Douglas Emmett Inc - Quarter Report: 2023 March (Form 10-Q)
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission file number: 001-33106
![deiblacklogoaa09.jpg](https://www.sec.gov/Archives/edgar/data/0001364250/000136425023000033/nysedei-20230331_g1.jpg)
Douglas Emmett, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 20-3073047 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1299 Ocean Avenue, Suite 1000, Santa Monica, California | 90401 | |||||||
(Address of principal executive offices) | (Zip Code) |
(310) 255-7700
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
Common Stock, $0.01 par value per share | DEI | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | April 28, 2023 | |||||||||
Common Stock, $0.01 par value per share | 169,809,682 | shares |
1
DOUGLAS EMMETT, INC. FORM 10-Q | ||||||||
Table of Contents | ||||||||
Page | ||||||||
2
Glossary
Abbreviations used in this Report:
AOCI | Accumulated Other Comprehensive Income (Loss) | ||||
ASC | Accounting Standards Codification | ||||
ASU | Accounting Standards Update | ||||
ATM | At-the-Market | ||||
BOMA | Building Owners and Managers Association | ||||
CEO | Chief Executive Officer | ||||
CFO | Chief Financial Officer | ||||
Code | Internal Revenue Code of 1986, as amended | ||||
COVID-19 | Coronavirus Disease 2019 | ||||
DEI | Douglas Emmett, Inc. | ||||
EPS | Earnings Per Share | ||||
Exchange Act | Securities Exchange Act of 1934, as amended | ||||
FASB | Financial Accounting Standards Board | ||||
FCA | Financial Conduct Authority | ||||
FDIC | Federal Deposit Insurance Corporation | ||||
FFO | Funds From Operations | ||||
Fund | Unconsolidated Institutional Real Estate Fund | ||||
GAAP | Generally Accepted Accounting Principles (United States) | ||||
JV | Joint Venture | ||||
LIBOR | London Interbank Offered Rate | ||||
LTIP Units | Long-Term Incentive Plan Units | ||||
NAREIT | National Association of Real Estate Investment Trusts | ||||
OCI | Other Comprehensive Income (Loss) | ||||
OP Units | Operating Partnership Units | ||||
Operating Partnership | Douglas Emmett Properties, LP | ||||
Partnership X | Douglas Emmett Partnership X, LP | ||||
PCAOB | Public Company Accounting Oversight Board (United States) | ||||
REIT | Real Estate Investment Trust | ||||
Report | Quarterly Report on Form 10-Q | ||||
SEC | Securities and Exchange Commission | ||||
Securities Act | Securities Act of 1933, as amended | ||||
SOFR | Secured Overnight Financing Rate | ||||
TRS | Taxable REIT Subsidiary(ies) | ||||
US | United States | ||||
USD | United States Dollar | ||||
VIE | Variable Interest Entity(ies) |
3
Glossary
Defined terms used in this Report:
Annualized Rent | Annualized cash base rent (excludes tenant reimbursements, parking and other revenue) before abatements under leases commenced as of the reporting date and expiring after the reporting date. Annualized Rent for our triple net office properties (in Honolulu and one single tenant building in Los Angeles) is calculated by adding expense reimbursements and estimates of normal building expenses paid by tenants to base rent. Annualized Rent does not include lost rent recovered from insurance and rent for building management use. Annualized Rent includes rent for our corporate headquarters in Santa Monica. We report Annualized Rent because it is a widely reported measure of the performance of equity REITs, and is used by some investors as a means to determine tenant demand and to compare our performance and value with other REITs. We use Annualized Rent to manage and monitor the performance of our office and multifamily portfolios. | ||||
Consolidated Portfolio | Includes all of the properties included in our consolidated results, including our consolidated JVs. | ||||
Funds From Operations (FFO) | We calculate FFO in accordance with the standards established by NAREIT by excluding gains (or losses) on sales of investments in real estate, gains (or losses) from changes in control of investments in real estate, real estate depreciation and amortization (other than amortization of right-of-use assets for which we are the lessee and amortization of deferred loan costs), and impairment write-downs of real estate from our net income (loss) (including adjusting for the effect of such items attributable to our consolidated JVs and our unconsolidated Fund, but not for noncontrolling interests included in our Operating Partnership). FFO is a non-GAAP supplemental financial measure that we report because we believe it is useful to our investors. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Report for a discussion of FFO. | ||||
Leased Rate | The percentage leased as of the reporting date. Management space is considered leased. Space taken out of service during a repositioning or which is vacant as a result of a fire or other damage is excluded from both the numerator and denominator for calculating percentage leased. We report Leased Rate because it is a widely reported measure of the performance of equity REITs, and is also used by some investors as a means to determine tenant demand and to compare our performance with other REITs. We use Leased Rate to manage and monitor the performance of our office and multifamily portfolios. | ||||
Net Operating Income (NOI) | We calculate NOI as revenue less operating expenses attributable to the properties that we own and operate. NOI is calculated by excluding the following from our net income (loss): general and administrative expenses, depreciation and amortization expense, other income, other expenses, income from unconsolidated Fund, interest expense, gains (or losses) on sales of investments in real estate and net income (loss) attributable to noncontrolling interests. NOI is a non-GAAP supplemental financial measure that we report because we believe it is useful to our investors. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Report for a discussion of our Same Property NOI. | ||||
Occupancy Rate | We calculate Occupancy Rate by excluding signed leases not yet commenced from the Leased Rate. Management space is considered occupied. Space taken out of service during a repositioning or which is vacant as a result of a fire or other damage is excluded from both the numerator and denominator for calculating Occupancy Rate. We report Occupancy Rate because it is a widely reported measure of the performance of equity REITs, and is also used by some investors as a means to determine tenant demand and to compare our performance with other REITs. We use Occupancy Rate to manage and monitor the performance of our office and multifamily portfolios. | ||||
Recurring Capital Expenditures | Building improvements required to maintain revenues once a property has been stabilized, and excludes capital expenditures for (i) acquired buildings being stabilized, (ii) newly developed space, (iii) upgrades to improve revenues or operating expenses or significantly change the use of the space, (iv) casualty damage and (v) bringing the property into compliance with governmental or lender requirements. We report Recurring Capital Expenditures because it is a widely reported measure of the performance of equity REITs, and is used by some investors as a means to determine our cash flow requirements and to compare our performance with other REITs. We use Recurring Capital Expenditures to manage and monitor the performance of our office and multifamily portfolios. | ||||
4
Glossary
Defined terms used in this Report (continued): | |||||
Rentable Square Feet | Based on the BOMA remeasurement and consists of leased square feet (including square feet with respect to signed leases not commenced as of the reporting date), available square feet, building management use square feet and square feet of the BOMA adjustment on leased space. We report Rentable Square Feet because it is a widely reported measure of the performance and value of equity REITs, and is also used by some investors to compare our performance and value with other REITs. We use Rentable Square Feet to manage and monitor the performance of our office portfolio. | ||||
Rental Rate | We present two forms of Rental Rates - Cash Rental Rates and Straight-Line Rental Rates. Cash Rental Rate is calculated by dividing the rent paid by the Rentable Square Feet. Straight-Line Rental Rate is calculated by dividing the average rent over the lease term by the Rentable Square Feet. | ||||
