

(i) depreciation and amortization of $31.4 million from a JV we consolidated in November 2019, (ii) an increase of $3.2 million in depreciation and amortization from the property we purchased in June 2019, partly offset by (a) a decrease of $2.8 million in depreciation and amortization from an office building we are converting to a residential building in Hawaii, due to less accelerated depreciation of the building in 2020, and (b) a decrease of $4.4 million for our other properties, which was primarily due to property repositioning activity in 2019.

Non-Operating Income and Expenses

The increase was primarily due to an increase in interest income and an increase in revenue from the health club that we own and operate.

Other expenses

The decrease was primarily due to a decrease in expenses related to our property management and other services we provide to our Funds and a decrease in acquisition expenses.

Income from unconsolidated Funds

The increase was primarily due to an increase in net income from our unconsolidated Funds, which was primarily due to an increase in revenues due to an increase in occupancy and rental rates.

Interest expense

The increase was primarily due to loan costs incurred in connection with our debt refinancing activities during the current year.

Gain from consolidation of JV

The gain is due to the consolidation of a JV in November 2019 that was previously accounted for as an unconsolidated Fund using the equity method.

Other income $ 16,288 $ 11,653 $ 4,635 39.8 % The increase was due to a $13.1 million gain from insurance recoveries related to property damage to a building impacted by a fire, partly offset by (i) a decrease of $4.8 million in revenue from a health club in Honolulu that we owned and operated and closed permanently in the fourth quarter of 2020, (ii) a decrease of $1.6 million in income related to our Fund that was consolidated as a JV in November 2019, and (iii) a decrease of $2.1 million in interest income due to lower money market balances and interest rates.

Other expenses $ (2,947) $ (7,216) $ 4,269 59.2 % The decrease was primarily due to a decrease of $3.2 million in expenses for the health club in Honolulu that we closed permanently in the fourth quarter of 2020 and a decrease in expenses of $0.9 million related to our Fund that was consolidated as a JV in November 2019.

Income from unconsolidated Funds $ 430 $ 6,923 $ (6,493) (93.8) % The decrease was primarily due to the consolidation of one of our Funds as a JV in November 2019 and a decrease in income from our remaining Fund in 2020.

The decrease in income from our remaining Fund was primarily due to the Fund's lower net income in 2020 as a result of write-offs of uncollectible receivables and deferred rent receivables, lower collections, and a decrease in parking income, which were all as a result of the COVID-19 pandemic.

Interest expense $ (142,872) $ (143,308) $ 436 0.3 % The decrease was primarily due to loan costs expensed in connection with our debt refinancing activities in 2019, partly offset by interest expense from the debt of a JV that was consolidated in November 2019 and interest expense from the debt to finance the property we purchased in June 2019.

Year Ended December 31, Favorable

2020 2019 (Unfavorable) % Commentary

(In thousands)

Gain on sale of investment in real estate $ 6,393 $ — $ 6,393 100.0 % The increase is due to the sale of an 80,000 square foot office property in Honolulu, which was held by a consolidated JV in which we owned a two-thirds capital interest.

We closed on the sale in December 2020 for a contract price of $21.0 million in cash.

Gain from consolidation of JV $ — $ 307,938 $ (307,938) (100.0) % The decrease is due to the gain in 2019 from the consolidation of a JV in November 2019 that was previously accounted for as an unconsolidated Fund using the equity method.

Comparison of 2019 to 2018

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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 trends in occupancy rates, rental rates and operating costs from year to year, and to compare our performance with other REITs.

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.

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Comparison of 2020 to 2019

Our FFO increased by $25.1 million , or 6.3% , to $424.8 million for 2019 compared to $399.7 million for 2018 , which was primarily due to (i) an increase in operating income from our office portfolio due to an increase in occupancy and rental rates, and operating income from retail space at The Glendon residential community we acquired in June 2019, and (ii) an increase in operating income from our residential portfolio due to operating income from apartments at The Glendon residential community and leasing of new units at our Moanalua Hillside Apartments development, which was partially offset by (iii) loan costs incurred in connection with the new loans we closed.

Our FFO results for 2020 were primarily impacted by the COVID-19 pandemic.

