Douglas Emmett Inc 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our Forward Looking Statements disclaimer and our consolidated financial statements and related notes in Item 15 of this Report. During 2022, our results of operations were impacted by the COVID-19 pandemic, inflation and capital transactions - see "Impact of the COVID-19 Pandemic on our Business" and "Acquisitions, Financings, Developments and Repositionings" further below. Overview Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. Through our interest in our Operating Partnership and its subsidiaries, our consolidated JVs and our unconsolidated Fund, we are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and in Honolulu, Hawaii. We focus on owning, acquiring, developing and managing a substantial market share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities. As of December 31, 2022, our portfolio consisted of the following (including ancillary retail space and excluding two parcels of land from which we receive rent under ground leases): Consolidated Portfolio (1) Total Portfolio (2) Office Class A Properties 69 71 Rentable Square Feet (in thousands) (3) 17,681 18,067 Leased rate 87.1% 87.0% Occupancy rate 83.7% 83.7% Multifamily Properties 14 14 Units 5,013 5,013 Leased rate (4) 99.4% 99.4% Occupancy rate (4) 98.1% 98.1% _____________________________________________________________________ (1) Our Consolidated Portfolio includes the properties in our consolidated results. Through our subsidiaries, we wholly-own 53 office properties totaling 13.5 million square feet and 12 residential properties with 4,543 apartments. Through four consolidated JVs, we partially own an additional 16 office properties totaling 4.2 million square feet and two residential properties with 470 apartments. Our Consolidated Portfolio excludes two wholly-owned land parcels from which we receive ground rent from ground leases to the owners of a Class A office building and a hotel. (2) Our Total Portfolio includes our Consolidated Portfolio as well as two properties totaling 0.4 million square feet owned by our unconsolidated Fund, Partnership X. See Note 6 to our consolidated financial statements in Item 15 of this Report for more information about Partnership X. (3) As of December 31, 2022, we removed approximately 406,000 Rentable Square Feet of vacant space at an office building that we are converting to residential apartments. See "Acquisitions, Financings, Developments and Repositionings" further below. (4) Calculations exclude 94 units temporarily unoccupied as a result of a fire and 376 units at a newly constructed property undergoing lease up. Revenues by Segment and Location During 2022, revenues from our Consolidated Portfolio were derived as follows: _____ _ 40 Table of Contents Impact of the COVID-19 Pandemic on our Business Our buildings have remained open and available to our tenants throughout the pandemic. The governmental authorities in the jurisdictions in which we primarily operate, California, Los Angeles, Beverly Hills and Santa Monica, passed COVID-19 pandemic relief ordinances of varying duration and scope (residential, retail, and office), and with varying exemptions, that generally prohibit evictions, late fees and interest and allow rent deferral over certain periods. While improving, our rent collections continue to be negatively impacted by the remaining impact of these ordinances and the pandemic. Our results of operations since 2020 have been adversely impacted by the COVID-19 pandemic. Our results of operations for 2022 generally compare favorably with 2021, primarily due to: (i) the gradual recovery, (ii) better collections from our tenants, (iii) lower write-offs of uncollectible tenant receivables, (iv) restoring certain office tenants to accrual basis accounting, (v) higher office parking income, (vi) a multifamily property we acquired in the second quarter of 2022, (vii) new units from our multifamily development projects, and (viii) higher rental rates for our multifamily portfolio. The favorable impacts were partly offset by the impact of inflation on our rental expenses. The pandemic had a significant impact on our collections, although they improved in 2021 and 2022. Charges for uncollectible office tenant receivables and deferred rent receivables, which were primarily due to the COVID-19 pandemic, reduced our office revenues by $0.6 million and $3.0 million for 2022 and 2021, respectively. We restored accrual basis accounting for certain office tenants that were previously determined to be uncollectible and accounted for on a cash basis of accounting, which increased our office revenues by $3.6 million for 2022. See "Collectibility" in our revenue recognition accounting policy in Note 2 to our consolidated financial statements in Item 15 of this Report regarding our accounting policy for collections. It is unclear how the pandemic will impact our future collections. Other considerations that could impact our future leasing, rent collections, and revenue include: • How long the pandemic continues; • Whether governmental authorities authorize any new tenant protections; • Whether more tenants stop paying rent if their business worsens; • How attendance in our buildings changes and impacts parking revenue or rent collection; and/or • How leasing activity and occupancy will evolve, including any long-term trends