Same Properties | Our consolidated properties that have been owned and operated by us in a consistent manner, and reported in our consolidated results during the entire span of both periods being compared. We exclude from our same property subset any properties that during the comparable periods were: (i) acquired, (ii) sold, held for sale, contributed or otherwise removed from our consolidated financial statements, (iii) that underwent a major repositioning project or were impacted by development activity, or suffered significant casualty loss that we believed significantly affected the properties' operating results. We also exclude rent received from ground leases. | ||||
Short-Term Leases | Represents leases that expired on or before the reporting date or had a term of less than one year, including hold over tenancies, month to month leases and other short-term occupancies. | ||||
Total Portfolio | Includes our Consolidated Portfolio plus the properties owned by our Fund. |
5
This Report contains forward-looking statements within the meaning of the Section 27A of the Securities Act and Section 21E of the Exchange Act. You can find many (but not all) of these statements by looking for words such as “believe”, “expect”, “anticipate”, “estimate”, “approximate”, “intend”, “plan”, “would”, “could”, “may”, “future” or other similar expressions in this Report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements used in this Report, or those that we make orally or in writing from time to time, are based on our beliefs and assumptions, as well as information currently available to us. Actual outcomes will be affected by known and unknown risks, trends, uncertainties and factors beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution when relying on previously reported forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends. Some of the risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:
•adverse economic or real estate developments affecting Southern California or Honolulu, Hawaii;
•competition from other real estate investors in our markets;
•decreasing rental rates or increasing tenant incentive and vacancy rates;
•reduced demand for office space, including as a result of remote work and flexible working arrangements that allow work from remote locations other than the employer’s office premises;
•defaults on, early terminations of, or non-renewal of leases by tenants;
•increases in interest rates;
•increases in operating costs, including due to inflation;
•insufficient cash flows to service our outstanding debt or pay rent on ground leases;
•difficulties in raising capital;
•inability to liquidate real estate or other investments quickly;
•adverse changes to rent control laws and regulations;
•environmental uncertainties;
•natural disasters;
•fire and other property damage;
•insufficient insurance, or increases in insurance costs;
•inability to successfully expand into new markets and submarkets;
•difficulties in identifying properties to acquire and failure to complete acquisitions successfully;
•failure to successfully operate acquired properties;
•risks associated with property development;
•risks associated with JVs;
•conflicts of interest with our officers and reliance on key personnel;
•changes in zoning and other land use laws;
•adverse results of litigation or governmental proceedings;
•failure to comply with laws, regulations and covenants that are applicable to our business;
•possible terrorist attacks or wars;
•possible cyber attacks or intrusions;
•adverse changes to accounting rules;
•weaknesses in our internal controls over financial reporting;
•failure to maintain our REIT status under federal tax laws; and
•adverse changes to tax laws, including those related to property taxes.
For further discussion of these and other risk factors see Item 1A. "Risk Factors” in our 2022 Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and Item 1A. "Risk Factors" in this Report. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Douglas Emmett, Inc. Consolidated Balance Sheets (Unaudited; In thousands, except share data) | |||||||||||
March 31, 2023 | December 31, 2022 | ||||||||||
Assets | |||||||||||
Investment in real estate, gross | $ | 12,317,670 | $ | 12,292,973 | |||||||
Less: accumulated depreciation and amortization | (3,367,802) | (3,299,365) | |||||||||
Investment in real estate, net | 8,949,868 | 8,993,608 | |||||||||
Ground lease right-of-use asset | 7,452 | 7,455 | |||||||||
Cash and cash equivalents | 301,979 | 268,837 | |||||||||
Tenant receivables | 4,818 | 6,879 | |||||||||
Deferred rent receivables | 114,853 | 114,980 | |||||||||
Acquired lease intangible assets, net | 3,388 | 3,536 | |||||||||
Interest rate contract assets | 218,298 | 270,234 | |||||||||
Investment in unconsolidated Fund | 47,263 | 47,976 | |||||||||
Other assets | 29,791 | 33,941 | |||||||||
Total Assets | $ | 9,677,710 | $ | 9,747,446 | |||||||
Liabilities | |||||||||||
Secured notes payable and revolving credit facility, net | $ | 5,193,005 | $ | 5,191,893 | |||||||
Ground lease liability | 10,843 | 10,848 | |||||||||
Interest payable, accounts payable and deferred revenue | 165,873 | 140,925 | |||||||||
Security deposits | 61,727 | 61,429 | |||||||||
Acquired lease intangible liabilities, net | 28,179 | 31,364 | |||||||||
Interest rate contract liabilities | 1,135 | 1,790 | |||||||||
Dividends payable | 33,142 | 33,414 | |||||||||
Total Liabilities | 5,493,904 | 5,471,663 | |||||||||
Equity | |||||||||||
Douglas Emmett, Inc. stockholders' equity: | |||||||||||
Common Stock, $0.01 par value, 750,000,000 authorized, 174,374,493 and 175,809,682 outstanding at March 31, 2023 and December 31, 2022, respectively | 1,744 | 1,758 | |||||||||
Additional paid-in capital | 3,476,811 | 3,493,307 | |||||||||
Accumulated other comprehensive income | 151,076 | 187,063 | |||||||||
Accumulated deficit | (1,134,472) | (1,119,714) | |||||||||
Total Douglas Emmett, Inc. stockholders' equity | 2,495,159 | 2,562,414 | |||||||||
Noncontrolling interests | 1,688,647 | 1,713,369 | |||||||||
Total Equity | 4,183,806 | 4,275,783 | |||||||||
Total Liabilities and Equity | $ | 9,677,710 | $ | 9,747,446 |
See accompanying notes to the consolidated financial statements.
7
Douglas Emmett, Inc.
Consolidated Statements of Operations
(Unaudited; in thousands, except per share data)
Three Months Ended March 31, | |||||||||||
2023 | 2022 | ||||||||||
Revenues | |||||||||||
Office rental | |||||||||||
Rental revenues and tenant recoveries | $ | 176,345 | $ | 180,427 | |||||||
Parking and other income | 27,013 | 22,713 | |||||||||
Total office revenues | 203,358 | 203,140 | |||||||||
Multifamily rental | |||||||||||
Rental revenues | 43,973 | 31,228 | |||||||||
Parking and other income | 5,062 | 4,514 | |||||||||
Total multifamily revenues | 49,035 | 35,742 | |||||||||
Total revenues | 252,393 | 238,882 | |||||||||
Operating Expenses | |||||||||||
Office expenses | 72,768 | 67,374 | |||||||||
Multifamily expenses | 16,888 | 10,173 | |||||||||
General and administrative expenses | 10,940 | 11,240 | |||||||||
Depreciation and amortization | 93,176 | 89,365 | |||||||||
Total operating expenses | 193,772 | 178,152 | |||||||||
Other income | 3,283 | 367 | |||||||||
Other expenses | (520) | (183) | |||||||||
Income from unconsolidated Fund | 289 | 247 | |||||||||
Interest expense | (45,511) | (34,902) | |||||||||
Net income | 16,162 | 26,259 | |||||||||
Net loss (income) attributable to noncontrolling interests | 2,211 | (745) | |||||||||
Net income attributable to common stockholders | $ | 18,373 | $ | 25,514 | |||||||
Net income per common share – basic and diluted | $ | 0.10 | $ | 0.14 | |||||||
See accompanying notes to the consolidated financial statements.
8
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
Three Months Ended March 31, | |||||||||||
2023 | 2022 | ||||||||||
Net income | $ | 16,162 | $ | 26,259 | |||||||
Other comprehensive (loss) income: cash flow hedges | (51,897) | 174,434 | |||||||||
Comprehensive (loss) income | (35,735) | 200,693 | |||||||||
Comprehensive loss (income) attributable to noncontrolling interests | 18,121 | (53,376) | |||||||||
Comprehensive (loss) income attributable to common stockholders | $ | (17,614) | $ | 147,317 |
See accompanying notes to the consolidated financial statements.
