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 2024, 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.
For the purpose of reporting key operating metrics, commencing with the fourth quarter of 2024, we are focused on the properties in our In-Service Portfolio. The In-Service Portfolio in the fourth quarter of 2024 consisted of our Total Portfolio excluding our Development Portfolio. The Development Portfolio consists of one office property and one multifamily property whose operations are significantly limited by the development activity and are excluded from our In-Service Portfolio statistics and operating metrics. Our portfolio statistics and operating metrics as of December 31, 2024 were as follows:
In-Service Portfolio Development Portfolio Total
Office Portfolio
Number of Properties 69 1 70
Rentable square feet 17,524,458 456,205 17,980,663
Multifamily Portfolio
Number of Properties 13 1 14
Number of Units 4,391 712 5,103
In-Service Portfolio Leasing Statistics
Office Portfolio
Leased Rate 81.1 %
Occupancy Rate 79.2 %
Multifamily Portfolio Leased Rate 99.1 %
Revenues by Segment and Location
During 2024, 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 2024 :
• We acquired an additional 20.2% of the equity in our unconsolidated Fund, Partnership X, which increased our ownership interest in the Fund to 74.0% .
• We acqui red 166 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
• We acquired 461 OP Un its for $6 thousand in cash.
• In connection with the Barrington Plaza loan, w e signed a construction completion guarantee. See "Development Portfolio" further below for more information about Barrington Plaza.
During the second quarter of 2024 :
• We acquired 27 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
• We acquired 703 OP Units for $10 thousand in cash.
During the third quarter of 2024 :
• We acquired 20 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
• We acquired 6,798 OP Units for $105 thousand in cash.
• Inte rest rate swaps, which fixed the interest rate on a $400 million interest-only, floating-rate loan that matures in September 2026 for one of our wholly-owned subsidiaries, expired during September 2024, and the interest rate on the respective loan is now floating. W e also paid the respective loan principal down by $34.0 million in order to meet a minimum financial threshold to exercise an extension option.
During the fourth quarter of 2024 :
• We acquired 17 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
• We acquired 872 OP Units for $17 thousand in cash.
• Interest rate swaps, which fixed the interest rate on a $200.0 million interest-only, floating-rate loan that matures in September 2026 for one of our wholly-owned subsidiaries, expired during October 2024, and the interest rate on the respective loan is now floating.
• Interest rate swaps, which fixed the interest rate on a $400.0 million interest-only, floating-rate loan that matures in November 2026 for one of our wholly-owned subsidiaries, expired during October 2024, and the interest rate on the respective loan is now floating.
• During December 2024, we closed a new $325.0 million loan for one of our JVs. The loan is secured by the JV's five office properties and matures in December 2028. The interest rate is SOFR + 2.5% and we used interest rate swaps to swap fix the rate at 6.36%. The swaps are effective on January 6, 2025. The loan requires monthly payments of principal and interest commencing on January 5, 2028 for twelve months based upon a 25-year principal amortization schedule. The loan replaced a $400.0 million loan which we paid off using proceeds from the new loan as well as cash on hand in the joint venture.
• We entered into a new consolidated JV in December 2024 that we manage and in which we own a 30% interest. The JV purchased a note receivable secured by a property. To fund the purchase of the secured note, the JV obtained a $61.8 million loan. The secured loan matures in January 2030. The interest rate is fixed at 6.0% until July 2027 and then increases to 6.25% for the remaining loan term.
During January 2025
• A consolidated JV that we manage, and in which we own a 30% interest, acquired a 17-story 247,000 square foot office property located at 10900 Wilshire Boulevard in Westwood. Title to the property was transferred following the purchase of a secured note by the respective JV. See Note 18 to our consolidated financial statements in Item 15 of this Report for more information regarding subsequent events.
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 Portfolio
Studio Plaza
Studio Plaza is a 456,000 square foot office property located in Burbank. Following the move-out of a long-term single tenant, we have begun extensive redevelopment of the property to convert it into a multi-tenant building. The development process is ongoing and we have begun leasing space to be occupied when the common areas and the related floors are completed. Commencing with the fourth quarter of 2024, we classified this property as part of our Development Portfolio and exclude it from our In-Service Portfolio statistics and operating metrics.