Our FFO decreased by $52.3 million, or 12.3%, to $372.5 million for 2020 compared to $424.8 million for 2019, which was primarily due to:

(i) a decrease in the operating income from our office portfolio (office revenues less office rental expenses), which was primarily due to lower collections, write-offs of uncollectible receivables and deferred rent receivables, and a decrease in parking income, and (ii) a decrease in the operating income from our multifamily portfolio (multifamily revenues less multifamily rental expenses), which was primarily due to an increase in property taxes, insurance premiums and personnel expenses.

Comparison of 2019 to 2018

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Depreciation and amortization of real estate assets (1)

Net income attributable to noncontrolling interests

385,248 357,743

Net (loss) income attributable to noncontrolling interests (1)

(11,868) 54,985

Adjustments attributable to unconsolidated Funds (1)(2)

Adjustments attributable to consolidated JVs (1)(3)

(47,606) (59,505)

Gain on sale of investment in real estate (6,393) —

Gain from consolidation of JV (1)

FFO $ 372,541 $ 424,813

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(1) We restructured one of our unconsolidated Funds in November 2019 after which it was consolidated as a JV.

The various adjustments in the reconciliation of FFO are therefore not directly comparable to the prior period.

See Note 6 to our consolidated financial statements in item 15 of this Report for more information.

(2) Adjusts for our share of our unconsolidated Funds depreciation and amortization of real estate assets.

Adjusts for the net income and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in our consolidated JVs.

(3) 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:

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Comparison of 2020 to 2019:

Our 2019 same properties included 60 office properties, aggregating 15.5 million Rentable Square Feet, and 9 multifamily properties with an aggregate 2,640 units.

The amounts presented include 100% (not our pro-rata share).

Year Ended December 31,

(Unfavorable)

Our same properties for 2020 included 60 office properties, aggregating 16.1 million Rentable Square Feet, and 8 multifamily properties with an aggregate 1,928 units.

The amounts presented reflect 100% (not our pro-rata share).

Our Same Property results for 2020 were primarily impacted by the COVID-19 pandemic.

Year Ended December 31, Favorable

2020 2019 (Unfavorable) % Commentary

(In thousands)

Office revenues

The increase was primarily due to (i) an increase in rental revenues due to an increase in rental and occupancy rates, (ii) an increase in tenant recoveries due to an increase in recoverable operating costs and (iii) an increase in parking and other income.

Office expenses

The increase was primarily due to an increase in property taxes, insurance, utility expenses, personnel expenses and repairs and maintenance expenses.

Multifamily revenues

The increase was primarily due to (i) an increase in rental revenues due to an increase in rental rates and (ii) parking and other income.

Multifamily expenses

The increase was primarily due to an increase in personnel expenses, repairs and maintenance expenses and utility expenses.

Office revenues $ 694,653 $ 789,223 $ (94,570) (12.0) % The decrease was primarily due to:

(i) a decrease in rental revenues due to lower collections and write-offs of uncollectible receivables and deferred rent receivables, (ii) a decrease in parking income due to lower activity, and (iii) a decrease in tenant recoveries due to a decrease in

recoverable operating costs and lower collections and write-offs of uncollectible receivables.

Office expenses (239,032) (251,384) 12,352 4.9 % The decrease was primarily due to a decrease in parking expenses, utility expenses, and janitorial expenses.

Office NOI 455,621 537,839 (82,218) (15.3) %

Multifamily revenues 59,286 62,969 (3,683) (5.8) % The decrease was primarily due to a decrease in rental revenues due to lower collections, rental rates and occupancy.

Multifamily expenses (16,319) (16,075) (244) (1.5) % The increase was primarily due to an increase in insurance expenses and personnel expenses.

Multifamily NOI 42,967 46,894 (3,927) (8.4) %

Total NOI $ 498,588 $ 584,733 $ (86,145) (14.7) %

Reconciliation to GAAP

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Non-comparable multifamily expenses (20,835) (17,606)

NOI 586,110 638,519

General and administrative expenses (39,601) (38,068)

Depreciation and amortization (385,248) (357,743)

Operating income

Other income 16,288 11,653

Other expenses (2,947) (7,216)

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Interest expense (142,872) (143,308)

Gain on sale of investment in real estate 6,393 —

Gain from consolidation of JV — 307,938

Net income attributable to noncontrolling interests

Net income 38,553 418,698

Net loss (income) attributable to noncontrolling interests 11,868 (54,985)

Net income attributable to common stockholders $ 50,421 $ 363,713

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Short-term liquidity

During the year ended December 31, 2020, we generated cash from operations of $420.2 million.