9
Douglas Emmett, Inc.
Consolidated Statements of Equity
(Unaudited; in thousands, except dividend per share data)
Three Months Ended March 31, | ||||||||||||||
2023 | 2022 | |||||||||||||
Shares of Common Stock | Beginning balance | 175,810 | 175,529 | |||||||||||
Exchange of OP Units for common stock | — | 243 | ||||||||||||
Repurchases of common stock | (1,435) | — | ||||||||||||
Ending balance | 174,375 | 175,772 | ||||||||||||
Common Stock | Beginning balance | $ | 1,758 | $ | 1,755 | |||||||||
Exchange of OP units for common stock | — | 3 | ||||||||||||
Repurchases of common stock | (14) | — | ||||||||||||
Ending balance | $ | 1,744 | $ | 1,758 | ||||||||||
Additional Paid-in Capital | Beginning balance | $ | 3,493,307 | $ | 3,488,886 | |||||||||
Exchange of OP Units for common stock | — | 3,941 | ||||||||||||
Repurchases of OP Units with cash | 4 | (168) | ||||||||||||
Repurchases of common stock | (16,500) | — | ||||||||||||
Ending balance | $ | 3,476,811 | $ | 3,492,659 | ||||||||||
Accumulated Other Comprehensive Income (Loss) | Beginning balance | $ | 187,063 | $ | (38,774) | |||||||||
Cash flow hedge adjustments | (35,987) | 121,803 | ||||||||||||
Ending balance | $ | 151,076 | $ | 83,029 | ||||||||||
Accumulated Deficit | Beginning balance | $ | (1,119,714) | $ | (1,035,798) | |||||||||
Net income attributable to common stockholders | 18,373 | 25,514 | ||||||||||||
Dividends | (33,131) | (49,215) | ||||||||||||
Ending balance | $ | (1,134,472) | $ | (1,059,499) | ||||||||||
Noncontrolling Interests | Beginning balance | $ | 1,713,369 | $ | 1,570,484 | |||||||||
Net (loss) income | (2,211) | 745 | ||||||||||||
Cash flow hedge adjustments | (15,910) | 52,631 | ||||||||||||
Contributions | 125 | — | ||||||||||||
Distributions | (10,140) | (15,393) | ||||||||||||
Exchange of OP Units for common stock | — | (3,944) | ||||||||||||
Repurchases of OP Units with cash | (93) | (145) | ||||||||||||
Stock-based compensation | 3,507 | 3,372 | ||||||||||||
Ending balance | $ | 1,688,647 | $ | 1,607,750 | ||||||||||
Statement continues on the next page. | ||||||||||||||
10
Douglas Emmett, Inc.
Consolidated Statements of Equity
(Unaudited; in thousands, except dividend per share data)
Three Months Ended March 31, | ||||||||||||||
2023 | 2022 | |||||||||||||
Total Equity | Beginning balance | $ | 4,275,783 | $ | 3,986,553 | |||||||||
Net income | 16,162 | 26,259 | ||||||||||||
Cash flow hedge adjustments | (51,897) | 174,434 | ||||||||||||
Repurchases of OP Units with cash | (89) | (313) | ||||||||||||
Repurchases of common stock | (16,514) | — | ||||||||||||
Contributions | 125 | — | ||||||||||||
Dividends | (33,131) | (49,215) | ||||||||||||
Distributions | (10,140) | (15,393) | ||||||||||||
Stock-based compensation | 3,507 | 3,372 | ||||||||||||
Ending balance | $ | 4,183,806 | $ | 4,125,697 | ||||||||||
Dividends declared per common share | $ | 0.19 | $ | 0.28 |
See accompanying notes to the consolidated financial statements.
11
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Three Months Ended March 31, | |||||||||||
2023 | 2022 | ||||||||||
Operating Activities | |||||||||||
Net income | $ | 16,162 | $ | 26,259 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Income from unconsolidated Fund | (289) | (247) | |||||||||
Depreciation and amortization | 93,176 | 89,365 | |||||||||
Net accretion of acquired lease intangibles | (3,037) | (1,797) | |||||||||
Straight-line rent | 126 | 111 | |||||||||
Loan premium amortized and written off | (113) | (113) | |||||||||
Deferred loan costs amortized and written off | 2,134 | 2,012 | |||||||||
Amortization of stock-based compensation | 2,794 | 2,581 | |||||||||
Operating distributions from unconsolidated Fund | 289 | 244 | |||||||||
Change in working capital components: | |||||||||||
Tenant receivables | 2,061 | 2,911 | |||||||||
Interest payable, accounts payable and deferred revenue | 28,176 | 14,934 | |||||||||
Security deposits | 298 | 1,061 | |||||||||
Other assets | 3,697 | 2,149 | |||||||||
Net cash provided by operating activities | 145,474 | 139,470 | |||||||||
Investing Activities | |||||||||||
Capital expenditures for improvements to real estate | (40,031) | (28,544) | |||||||||
Capital expenditures for developments | (11,953) | (20,716) | |||||||||
Insurance recoveries for damage to real estate | 529 | 785 | |||||||||
Deposit for property acquisition | — | (25,000) | |||||||||
Capital distributions from unconsolidated Fund | 52 | 531 | |||||||||
Net cash used in investing activities | (51,403) | (72,944) | |||||||||
Financing Activities | |||||||||||
Proceeds from borrowings | 10,000 | — | |||||||||
Repayment of borrowings | (10,212) | (202) | |||||||||
Loan cost payments | (696) | (101) | |||||||||
Contributions from noncontrolling interests in consolidated JVs | 125 | — | |||||||||
Distributions paid to noncontrolling interests | (10,140) | (15,393) | |||||||||
Dividends paid to common stockholders | (33,403) | (49,148) | |||||||||
Repurchases of OP Units | (89) | (313) | |||||||||
Repurchases of common stock | (16,514) | — | |||||||||
Net cash used in financing activities | (60,929) | (65,157) | |||||||||
Increase in cash and cash equivalents and restricted cash | 33,142 | 1,369 | |||||||||
Cash and cash equivalents and restricted cash - beginning balance | 268,938 | 336,006 | |||||||||
Cash and cash equivalents and restricted cash - ending balance | $ | 302,080 | $ | 337,375 | |||||||
12
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Reconciliation of Ending Cash Balance | |||||||||||
March 31, 2023 | March 31, 2022 | ||||||||||
Cash and cash equivalents | $ | 301,979 | $ | 337,274 | |||||||
Restricted cash | 101 | 101 | |||||||||
Cash and cash equivalents and restricted cash | $ | 302,080 | $ | 337,375 |
Supplemental Cash Flows Information
Three Months Ended March 31, | |||||||||||
2023 | 2022 | ||||||||||
Cash paid for interest, net of capitalized interest | $ | 41,371 | $ | 32,785 | |||||||
Capitalized interest paid | $ | 513 | $ | 2,801 | |||||||
Non-cash Investing Transactions | |||||||||||
Accrual for real estate and development capital expenditures | $ | 29,904 | $ | 32,407 | |||||||
Capitalized stock-based compensation for improvements to real estate and developments | $ | 713 | $ | 791 | |||||||
Removal of fully depreciated and amortized buildings, building improvements, tenant improvements and lease intangibles | $ | 22,812 | $ | 21,139 | |||||||
Removal of fully amortized acquired lease intangible assets | $ | 75 | $ | 887 | |||||||
Removal of fully accreted acquired lease intangible liabilities | $ | 3,721 | $ | 2,834 | |||||||
Non-cash Financing Transactions | |||||||||||
(Loss) gain recorded in AOCI - consolidated derivatives | $ | (19,817) | $ | 154,944 | |||||||
(Loss) gain recorded in AOCI - unconsolidated Fund's derivatives (our share) | $ | (272) | $ | 1,774 | |||||||
Dividends declared | $ | 33,142 | $ | 49,215 | |||||||
Exchange of OP Units for common stock | $ | — | $ | 3,944 | |||||||
See accompanying notes to the consolidated financial statements.
