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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-22 · 166 added, 152 removed, 229 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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.

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 2021, our results of operations were impacted by the COVID-19 pandemic and capital transactions - see "Impact of the COVID-19 Pandemic on our Business" and "Financings, Developments and Repositionings" further below.

Douglas Emmett, Inc.

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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 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.

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, 2021, our portfolio consisted of the following (including ancillary retail space):

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Rentable Square Feet (in thousands) (3)

17,775 18,160

Leased rate 87.7% 87.6%

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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 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.

(2) Our Total Portfolio includes our Consolidated Portfolio as well as two properties totaling 0.4 million square feet owned by our unconsolidated Fund.

See Note 6 to our consolidated financial statements in Item 15 of this Report for more information about our unconsolidated Fund.

Through our subsidiaries, we wholly-own 53 office properties totaling 13.6 million square feet and 11 residential properties with 4,038 apartments.

Through three consolidated JVs, we partially own an additional 16 office properties totaling 4.2 million square feet and one residential property with 350 apartments.

Our Consolidated Portfolio also includes 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 (the land parcels are not included in the number of Class A Properties).

(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, 2021, we removed approximately 313,000 Rentable Square Feet of vacant space at an office building that we are converting to residential apartments.

See "Financings, Developments and Repositionings" further below.

Revenues by Segment and Location

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

During 2021, 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.

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%.

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 for 2021 generally compare favorably with 2020, due to the gradual recovery, better collections and lower write-offs of uncollectible receivables, and an increase in tenant recoveries.

Charges for uncollectible tenant receivables and deferred rent receivables, which were primarily due to the COVID-19 pandemic, reduced our rental revenues and tenant recoveries by $3.0 million and $41.0 million for 2021 and 2020, respectively.

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.

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

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 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.

• 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;

• 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.

Financings, Developments and Repositionings

During the first quarter of 2021 :

• We paid down the principal balance of our unconsolidated Fund's term loan by $5.25 million from $110.0 million to $104.75 million.

The loan was subsequently paid off in the third quarter of 2021 - see below.

• Interest rate swaps which hedged a $580.0 million interest-only term loan for one of our consolidated JV's expired and were replaced by forward swaps executed in 2020.

This reduced the term-loan swap-fixed interest rate from 2.37% to 2.17%.

The loan was subsequently paid off in the third quarter of 2021 - see below.

During the second quarter of 2021 :

• We closed a secured, non-recourse $300.0 million interest-only term loan scheduled to mature in May 2028.

The loan bears interest at LIBOR + 1.40% (with a zero-percent LIBOR floor), which has been effectively fixed at 2.21% until June 2026 with interest rate swaps (which do not have zero-percent LIBOR floors).

The loan is secured by three of our wholly-owned office properties that were previously unencumbered.

We used $175.0 million of the proceeds to pay off our revolving credit facility balance.

During the third quarter of 2021 :

• We closed a secured, non-recourse $625.0 million interest-only term loan for one of our consolidated JVs.

The loan matures in August 2028.

The loan bears interest at LIBOR + 1.35% (with a zero-percent LIBOR floor), which has been effectively fixed at 2.12% until June 2025 with interest rate swaps (which do not have zero-percent LIBOR floors).

The loan is secured by the JV's four properties.

We used $580.0 million of the proceeds to pay off a loan that was secured by the same properties.

• We closed a secured, non-recourse $115.0 million interest-only term loan for our unconsolidated Fund.

The loan matures in September 2028.

Starting on October 1, 2021, the loan bears interest at LIBOR + 1.35% (with a zero-percent LIBOR floor), which has been effectively fixed at 2.19% until October 2026 with interest rate swaps (which do not have zero-percent LIBOR floors).

The loan is secured by the Fund's two properties.

We used $104.75 million of the proceeds to pay off the Fund's term loan that was secured by the same properties.

We have made certain guarantees related to the loan and the swaps - see "Guarantees" in Note 17 to our consolidated financial statements in Item 15 of this Report.

During the fourth quarter of 2021 :

• We closed a secured, non-recourse $300.0 million interest-only term loan for one of our consolidated wholly-owned subsidiaries.

