Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Forward Looking Statements disclaimer and our consolidated financial statements and related notes in Item 15 of this Report. During 2023, our results of operations were impacted by various transactions - see "Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions" 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, 2023, 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 68 70
Rentable Square Feet (in thousands) (3)
17,595 17,981
Leased rate 83.3% 83.3%
Occupancy rate 80.9% 81.0%
Multifamily
Properties 14 14
Units (4)
4,576 4,576
Leased rate (4)
98.5% 98.5%
Occupancy rate (4)
96.7% 96.7%
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(1) Our Consolidated Portfolio includes the properties in our consolidated results. Through our subsidiaries, we wholly-own 52 office properties totaling 13.4 million square feet and 12 residential properties with 4,106 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, 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:
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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 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:
• 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:
• 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 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.
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Development
• 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, 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.
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.
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
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,
2023 2022 2021 2020 2019
Average straight-line rental rate (1)(2)(4)
$42.97 $46.78 $44.99 $45.26 $49.65
Annualized lease transaction costs (3)(4)
$5.53 $5.85 $4.77 $5.11 $6.02
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(1) These average rental rates are not directly comparable from year to year because the averages are significantly affected from period to period by factors such as the buildings, submarkets, and types of space and terms involved in the leases executed during the respective reporting period. Because straight-line rent takes into account the full economic value 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.
(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.
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Office Rent Roll
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, 2023
Rent Roll (1)(2)
Expiring
Rate (2)
New/Renewal Rate (2)
Percentage Change
Cash Rent $45.25 $41.80 (7.6)%
Straight-line Rent $41.17 $42.97 4.4%
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(1) Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the year compared to the prior leases for the same space. Excludes leases with a term of twelve months or less, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated at the landlord's request, leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe the base rent reflects other off-market inducements to the tenant, and other non-comparable leases.
(2) Our office rent roll can fluctuate from period to period as a result of changes in our submarkets, buildings and term of the expiring leases, making these metrics difficult to predict.
Multifamily Rental Rates
The table below presents the average annual rental rate per leased unit for new tenants:
Year Ended December 31,
2023 2022 2021 2020 2019
Average annual rental rate - new tenants (1)(2)
$ 36,070 $ 31,763 $ 29,837 $ 28,416 $ 28,350
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(1) These average rental rates are not directly comparable from year to year because of changes in the properties and units included. For example:
(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.
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Occupancy Rates - Total Portfolio
The tables below present the occupancy rates for our total office portfolio and multifamily portfolio:
December 31,
Occupancy Rates (1) as of:
2023 2022 2021 2020 2019
Office portfolio (2)
81.0 % 83.7 % 84.9 % 87.4 % 91.4 %
Multifamily portfolio (3)(5)
96.7 % 98.1 % 98.0 % 94.2 % 95.2 %
Year Ended December 31,
Average Occupancy Rates (1)(4) :
2023 2022 2021 2020 2019
Office portfolio (2)
82.6 % 84.2 % 85.7 % 89.5 % 90.7 %
Multifamily portfolio (3)(5)
96.9 % 97.9 % 96.8 % 94.2 % 96.5 %
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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. 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
As of December 31, 2023, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio as follows:
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(1) Average of the percentage of leases at December 31, 2020, 2021, and 2022 with the same remaining duration as the leases for the labeled year had at December 31, 2023. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
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Results of Operations
Comparison of 2023 to 2022
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)
2023 2022 Change % Commentary
(In thousands)
Revenues
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) 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 $ 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) 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.
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Year Ended December 31, Favorable (Unfavorable)
2023 2022 Change % Commentary
(In thousands)
Non-Operating Income and Expenses
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
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 results of operations for 2022 compared to 2021.
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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 (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. 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 (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 (loss) income attributable to common stockholders (1)
$ (42,706) $ 97,145
Depreciation and amortization of real estate assets 459,949 372,798
Net loss attributable to noncontrolling interests (33,134) (605)
Adjustments attributable to unconsolidated Fund (1)(2)
39,194 2,848
Adjustments attributable to consolidated JVs (3)
(46,012) (52,503)
FFO $ 377,291 $ 419,683
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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.
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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 (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. 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 2023 to 2022:
Our Same Properties for 2023 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 were adversely impacted by the effects of inflation during 2023 and by the COVID-19 pandemic during 2022.
Year Ended December 31, Favorable
(Unfavorable)
2023 2022 Change % Commentary
(In thousands)
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 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 %
Total NOI $ 608,645 $ 614,486 $ (5,841) (1.0) %
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Reconciliation to GAAP
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
Non-comparable office revenues 10,014 10,489
Non-comparable office expenses (624) (4,869)
Non-comparable multifamily revenues 70,825 54,391
Non-comparable multifamily expenses (30,005) (14,666)
NOI $ 658,855 $ 659,831
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 same property NOI for 2022 compared to 2021.
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Liquidity and Capital Resources
Short-term liquidity
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, 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 and cash generated by operations.
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 only use non-recourse debt, secured by our properties. 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. 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 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, 2023, 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.
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Cash Flows
Comparison of 2023 to 2022
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)
In Cash %
2023 2022
(In thousands)
Net cash provided by operating activities (1)
$ 426,964 $ 496,888 $ (69,924) (14.1) %
Net cash used in investing activities (2)
$ (233,590) $ (560,953) $ 327,363 58.4 %
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 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 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 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.
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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. 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.
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 during 2023, 2022 or 2021.
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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 rental revenues and tenant recoveries. 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 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. 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 and 2021, our results of operations were materially impacted by the COVID-19 pandemic. 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. 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 $4.4 million and $3.6 million in 2023 and 2022, respectively.
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 $2.6 million, $2.2 million and $2.4 million during 2023, 2022 and 2021, respectively.
Stock-Based Compensation
We award stock-based compensation to certain employees and non-employee directors in the form of LTIP Units. We recognize the fair value of the awards over the requisite vesting period, which is based upon service. The fair value of the awards is based upon the market value of our common stock on the grant date and a discount for post-vesting restrictions.
Our estimate of the discount for post-vesting restrictions requires judgment. If our estimate of the discount is too high or too low, it would result in the fair value of the awards that we make being too low or too high, respectively, which would result in an under- or over-expense of stock-based compensation, respectively, and this under- or over-expensing of stock-based compensation would result in our net income being overstated or understated, respectively. Stock-based compensation expense was $19.8 million, $21.0 million and $20.9 million for 2023, 2022 and 2021, 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 $1.0 million, $1.1 million and $1.0 million during 2023, 2022 and 2021, respectively.
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