13
1. Overview
Organization and Business Description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and Honolulu, Hawaii. Through our interest in our Operating Partnership and its subsidiaries, consolidated JVs and unconsolidated Fund, 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. The terms "us," "we" and "our" as used in the consolidated financial statements refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis.
At March 31, 2023, our Consolidated Portfolio consisted of (i) a 17.6 million square foot office portfolio, (ii) 5,032 multifamily apartment units and (iii) fee interests in two parcels of land from which we receive rent under ground leases. We also manage and own an equity interest in an unconsolidated Fund which, at March 31, 2023, owned an additional 0.4 million square feet of office space. We manage our unconsolidated Fund alongside our Consolidated Portfolio, and we therefore present the statistics for our office portfolio on a Total Portfolio basis. As of March 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 | Total Portfolio | ||||||||||
Office | |||||||||||
Wholly-owned properties | 52 | 52 | |||||||||
Consolidated JV properties | 16 | 16 | |||||||||
Unconsolidated Fund properties | — | 2 | |||||||||
68 | 70 | ||||||||||
Multifamily | |||||||||||
Wholly-owned properties | 12 | 12 | |||||||||
Consolidated JV properties | 2 | 2 | |||||||||
14 | 14 | ||||||||||
Total | 82 | 84 |
Basis of Presentation
The accompanying consolidated financial statements are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries, including our Operating Partnership and our consolidated JVs. All significant intercompany balances and transactions have been eliminated in our consolidated financial statements.
We consolidate entities in which we are considered to be the primary beneficiary of a VIE or have a majority of the voting interest of the entity. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of that VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We do not consolidate entities in which the other parties have substantive kick-out rights to remove our power to direct the activities, most significantly impacting the economic performance, of that VIE. In determining whether we are the primary beneficiary, we consider factors such as ownership interest, management representation, authority to control decisions, and contractual and substantive participating rights of each party.
We consolidate our Operating Partnership through which we conduct substantially all of our business, and own, directly and through subsidiaries, substantially all of our assets, and are obligated to repay substantially all of our liabilities. The consolidated debt, excluding our consolidated JV's, was $3.41 billion as of March 31, 2023 and December 31, 2022. See Note 8. We also consolidate four JVs through our Operating Partnership. We consolidate our Operating Partnership and our four JVs because they are VIEs and we or our Operating Partnership are the primary beneficiary for each.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
As of March 31, 2023, our consolidated VIE entities, excluding our Operating Partnership, had:
•aggregate consolidated assets of $3.92 billion (of which $3.52 billion related to investment in real estate), and
•aggregate consolidated liabilities of $1.90 billion (of which $1.81 billion related to debt).
As of December 31, 2022, our consolidated VIE entities, excluding our Operating Partnership, had:
•aggregate consolidated assets of $3.94 billion (of which $3.54 billion related to investment in real estate), and
•aggregate consolidated liabilities of $1.89 billion (of which $1.81 billion related to debt).
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC in conformity with US GAAP as established by the FASB in the ASC. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in conformity with US GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited interim consolidated financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements in our 2022 Annual Report on Form 10-K and the notes thereto. Any references to the number or class of properties, square footage, per square footage amounts, apartment units and geography, are outside the scope of our independent registered public accounting firm’s review of our consolidated financial statements in accordance with the standards of the PCAOB.
2. Summary of Significant Accounting Policies
We have not made any changes to our significant accounting policies disclosed in our 2022 Annual Report on Form 10-K.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make certain estimates that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Revenue Recognition
Rental revenues and tenant recoveries
We account for our rental revenues and tenant recoveries in accordance with Topic 842 "Leases". Rental revenues and tenant recoveries are included in: (i) Rental revenues and tenant recoveries under Office rental, and (ii) Rental revenues under Multifamily rental, on our consolidated statements of operations.
Collectibility
In accordance with Topic 842, we perform an assessment as to whether or not substantially all of the amounts due under a tenant’s lease agreement is deemed probable of collection. 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. For leases where we have concluded it is probable that we will collect substantially all the lease payments due under those leases, we continue to record lease income on a straight-line basis over the lease term. For leases where we have concluded that it is not probable that we will collect substantially all the lease payments due under those leases, we limit the lease income to the lesser of the income recognized on a straight-line basis or cash basis. We write-off tenant receivables and deferred rent receivables as a charge against rental revenues and tenant recoveries in the period we conclude that substantially all of the lease payments are not probable of 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. If our conclusion of collectibility changes, we will 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.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Charges for uncollectible office tenant receivables and deferred rent receivables, reduced our office revenues by $0.1 million for the three months ended March 31, 2023 and 2022. 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 $0.2 million for the three months ended March 31, 2023.
Office parking revenues
We account for our office parking revenues in accordance with ASC 606 "Revenue from Contracts with Customers". Office parking revenues are included in Parking and other income under Office rental on our consolidated statements of operations. Our lease contracts generally make a specified number of parking spaces available to the tenant, and we bill and recognize parking revenues on a monthly basis in accordance with the lease agreements, generally using the monthly parking rates in effect at the time of billing. Office parking revenues were $22.7 million and $19.0 million for the three months ended March 31, 2023 and 2022, respectively. Office parking receivables, which are included in Tenant receivables on our consolidated balance sheets, were $1.2 million as of March 31, 2023, and $0.9 million as of December 31, 2022.
Income Taxes
We have elected to be taxed as a REIT under the Code. Provided that we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. We are subject to corporate-level tax on the earnings that we derive through our TRS.
New Accounting Pronouncements
Changes to US GAAP are implemented by the FASB in the form of ASUs. We consider the applicability and impact of all ASUs. As of the date of this Report, the FASB has not issued any ASUs that we expect to be applicable and have a material impact on our consolidated financial statements.
3. Investment in Real Estate
The table below summarizes our investment in real estate:
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Land | $ | 1,185,977 | $ | 1,185,977 | |||||||
Buildings and improvements | 10,060,785 | 10,055,499 | |||||||||
Tenant improvements and lease intangibles | 993,117 | 981,460 | |||||||||
Property under development | 77,791 | 70,037 | |||||||||
Investment in real estate, gross | $ | 12,317,670 | $ | 12,292,973 |
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
4. Ground Lease
We pay rent under a ground lease located in Honolulu, Hawaii, which expires on December 31, 2086. The rent is fixed at $733 thousand per year until February 28, 2029, after which it will reset to the greater of the existing ground rent or the market rent at the time.
As of March 31, 2023, the ground lease right-of-use asset carrying value was $7.5 million and the ground lease liability was $10.8 million.
Ground rent expense, which is included in Office expenses on our consolidated statements of operations, was $183 thousand for each of the three month periods ended March 31, 2023 and 2022.