The loan matures in January 2029 and bears interest at SOFR + 1.56% (with a zero-percent SOFR floor).

The loan was effectively fixed with an interest rate swap (which does not have a zero-percent SOFR floor) at 3.42% until December 31, 2021, and 2.66% thereafter until January 2027.

We used the proceeds from the new loan to pay off a $300.0 million loan secured by the same property.

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.

The tower is being built on a site that is directly adjacent to an existing office building and a 712 unit residential property, both of which we own.

We expect the cost of the development to be approximately $180 million to $200 million, which does not include the cost of the land which we have owned since 1997.

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

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.

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.

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 we expect to place the building into service during the first quarter of 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.

As of December 31, 2021, we had delivered and leased approximately fifty-percent of the planned units.

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

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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

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

Our office rental rates for 2021 and 2020 were adversely impacted by the COVID-19 pandemic, although these declines 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:

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

Because straight-line rent takes into account the full economic value of each lease, including rent concessions and escalations, we believe that it may provide a better comparison than ending cash rents, which include the impact of the annual escalations over the entire term of the lease.

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 landlords request.

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

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

Excludes leases with a term of twelve months or less, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated 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.

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

Our multifamily rental rates for 2021 and 2020 were adversely impacted by the COVID-19 pandemic.

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

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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.

(i) the average for 2018 decreased from 2017 because we added a significant number of units at our Moanalua Hillside Apartments development in Honolulu, where the rental rates are lower than the average in our portfolio, (ii) the average for 2019 increased from 2018 because we acquired The Glendon where higher rental rates offset the effect of adding additional units at our Moanalua Hillside Apartments development, and (iii) the average for 2020 increased from 2019 because we added a significant number of units at our Bishop Place development in Honolulu, where the rental rates are higher than the average in our portfolio.

Multifamily Rent Roll

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.

The rent on leases subject to rent change during 2021 (new tenants and existing tenants undergoing annual rent review) was 2.1% higher on average 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.

Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2021 and 2020.

Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, but have improved during 2021.

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

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

(2) 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.

(2) The Occupancy Rate for our multifamily portfolio was impacted by our acquisition of The Glendon property in 2019 and 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, 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:

As of December 31, 2021, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio as follows:

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Comparison of 2021 to 2020

Year Ended December 31, Favorable

2020 2019 (Unfavorable) % Commentary

Our results in both periods were adversely impacted by the COVID-19 pandemic.

The first three months of the comparable period results were largely unaffected by the COVID-19 pandemic.

The current period generally compares favorably with the comparable period due to the gradual recovery, better collections and lower write-offs of uncollectible receivables, and an increase in tenant recoveries.

Year Ended December 31, Favorable (Unfavorable)

2021 2020 Change % Commentary

(In thousands)

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.

Office rental revenue and tenant recoveries $ 704,946 $ 680,359 $ 24,587 3.6 % The increase was primarily due to:

(i) better collections and a decrease in write-offs of uncollectible receivables, and (ii) an increase in tenant recoveries.

This was partly offset by a decrease in rental revenues due to:

(i) a decrease in occupancy and (ii) lower accretion from below-market leases.

Office parking and other income $ 81,924 $ 90,810 $ (8,886) (9.8) % The decrease was primarily due to a decrease in parking income due to lower parking activity.

Multifamily revenue $ 131,527 $ 120,354 $ 11,173 9.3 % The increase was primarily due to higher rental revenues due to:

(i) higher occupancy and better collections, and (iii) the new units at our Bishop Place development project in Hawaii.

Operating expenses

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 $ 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.

Office rental expenses $ 265,376 $ 268,259 $ 2,883 1.1 % The decrease was primarily due to:

(i) a decrease in advocacy expenses, (ii) a decrease in parking and janitorial expenses due to lower tenant utilization, and (iii) a decrease in personnel expenses.

The decrease in those expenses was partly offset by an increase in insurance expense and property taxes.

Multifamily rental expenses $ 38,025 $ 37,154 $ (871) (2.3) % The increase was primarily due to:

(i) an increase in insurance and utility expenses, and (ii) the new units at our Bishop Place development project in Hawaii.