after the pandemic ends. Overall, we expect the pandemic to continue to adversely impact many parts of our business, and those impacts have been, and will continue, to be material. For more information about the risks to our business, see "Risk Factors” in Part I, Item 1A. of this Report. Acquisitions, Financings, Developments and Repositionings Acquisitions Acquisition of 1221 Ocean Avenue On April 26, 2022, we paid $330.0 million, excluding acquisition costs, to acquire a luxury multifamily apartment building with 120 units, located at 1221 Ocean Avenue in Santa Monica. We acquired the property through a new consolidated JV that we manage and in which we own a 55% interest. We contributed $99.0 million to the JV and an outside investor contributed $81.0 million to the JV. The JV partly financed the acquisition with a $175.0 million secured, non-recourse interest-only term loan that matures in April 2029. We swap-fixed the interest rate on the loan at 3.90% using interest rate swaps, which expire in May 2026. The acquired property's results of operations are included in our consolidated operating results from the date of acquisition. See Note 3 to our consolidated financial statements in Item 15 of this Report for the purchase price allocation. 41 Table of Contents Financings During the first quarter of 2022 : • Interest rate swaps which hedged a $300.0 million interest-only term loan for one of our consolidated wholly- owned subsidiaries expired, and were replaced with an interest rate swap that reduced the term-loan swap-fixed interest rate to 2.66% from 3.42%. During the second quarter of 2022 : • A new consolidated JV that we manage and in which we own a fifty-five percent interest partly financed the purchase of a residential property with a new term loan, see "Acquisitions" above. • Interest rate swaps that hedged a $550.0 million floating-rate term loan that matures in June 2027 expired on June 1, 2022, so that the interest on that loan is currently floating. During the third quarter of 2022 : • Interest rate swaps which hedged a $450.0 million interest-only term loan for one of our consolidated JV's expired, and were replaced with existing interest rate swaps that were upsized. This reduced the term-loan swap-fixed interest rate to 2.26% from 3.04%. During the fourth quarter of 2022 : • We did not have any financing transactions during the fourth quarter of 2022. See Notes 3, 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our acquisitions, debt and derivatives, respectively. Developments • Residential High-Rise Tower, Brentwood, California - "The Landmark Los Angeles" In West Los Angeles, we completed the construction of a 34-story high-rise apartment building with 376 apartments and placed it in service in 2022. The tower was built on a site that is directly adjacent to a 394 thousand square foot office building, a one acre park, and a 712 unit residential property, all of which we own. • 1132 Bishop Street, Honolulu, Hawaii - "The Residences at Bishop Place" In downtown Honolulu, we are converting a 25-story, 493 thousand square foot office tower into 493 rental apartments. This project is helping to address the severe shortage of rental housing in Honolulu and revitalize the central business district, where we own a significant portion of the Class A office space. As of December 31, 2022, we had delivered seventy-two percent of the planned units and leased all of the units delivered. The conversion will continue in phases through 2025 as the remaining office space is vacated, therefore, the expected timing of the remaining spending is uncertain. Repositionings We often strategically purchase properties with large vacancies or expected near-term lease roll-over and use our knowledge of the property and submarket to reposition the property for the optimal use and tenant mix. In addition, we may reposition properties already in our portfolio. The work we undertake to reposition a building typically takes months or even years, and could involve a range of improvements from a complete structural renovation to a targeted remodeling of selected spaces. During the repositioning, the affected property may display depressed rental revenue and occupancy levels that impact our results and, therefore, comparisons of our performance from period to period. 42 Table of Contents Rental Rate Trends - Total Portfolio Office Rental Rates Our office rental rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022, although the lower rental rates for the respective periods were partly offset by lower tenant improvement costs. The table below presents the average annual rental rate per leased square foot and the annualized lease transaction costs per leased square foot for leases executed in our total office portfolio during the respective periods: Year Ended December 31, 2022 2021 2020 2019 2018 Average straight-line rental rate (1)(2) $46.78 $44.99 $45.26 $49.65 $48.77 Annualized lease transaction costs (3) $5.85 $4.77 $5.11 $6.02 $5.80 ___________________________________________________ (1) These average rental rates are not directly comparable from year to year because the averages are significantly affected from period to period by factors such as the buildings, submarkets, and types of space and terms involved in the leases executed during the respective reporting period. Because straight-line rent takes into account