Barrington Plaza
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. As of December 31, 2024, a significant majority of the tenants have vacated. See "Legal Proceedings" in Note 17 to our consolidated financial statements in Item 15 of this Report. 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. Commencing with the fourth quarter of 2024, we classified this property as part of our Development Portfolio and exclude it from our In-Service Portfolio statistics and operating metrics.
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 revenues and occupancy levels that impact our operating results and, therefore, comparisons of our performance from period to period.
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. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
Year Ended December 31,
2024 2023 2022 2021 2020
Average straight-line rental rate (1)(2)(4)(5)
$50.50 $42.97 $46.78 $44.99 $45.26
Annualized lease transaction costs (3)(4)(5)
$5.95 $5.53 $5.85 $4.77 $5.11
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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, leases for tenants relocated from space at the landlord's request, and non-comparable leases, such as retail leases.
(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.
(5) Our office rental rates and lease transaction costs for the year ended December 31, 2024 were higher than historical periods as a result of a large tenant lease renewal during the three months ended March 31, 2024.
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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. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
Year Ended December 31, 2024
Rent Roll (1)(2)(3)
Expiring
Rate (2)
New/Renewal Rate (2)
Percentage Change
Cash Rent $50.03 $47.31 (5.4)%
Straight-line Rent $44.47 $50.50 13.5%
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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, such as retail 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.
(3) Our office cash rent and straight-line rent roll were impacted by a large tenant lease renewal during the three months ended March 31, 2024.
Multifamily Rental Rates
The table below presents the average annual rental rate per leased unit for new tenants. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
Year Ended December 31,
2024 2023 2022 2021 2020
Average annual rental rate - new tenants (1)(2)
$ 39,580 $ 36,070 $ 31,763 $ 29,837 $ 28,416
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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.
(iv) During 2024, 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.
(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 2024 (new tenants and existing tenants undergoing annual rent review) was 2.4% higher on average than the prior rent for the same unit after adjusting for rent concessions. Commencing with the fourth quarter of 2024, the rent change includes only our In-Service Portfolio.
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Occupancy Rates - Total Portfolio
The tables below present the occupancy rates for our total office portfolio and multifamily portfolio. Our Occupancy Rates may not be directly comparable from year to year, as they can be impacted by acquisitions, dispositions, and development and redevelopment projects. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
December 31,
Occupancy Rates as of:
2024 2023 2022 2021 2020
Office portfolio (1)
79.2 % 81.0 % 83.7 % 84.9 % 87.4 %
Multifamily portfolio (2)
97.4 % 96.7 % 98.1 % 98.0 % 94.2 %
Year Ended December 31,
Average Occupancy Rates (3) :
2024 2023 2022 2021 2020
Office portfolio (1)
80.1 % 82.6 % 84.2 % 85.7 % 89.5 %
Multifamily portfolio (2)
97.0 % 96.9 % 97.9 % 96.8 % 94.2 %
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(1) Our office occupancy rate for 2024 was impacted by a large tenant lease expiration during the three months ended December 31, 2024. Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022.
(2) 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. Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020 but recovered during 2021 and 2022.
(3) Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period.
In-Service Office Portfolio Lease Expirations
As of December 31, 2024, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage for our In-Service office portfolio as follows:
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(1) Average of the percentage of leases at December 31, 2021, 2022, and 2023 with the same remaining duration as the leases for the labeled year had at December 31, 2024. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
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Results of Operations
Comparison of 2024 to 2023
Our operating results were adversely impacted by the effects of inflation and higher interest rates during 2024 and 2023 .
Year Ended December 31, Favorable (Unfavorable)
2024 2023 Change % Commentary
(In thousands)
Revenues
Office rental revenue and tenant recoveries $ 683,901 $ 714,742 $ (30,841) (4.3) % The decrease was primarily due to a decrease in rental revenues due to lower occupancy, and lower tenant recoveries. The lower tenant recoveries were primarily due to lower property taxes.
Office parking and other income $ 112,503 $ 115,203 $ (2,700) (2.3) % The decrease was primarily due to a one-time
catch-up payment related to a ground lease
reset dispute in 2023, partly offset by an increase in parking income due to higher parking rates.
Multifamily revenue $ 190,074 $ 190,543 $ (469) (0.2) % The decrease was primarily due to: (i) a decrease in revenues at our Barrington Plaza property, which we removed from service during the second quarter of 2023, (ii) lower accretion from below-market leases, and (iii) insurance proceeds received during the first quarter of 2023 for the 2020 Barrington Plaza fire. The decrease was partly offset by (i) an increase in revenues from new units at our Landmark Los Angeles development project and our Residences at Bishop Place conversion project, and (ii) higher rental rates.