The increase in those expenses was partly offset by a decrease in personnel expenses, repairs and maintenance expenses, scheduled services expenses and legal expenses.

General and administrative expenses $ 42,554 $ 39,601 $ (2,953) (7.5) % The increase was primarily due to an increase in legal and advocacy expenses.

Depreciation and amortization $ 371,289 $ 385,248 $ 13,959 3.6 % The decrease was due to higher accelerated depreciation in the comparable period for our Bishop Place development project in Hawaii.

Non-Operating Income and Expenses

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

Other income $ 2,465 $ 16,288 $ (13,823) (84.9) % The decrease was primarily due to:

(i) higher insurance recoveries in the comparable period related to property damage to a building impacted by a fire, and (ii) revenues in the comparable period from a health club in Honolulu that we closed permanently in the fourth quarter of 2020.

Other expenses $ (937) $ (2,947) $ 2,010 68.2 % The decrease was primarily due to expenses in the comparable period for the health club in Honolulu that we closed.

Year Ended December 31, Favorable (Unfavorable)

2021 2020 Change % 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.

Income from unconsolidated Funds $ 946 $ 430 $ 516 120.0 % The increase was due to an increase in the net income of Partnership X, which was primarily due to better collections and lower write-offs of uncollectible receivables.

Interest expense $ (147,496) $ (142,872) $ (4,624) (3.2) % The increase was primarily due to:

(i) an increase in debt, (ii) higher loan costs and (iii) lower debt premium accretion, partly offset by an increase in interest capitalized related to development activity.

Gain on sale of investment in real estate $ — $ 6,393 $ (6,393) (100.0) % We did not sell any properties in 2021.

In 2020, we sold an 80,000 square foot office property in Honolulu.

Comparison of 2020 to 2019

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 14, 2020 for a discussion of our results of operations for the year ended December 31, 2019.

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 22, 2021 for a comparison of our results of operations for 2020 compared to 2019.

Non-GAAP Supplemental Financial Measure:

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Comparison of 2021 to 2020

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.

During 2021, FFO increased by $10.9 million, or 2.9%, to $383.5 million, compared to $372.5 million for 2020.

The increase was primarily due to:

(i) an increase in revenues from our office portfolio due to better collections and lower write-offs of uncollectible receivables and an increase in tenant recoveries, and (ii) an increase in revenues from our multifamily portfolio due to higher occupancy, better collections and new units at our Bishop Place development project in Hawaii.

Comparison of 2020 to 2019

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 14, 2020 for a discussion of our FFO for the year ended December 31, 2019.

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 22, 2021 for a comparison of our FFO for 2020 compared to 2019.

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 Funds FFO) to net income attributable to common stockholders computed in accordance with 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,

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Depreciation and amortization of real estate assets 371,289 385,248

385,248 357,743

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

(11,868) 54,985

Adjustments attributable to unconsolidated Funds (1)(2)

Net loss attributable to noncontrolling interests (9,136) (11,868)

Adjustments attributable to unconsolidated Fund (1)

Adjustments attributable to consolidated JVs (2)

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

Gain from consolidation of JV (1)

FFO $ 383,456 $ 372,541

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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.

(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.

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Our same properties for 2021 included 67 office properties, aggregating 17.6 million Rentable Square Feet, and 10 multifamily properties with an aggregate 3,449 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.

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

Our Same Property results in both periods were adversely affected by the COVID-19 pandemic.

The first three months of the comparable period results were largely unaffected by the COVID-19 pandemic.

Year Ended December 31, Favorable

2020 2019 (Unfavorable) % Commentary

(Unfavorable)

2021 2020 Change % Commentary

(In thousands)

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 revenues $ 776,733 $ 756,080 $ 20,653 2.7 % The increase was primarily due to:

(i) better collections and a decrease in write-offs of uncollectible receivables, and (ii) an increase in tenant recoveries.

This was partly offset by:

(i) a decrease in rental revenues due to a decrease in occupancy, (ii) lower accretion from below-market leases, and (iii) a decrease in parking income due to lower parking activity.

Office expenses (258,263) (260,102) 1,839 0.7 % The decrease was primarily due to:

(i) a decrease in advocacy expenses, (ii) a decrease in parking and janitorial expenses due to lower tenant utilization, and (iii) a decrease in personnel expenses.