the full economic value during the full term of each lease, including rent concessions and escalations, we believe that it may provide a better comparison than ending cash rents, which include the impact of the annual escalations over the entire term of the lease. (2) Reflects the weighted average straight-line Annualized Rent. (3) Reflects the weighted average leasing commissions and tenant improvement allowances divided by the weighted average number of years for the leases. Excludes leases substantially negotiated by the seller in the case of acquired properties and leases for tenants relocated from space at the landlord's request. Office Rent Roll Our office rent roll continued to be adversely impacted by the COVID-19 pandemic during 2022. The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio: Year Ended December 31, 2022 Rent Roll (1)(2) Expiring Rate (2) New/Renewal Rate (2) Percentage Change Cash Rent $49.19 $45.66 (7.2)% Straight-line Rent $44.21 $46.78 5.8% ___________________________________________________ (1) Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the year compared to the prior leases for the same space. Excludes leases with a term of twelve months or less, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated at the landlord's request, leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe the base rent reflects other off-market inducements to the tenant, and other non-comparable leases. (2) Our office rent roll can fluctuate from period to period as a result of changes in our submarkets, buildings and term of the expiring leases, making these metrics difficult to predict. 43 Table of Contents Multifamily Rental Rates Our multifamily rental rates were adversely impacted by the COVID-19 pandemic in 2020, but improved in 2021 and 2022. The table below presents the average annual rental rate per leased unit for new tenants: Year Ended December 31, 2022 2021 2020 2019 2018 Average annual rental rate - new tenants (1)(2) $ 31,763 $ 29,837 $ 28,416 $ 28,350 $ 27,542 _____________________________________________________ (1) Calculations exclude 376 units at a newly constructed property undergoing lease up. (2) These average rental rates are not directly comparable from year to year because of changes in the properties and units included. For example: (i) In 2019, the average was impacted by our acquisition of The Glendon where rental rates were higher than the average in our portfolio, (ii) In 2020, the average was impacted by the addition of a significant number of units at our Bishop Place development in Honolulu, where the rental rates were higher than the average in our portfolio, and (iii) In 2022, the average was impacted by the acquisition of 1221 Ocean Avenue, where the rental rates were higher than the average in our portfolio. See "Acquisitions, Financings, Developments and Repositionings" for more information regarding this acquisition. Multifamily Rent Roll The rent on leases subject to rent change during 2022 (new tenants and existing tenants undergoing annual rent review) was 6.4% higher on average than the prior rent on the same unit. This excludes leasing at a newly constructed property undergoing lease up. Occupancy Rates - Total Portfolio Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022. Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, but recovered during 2021 and 2022. The tables below present the occupancy rates for our total office portfolio and multifamily portfolio: December 31, Occupancy Rates (1) as of: 2022 2021 2020 2019 2018 Office portfolio 83.7 % 84.9 % 87.4 % 91.4 % 90.3 % Multifamily portfolio (2) 98.1 % 98.0 % 94.2 % 95.2 % 97.0 % Year Ended December 31, Average Occupancy Rates (1)(3) : 2022 2021 2020 2019 2018 Office portfolio 84.2 % 85.7 % 89.5 % 90.7 % 89.4 % Multifamily portfolio (2) 97.9 % 96.8 % 94.2 % 96.5 % 96.6 % ___________________________________________________ (1) Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were below that of our existing portfolio. (2) Our Occupancy Rates may not be directly comparable from year to year, as they can be impacted by acquisitions, dispositions, development and redevelopment projects. Multifamily calculations exclude units temporarily unoccupied as a result of a fire at one property and all units at a newly constructed property undergoing lease up. (3) Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period. 44 Table of Contents Office Lease Expirations As of December 31, 2022, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio as follows: ______________________________________________________ (1) Average of the percentage of leases at December 31, 2019, 2020, and 2021 with the same remaining duration as the leases for the labeled year had at December 31, 2022. Acquisitions are included in the prior year average commencing in the quarter after the acquisition. 