As of December 31, 2020, we had $172.4 million of cash and cash equivalents, and we had a $75.0 million balance on our $400.0 million revolving credit facility.

Our earliest debt maturity is February 28, 2023.

Excluding acquisitions, development projects and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand, cash generated by operations and our revolving credit facility.

See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our revolving credit facility.

See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt.

Long-term liquidity

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We plan to meet our long-term liquidity needs through long-term secured non-recourse indebtedness, the issuance of equity securities, including common stock and OP Units, as well as property dispositions and JV transactions.

We have an ATM program which would allow us, subject to market conditions, to sell up to an additional $198 million of shares of common stock as of the date of this Report.

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 as of the date of this Report.

We only use property level, non-recourse debt.

As of December 31, 2020, approximately 41% of our total office portfolio is 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.

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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.

Contractual obligations as of December 31, 2019

Payment due by period

(In thousands)

Term loan principal payments (1)

Term loan interest payments (2)

Ground lease payments (3)

Development commitments (4)

Capital expenditures and tenant improvements commitments (5)

____________________________________________________

Reflects the future principal payments due on our consolidated secured notes payable and revolving credit facility, excluding any maturity extension options.

See Note 8 to our consolidated financial statements in Item 15 of this Report.

Reflects the future interest payments due on our consolidated secured notes payable and revolving credit facility, excluding any maturity extension options.

The interest payments include the effect of interest rate swaps when relevant, and are based on the USD one-month LIBOR rate as of December 31, 2019 when floating.

Future interest payments on our revolving credit facility are based on the balance as of December 31, 2019 .

See Note 8 to our consolidated financial statements in Item 15 of this Report.

Reflects the future minimum ground lease payments.

See Note 4 to our consolidated financial statements in Item 15 of this Report.

See "Acquisitions, Financings, Developments and Repositionings" for a discussion of our developments.

Reflects the aggregate remaining contractual commitment for capital expenditure projects and repositionings, as well as tenant improvements.

See "Acquisitions, Financings, Developments and Repositionings" for a discussion of our repositionings.

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;

• Note 17 - developments, capital expenditure projects and repositionings.

Off-Balance Sheet Arrangements

Unconsolidated Fund's Debt

Our unconsolidated Fund has its own secured non-recourse debt, and we have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to that loan.

Our Fund has its own secured non-recourse debt, and we have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to that loan.

We have also guaranteed the related swap.

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Net cash provided by operating activities (1)

$ 420,218 $ 469,586 $ (49,368) (10.5) %

Net cash used in investing activities (2)

Cash provided by (used in) financing activities (3)

$ (265,175) $ (649,668) $ (384,493) (59.2) %

Cash (used in) provided by financing activities (3)

$ (136,330) $ 187,538 $ (323,868) (172.7) %

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(1) Our cash flows provided by operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectability of rent and recoveries from our tenants, and the level of our operating expenses and general and administrative expenses, and interest expense.

The increase was primarily due to:

(i) an increase in operating income from our office portfolio due to an increase in occupancy and rental rates, and operating income from retail space at The Glendon residential community we acquired in June 2019, and (ii) an increase in operating income from our residential portfolio due to operating income from apartments at The Glendon residential community and leasing of new units at our Moanalua Hillside Apartments development.

The decrease in cash provided by operating activities was primarily due to:

(i) a decrease in cash generated by our office portfolio, which was primarily due to a decrease in collections and parking income as a result of the COVID-19 pandemic, (ii) an increase of $8.6 million in cash paid for interest primarily due to the consolidation of one of our Funds as a JV in November 2019, (iii) a decrease of $6.4 million in operating distributions from our unconsolidated real estate funds primarily due to the consolidation of one of our Funds as a JV in November 2019, and (iv) a decrease in cash generated by our multifamily portfolio, which was primarily due to an increase in property taxes, insurance premiums and personnel expenses.

(2) Our cash flows used in investing activities are generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures.

The increase is primarily due to $365.9 million paid for The Glendon residential community in 2019 and an increase of $81.4 million paid for additional interests in unconsolidated Funds in 2019, partially offset by $39.2 million of cash assumed from the consolidation of a JV.

Our cash flows provided by financing activities are generally impacted by our borrowings and capital activities, as well as dividends and distributions paid to common stockholders and noncontrolling interests, respectively.