The decrease in those expenses was partly offset by an increase in insurance expense and property taxes.

Office NOI 518,470 495,978 22,492 4.5 %

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 revenues 105,743 100,293 5,450 5.4 % The increase was primarily due to an increase in rental revenues due to an increase in occupancy and better collections.

Multifamily expenses (31,958) (31,028) (930) (3.0) % The increase was primarily due to an increase in insurance and utility expenses.

The increase in those expenses was partly offset by a decrease in repairs and maintenance, legal and scheduled services expenses.

Multifamily NOI 73,785 69,265 4,520 6.5 %

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Reconciliation to GAAP

The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders:

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,

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Other expenses (937) (2,947)

Income from unconsolidated Funds 430 6,923

Income from unconsolidated Fund 946 430

Interest expense (147,496) (142,872)

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

Gain from consolidation of JV — 307,938

Net income 56,131 38,553

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

Net loss attributable to noncontrolling interests 9,136 11,868

Net income attributable to common stockholders $ 65,267 $ 50,421

Comparison of 2020 to 2019

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 14, 2020 for a discussion of our same property NOI for the year ended December 31, 2019.

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 22, 2021 for a comparison of our same property NOI for 2020 compared to 2019.

Liquidity and Capital Resources

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.

During 2021, we generated cash from operations of $447.0 million.

As of December 31, 2021, we had $335.9 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.

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.

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

Long-term liquidity

Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development projects and debt refinancings.

We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to the requirement to distribute a substantial majority of our income on an annual basis imposed by REIT federal tax rules.

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 $400.0 million of shares of common stock as of the date of this Report.

Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions and debt refinancings.

We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to the requirement to distribute at least 90% of our income on an annual basis imposed by REIT federal tax rules.

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 property level, non-recourse debt.

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

As of December 31, 2021, 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 between one to two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty.

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.

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• 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.

• Note 17 - contractual commitments.

Off-Balance Sheet Arrangements

Unconsolidated Fund's Debt

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.

Our Fund has agreed to indemnify us for any amounts that we would be required to pay under that agreement.

Partnership X 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, 2021, all of the obligations under the respective loan and swap agreements have been performed in accordance with the terms of those agreements.

For information regarding our Fund and our Fund's debt, see Notes 6 and 17, respectively, to our consolidated financial statements in Item 15 of this Report.

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.

Comparison of 2021 to 2020

2020 2019 Increase (Decrease) %

Our operating cash flows in both periods were adversely impacted by the COVID-19 pandemic.

The first three months of 2020 were largely unaffected by the COVID-19 pandemic.

Year Ended December 31, Increase (Decrease)

(In thousands)

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$ (288,708) $ (265,175) $ (23,533) (8.9) %

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

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

$ 5,246 $ (136,330) $ 141,576 103.8 %

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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 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 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.

(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 was primarily due to:

(i) an increase in revenues from our office portfolio due to better collections and an increase in tenant recoveries, and (ii) an increase in revenues from our multifamily portfolio due to higher occupancy, better collections and new units at our Bishop Place development project in Hawaii.

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

The decrease in cash was primarily due to:

(i) an increase in capital expenditures for developments of $30.4 million, (ii) proceeds from the sale of a property in the comparable period of $20.7 million, and (iii) a decrease in insurance recoveries for property damage of $14.1 million, which was partly offset by:

(a) a decrease in capital expenditures for improvements to real estate of $34.9 million, and (b) the acquisition of additional interests in our Fund in the comparable period of $6.6 million.

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

The increase in cash was primarily due to an increase in net borrowing of $145.0 million.

Comparison of 2020 to 2019

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 14, 2020 for a discussion of our cash flows for the year ended December 31, 2019.

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 22, 2021 for a comparison of our cash flows for 2020 compared to 2019.

Critical Accounting Policies

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Based upon such periodic assessments we did not record any impairment losses for our long-lived assets and Funds during 2021, 2020 or 2019.

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

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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.

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.

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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".

During 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 $3.0 million and $41.0 million in 2021 and 2020, respectively.

Revenue Recognition for Tenant Recoveries

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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