The table below, which assumes that the ground rent payments will continue to be $733 thousand per year after February 28, 2029, presents the future minimum ground lease payments as of March 31, 2023:
Twelve months ending March 31: | (In thousands) | ||||
2024 | $ | 733 | |||
2025 | 733 | ||||
2026 | 733 | ||||
2027 | 733 | ||||
2028 | 733 | ||||
Thereafter | 43,063 | ||||
Total future minimum lease payments | $ | 46,728 |
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
5. Acquired Lease Intangibles
Summary of our Acquired Lease Intangibles
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Above-market tenant leases | $ | 4,892 | $ | 4,968 | |||||||
Above-market tenant leases - accumulated amortization | (2,377) | (2,309) | |||||||||
Above-market ground lease where we are the lessor | 1,152 | 1,152 | |||||||||
Above-market ground lease - accumulated amortization | (279) | (275) | |||||||||
Acquired lease intangible assets, net | $ | 3,388 | $ | 3,536 | |||||||
Below-market tenant leases | $ | 61,131 | $ | 64,851 | |||||||
Below-market tenant leases - accumulated accretion | (32,952) | (33,487) | |||||||||
Acquired lease intangible liabilities, net | $ | 28,179 | $ | 31,364 |
Impact on the Consolidated Statements of Operations
The table below summarizes the net amortization/accretion related to our above- and below-market leases:
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
Net accretion of above- and below-market tenant lease assets and liabilities(1) | $ | 3,041 | $ | 1,801 | |||||||
Amortization of an above-market ground lease asset(2) | (4) | (4) | |||||||||
Total | $ | 3,037 | $ | 1,797 |
______________________________________________
(1) Recorded as a net increase to office and multifamily rental revenues.
(2) Recorded as a decrease to office parking and other income.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
6. Investment in Unconsolidated Fund
Description of our Fund
As of March 31, 2023 and 2022, we managed and owned an equity interest of 33.5% in an unconsolidated Fund, Partnership X, through which we and other investors in the Fund owned two office properties totaling 0.4 million square feet.
Partnership X pays us fees and reimburses us for certain expenses related to property management and other services we provide, which are included in Other income on our consolidated statements of operations. We also receive distributions based on invested capital and on any profits that exceed certain specified cash returns to the investors. The table below presents the cash distributions we received from Partnership X:
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
Operating distributions received | $ | 289 | $ | 244 | |||||||
Capital distributions received | 52 | 531 | |||||||||
Total distributions received | $ | 341 | $ | 775 |
Summarized Financial Information for Partnership X
The tables below present selected financial information for Partnership X. The amounts presented reflect 100% (not our pro-rata share) of the amounts related to the Fund, and are based upon historical book value:
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Total assets | $ | 146,395 | $ | 147,853 | |||||||
Total liabilities | $ | 119,072 | $ | 119,038 | |||||||
Total equity | $ | 27,323 | $ | 28,815 |
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
Total revenues | $ | 4,642 | $ | 4,397 | |||||||
Operating income | $ | 1,305 | $ | 1,296 | |||||||
Net income | $ | 749 | $ | 622 |
7. Other Assets
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Restricted cash | $ | 101 | $ | 101 | |||||||
Prepaid expenses | 15,965 | 19,871 | |||||||||
Indefinite-lived intangibles | 1,988 | 1,988 | |||||||||
Furniture, fixtures and equipment, net | 7,101 | 7,144 | |||||||||
Other | 4,636 | 4,837 | |||||||||
Total other assets | $ | 29,791 | $ | 33,941 |
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
8. Secured Notes Payable and Revolving Credit Facility, Net
Description | Maturity Date(1) | Principal Balance as of March 31, 2023 | Principal Balance as of December 31, 2022 | Variable Interest Rate | Fixed Interest Rate(2) | Swap Maturity Date | ||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||
Consolidated Wholly Owned Subsidiaries | ||||||||||||||||||||||||||||||||||||||
Term loan(3)(4) | 3/3/2025 | $ | 335,000 | $ | 335,000 | LIBOR + 1.30% | N/A | N/A | ||||||||||||||||||||||||||||||
Fannie Mae loan(3)(4) | 4/1/2025 | 102,400 | 102,400 | LIBOR + 1.25% | N/A | N/A | ||||||||||||||||||||||||||||||||
Term loan(3) | 8/15/2026 | 415,000 | 415,000 | LIBOR + 1.10% | 3.07% | 8/1/2025 | ||||||||||||||||||||||||||||||||
Term loan(3) | 9/19/2026 | 400,000 | 400,000 | LIBOR + 1.15% | 2.44% | 9/1/2024 | ||||||||||||||||||||||||||||||||
Term loan(3) | 9/26/2026 | 200,000 | 200,000 | LIBOR + 1.20% | 2.36% | 10/1/2024 | ||||||||||||||||||||||||||||||||
Term loan(3) | 11/1/2026 | 400,000 | 400,000 | LIBOR + 1.15% | 2.31% | 10/1/2024 | ||||||||||||||||||||||||||||||||
Fannie Mae loan(3) | 6/1/2027 | 550,000 | 550,000 | LIBOR + 1.37% | N/A | N/A | ||||||||||||||||||||||||||||||||
Term loan(3) | 5/18/2028 | 300,000 | 300,000 | LIBOR + 1.40% | 2.21% | 6/1/2026 | ||||||||||||||||||||||||||||||||
Term loan(3) | 1/1/2029 | 300,000 | 300,000 | SOFR + 1.56% | 2.66% | 1/1/2027 | ||||||||||||||||||||||||||||||||
Fannie Mae loan(3) | 6/1/2029 | 255,000 | 255,000 | LIBOR + 0.98% | 3.26% | 6/1/2027 | ||||||||||||||||||||||||||||||||
Fannie Mae loan(3) | 6/1/2029 | 125,000 | 125,000 | LIBOR + 0.98% | 3.25% | 6/1/2027 | ||||||||||||||||||||||||||||||||
Term loan(6) | 6/1/2038 | 28,290 | 28,502 | N/A | 4.55% | N/A | ||||||||||||||||||||||||||||||||
Revolving credit facility(7) | 8/21/2023 | — | — | LIBOR + 1.15% | N/A | N/A | ||||||||||||||||||||||||||||||||
Total Wholly-Owned Subsidiary Debt | 3,410,690 | 3,410,902 | ||||||||||||||||||||||||||||||||||||
Consolidated JVs | ||||||||||||||||||||||||||||||||||||||
Term loan(3)(5) | 12/19/2024 | 400,000 | 400,000 | LIBOR + 1.30% | N/A | N/A | ||||||||||||||||||||||||||||||||
Term loan(3) | 5/15/2027 | 450,000 | 450,000 | LIBOR + 1.35% | 2.26% | 4/1/2025 | ||||||||||||||||||||||||||||||||
Term loan(3) | 8/19/2028 | 625,000 | 625,000 | LIBOR + 1.35% | 2.12% | 6/1/2025 | ||||||||||||||||||||||||||||||||
Term loan(3) | 4/26/2029 | 175,000 | 175,000 | SOFR + 1.25% | 3.90% | 5/1/2026 | ||||||||||||||||||||||||||||||||
Fannie Mae loan(3) | 6/1/2029 | 160,000 | 160,000 | LIBOR + 0.98% | 3.25% | 7/1/2027 | ||||||||||||||||||||||||||||||||
Total Consolidated Debt(8) | 5,220,690 | 5,220,902 | ||||||||||||||||||||||||||||||||||||
Unamortized loan premium, net(9) | 3,434 | 3,547 | ||||||||||||||||||||||||||||||||||||
Unamortized deferred loan costs, net(10) | (31,119) | (32,556) | ||||||||||||||||||||||||||||||||||||
Total Consolidated Debt, net | $ | 5,193,005 | $ | 5,191,893 |
_______________________________________________________________________
Except as noted below, our loans and revolving credit facility: (i) are non-recourse, (ii) are secured by separate collateral pools consisting of one or more properties, (iii) require interest-only monthly payments with the outstanding principal due upon maturity, and (iv) contain certain financial covenants which could require us to deposit excess cash flow with the lender under certain circumstances unless we (at our option) either provide a guarantee or additional collateral or pay down the loan within certain parameters set forth in the loan documents. Certain loans with maturity date extension options require us to meet minimum financial thresholds in order to extend the loan maturity date.
