What changed in this filing

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Item 1A. Risk Factors

2023-02-07 compared with 2022-02-08 · 62 added, 56 removed, 276 unchanged (30% of the section changed)

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If any of these risks actually occur, our business, results of operations, prospects and financial condition could be adversely affected.

Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic and its ongoing impact on the U.S.

economy could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.

The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets.

The spread of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility in financial markets.

The global impact of the pandemic has been rapidly evolving and many countries, including the United States, continue to react by restricting many business and travel activities,

mandating the partial or complete closures of certain business and schools and taking other actions to mitigate the spread of the virus, most of which have a disruptive effect on economic activity, including the use of and demand for office space.

Many private businesses, including some of our customers, continue to recommend or mandate some or all of their employees work from home or are rotating employees in and out of the office to encourage social distancing in the workplace.

Due to these events, during 2021, the usage of our assets and parking and parking-related revenues remained lower than pre-pandemic levels.

We cannot predict when, if and to what extent these restrictions and other actions will end and when, if and to what extent economic activity, including the use of and demand for office space, will return to pre-pandemic levels.

The COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which we and our customers operate.

The COVID-19 pandemic, or a future pandemic, could also have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:

• the reduced economic activity, from circumstances such as a complete or partial closure of one or more of our properties, could severely impact our customers’ businesses, financial condition and liquidity and may cause one or more of our customers to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;

• the reduced economic activity could negatively impact our prospects for leasing additional space and/or renewing leases with existing customers;

• severe disruption and instability in the global financial markets, negative impacts to our credit ratings and deteriorations in credit and financing conditions may affect our ability to access debt and equity capital on attractive terms, or at all, resulting in an inability to fund our business operations, including funding our development pipeline or addressing maturing liabilities on a timely basis, and such an environment may affect our customers’ ability to fund their business operations and meet their obligations to us;

• the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our revolving credit facility and other debt agreements and result in a default and potentially an acceleration of repayment of indebtedness, which in turn could negatively impact our ability to make additional borrowings under our revolving credit facility and pay dividends, among other things;

• weaker economic conditions due to the pandemic could require us to recognize future impairment losses;

• a deterioration in our or our customers’ ability to operate in affected areas or delays in the supply of products or services to us or our customers from vendors that are needed for our or our customers’ operations could adversely affect our operations and those of our customers;

• potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, could materially and negatively impact the future demand for office space over the long-term even after the pandemic subsides;

• the potential negative impact on the health of our employees, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption.

The extent to which the COVID-19 pandemic impacts our operations and those of our customers will depend on future circumstances, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its resulting impact on economic activity, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic, social and behavioral effects of the pandemic and containment measures, among others.

Financial difficulties experienced by our customers, including the potential for bankruptcies or other early terminations of their leases, could reduce our cash flows, which could impact our ability to continue paying dividends to our stockholders at expected levels or at all.

Moreover, many of the other risk factors set forth in this Annual Report should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

Risks Related to our Operations

Potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, could materially and negatively impact the future demand for office space over the long-term .

The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets.

Most countries, including the United States, reacted to the pandemic by restricting many business and travel activities, mandating the partial or complete closures of certain business and schools and taking other actions to mitigate the spread of the virus, most of which had a disruptive effect on economic activity, including the use of and demand for office space.

Many private businesses, including some of our customers, continue to permit some or all of their employees to work from home some or all of the time even after the pandemic has subsided.

Potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements prompted initially by the pandemic, could materially and negatively impact the future demand for office space over the long-term.

Adverse economic conditions in our markets that negatively impact the demand for office space, such as high unemployment, may result in lower occupancy and rental rates for our portfolio, which would adversely affect our results of operations .

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In addition, the timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels.

Occupancy in our office portfolio increased from 90.3% at December 31, 2020 to 91.2% at December 31, 2021.

Average occupancy in future periods will be lower, perhaps significantly lower, if the COVID-19 pandemic causes vacancies and move-outs due to potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, which could materially and negatively impact the future demand for office space over the long-term.

Occupancy in our office portfolio decreased from 91.2% as of December 31, 2021 to 91.0% as of December 31, 2022.

Average occupancy in future periods will be lower, perhaps significantly lower, if potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, result in reduced future demand for office space over the long-term.

For additional information regarding our average occupancy and rental rate trends over the past five years, see “Item 2.