45 Table of Contents Results of Operations Comparison of 2022 to 2021 Our results of operations for 2022 and 2021 were adversely impacted by the COVID-19 pandemic. Our results of operations for 2022 generally compare favorably with 2021 primarily due to: (i) the gradual recovery from the pandemic, (ii) better collections from our tenants, (iii) lower write-offs of uncollectible tenant receivables, (iv) restoring certain office tenants to accrual basis accounting, (v) higher office parking income, (vi) a multifamily property we acquired in the second quarter of 2022, (vii) new units from our multifamily development projects, and (viii) higher rental rates for our multifamily portfolio. The favorable impacts were partly offset by the impact of inflation on our rental expenses. Year Ended December 31, Favorable (Unfavorable) 2022 2021 Change % Commentary (In thousands) Revenues Office rental revenue and tenant recoveries $ 724,131 $ 704,946 $ 19,185 2.7 % The increase was primarily due to better collections, lower write-offs of uncollectible receivables, and restoring certain tenants to accrual basis accounting. The increase was partly offset by a decrease in rental revenues due to a decrease in occupancy and lower accretion from below-market leases. Office parking and other income $ 100,442 $ 81,924 $ 18,518 22.6 % The increase was primarily due to an increase in parking income due to an increase in parking activity. Multifamily revenue $ 169,079 $ 131,527 $ 37,552 28.6 % The increase was primarily due to: (i) revenues from our 1221 Ocean Avenue property in Santa Monica which we purchased in the second quarter of 2022, (ii) higher rental rates, (iii) new units at our Landmark Los Angeles development project and our Bishop Place conversion project, and (iv) better collections. Operating expenses Office rental expenses $ 284,522 $ 265,376 $ (19,146) (7.2) % The increase was primarily due to an increase in utility, janitorial, personnel, insurance and parking expenses. The increase was partly offset by a decrease in rental expenses at our Bishop Place conversion project and lower advocacy expenses. Multifamily rental expenses $ 49,299 $ 38,025 $ (11,274) (29.6) % The increase was primarily due to: (i) rental expenses from our 1221 Ocean Avenue property in Santa Monica which we purchased in the second quarter of 2022, (ii) rental expenses from new units at our Bishop Place conversion project and Landmark Los Angeles development project, and (iii) an increase in utility and personnel expenses. The increase was partly offset by a decrease in property taxes. 46 Table of Contents Year Ended December 31, Favorable (Unfavorable) 2022 2021 Change % Commentary (In thousands) General and administrative expenses $ 45,405 $ 42,554 $ (2,851) (6.7) % The increase was primarily due to an increase in advocacy and leasing expenses. The increase was partly offset by a decrease in legal expenses and stock-based compensation expense. Depreciation and amortization $ 372,798 $ 371,289 $ (1,509) (0.4) % The increase was primarily due to depreciation from the property we purchased in the second quarter, and depreciation from the Landmark Los Angeles development project. The increase was partly offset by a decrease in depreciation from our Bishop Place conversion project and a decrease in depreciation for our other properties. Non-Operating Income and Expenses Other income $ 4,587 $ 2,465 $ 2,122 86.1 % The increase was primarily due to an increase in interest income, partly offset by the recovery of transaction fees in 2021. Other expenses $ (714) $ (937) $ 223 23.8 % The decrease was primarily due to transaction expenses in 2021, partly offset by an increase in expenses related to services we provide to our unconsolidated fund, Partnership X. Income from unconsolidated Fund $ 1,224 $ 946 $ 278 29.4 % The increase was due to an increase in the net income of our unconsolidated fund, Partnership X, which was primarily due to: (i) an increase in rental revenues due to higher rental rates and (ii) an increase in parking income due to higher parking activity. Interest expense $ (150,185) $ (147,496) $ (2,689) (1.8) % The increase was primarily due to higher debt and interest rates, partly offset by a decrease in loan costs. Comparison of 2021 to 2020 See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our results of operations for 2021 compared to 2020. 47 Table of Contents Non-GAAP Supplemental Financial Measure: FFO Usefulness to Investors We report FFO because it is a widely reported measure of the performance of equity REITs, and is also used by some investors to identify the impact of trends in occupancy rates, rental rates and operating costs from year to year, excluding the impacts from changes in the value of our real estate, and to compare our performance with other REITs. FFO is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. FFO should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other REITs. See "Results of Operations" above for a discussion of the items that impacted our net income. Comparison of 2022 to 2021 During 2022, FFO increased by $36.2 million, or 9.4%, to $419.7 million, compared to $383.5 million for 2021. The increase was primarily due to an increase in NOI from our multifamily and office portfolios, partly offset by an increase in general and administrative expenses and higher interest expense. The increase in NOI from our multifamily portfolio was primarily due to: (i) our acquisition of the 1221 Ocean Avenue property in Santa Monica in the second quarter of 2022, (ii) higher rental rates, (iii) new units at our Landmark Los Angeles development project and our Bishop Place conversion project, and (iv) better collections. The increase in NOI from our office portfolio was primarily due to: (i) better collections, lower write-offs of uncollectible receivables, and restoring certain tenants to accrual basis accounting, and (ii) an