(1)Maturity dates include extension options.
(2)Effective rate as of March 31, 2023. Includes the effect of interest rate swaps (if applicable) and excludes the effect of prepaid loan fees and loan premiums. See Note 10 for details of our interest rate swaps. See further below for details of our loan costs and loan premiums.
(3)The loan agreement includes a zero-percent LIBOR or SOFR floor. If the loan is swap-fixed then the related swaps do not include such a floor.
(4)The swaps expired on March 1, 2023.
(5)The swaps expired on January 1, 2023.
(6)The loan requires monthly payments of principal and interest. Principal amortization is based upon a 30-year amortization schedule.
(7)$400.0 million revolving credit facility. Unused commitment fees range from 0.10% to 0.15%. The facility has a zero-percent LIBOR floor.
(8)The table does not include our unconsolidated Fund's loan - see Note 16. See Note 13 for our fair value disclosures.
(9)Balances are net of accumulated amortization of $3.8 million and $3.7 million at March 31, 2023 and December 31, 2022, respectively.
(10)Balances are net of accumulated amortization of $56.0 million and $54.1 million at March 31, 2023 and December 31, 2022, respectively.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Debt Statistics
The table below summarizes our consolidated fixed and floating rate debt:
(In thousands) | Principal Balance as of March 31, 2023 | Principal Balance as of December 31, 2022 | ||||||||||||
Aggregate swapped to fixed rate loans | $ | 3,805,000 | $ | 4,642,400 | ||||||||||
Aggregate fixed rate loans | 28,290 | 28,502 | ||||||||||||
Aggregate floating rate loans | 1,387,400 | 550,000 | ||||||||||||
Total Debt | $ | 5,220,690 | $ | 5,220,902 |
The table below summarizes certain consolidated debt statistics as of March 31, 2023:
Statistics for consolidated loans with interest fixed under the terms of the loan or a swap | ||||||||
Principal balance (in billions) | $3.83 | |||||||
Weighted average remaining life (including extension options) | 4.8 years | |||||||
Weighted average remaining fixed interest period | 2.6 years | |||||||
Weighted average annual interest rate | 2.65% |
Future Principal Payments
At March 31, 2023, the minimum future principal payments due on our consolidated secured notes payable and revolving credit facility were as follows:
Twelve months ending March 31: | Including Maturity Extension Options(1) | |||||||
(In thousands) | ||||||||
2024 | $ | 871 | ||||||
2025 | 735,912 | |||||||
2026 | 103,354 | |||||||
2027 | 1,415,999 | |||||||
2028 | 1,001,045 | |||||||
Thereafter | 1,963,509 | |||||||
Total future principal payments | $ | 5,220,690 |
________________________________________________
(1) Some of our loan agreements require that we meet certain minimum financial thresholds to be able to extend the loan maturity.
Loan Premium and Loan Costs
The table below presents loan premium and loan costs, which are included in Interest expense on our consolidated statements of operations:
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
Loan premium amortized and written off | $ | (113) | $ | (113) | |||||||
Deferred loan costs amortized and written off | 2,134 | 2,012 | |||||||||
Loan costs expensed | 3 | — | |||||||||
Total | $ | 2,024 | $ | 1,899 |
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
9. Interest Payable, Accounts Payable and Deferred Revenue
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Interest payable | $ | 15,648 | $ | 13,529 | |||||||
Accounts payable and accrued liabilities | 94,119 | 80,244 | |||||||||
Deferred revenue | 56,106 | 47,152 | |||||||||
Total interest payable, accounts payable and deferred revenue | $ | 165,873 | $ | 140,925 |
10. Derivative Contracts
We make use of interest rate swap and cap contracts to manage the risk associated with changes in interest rates on our floating-rate debt and to satisfy certain lender requirements. When we enter into a floating-rate term loan, we generally enter into an interest rate swap agreement for the equivalent principal amount, for a period covering the majority of the loan term, which effectively converts our floating-rate debt to a fixed-rate basis during that time. We may enter into derivative contracts that are intended to hedge certain economic risks, even though hedge accounting does not apply or we elect to not apply hedge accounting. We do not speculate in derivatives and we do not make use of any other derivative instruments. See Note 8 regarding our debt and our consolidated JVs' debt that is hedged.
Derivative Summary
The table below summarizes our derivative contracts as of March 31, 2023:
Number of Interest Rate Contracts | Notional (In thousands) | ||||||||||
Derivatives Designated as Cash Flow Hedges: | |||||||||||
Consolidated derivatives - swaps(1)(3)(5) | 24 | $ | 3,805,000 | ||||||||
Unconsolidated Fund's derivatives - swaps(2)(3)(5) | 2 | $ | 115,000 | ||||||||
Derivatives Not Designated as Cash Flow Hedges: | |||||||||||
Consolidated derivatives - caps(3)(4)(5) | 5 | $ | 1,100,000 |
___________________________________________________
(1)The notional amount includes 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(2)The notional amount reflects 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. For more information about our Fund, including our equity interest percentage see Note 6.
(3)Our derivative contracts do not provide for right of offset between derivative contracts.
(4)Includes four interest rate caps purchased with a notional amount of $550.0 million and one interest rate cap sold with a notional amount of $550.0 million.
(5)See Note 13 for our derivative fair value disclosures.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Counterparty Credit Risk
We are subject to credit risk from the counterparties on our interest rate swap and cap contract assets because we do not receive collateral. We seek to minimize that risk by entering into agreements with a variety of counterparties with investment grade ratings. The fair value of our interest rate swap and cap contract assets, including accrued interest and excluding credit risk adjustments, was as follows:
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Consolidated derivatives(1) | $ | 230,394 | $ | 281,982 | |||||||
Unconsolidated Fund's derivatives(2) | $ | 10,986 | $ | 12,863 |
___________________________________________________
(1)The amounts include 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(2)The amounts reflect 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. For more information about our Fund, including our equity interest percentage, see Note 6.
Impact of Hedges on AOCI and the Consolidated Statements of Operations
The table below presents the effect of our derivatives on our AOCI and the consolidated statements of operations:
(In thousands) | Three Months Ended March 31, | ||||||||||
2023 | 2022 | ||||||||||
Derivatives Designated as Cash Flow Hedges: | |||||||||||
Consolidated derivatives: | |||||||||||
(Losses) gains recorded in AOCI before reclassifications(1) | $ | (19,817) | $ | 154,944 | |||||||
(Gains) losses reclassified from AOCI to Interest Expense(1) | $ | (31,452) | $ | 17,649 | |||||||
Interest expense presented on the consolidated statements of operations | $ | (45,511) | $ | (34,902) | |||||||
Unconsolidated Fund's derivatives (our share)(2): | |||||||||||
(Losses) gains recorded in AOCI before reclassifications(1) | $ | (272) | $ | 1,774 | |||||||
(Gains) losses reclassified from AOCI to Income from unconsolidated Fund(1) | $ | (356) | $ | 67 | |||||||
Income from unconsolidated Fund presented on the consolidated statements of operations | $ | 289 | $ | 247 | |||||||
Derivatives Not Designated as Cash Flow Hedges: | |||||||||||
Consolidated derivatives: | |||||||||||
(Gain) loss recorded as interest expense(3) | $ | — | $ | — |
___________________________________________________
(1)See Note 11 for our AOCI reconciliation.
(2)We calculate our share by multiplying the total amount for the Fund by our equity interest in the Fund. For more information about our Fund, including our equity interest percentage, see Note 6.
(3)Gains and losses from interest rate caps offset each other during the periods presented.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Future Reclassifications from AOCI
At March 31, 2023, our estimate of the AOCI related to derivatives designated as cash flow hedges that will be reclassified to earnings during the next twelve months as interest rate swap payments are made is as follows:
(In thousands) | |||||
Consolidated derivatives: | |||||
Gains to be reclassified from AOCI to Interest Expense | $ | 125,289 | |||
Unconsolidated Fund's derivative (our share)(1): | |||||
Gains to be reclassified from AOCI to Income from unconsolidated Fund | $ | 1,472 |
___________________________________________________
(1) We calculate our share by multiplying the total amount for the Fund by our equity interest in the Fund. For more information about our Fund, including our equity interest percentage, see Note 6.
11. Equity
Transactions
During the Three Months Ended March 31, 2023
•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 Three Months Ended March 31, 2022
•We acquired 243 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 9 thousand OP Units for $313 thousand in cash.
Noncontrolling Interests
Our noncontrolling interests consist of interests in our Operating Partnership and consolidated JVs which are not owned by us. As of March 31, 2023, noncontrolling interests in our Operating Partnership owned 32.5 million OP Units and fully-vested LTIP Units, which represented approximately 16% of our Operating Partnership's total outstanding interests, and we owned 174.4 million OP Units (to match our 174.4 million shares of outstanding common stock).
A share of our common stock, an OP Unit and an LTIP Unit (once vested and booked up) have essentially the same economic characteristics, sharing equally in the distributions from our Operating Partnership. Investors who own OP Units have the right to cause our Operating Partnership to acquire their OP Units for an amount of cash per unit equal to the market value of one share of our common stock at the date of acquisition, or, at our election, exchange their OP Units for shares of our common stock on a one-for-one basis. LTIP Units have been granted to our employees and non-employee directors as part of their compensation. These awards generally vest over a service period and once vested can generally be converted to OP Units provided our stock price increases by more than a specified hurdle.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Changes in our Ownership Interest in our Operating Partnership
The table below presents the effect on our equity from net income attributable to common stockholders and changes in our ownership interest in our Operating Partnership:
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
Net income attributable to common stockholders | $ | 18,373 | $ | 25,514 | |||||||
Transfers from noncontrolling interests: | |||||||||||
Exchange of OP Units with noncontrolling interests | — | 3,944 | |||||||||
Repurchases of OP Units from noncontrolling interests | 4 | (168) | |||||||||
Net transfers from noncontrolling interests | 4 | 3,776 | |||||||||
Change from net income attributable to common stockholders and transfers from noncontrolling interests | $ | 18,377 | $ | 29,290 |
AOCI Reconciliation(1)
The table below presents a reconciliation of our AOCI, which consists solely of adjustments related to derivatives designated as cash flow hedges:
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
Accumulated Other Comprehensive Income (Loss) - Beginning balance | $ | 187,063 | $ | (38,774) | |||||||
Consolidated derivatives: | |||||||||||
Other comprehensive (loss) income before reclassifications | (19,817) | 154,944 | |||||||||
Reclassification of (gains) losses from AOCI to Interest Expense | (31,452) | 17,649 | |||||||||
Unconsolidated Fund's derivatives (our share)(2): | |||||||||||
Other comprehensive (loss) income before reclassifications | (272) | 1,774 | |||||||||
Reclassification of (gains) losses from AOCI to Income from unconsolidated Fund | (356) | 67 | |||||||||
Net current period OCI | (51,897) | 174,434 | |||||||||
OCI attributable to noncontrolling interests | 15,910 | (52,631) | |||||||||
OCI attributable to common stockholders | (35,987) | 121,803 | |||||||||
Accumulated Other Comprehensive Income - Ending balance | $ | 151,076 | $ | 83,029 |
___________________________________________________
(1)See Note 10 for the details of our derivatives and Note 13 for our derivative fair value disclosures.
(2)We calculate our share by multiplying the total amount for our Fund by our equity interest in the Fund. For more information about our Fund, including our equity interest percentage, see Note 6.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Stock-Based Compensation
The Douglas Emmett, Inc. 2016 Omnibus Stock Incentive Plan, as amended (the "2016 Plan"), permits us to make grants of stock-based compensation awards to our directors, officers, employees and consultants. The plan is administered by the compensation committee of our board of directors. The table below presents our stock-based compensation expense:
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
Stock-based compensation expense, net | $ | 2,794 | $ | 2,581 | |||||||
Capitalized stock-based compensation | $ | 713 | $ | 791 |
12. EPS
We calculate basic EPS by dividing the net income attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. We calculate diluted EPS by dividing the net income attributable to common stockholders for the period by the weighted average number of common shares and dilutive instruments outstanding during the period using the treasury stock method. We account for unvested LTIP awards that contain non-forfeitable rights to dividends as participating securities and include these securities in the computation of basic and diluted EPS using the two-class method. The table below presents the calculation of basic and diluted EPS:
Three Months Ended March 31, | |||||||||||
2023 | 2022 | ||||||||||
Numerator (In thousands): | |||||||||||
Net income attributable to common stockholders | $ | 18,373 | $ | 25,514 | |||||||
Allocation to participating securities: Unvested LTIP Units | (239) | (226) | |||||||||
Net income attributable to common stockholders - basic and diluted | $ | 18,134 | $ | 25,288 | |||||||
Denominator (In thousands): | |||||||||||
Weighted average shares of common stock outstanding - basic and diluted(1) | 175,765 | 175,656 | |||||||||
Net income per common share - basic and diluted | $ | 0.10 | $ | 0.14 | |||||||
____________________________________________________
(1) Outstanding OP Units and vested LTIP Units are not included in the denominator in calculating diluted EPS, even though they may be exchanged under certain conditions for common stock on a one-for-one basis, because their associated net income (equal on a per unit basis to the Net income per common share - diluted) was already deducted in calculating Net income attributable to common stockholders. Accordingly, any exchange would not have any effect on diluted EPS. The table below presents the weighted average OP Units and vested LTIP Units outstanding for the respective periods:
Three Months Ended March 31, | |||||||||||
(In thousands) | 2023 | 2022 | |||||||||
OP Units | 30,129 | 29,365 | |||||||||
Vested LTIP Units | 2,390 | 1,592 |
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
13. Fair Value of Financial Instruments
Our estimates of the fair value of financial instruments were determined using available market information and widely used valuation methods. Considerable judgment is necessary to interpret market data and determine an estimated fair value. The use of different market assumptions or valuation methods may have a material effect on the estimated fair values. The FASB fair value framework hierarchy distinguishes between assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market-based inputs. The hierarchy is as follows:
Level 1 - inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - inputs are observable either directly or indirectly for similar assets and liabilities in active markets.
Level 3 - inputs are unobservable assumptions generated by the reporting entity.
As of March 31, 2023, we did not have any fair value estimates of financial instruments using Level 3 inputs.
Financial instruments disclosed at fair value
Short term financial instruments
The carrying amounts for cash and cash equivalents, tenant receivables, revolving credit line, interest payable, accounts payable, security deposits and dividends payable approximate fair value because of the short-term nature of these instruments.