The increase is primarily due to (i) $201.0 million of net proceeds from the issuance of common stock, (ii) $163.6 million of contributions from noncontrolling interests in consolidated JVs, and (iii) an increase of $77.6 million in net borrowings, partially offset by (a) an increase in loan cost payments of $18.4 million , (b) an increase in distributions to noncontrolling interests of $12.4 million , and (c) an increase in dividends paid to common stockholders of $9.8 million .

The decrease in cash used in investing activities was primarily due to:

(i) $365.9 million paid for a property that we purchased in June 2019, (ii) a decrease of $84.2 million paid for additional interests in unconsolidated Funds, (iii) a decrease of $33.0 million in capital expenditures for improvements to real estate, and (iv) $20.7 million in net proceeds from the sale of an office property in Honolulu in December 2020, partly offset by (a) an increase of $92.5 million in capital expenditures for developments and (b) $39.2 million of cash assumed from the consolidation of a JV in 2019.

(3) Our cash flows used in 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 is primarily due to (i) $201.0 million of net proceeds from the issuance of common stock in 2019, (ii) $163.6 million of contributions from noncontrolling interests in consolidated JVs in 2019, and (iii) an increase of $16.7 million in dividends paid to common stockholders, partly offset by (a) an increase of $35.0 million in net borrowings and (b) a decrease of $17.5 million in loan cost payments.

Comparison of 2019 to 2018

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The capitalization of development costs requires judgment, and can directly and materially impact our results of operations because, for example, (i) if we don't capitalize costs that should be capitalized, then our operating expenses would be overstated during the development period, and the subsequent depreciation of the developed real estate would be understated, or (ii) if we capitalize costs that should not be capitalized, then our operating expenses would be understated during the development period, and the subsequent depreciation of the real estate would be overstated.

We capitalized development costs of $75.3 million , $78.7 million and $66.0 million during 2019 , 2018 or 2017 , respectively.

We capitalized development costs of $186.4 million, $75.3 million and $78.7 million during 2020, 2019 and 2018, respectively.

Impairment of Long-Lived Assets

We assess our investment in real estate and our investment in our Funds for impairment on a periodic basis, and whenever events or changes in circumstances indicate that the carrying value of our investments may not be recoverable.

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.

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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 during 2019 , 2018 or 2017 .

In downtown Honolulu, 1132 Bishop Street, we are converting a 25 story, 490,000 square foot office tower into approximately 500 apartments.

We expect the conversion to occur in phases over a number of years as the office space is vacated.

Due to the significant change in planned use of the property, we performed an impairment assessment by comparing the property's expected undiscounted cash flows to the property's carrying value plus the expected development costs and concluded that there was no impairment as of December 31, 2019.

Based upon such periodic assessments we did not record any impairment losses for our long-lived assets and Funds during 2020, 2019 or 2018.

In downtown Honolulu, we are converting a 25 story, 490,000 square foot office tower into approximately 500 apartments in phases over a number of years as the office space is vacated.

Due to the significant change in planned use of the property, we performed an annual impairment assessment in 2019 by comparing the property's expected undiscounted cash flows to the property's carrying value plus the expected development costs and concluded that there was no impairment loss.

We determined the undiscounted cash flows using our estimates of the expected future cash flows which included, but were not limited to, our estimates of property's net operating income, and capitalization rates.

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 complete impairment model guidance within Topic 842.

Under this model, commencing on January 1, 2019, we no longer maintain a general reserve related to our receivables, and instead analyze, on a lease-by-lease basis, whether amounts due under the operating lease are deemed probable for collection.

We write off tenant and deferred rent receivables as a charge against rental revenue in the period we determine the lease payments are not probable for collection.

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 the year ended December 31, 2020, our results of operations were materially impacted by the COVID-19 pandemic.

See "Impacts of the COVID-19 Pandemic on our Business".

Revenue Recognition for Tenant Recoveries

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• judging whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease.

These estimates require judgment and involve complex calculations.

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.

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Our estimate of the discount for post-vesting restrictions requires judgment.

If our estimate of the discount is too high or too low it would result in the fair value of the awards that we make being too low or too high, respectively, which would result in an under- or over-expense of stock-based compensation, respectively, and this under- or over-expensing of stock-based compensation could be material to our net income.

Stock-based compensation expense was $21.4 million, $18.4 million and $22.3 million for 2020, 2019 and 2018, respectively.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis