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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-17 · 140 added, 151 removed, 249 unchanged (54% of the section changed)

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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.

During 2023, our results of operations were impacted by various transactions - see "Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions" further below.

Douglas Emmett, Inc.

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Properties 14 14

Units 5,013 5,013

Leased rate (4)

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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.

(3) As of December 31, 2023, we removed approximately 77,000 Rentable Square Feet for an office building we are converting to apartments.

See "Development" further below.

(4) Unit totals exclude units vacated as part of removing Barrington Plaza from the rental market.

The leased and occupancy rates exclude the impact of Barrington Plaza.

See "Property to be Removed from Service" further below.

Revenues by Segment and Location

During 2023, revenues from our Consolidated Portfolio were derived as follows:

Impact of the COVID-19 Pandemic on our Business

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

The governmental authorities in the jurisdictions in which we primarily operate, California, Los Angeles, Beverly Hills and Santa Monica, passed COVID-19 pandemic relief ordinances of varying duration and scope (residential, retail, and office), and with varying exemptions, that generally prohibit evictions, late fees and interest and allow rent deferral over certain periods.

While improving, our rent collections continue to be negatively impacted by the remaining impact of these ordinances and the pandemic.

Our results of operations since 2020 have been adversely impacted by the COVID-19 pandemic.

Our results of operations for 2022 generally compare favorably with 2021, primarily due to:

(i) the gradual recovery, (ii) better collections from our tenants, (iii) lower write-offs of uncollectible tenant receivables, (iv) restoring certain office tenants to accrual basis accounting, (v) higher office parking income, (vi) a multifamily property we acquired in the second quarter of 2022, (vii) new units from our multifamily development projects, and (viii) higher rental rates for our multifamily portfolio.

The favorable impacts were partly offset by the impact of inflation on our rental expenses.

The pandemic had a significant impact on our collections, although they improved in 2021 and 2022.

Charges for uncollectible office tenant receivables and deferred rent receivables, which were primarily due to the COVID-19 pandemic, reduced our office revenues by $0.6 million and $3.0 million for 2022 and 2021, respectively.

We restored accrual basis accounting for certain office tenants that were previously determined to be uncollectible and accounted for on a cash basis of accounting, which increased our office revenues by $3.6 million for 2022.

See "Collectibility" in our revenue recognition accounting policy in Note 2 to our consolidated financial statements in Item 15 of this Report regarding our accounting policy for collections.

It is unclear how the pandemic will impact our future collections.

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

• How long the pandemic continues;

• Whether governmental authorities authorize any new tenant protections;

• Whether more tenants stop paying rent if their business worsens;

• How attendance in our buildings changes and impacts parking revenue or rent collection;

• 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

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.

Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions

Debt and Equity Transactions

During the first quarter of 2023 :

• Interest rate swaps which hedged a $300.0 million interest-only term loan for one of our consolidated wholly- owned subsidiaries expired, and were replaced with an interest rate swap that reduced the term-loan swap-fixed interest rate to 2.66% from 3.42%.

• Interest rate swaps, which fixed the interest rate on a $400.0 million interest-only, floating-rate term loan that matures in December 2024 for one of our consolidated JVs, expired on January 1, 2023, and the interest rate on the respective loan is now floating.

• Interest rate swaps, which fixed the interest rate on a $335.0 million interest-only, floating-rate term loan that matures in March 2025 for one of our wholly-owned subsidiaries, expired on March 1, 2023, and the interest rate on the respective loan is now floating.

• An interest rate swap that fixed the interest rate on a $102.4 million interest-only, floating-rate term loan that matures in April 2025 for one of our wholly-owned subsidiaries, expired on March 1, 2023, and the interest rate on the respective loan is now floating.

• We repurchased 1.4 million shares of common stock for $16.5 million in cash, excluding transaction costs, in open market transactions.

The average purchase price was $11.50 per share.

• We acquired 5 thousand OP Units for $89 thousand in cash.

During the second quarter of 2023:

• 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.

• We repurchased 7.6 million shares of common stock for $92.6 million in cash , excluding transaction costs, in open market transactions.

The average purchase price was $12.13 per share.

• We acquired 20 thousand OP Units for $232 thousand in cash.

During the third quarter of 2023:

• 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%.

• We closed a new $350.0 million secured, non-recourse interest-only term loan that matures in August 2033.

The loan accrues intere st at SOFR plus 1.37% and is secured by our Landmark Los Angeles and Bishop Place properties.

The interest rate is capped with lender-required out-of-the-money interest rate caps at 7.84% until August 2026 .

We used part of the proceeds to pay off the balance on our revolving credit facility, which expired in August 2023.

• We purchased three lender-required out-of-the-money interest rate caps with an aggregate notional amount of $472.0 million to hedge $472.0 million of a $550.0 million loan.

The interest rate is capped at a weighted average of 8.99% until July 2026.

• We converted our LIBOR loans and swaps to SOFR.

See Item 7A in Part II for our SOFR transition disclosures.

• In connection with the Barrington Plaza loan, Barrington Plaza Apartments have been removed from the rental market.

The lender is treating the debt as a construction loan and they required a $13.3 million cash deposit, which we placed in an interest-bearing collateral account during the third quarter.

See "Property to be Removed from Service" further below for more information about Barrington Plaza.

• We acquired 3 thousand OP Units for $46 thousand in cash.

During the fourth quarter of 2023 :

• We did not have any financing transactions during the fourth quarter of 2022.

See Notes 3, 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our acquisitions, debt and derivatives, respectively.

• 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.

• We acquired an additional 20.2% of the equity in our unconsolidated Fund, Partnership X, which increased our ownership interest in the Fund to 53.8% .

• We entered into a guarantee for the $175.0 million consolidated JV loan which guarantees the portion of the loan principal that would need to be paid down to meet the minimum debt yield in the loan agreement.

• We acquired 180 thousand OP Units for $2.0 million in cash.

• We acquired 468 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.

In January of 2024:

• In connection with the Barrington Plaza loan, w e signed a construction completion guarantee.

See "Property to be Removed from Service" further below for more information about Barrington Plaza.

See Notes 6, 8, 10 and 11 to our consolidated financial statements in Item 15 of this Report for more information regarding our unconsolidated Fund, debt, derivatives and equity, respectively.

• 1132 Bishop Street, Honolulu, Hawaii - "The Residences at Bishop Place"

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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.

As of December 31, 2023, we had delivered ninety-percent of the planned units and leased ninety-seven-percent 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.

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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.

Property to be Removed from Service

During the second quarter of 2023, we removed our Barrington Plaza Apartments property in Los Angeles from the rental market.

A reconstruction of this property is expected to take a number of years at a cost of several hundred million dollars.

We are currently in litigation with the insurance providers in 2020 for Barrington Plaza to recover certain costs associated with reconstruction.

As of December 31, 2023, a significant majority of the tenants have vacated.

Tenants occupying 154 units have the right to remain until May 2024, and we expect them to move out at an uneven pace over the intervening period.

That schedule could be impacted by legal or regulatory actions.

During any period when the property is unoccupied, we will not generate any revenue from it.

In connection with the removal of the property from the rental market, we accelerated and re corded additional depreciation expense of $82.1 million for the year ended December 31, 2023, which is included in Depreciation and amortization on our consolidated stateme nts of operations.

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:

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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.

(4) 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.

Office Rent Roll

Our office rent roll continued to be adversely impacted by the COVID-19 pandemic during 2022.

The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio:

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Multifamily Rental Rates

Our multifamily rental rates were adversely impacted by the COVID-19 pandemic in 2020, but improved in 2021 and 2022.

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

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(1) Calculations exclude 376 units at a newly constructed property undergoing lease up.

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

(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.

(i) During 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

(ii) During 2022, the average was impacted by the acquisition of 1221 Ocean Avenue, where the rental rates were higher than the average in our portfolio.

(iii) During 2023, the average was impacted by leasing of units at our newly developed West Los Angeles property, where the rental rates were higher than the average in our portfolio.

Barrington Plaza was removed from this metric beginning with the third quarter of 2023.

(2) Our multifamily rental rates were adversely impacted by the COVID-19 pandemic in 2020 but improved in 2021 and 2022.

Multifamily Rent Roll

The rent on leases subject to rent change during 2023 (new tenants and existing tenants undergoing annual rent review) was 2.1% higher on average than the prior rent on the same unit.

This excludes leasing at a newly constructed property undergoing lease up.

Occupancy Rates - Total Portfolio

Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022.

Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, but recovered during 2021 and 2022.

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

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Office portfolio (2)

81.0 % 83.7 % 84.9 % 87.4 % 91.4 %

Multifamily portfolio (3)(5)

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Office portfolio (2)

82.6 % 84.2 % 85.7 % 89.5 % 90.7 %

Multifamily portfolio (3)(5)

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

(2) Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022.

(3) 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.

Excludes units vacated as part of removing Barrington Plaza from the rental market until June of 2023 and excludes the impact of Barrington Plaza entirely starting in July 2023.

(4) 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.

(5) Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020 but recovered during 2021 and 2022.

Office Lease Expirations

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Comparison of 2023 to 2022

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.

Our operating results were adversely impacted by the effects of inflation and higher interest rates during 2023 , and by the COVID-19 pandemic during 2022 .

Year Ended December 31, Favorable (Unfavorable)

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(In thousands)

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.

Office rental revenue and tenant recoveries $ 714,742 $ 724,131 $ (9,389) (1.3) % The decrease was primarily due to lower occupancy, lower collections, lower accretion from below-market leases and our office to residential conversion project at Bishop Place.

The decrease was partly offset by higher rental rates, higher lease termination revenues and an increase in tenant recoveries.

Office parking and other income $ 115,203 $ 100,442 $ 14,761 14.7 % The increase was primarily due to an increase in parking income due to higher parking activity and higher ground lease income due to a one-time catch-up payment related to a ground lease reset dispute.

Multifamily revenue $ 190,543 $ 169,079 $ 21,464 12.7 % 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.

(i) an increase in revenues from new units at our Landmark Los Angeles development project and our Residences at Bishop Place conversion project, (ii) an increase in revenues from our 1221 Ocean Avenue property in Santa Monica that we purchased in the second quarter of 2022 and (iii) higher rental rates at our other multifamily properties.

The increase was partly offset by a decrease in revenues from units removed from service at our Barrington Plaza property commencing during the second quarter of 2023.

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.

Office rental expenses $ 294,310 $ 284,522 $ (9,788) (3.4) % The increase was primarily due to an increase in utility, security, janitorial and insurance expenses.

The increase was partly offset by a decrease in rental expenses from our office to residential conversion project at Bishop Place and lower property taxes.

Multifamily rental expenses $ 67,323 $ 49,299 $ (18,024) (36.6) % 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.

(i) an increase in rental expenses from new units at our development projects, (ii) an increase in rental expenses from our 1221 Ocean Avenue property in Santa Monica that we purchased in the second quarter of 2022, and (iii) an increase in property taxes, security and personnel expenses at our other multifamily properties.

General and administrative expenses $ 49,236 $ 45,405 $ (3,831) (8.4) % The increase was primarily due to higher legal expenses, partly offset by a decrease in advocacy expenses.

Depreciation and amortization $ 459,949 $ 372,798 $ (87,151) (23.4) % The increase was primarily due to accelerated depreciation related to removing units from service at our Barrington Plaza property commencing during the second quarter of 2023.

Year Ended December 31, Favorable (Unfavorable)

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(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.

Other income $ 19,633 $ 4,587 $ 15,046 328.0 % The increase was primarily due to an increase in interest income due to higher interest rates and higher cash and cash equivalent balances.

Other expenses $ (1,032) $ (714) $ (318) (44.5) % The increase was primarily due to higher transaction costs.

(Loss) income from unconsolidated Fund $ (34,643) $ 1,224 $ (35,867) (2,930.3) % The decrease was primarily due to an impairment charge of $36.2 million in 2023 related to our investment in our Fund.

Interest expense $ (209,468) $ (150,185) $ (59,283) (39.5) % The increase was primarily due to higher interest rates on our floating rate debt, higher debt, and a decrease in interest capitalized related to development activity.

Comparison of 2022 to 2021

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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 is a non-GAAP financial measure for which we believe that net income (loss) 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.

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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):

See "Results of Operations" above for a discussion of the items that impacted our net income (loss).

FFO 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 (loss) income attributable to common stockholders (the most directly comparable GAAP measure).

Our FFO was adversely impacted by the effects of inflation and higher interest rates during 2023 , and by the COVID-19 pandemic during 2022 .

Year Ended December 31,

(In thousands) 2023 2022

Net income attributable to common stockholders $ 97,145 $ 65,267

Net (loss) income attributable to common stockholders (1)

$ (42,706) $ 97,145

Depreciation and amortization of real estate assets 459,949 372,798

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(1) Our net loss for the year ended December 31, 2023 includes a $36.2 million impairment charge related to our investment in our unconsolidated Fund.

Adjustments attributable to our unconsolidated Fund include an adjustment to exclude the respective impairment loss.

We excluded this impairment charge from our calculation of FFO because the impairment charge relates directly to the real estate held by the Fund.

(2) Adjusts for our share of Partnership X's depreciation and amortization of real estate assets.

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

Comparison of 2023 to 2022

During 2023, FFO decreased by $42.4 million, or 10.1%, to $377.3 million, compared to $419.7 million for 2022.

The decrease was primarily due to higher interest expense and a decrease in NOI from our office portfolio, partly offset by higher interest income and an increase in NOI from our multifamily portfolio.

The increase in interest expense was primarily due to higher interest rates on our floating rate debt, higher debt and a decrease in interest capitalized related to development activity.

The decrease in NOI from our office portfolio was primarily due to:

(i) lower occupancy, (ii) lower collections, (iii) lower accretion from below-market leases, (iv) our office to residential conversion project at Bishop Place and (v) higher rental expenses.

The increase in interest income was primarily due to higher interest rates and higher cash and cash equivalents balances.

The increase in NOI from our multifamily portfolio was primarily due to:

(i) new units from our development projects , (ii) our acquisition of the 1221 Ocean Avenue property in Santa Monica in the second quarter of 2022, and (iii) higher rental rates at our other multifamily properties.

Comparison of 2022 to 2021

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 17, 2023 for a comparison of our FFO for 2022 compared to 2021.

Non-GAAP Supplemental Financial Measure:

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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.

Same Property NOI is a non-GAAP financial measure for which we believe that net income (loss) 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.

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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:

These favorable impacts were partly offset by the impact of inflation on our rental expenses.

Our Same Property results were adversely impacted by the effects of inflation during 2023 and by the COVID-19 pandemic during 2022.

Year Ended December 31, Favorable

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(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 revenues $ 819,931 $ 814,084 $ 5,847 0.7 % The increase was primarily due to an increase in parking income and tenant recoveries, partly offset by lower rental revenues.

The lower rental revenues were primarily due to lower occupancy, lower collections and lower accretion from below-market leases, partly offset by higher lease termination revenues.

Office expenses (293,686) (279,653) (14,033) (5.0) % The increase was primarily due to an increase in utility, security, janitorial and insurance expenses.

The increase was partly offset by lower property taxes.

Office NOI 526,245 534,431 (8,186) (1.5) %

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 revenues 119,718 114,688 5,030 4.4 % The increase was primarily due to an increase in rental revenues due to higher rental rates.

Multifamily expenses (37,318) (34,633) (2,685) (7.8) % The increase was primarily due to an increase in property taxes, security, and personnel expenses.

Multifamily NOI 82,400 80,055 2,345 2.9 %

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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 most directly comparable GAAP measure):

The table below presents a reconciliation of Net (loss) income attributable to common stockholders (the most directly comparable GAAP measure) to Same Property NOI:

Year Ended December 31,

(In thousands) 2023 2022

Net (loss) income attributable to common stockholders $ (42,706) $ 97,145

Net loss attributable to noncontrolling interests (33,134) (605)

Net (loss) income (75,840) 96,540

General and administrative expenses 49,236 45,405

Depreciation and amortization 459,949 372,798

Other income (19,633) (4,587)

Other expenses 1,032 714

Loss (income) from unconsolidated Fund 34,643 (1,224)

Interest expense 209,468 150,185

NOI $ 658,855 $ 659,831

Same Property NOI by Segment

Same property office revenues $ 819,931 $ 814,084

Same property office expenses (293,686) (279,653)

Same Property Office NOI 526,245 534,431

Same property multifamily revenues 119,718 114,688

Same property multifamily expenses (37,318) (34,633)

Same Property Multifamily NOI 82,400 80,055

Same Property NOI 608,645 614,486

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NOI $ 658,855 $ 659,831

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 2022 to 2021

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Short-term liquidity

Our short-term liquidity needs consist primarily of funds necessary for our operating activities, development, repositioning projects and dividends and distributions.

Our short-term liquidity needs consist primarily of funds necessary for our operating activities, development, repositioning projects, dividends, distributions, and discretionary share repurchases.

During 2023, we generated cash from operations of $427.0 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.

As of December 31, 2023, we had $523.1 million of cash and cash equivalents.

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.

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

Long-term liquidity

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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.

As of the date of this report, approximately 45% 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.

We also enter into interest rate cap agreements from time to time to cap the interest rates on our floating rate loans.

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 4 - minimum future ground lease payments;

• Note 8 - minimum future principal payments for our secured notes payable and revolving credit facility, and the interest rates that determine our future periodic interest payments;

• Note 8 - minimum future principal payments for our secured notes payable, and the interest rates that determine our future periodic interest payments;

• Note 17 - contractual commitments.

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Comparison of 2023 to 2022

Our operating cash flows in both periods were adversely impacted by the COVID-19 pandemic, and in 2022 by the effects of inflation.

Our operating cash flows were adversely impacted by the effects of inflation and higher interest rates during 2023 and by the COVID-19 pandemic during 2022.

Year Ended December 31, Increase (Decrease)

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$ (233,590) $ (560,953) $ 327,363 58.4 %

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

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

$ 60,871 $ (3,003) $ 63,874 (2,127.0) %

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(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:

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.

The decrease in cash from operating activities of $69.9 million was primarily due to:

(i) higher interest expense, (ii) cash used to fund working capital, (iii) an increase in general and administrative cash expenses, and (iv) a decrease in NOI from our office portfolio, partly offset by higher interest income and an increase in NOI from our multifamily portfolio.

(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.

The increase in cash from investing activities of $327.4 million was primarily due to $330.5 million for a property acquisition during 2022 and a decrease in capital expenditures for developments of $34.3 million, partly offset by an increase in capital expenditures for improvements to real estate of $26.8 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.

The increase in cash from financing activities of $63.9 million was primarily due to:

(i) an increase in net borrowings of $175.0 million, (ii) a decrease in dividends paid to common stockholders of $66.9 million, and (iii) lower distributions paid to noncontrolling interests of $18.4 million, partly offset by cash paid to repurchase common stock of $109.2 million and a decrease in contributions from noncontrolling interests in our consolidated JVs of $80.9 million.

Comparison of 2022 to 2021

See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 17, 2023 for a comparison of our cash flows for 2022 compared to 2021.

Critical Accounting Policies

Critical Accounting Policies and Estimates

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.

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These estimates require judgment, involve complex calculations, and the allocations have a direct and material impact on our results of operations because, for example, (i) there would be less depreciation if we allocate more value to land (which is not depreciated), or (ii) if we allocate more value to buildings than to tenant improvements, the depreciation would be recognized over a much longer time period, because buildings are depreciated over a longer time period than tenant improvements.

Cost capitalization

We capitalize development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related to the development of real estate.

Indirect development costs, including salaries and benefits, office rent, and associated costs for those individuals directly responsible for and who spend their time on development activities are also capitalized and allocated to the projects to which they relate.

Development costs are capitalized while substantial activities are ongoing to prepare an asset for its intended use.

We consider a development project to be substantially complete when the residential units or office space is available for occupancy but no later than one year after cessation of major construction activity.

Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred.

Costs previously capitalized related to abandoned developments are charged to earnings.

Expenditures for repairs and maintenance are expensed as incurred.

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

We capitalized development costs of $59.7 million, $185.4 million and $186.4 million during 2022, 2021 and 2020, respectively.

Impairment of Long-Lived Assets

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Impairment losses would reduce our net income and could be material.

Based upon such periodic assessments we did not record any impairment losses for our long-lived assets and Fund during 2022, 2021 or 2020.

Based upon such periodic assessments we did not record any impairment losses for our long-lived assets during 2023, 2022 or 2021.

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.

We write off tenant and deferred rent receivables as a charge against rental revenues and tenant recoveries 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 in the period they are collected.

Our assessment of the collectibility of lease payments requires judgment and could have a material impact on our results of operations.

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During 2022 and 2021, 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.

Charges for uncollectible amounts related to tenant receivables and deferred rent receivables reduced our rental revenues and tenant recoveries by $0.8 million, $0.6 million, and $3.0 million in 2023, 2022 and 2021, 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