Operating expenses
Office rental expenses $ 285,352 $ 294,310 $ 8,958 3.0 % The decrease was primarily due to lower property taxes and lower repairs and maintenance expenses, partly offset by higher personnel and security expenses.
Multifamily rental expenses $ 64,906 $ 67,323 $ 2,417 3.6 % The decrease was primarily due to a decrease in multifamily expenses at our Barrington Plaza property, which we removed from service during the second quarter of 2023, partly offset by an increase in multifamily expenses from new units at our Residences at Bishop Place conversion project.
General and administrative expenses $ 45,356 $ 49,236 $ 3,880 7.9 % The decrease was primarily due to lower advocacy, legal and personnel expenses.
Depreciation and amortization $ 384,048 $ 459,949 $ 75,901 16.5 % The decrease was primarily due to accelerated depreciation during 2023 related to removing units from service at our Barrington Plaza property.
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Year Ended December 31, Favorable (Unfavorable)
2024 2023 Change % Commentary
(In thousands)
Non-Operating Income and Expenses
Other income $ 28,019 $ 19,633 $ 8,386 42.7 % The increase was primarily due to an increase in interest income due to higher cash and cash equivalent balances during the year.
Other expenses $ (398) $ (1,032) $ 634 61.4 % The decrease was primarily due to transaction costs during the first quarter of 2023 and lower expenses related to property management and other services provided to our unconsolidated fund.
Income (loss) from unconsolidated Fund $ 2,593 $ (34,643) $ 37,236 107.5 % The increase was primarily due to an impairment
charge of $36.2 million in 2023 related to our
investment in our Fund.
Interest expense $ (229,442) $ (209,468) $ (19,974) (9.5) % The increase was primarily due to higher interest rates on our floating rate debt. The increase was partly offset by interest capitalized related to development activity.
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our results of operations for 2023 compared to 2022.
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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 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 (loss) 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 income (loss) 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 2024 and 2023 .
Year Ended December 31,
(In thousands) 2024 2023
Net income (loss) attributable to common stockholders (1)
$ 23,517 $ (42,706)
Depreciation and amortization of real estate assets 384,048 459,949
Net loss attributable to noncontrolling interests (15,929) (33,134)
Adjustments attributable to unconsolidated Fund (1)(2)
4,579 39,194
Adjustments attributable to consolidated JVs (3)
(50,687) (46,012)
FFO $ 345,528 $ 377,291
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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 2024 to 2023
During 2024, FFO decreased by $31.8 million, or 8.4%, to $345.5 million, compared to $377.3 million for 2023 . The decrease was primarily due to: (i) lower office occupancy and tenant recoveries, (ii) higher interest expense, and (iii) the removal of our Barrington Plaza property from service during the second quarter of 2023. The decrease was partly offset by (i) higher interest income, (ii) lower office property taxes, (iii) new units from our multifamily development projects, (iv) higher multifamily rental rates, and (v) lower general and administrative expenses.
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our FFO for 2023 compared to 2022.
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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 (loss) 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 2024 to 2023:
Our Same Properties for 2024 included 66 office properties, aggregating 17.1 million Rentable Square Feet, and 11 multifamily properties with an aggregate 3,569 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 2024 and 2023.
Year Ended December 31, Favorable
(Unfavorable)
2024 2023 Change % Commentary
(In thousands)
Office revenues $ 769,882 $ 795,768 $ (25,886) (3.3) % The decrease was primarily due to a decrease in rental revenues due to lower occupancy, and lower tenant recoveries. The decrease in tenant recoveries was primarily due to lower property taxes. The decrease was partly offset by higher parking income, due to higher parking rates.
Office expenses (282,634) (291,061) 8,427 2.9 % The decrease was primarily due to lower property taxes and repairs and maintenance expenses. The decrease was partly offset by higher personnel and security expenses.
Office NOI 487,248 504,707 (17,459) (3.5) %
Multifamily revenues 144,084 141,640 2,444 1.7 % The increase was primarily due to an increase in rental revenues due to higher rental rates, partly offset by lower accretion from below-market leases.
Multifamily expenses (44,894) (44,547) (347) (0.8) % The increase was primarily due to higher personnel expenses and professional fees. The increase was partly offset by lower utility expenses and lower property taxes.
Multifamily NOI 99,190 97,093 2,097 2.2 %
Total NOI $ 586,438 $ 601,800 $ (15,362) (2.6) %
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Reconciliation to GAAP
The table below presents a reconciliation of Net income (loss) attributable to common stockholders (the most directly comparable GAAP measure) to NOI and Same Property NOI:
Year Ended December 31,
(In thousands) 2024 2023
Net income (loss) attributable to common stockholders $ 23,517 $ (42,706)
Net loss attributable to noncontrolling interests (15,929) (33,134)
Net income (loss) 7,588 (75,840)
General and administrative expenses 45,356 49,236
Depreciation and amortization 384,048 459,949
Other income (28,019) (19,633)
Other expenses 398 1,032
(Income) loss from unconsolidated Fund (2,593) 34,643
Interest expense 229,442 209,468
NOI $ 636,220 $ 658,855
Same Property NOI by Segment
Same property office revenues $ 769,882 $ 795,768
Same property office expenses (282,634) (291,061)
Same Property Office NOI 487,248 504,707
Same property multifamily revenues 144,084 141,640
Same property multifamily expenses (44,894) (44,547)
Same Property Multifamily NOI 99,190 97,093
Same Property NOI 586,438 601,800
Non-comparable office revenues 26,522 34,177
Non-comparable office expenses (2,718) (3,249)
Non-comparable multifamily revenues 45,990 48,903
Non-comparable multifamily expenses (20,012) (22,776)
NOI $ 636,220 $ 658,855
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our same property NOI for 2023 compared to 2022.
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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 2024, we generated cash from operations of $408.7 million. As of December 31, 2024, we had $444.6 million of cash and cash equivalents. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt maturities and interest rate swap expirations. Excluding acquisitions and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand and cash generated by operations. With respect to our short-term debt maturities, we expect to refinance or extend them prior to maturity. We are currently in the process of negotiating an amendment and extension of a $335.0 million loan secured by a wholly-owned office property that matures on March 03, 2025. If the amendment and extension is not finalized by the due date, the holding period and carrying value for the asset encumbered by the loan may be affected.
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 generally only use non-recourse debt, secured by our properties. As of the date of this report, approximately 44% 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 and guarantees.
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, 2024, 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 2024 to 2023
Our operating cash flows were adversely impacted by the effects of inflation and higher interest rates during 2024 and 2023.
Year Ended December 31, Increase (Decrease)
In Cash %
2024 2023
(In thousands)
Net cash provided by operating activities (1)
$ 408,693 $ 426,964 $ (18,271) (4.3) %
Net cash used in investing activities (2)
$ (240,761) $ (233,590) $ (7,171) (3.1) %
Net cash (used in) provided by financing activities (3)
$ (246,463) $ 60,871 $ (307,334) (504.9) %
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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 $18.3 million was primarily due to: (i) lower office occupancy and tenant recoveries, (ii) higher interest expense, and (iii) the removal of our Barrington Plaza property from service during the second quarter of 2023. The decrease was partly offset by (i) higher cash provided by working capital, (ii) higher interest income, (iii) lower office property taxes, (iv) new units from our multifamily development projects, (v) higher multifamily rental rates, and (vi) lower general and administrative expenses.
(2) Our cash flows from investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The decrease in cash from investing activities of $7.2 million was primarily due to the purchase of a note receivable partly offset by a decrease in capital expenditures for improvements to real estate.
(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 $307.3 million was primarily due to lower proceeds from borrowings and higher repayments of borrowings, partly offset by the repurchase of common stock during the prior period and higher contributions from noncontrolling interests in consolidated JVs during the current period.
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our cash flows for 2023 compared to 2022.
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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 US GAAP, and 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 2024, 2023 or 2022.
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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.
Charges for uncollectible amounts related to tenant receivables and deferred rent receivables reduced our rental revenues and tenant recoveries by $1.0 million, $0.8 million, and $0.6 million in 2024, 2023 and 2022, 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 $0.9 million, $4.4 million, and $3.6 million in 2024, 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 $2.5 million, $2.6 million and $2.2 million during 2024, 2023 and 2022, 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 $21.0 million, $19.8 million and $21.0 million for 2024, 2023 and 2022, respectively. The impact of changing the discount rate by 5% would result in a change to our stock-based compensation expense and net income of $1.1 million, $1.0 million and $1.1 million during 2024, 2023 and 2022, respectively.
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