increase in parking income. Comparison of 2021 to 2020 See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our FFO for 2021 compared to 2020. Reconciliation to GAAP The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in our Operating Partnership - which includes our share of our consolidated JVs and our unconsolidated Fund's FFO) to net income attributable to common stockholders (the most directly comparable GAAP measure): Year Ended December 31, (In thousands) 2022 2021 Net income attributable to common stockholders $ 97,145 $ 65,267 Depreciation and amortization of real estate assets 372,798 371,289 Net loss attributable to noncontrolling interests (605) (9,136) Adjustments attributable to unconsolidated Fund (1) 2,848 2,796 Adjustments attributable to consolidated JVs (2) (52,503) (46,760) FFO $ 419,683 $ 383,456 ___________________________________________________ (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. 48 Table of Contents Non-GAAP Supplemental Financial Measure: Same Property NOI Usefulness to Investors We report Same Property NOI to facilitate a comparison of our operations between reported periods. Many investors use Same Property NOI to evaluate our operating performance and to compare our operating performance with other REITs, because it can reduce the impact of investing transactions on operating trends. Same Property NOI is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. We report Same Property NOI because it is a widely recognized measure of the performance of equity REITs, and is used by some investors to identify trends in occupancy rates, rental rates and operating costs and to compare our operating performance with that of other REITs. Same Property NOI has limitations as a measure of our performance because it excludes depreciation and amortization expense, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. Other REITs may not calculate Same Property NOI in the same manner. As a result, our Same Property NOI may not be comparable to the Same Property NOI of other REITs. Same Property NOI should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Comparison of 2022 to 2021: Our Same Properties for 2022 included 67 office properties, aggregating 17.6 million Rentable Square Feet, and 10 multifamily properties with an aggregate 3,449 units. The amounts presented below reflect 100% (not our pro-rata share). Our Same Property results for 2022 and 2021 were adversely impacted by the COVID-19 pandemic. The Same Property results for 2022 generally compare favorably with 2021 due to: (i) the gradual recovery from the pandemic, (ii) better collections from our tenants, (iii) lower write-offs of uncollectible tenant receivables, (iv) restoring certain office tenants to accrual basis accounting, (v) higher office parking income, and (vi) higher rental rates for our multifamily portfolio. These favorable impacts were partly offset by the impact of inflation on our rental expenses. Year Ended December 31, Favorable (Unfavorable) 2022 2021 Change % Commentary (In thousands) Office revenues $ 814,084 $ 776,734 $ 37,350 4.8 % The increase was primarily due to: (i) better collections, a decrease in write-offs of uncollectible receivables, and restoring certain tenants to accrual basis accounting, and (ii) an increase in parking income. The increase was partly offset by a decrease in rental revenues due to a decrease in occupancy and lower accretion from below-market leases. Office expenses (279,653) (258,262) (21,391) (8.3) % The increase was primarily due to an increase in utility, janitorial, personnel, insurance and parking expenses. The increase was partly offset by lower advocacy expenses. Office NOI 534,431 518,472 15,959 3.1 % Multifamily revenues 114,688 105,743 8,945 8.5 % The increase was primarily due to an increase in rental revenues due to higher rental rates and better collections. Multifamily expenses (34,633) (31,958) (2,675) (8.4) % The increase was primarily due to an increase in utility and personnel expenses. The increase was partly offset by a decrease in property taxes. Multifamily NOI 80,055 73,785 6,270 8.5 % Total NOI $ 614,486 $ 592,257 $ 22,229 3.8 % 49 Table of Contents Reconciliation to GAAP The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders (the most directly comparable GAAP measure): Year Ended December 31, (In thousands) 2022 2021 Same Property NOI $ 614,486 $ 592,257 Non-comparable office revenues 10,489 10,136 Non-comparable office expenses (4,869) (7,114) Non-comparable multifamily revenues 54,391 25,784 Non-comparable multifamily expenses (14,666) (6,067) NOI 659,831 614,996 General and administrative expenses (45,405) (42,554) Depreciation and amortization (372,798) (371,289) Other income 4,587 2,465 Other expenses (714) (937) Income from unconsolidated Fund 1,224 946 Interest expense (150,185) (147,496) Net income 96,540 56,131 Net loss attributable to noncontrolling interests 605 9,136 Net income attributable to common stockholders $ 97,145 $ 65,267 Comparison of 2021 to 2020 See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our same property NOI for 2021 compared to 2020. 50 Table of Contents Liquidity and Capital Resources Short-term liquidity Our short-term liquidity needs consist primarily of funds necessary for our operating activities, development, repositioning projects and dividends and distributions. During 2022, we generated cash from operations of $496.9 million. As of December 31, 2022, we had $268.8 million of cash and cash equivalents, and we had no balance outstanding on our $400.0 million revolving credit facility. Our earliest term loan maturity is December 2024. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt. Excluding acquisitions and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand, cash generated by operations and our revolving credit facility. Long-term liquidity Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to REIT federal tax rules which require that we distribute at least 90% of our income on an annual basis. We plan to meet our long-term liquidity needs through long-term secured non-recourse debt, the issuance of equity securities, including common stock and OP Units, as well as property dispositions and JV transactions. We have an ATM program which would allow us, subject to market conditions, to sell up to $400.0 million of shares of common stock. We only use non-recourse debt, secured by our properties. As of December 31, 2022, approximately 46% of our total office portfolio was unencumbered. To mitigate the impact of changing interest rates on our cash flows from operations, we generally enter into interest rate swap agreements with respect to our loans with floating interest rates. These swap agreements generally expire two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and derivative contracts, respectively. See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" of this Report regarding the impact of interest rate increases on our future operating results and cash flows. Certain Contractual Obligations See the following notes to our consolidated financial statements in Item 15 of this Report for information regarding our contractual commitments: • Note 4 - minimum future ground lease payments; • Note 8 - minimum future principal payments for our secured notes payable and revolving credit facility, and the interest rates that determine our future periodic interest payments; and • Note 17 - contractual commitments. Off-Balance Sheet Arrangements Unconsolidated Fund Debt Our Fund, Partnership X, has its own secured non-recourse debt and interest rate swaps. We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to that loan, and we have also guaranteed the interest rate swaps. Partnership X has agreed to indemnify us for any amounts that we would be required to pay under these agreements. As of December 31, 2022, all of the obligations under the respective loan and swap agreements have been performed in accordance with the terms of those agreements. See "Guarantees" in Note 17 to our consolidated financial statements in Item 15 of this Report for more information about our Fund's debt and swaps, and the respective guarantees. 51 Table of Contents Cash Flows Comparison of 2022 to 2021 Our operating cash flows in both periods were adversely impacted by the COVID-19 pandemic, and in 2022 by the effects of inflation. Year Ended December 31, Increase (Decrease) In Cash % 2022 2021 (In thousands) Net cash provided by operating activities (1) $ 496,888 $ 446,951 $ 49,937 11.2 % Net cash used in investing activities (2) $ (560,953) $ (288,708) $ (272,245) (94.3) % Cash (used in) provided by financing activities (3) $ (3,003) $ 5,246 $ (8,249) (157.2) % ___________________________________________________ (1) Our cash flows from operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectibility of tenant receivables, the level of our operating and general and administrative expenses, and interest expense. The increase in cash from operating activities of $49.9 million was primarily due to an increase in NOI from our multifamily and office portfolios, partly offset by higher interest expense and an increase in general and administrative expenses. The increase in NOI from our multifamily portfolio was primarily due to: (i) our acquisition of the 1221 Ocean Avenue property in Santa Monica in the second quarter of 2022, (ii) higher rental rates, (iii) new units at our Landmark Los Angeles development project and our Bishop Place conversion project, and (iv) better collections. The increase in NOI from our office portfolio was primarily due to: (i) better collections and (ii) an increase in parking income. For both portfolios, these improvements were partially offset by increases in expenses. (2) Our cash flows from investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The decrease in cash from investing activities of $272.2 million was primarily due to a property acquisition of $330.5 million and an increase in capital expenditures for improvements to real estate of $53.9 million, partly offset by a decrease in capital expenditures for developments of $108.8 million. (3) Our cash flows from financing activities are generally impacted by our borrowings and capital activities, as well as dividends and distributions paid to common stockholders and noncontrolling interests, respectively. The decrease in cash from financing activities of $8.2 million was primarily due to a decrease in net borrowings of $95.0 million and higher distributions paid to noncontrolling interests of $4.1 million, partly offset by contributions from noncontrolling interests in our consolidated JVs of $81.0 million and a decrease in loan cost payments of $10.4 million. Comparison of 2021 to 2020 See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 18, 2022 for a comparison of our cash flows for 2021 compared to 2020. 