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A default by a significant customer on its lease payments would cause us to lose the revenue and any other amounts due under such lease.

In the event of a customer default or bankruptcy (including as a result of the COVID-19 pandemic), we may experience delays in enforcing our rights as landlord and may incur substantial costs re-leasing the property.

In the event of a customer default or

bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs re-leasing the property.

We cannot evict a customer solely because of its bankruptcy.

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An oversupply of space in our markets often causes rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all .

Undeveloped land in many of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York and San Francisco.

Undeveloped land in many of the markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets.

As a result, even during times of positive economic growth, we and/or our competitors could construct new buildings that would compete with our existing properties.

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Any expenditures, fines or damages we must pay would adversely affect our results of operations.

Proposed legislation to address climate change could increase utility and other costs of operating our properties.

Discovery of previously undetected environmentally hazardous conditions may adversely affect our financial condition and results of operations .

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The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could adversely affect our financial condition and results of operations.

Our same property results of operations would suffer if costs of operating our properties, such as real estate taxes, utilities, insurance, maintenance and other costs, rise faster than our ability to increase rental revenues and/or cost

recovery income .

While we receive additional rent from our customers that is based on recovering a portion of operating expenses, increased operating expenses will negatively impact our results of operations.

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Furthermore, the costs associated with owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in rental revenues from the property.

Increases in same property operating expenses would adversely affect our results of operations unless offset by higher rental rates, higher cost recovery income, the impact of any newly acquired or developed properties, lower general and administrative expenses and/or lower interest expense.

Increases in same

property operating expenses would adversely affect our results of operations unless offset by higher rental rates, higher cost recovery income, the impact of any newly acquired or developed properties, lower general and administrative expenses and/or lower interest expense.

Natural disasters and climate change could have an adverse impact on our cash flow and operating results.

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Our failure to comply with these laws could subject us to fines and penalties, cause us to be in default of our leases and other contracts with the Federal government and bar us from entering into future leases and other contracts with the Federal government.

We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (“IT”) networks and related systems.

We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems.

We face risks associated with security breaches through cyber attacks, cyber intrusions, ransomware or otherwise, as well as other significant disruptions of our information technology (“IT”) networks and related systems.

We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, ransomware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems.

The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.

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Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.

Accordingly, we may be unable to anticipate

these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.

Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.

A security breach or other significant disruption involving our IT networks and related systems could:

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• damage our reputation among our customers and investors generally.

Additionally, we face potential heightened cybersecurity risks during the COVID-19 pandemic as our level of dependence on our IT networks and related systems increases, stemming from employees working remotely, and the number of malware campaigns and phishing attacks preying on the uncertainties surrounding the COVID-19 pandemic increases.

These heightened cybersecurity risks may increase our vulnerability to cyber attacks and cause disruptions to our internal control procedures.

Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.

Risks Related to our Capital Recycling Activity

Risks Related to our Investment Activities

Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates.

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If a transaction’s gain that is intended to qualify as a Section 1031 deferral is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis.

Our use of joint ventures may limit our flexibility with jointly owned investments .

Our use of joint ventures may limit our control over and flexibility with jointly owned investments .

From time to time, we own, develop and acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures.

Types of joint venture investments include noncontrolling ownership interests in entities such as partnerships and limited liability companies and tenant-in-common interests in which we own less than 100% of the undivided interests in a real estate asset.

In some cases, we rely on our joint venture partners to manage and lease the properties.

Our participation in joint ventures is subject to the risks that:

• we could become engaged in a dispute with any of our joint venture partners that might affect our ability to develop or operate a property;

• our joint ventures are subject to debt and the refinancing of such debt may require equity capital calls;

• some of our joint ventures are subject to debt and the refinancing of such debt may require equity capital calls;

• our joint venture partners may default on their obligations necessitating that we fulfill their obligation ourselves;

• our joint ventures may be unable to repay any amounts that we may loan to them;

• we may need our joint venture partner’s approval to take certain actions and, therefore, we may be unable to cause a joint venture to implement decisions that we consider advisable;

• our joint venture partners may have different objectives than we have regarding the appropriate timing and terms of any renovation, sale or refinancing of properties;

• with respect to certain joint ventures, our joint venture partner has a right to sell its interest to us under certain circumstances for fair market value (less estimated costs to sell) at various dates in the future;

• with respect to certain joint ventures, our joint venture partner has a right to receive additional consideration from us or the joint venture under certain circumstances if and to the extent the internal rate of return on the applicable development project exceeds certain thresholds;

• our joint venture partners may be structured differently than us for tax purposes, which could create conflicts of interest;

• we or our joint venture partners may have competing interests in our markets that could create conflicts of interest.

We face risks associated with the development of mixed-use commercial properties.

We operate, are currently developing and may in the future develop properties either alone or through joint ventures with other persons that are known as “mixed-use” developments.

This means that in addition to the development of office space, the project may also include space for residential, retail, hotel or other commercial purposes.

We have less experience in developing and managing non-office real estate than we do with office real estate.

As a result, if a development project includes a non-office use, we may seek to develop that component ourselves, sell the rights to that component to a third-party developer with experience in that use or we may seek to partner with such a developer.

If we do not sell the rights or partner with such a developer, or if we choose to develop the other component ourselves, we would be exposed not only to those risks typically associated with the development of commercial real estate generally, but also to specific risks associated with the development and ownership of non-office real estate.

In addition, even if we sell the rights to develop the other component or elect to participate in the development through a joint venture, we may be exposed to the risks associated with the failure of the other party to complete the development as expected.

These include the risk that the other party would default on its obligations necessitating that we complete the other component ourselves (including providing any necessary financing).

We own certain properties subject to ground leases that limit our uses of the properties, restrict our ability to sell or otherwise transfer the properties and expose us to the loss of the properties if such agreements are breached by us, terminated or not renewed.

As of December 31, 2022, we owned 2.8 million square feet of office space located on various land parcels that we lease on a long-term basis.

Many of these ground leases impose significant limitations on our uses of the subject property, restrict our ability to sell or otherwise transfer our interests in the property or restrict our leasing of the property.

These restrictions may limit our ability to timely sell or exchange the properties, impair the properties’ value or negatively impact our ability to find suitable customers for the properties.

In addition, if we default under the terms of any particular ground lease, we may lose the ownership rights to the property subject to the ground lease.

Upon expiration of a ground lease, we may not be able to renegotiate a new ground lease on favorable terms, if at all.

The loss of the ownership rights to these properties or an increase of rental expense could have a material adverse effect on our results of operations, financial condition and cash flows.

Risks Related to our Financing Activities

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Increases in interest rates would increase our interest expense.

At December 31, 2021, we had $220.0 million of variable rate debt outstanding not protected by interest rate hedge contracts.

As of December 31, 2022, we had $936.0 million of variable rate debt outstanding not protected by interest rate hedge contracts.

We may incur additional variable rate debt in the future.

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In addition, we utilize fixed rate debt at market rates.

If interest rates decrease, the fair market value of any existing interest rate hedge contracts or outstanding fixed-rate debt would decline.

If interest rates decrease, the fair market value of any existing interest rate hedge contracts on outstanding fixed-rate debt would decline.

Our efforts to manage these exposures may not be successful.

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Termination of interest rate hedge contracts typically involves costs, such as transaction fees or breakage costs.

Our revolving credit facility and bank term loans currently bear interest at a spread above LIBOR.

The Financial Conduct Authority (“FCA”) that regulates LIBOR intends to stop compelling banks to submit rates for the calculation of LIBOR at some point in the future.

As a result, a committee formed by the Federal Reserve Board and the Federal Reserve Bank of New York identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR in financial contracts.

We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets.

If and when LIBOR is discontinued, our revolving credit facility and term loans will transition the reference rate under our variable rate debt from LIBOR to SOFR, which could be challenging and adversely affect our interest expense.

We face the risk that third parties will not be able to service or repay loans we make to them .

From time to time, we have loaned and in the future may loan funds to a buyer to facilitate the sale of an asset or in connection with the formation of a joint venture to acquire and/or develop a property.

Making these loans subjects us to the following risks, each of which could have a material adverse effect on our cash flow, results of operations and/or financial condition:

• the third party may be unable to make full and timely payments of interest and principal on the loan when due;

• if the buyer to whom we provide seller financing does not manage the property well, or the property otherwise fails to meet financial projections, performs poorly or declines in value, then the buyer may not have the funds or ability to raise new debt with which to make required payments of interest and principal to us;

• if we loan funds to a joint venture, and the joint venture is unable to make required payments of interest or principal, or both, or there are disagreements with respect to the repayment of the loan or other matters, then we could have a resulting dispute with our partner, and such a dispute could harm our relationship with our partner and cause delays in developing or selling the property or the failure to properly manage the property;

• if we loan funds to a joint venture and the joint venture is unable to make required payments of interest and principal, or both, then we may exercise remedies available to us in the joint venture agreement that could allow us to increase our ownership interest or our control over major decisions, or both, which could result in an unconsolidated joint venture becoming consolidated with our financial statements;

doing so could require us to reallocate the purchase price among the various asset and liability components and this could result in material changes to our reported results of operations and financial condition.

Risks Related to our Status as a REIT

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Furthermore, Congress and the Internal Revenue Service might change the tax laws and regulations and the courts might issue new rulings that make it more difficult, or impossible, for the Company to remain qualified as a REIT.

If the Company fails to qualify as a REIT, it would (a) not be allowed a deduction for dividends paid to stockholders in computing its taxable income, (b) be subject to federal income tax at regular corporate rates (and state and local taxes) and (c) unless entitled to relief under the tax laws, not be able to re-elect REIT status until the fifth calendar year after it failed to qualify as a REIT.

If the Company fails to qualify as a REIT, it would (a) not be allowed a deduction

for dividends paid to stockholders in computing its taxable income, (b) be subject to federal income tax at regular corporate rates (and state and local taxes) and (c) unless entitled to relief under the tax laws, not be able to re-elect REIT status until the fifth calendar year after it failed to qualify as a REIT.

Additionally, the Company would no longer be required to make distributions.

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• the perceived attractiveness of investment in us, in comparison to other REITs;

• the attractiveness of securities of REITs in comparison to other asset classes;

• the attractiveness of securities of REITs, and office REITs in particular, in comparison to other asset classes;

• our financial condition and performance;

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For the Company to maintain its qualification as a REIT, it must annually distribute to its stockholders at least 90% of REIT taxable income, excluding net capital gains.

In addition, although capital gains are not required to be distributed to maintain REIT status, taxable

capital gains, if any, that are generated as part of our capital recycling program are subject to federal and state income tax unless such gains are distributed to our stockholders.

In addition, although capital gains are not required to be distributed to maintain REIT status, taxable capital gains, if any, that are generated as part of our investment activities are subject to federal and state income tax unless such gains are distributed to our stockholders.

Cash distributions made to stockholders to maintain REIT status or to distribute otherwise taxable capital gains limit our ability to accumulate capital for other business purposes, including paying off debt, reinvesting in our existing portfolio or funding future growth initiatives.

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The interests of our existing stockholders could be diluted if additional equity securities are issued to finance future developments and acquisitions or repay indebtedness.

Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common equity.

Our ability to

execute our business strategy depends on our access to an appropriate blend of:

non-core asset sales;

debt financing, including unsecured lines of credit and other forms of secured and unsecured debt;

and equity financing, including common equity.

We may change our policies without obtaining the approval of our stockholders .

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• Business combinations.

Pursuant to the Company’s charter and Maryland law, the Company cannot merge into or consolidate with another corporation or enter into a statutory share exchange transaction in which the Company is not the surviving entity or sell all or substantially all of its assets unless the board of directors adopts a resolution declaring the proposed transaction advisable and a majority of the stockholders voting together as a single class approve the transaction.

Pursuant to the Company’s charter and Maryland law, the Company cannot merge into or consolidate with another corporation or enter into a statutory share exchange transaction in which the Company is not the surviving entity or sell all or substantially all of its assets unless the Company’s Board of Directors adopts a resolution declaring the proposed transaction advisable and a majority of the stockholders voting together as a single class approve the transaction.

Maryland law prohibits stockholders from taking action by written consent unless all stockholders consent in writing.

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• Control share acquisitions.

Maryland general corporation law also provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or

employee directors.

The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation’s charter or bylaws.

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• Anti‑takeover protections of operating partnership agreement .

Upon a change in control of the Company, the partnership agreement of the Operating Partnership requires certain acquirers to maintain an umbrella partnership real estate investment trust structure with terms at least as favorable to the limited partners as are currently in place.

Upon a change in control of the Company, the partnership agreement of the Operating Partnership requires certain acquirers to maintain an umbrella partnership real

estate investment trust structure with terms at least as favorable to the limited partners as are currently in place.

For instance, the acquirer would be required to preserve the limited partner’s right to continue to hold tax-deferred partnership interests that are redeemable for capital stock of the acquirer.

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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 1A. Risk Factors