52 Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP, which requires us to make estimates of certain items which affect the reported amounts of our assets, liabilities, revenues and expenses. While we believe that our estimates are based upon reasonable assumptions and judgments at the time that they are made, some of our estimates could prove to be incorrect, and those differences could be material. Below is a discussion of our critical accounting policies, which are the policies we believe require the most estimate and judgment. See Note 2 to our consolidated financial statements included in Item 15 of this Report for the summary of our significant accounting policies. Investment in Real Estate Acquisitions and Initial Consolidation of VIEs We account for property acquisitions as asset acquisitions. We allocate the purchase price for asset acquisitions, which includes the capitalized transaction costs, and for the properties upon the initial consolidation of VIEs not determined to be a business, on a relative fair value basis to: (i) land, (ii) buildings and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place at-market leases, (iv) acquired above- and below-market ground and tenant leases, and if applicable (v) assumed debt, based upon comparable sales for land, and the income approach using our estimates of expected future cash flows and other valuation techniques, which include but are not limited to, our estimates of rental rates, revenue growth rates, capitalization rates and discount rates, for other assets and liabilities. We estimate the relative fair values of the tangible assets on an ‘‘as-if-vacant’’ basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the property to the occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We evaluate the time period over which we expect such occupancy level to be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period. Above and below-market ground and tenant leases are recorded as an asset or liability based upon the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid or received pursuant to the in-place ground or tenant leases, respectively, and our estimate of fair market rental rates for the corresponding in-place leases, over the remaining non-cancelable term of the leases. Assumed debt is recorded at fair value based upon the present value of the expected future payments and current interest rates. These estimates require judgment, involve complex calculations, and the allocations have a direct and material impact on our results of operations because, for example, (i) there would be less depreciation if we allocate more value to land (which is not depreciated), or (ii) if we allocate more value to buildings than to tenant improvements, the depreciation would be recognized over a much longer time period, because buildings are depreciated over a longer time period than tenant improvements. Cost capitalization We capitalize development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related to the development of real estate. Indirect development costs, including salaries and benefits, office rent, and associated costs for those individuals directly responsible for and who spend their time on development activities are also capitalized and allocated to the projects to which they relate. Development costs are capitalized while substantial activities are ongoing to prepare an asset for its intended use. We consider a development project to be substantially complete when the residential units or office space is available for occupancy but no later than one year after cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred. Costs previously capitalized related to abandoned developments are charged to earnings. Expenditures for repairs and maintenance are expensed as incurred. The capitalization of development costs requires judgment, and can directly and materially impact our results of operations because, for example, (i) if we don't capitalize costs that should be capitalized, then our operating expenses would be overstated during the development period, and the subsequent depreciation of the developed real estate would be understated, or (ii) if we capitalize costs that should not be capitalized, then our operating expenses would be understated during the development period, and the subsequent depreciation of the real estate would be overstated. We capitalized development costs of $59.7 million, $185.4 million and $186.4 million during 2022, 2021 and 2020, respectively. 53 Table of Contents Impairment of Long-Lived Assets We assess our investment in real estate for impairment on a periodic basis, and whenever events or changes in circumstances indicate that the carrying value of our investments in real estate may not be recoverable. If the undiscounted future cash flows expected to be generated by the asset are less than the carrying value of the asset, and our evaluation indicates that we may be unable to recover the carrying value, then we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. Our estimates of future cash flows are based in part upon assumptions regarding future occupancy, rental revenues and operating costs, and could differ materially from actual results. We record real estate held for sale at the lower of carrying value or estimated fair value, less costs to sell, and similarly recognize impairment losses if we believe that we cannot recover the carrying value. Our evaluation of market conditions for assets held for sale requires judgment, and our expectations could differ materially from actual results. Impairment losses would reduce our net income and could be material. Based upon such periodic assessments we did not record any impairment losses for our long-lived assets and Fund during 2022, 2021 or 2020. Revenue Recognition - Collectibility of lease payments from office tenants In accordance with Topic 842, if collectibility of lease payments is not probable at the commencement date, then we limit the lease income to the lesser of the income recognized on a straight-line basis or cash basis. If our assessment of collectibility changes after the commencement date, we record the difference between the lease income that would have been recognized on a straight-line basis and cash basis as a current-period adjustment to lease income. We adopted the Topic 842 complete impairment model. Under this model, we no longer maintain a general reserve related to our receivables, and instead analyze, on a lease-by-lease basis, whether amounts due under the operating lease are deemed probable for collection. We write off tenant and deferred rent receivables as a charge against rental revenue in the period we determine the lease payments are not probable for collection. If we subsequently collect amounts that were previously written off then the amounts collected are recorded as an increase to our rental revenues and tenant recoveries. Our assessment of the collectibility of lease payments requires judgment and could have a material impact on our results of operations. This assessment involves using a methodology that requires judgment and estimates about matters that are uncertain at the time the estimates are made, including tenant specific factors, specific industry conditions, and general economic trends and conditions. During 2022, 2021 and 2020, our results of operations were materially impacted by the COVID-19 pandemic. See "Impact of the COVID-19 Pandemic on our Business". Charges for uncollectible amounts related to tenant receivables and deferred rent receivables, which were primarily due to the COVID-19 pandemic, reduced our rental revenues and tenant recoveries by $0.6 million, $3.0 million, and $41.0 million in 2022, 2021 and 2020, respectively. We restored accrual basis accounting for certain office tenants that were previously determined to be uncollectible and accounted for on a cash basis of accounting, which increased our office revenues by $3.6 million in 2022. Revenue Recognition for Tenant Recoveries Our tenant recovery revenues for recoverable operating expenses are recognized as revenue in the period that the recoverable expenses are incurred. Subsequent to year-end, we perform reconciliations on a lease-by-lease basis and bill or credit each tenant for any differences between the estimated expenses we billed to the tenant and the actual expenses incurred. Estimating tenant recovery revenues requires an in-depth analysis of the complex terms of each underlying lease. Examples of estimates and judgments made when determining the amounts recoverable include: • estimating the recoverable expenses; • estimating the impact of changes to expense and occupancy during the year; • estimating the fixed and variable components of operating expenses for each building; • conforming recoverable expense pools to those used in the base year for the underlying lease; and • judging whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease. These estimates require judgment and involve calculations for each of our office properties. If our estimates prove to be incorrect, then our tenant recovery revenues and net income could be materially and adversely affected in future periods when we perform our reconciliations. The impact of changing our current year tenant recovery billings by 5% would result in a change to our tenant recovery revenues and net income of $2.2 million, $2.4 million and $2.6 million during 2022, 2021 and 2020, respectively. 54 Table of Contents Stock-Based Compensation We award stock-based compensation to certain employees and non-employee directors in the form of LTIP Units. We recognize the fair value of the awards over the requisite vesting period, which is based upon service. The fair value of the awards is based upon the market value of our common stock on the grant date and a discount for post-vesting restrictions. Our estimate of the discount for post-vesting restrictions requires judgment. If our estimate of the discount is too high or too low it would result in the fair value of the awards that we make being too low or too high, respectively, which would result in an under- or over-expense of stock-based compensation, respectively, and this under- or over-expensing of stock-based compensation would result in our net income being overstated or understated, respectively. Stock-based compensation expense was $21.0 million, $20.9 million and $21.4 million for 2022, 2021 and 2020, respectively. The impact of changing the discount rate by 5% would result in a change to our stock-based compensation expense and net income of $1.1 million, $1.0 million and $1.1 million during 2022, 2021 and 2020, respectively.