Secured notes payable
See Note 8 for the details of our secured notes payable. We estimate the fair value of our consolidated secured notes payable by calculating the credit-adjusted present value of the principal and interest payments for each secured note payable. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs, assumes that the loans will be outstanding through maturity, and includes any maturity extension options. The table below presents the estimated fair value and carrying value of our secured notes payable (excluding our revolving credit facility), the carrying value includes unamortized loan premium and excludes unamortized deferred loan fees:
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Fair value | $ | 5,119,831 | $ | 5,115,548 | |||||||
Carrying value | $ | 5,224,124 | $ | 5,224,449 |
Ground lease liability
See Note 4 for the details of our ground lease. We estimate the fair value of our ground lease liability by calculating the present value of the future lease payments disclosed in Note 4 using our incremental borrowing rate. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs. The table below presents the estimated fair value and carrying value of our ground lease liability:
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Fair value | $ | 4,598 | $ | 4,466 | |||||||
Carrying value | $ | 10,843 | $ | 10,848 |
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Financial instruments measured at fair value
Derivative instruments
See Note 10 for the details of our derivatives. We present our derivatives on our consolidated balance sheets at fair value, on a gross basis, excluding accrued interest. We estimate the fair value of our derivative instruments by calculating the credit-adjusted present value of the expected future cash flows of each derivative. The calculation incorporates the contractual terms of the derivatives, observable market interest rates which we consider to be Level 2 inputs, and credit risk adjustments to reflect the counterparty's as well as our own non-performance risk. Our derivatives are not subject to master netting arrangements.
The table below presents the estimated fair value of our derivatives:
(In thousands) | March 31, 2023 | December 31, 2022 | |||||||||
Derivative Assets: | |||||||||||
Fair value - consolidated derivatives(1) | $ | 218,298 | $ | 270,234 | |||||||
Fair value - unconsolidated Fund's derivatives(2) | $ | 10,516 | $ | 12,426 | |||||||
Derivative Liabilities: | |||||||||||
Fair value - consolidated derivatives(1) | $ | 1,135 | $ | 1,790 | |||||||
Fair value - unconsolidated Fund's derivatives(2) | $ | — | $ | — |
____________________________________________________
(1) Consolidated derivatives, which include 100%, not our pro-rata share, of our consolidated JVs' derivatives, are included in interest rate contracts on our consolidated balance sheets. The fair values exclude accrued interest which is included in interest payable on our consolidated balance sheets.
(2) The amounts reflect 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. Our pro-rata share of the amounts related to the unconsolidated Fund's derivatives is included in our Investment in unconsolidated Fund on our consolidated balance sheets. Our unconsolidated Fund did not have any derivatives in a liability position for the periods presented. See Note 6 for more information about our Fund, including our equity interest percentage, and see "Guarantees" in Note 16 regarding our Fund's derivatives.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
14. Segment Reporting
Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate in two business segments: (i) the acquisition, development, ownership and management of office real estate and (ii) the acquisition, development, ownership and management of multifamily real estate. The services for our office segment primarily include rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses and interest expense are not included in segment profit as our internal reporting addresses these items on a corporate level.
The table below presents the operating activity of our reportable segments:
(In thousands) | Three Months Ended March 31, | ||||||||||
2023 | 2022 | ||||||||||
Office Segment | |||||||||||
Total office revenues | $ | 203,358 | $ | 203,140 | |||||||
Office expenses | (72,768) | (67,374) | |||||||||
Office segment profit | 130,590 | 135,766 | |||||||||
Multifamily Segment | |||||||||||
Total multifamily revenues | 49,035 | 35,742 | |||||||||
Multifamily expenses | (16,888) | (10,173) | |||||||||
Multifamily segment profit | 32,147 | 25,569 | |||||||||
Total profit from all segments | $ | 162,737 | $ | 161,335 |
The table below presents a reconciliation of the total profit from all segments to net income attributable to common stockholders:
(In thousands) | Three Months Ended March 31, | ||||||||||
2023 | 2022 | ||||||||||
Total profit from all segments | $ | 162,737 | $ | 161,335 | |||||||
General and administrative expenses | (10,940) | (11,240) | |||||||||
Depreciation and amortization | (93,176) | (89,365) | |||||||||
Other income | 3,283 | 367 | |||||||||
Other expenses | (520) | (183) | |||||||||
Income from unconsolidated Fund | 289 | 247 | |||||||||
Interest expense | (45,511) | (34,902) | |||||||||
Net income | 16,162 | 26,259 | |||||||||
Net loss (income) attributable to noncontrolling interests | 2,211 | (745) | |||||||||
Net income attributable to common stockholders | $ | 18,373 | $ | 25,514 |
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
15. Future Minimum Lease Rental Receipts
We lease space to tenants primarily under non-cancelable operating leases that generally contain provisions for a base rent plus reimbursement of certain operating expenses, and we own fee interests in two parcels of land from which we receive rent under ground leases. The table below presents the future minimum base rentals on our non-cancelable office tenant and ground leases for our consolidated properties at March 31, 2023:
Twelve months ending March 31: | (In thousands) | ||||
2024 | $ | 623,607 | |||
2025 | 526,955 | ||||
2026 | 425,252 | ||||
2027 | 328,204 | ||||
2028 | 240,450 | ||||
Thereafter | 689,036 | ||||
Total future minimum base rentals(1) | $ | 2,833,504 |
___________________________________
(1) Does not include (i) residential leases, which typically have a term of one year or less, (ii) holdover rent, (iii) other types of rent such as storage and antenna rent, (iv) tenant reimbursements, (v) straight-line rent, (vi) amortization/accretion of acquired above/below-market lease intangibles and (vii) percentage rents. The amounts assume that early termination options held by tenants will not be exercised.
16. Commitments, Contingencies and Guarantees
Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results of operations.
Concentration of Risk
Tenant Receivables
We are subject to credit risk with respect to our tenant receivables and deferred rent receivables related to our tenant leases. Our tenants' ability to honor the terms of their respective leases remains dependent upon economic, regulatory and social factors. We seek to minimize our credit risk from our tenant leases by (i) targeting smaller, more affluent office tenants, from a diverse mix of industries, (ii) performing credit evaluations of prospective tenants and (iii) obtaining security deposits or letters of credit from our tenants. For the three months ended March 31, 2023 and 2022, no tenant accounted for more than 10% of our total revenues. See our revenue recognition policy in Note 2 for the charges to revenue for uncollectible amounts for tenant receivables and deferred rent receivables.
Geographic Risk
All of our properties, including our consolidated JVs and our unconsolidated Fund's properties, are located in Los Angeles County, California and Honolulu, Hawaii, and we are therefore susceptible to adverse economic and regulatory developments, as well as natural disasters, in those markets.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
Derivative Counterparty Credit Risk
We are subject to credit risk with respect to our derivative counterparties. We do not post or receive collateral with respect to our derivative transactions. Our derivative contracts do not provide for right of offset between derivative contracts. See Note 10 for the details of our derivative contracts. We seek to minimize our credit risk by entering into agreements with a variety of counterparties with investment grade ratings.
Cash Balances
We have significant cash balances invested in a variety of short-term money market funds that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments are not insured against loss of principal and there is no guarantee that our investments in these funds will be redeemable at par value. We also have significant cash balances in bank accounts with high quality financial institutions with investment grade ratings. Interest bearing bank accounts at each U.S. banking institution are insured by the FDIC up to $250 thousand.
Asset Retirement Obligations
Conditional asset retirement obligations represent a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within our control. A liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. Environmental site assessments have identified thirty-three buildings in our Consolidated Portfolio which contain asbestos, and would have to be removed in compliance with applicable environmental regulations if these properties are demolished or undergo major renovations.
As of March 31, 2023, the obligations to remove the asbestos from properties which are currently undergoing major renovations, or that we plan to renovate in the future, are not material to our consolidated financial statements. As of March 31, 2023, the obligations to remove the asbestos from our other properties have indeterminable settlement dates, and we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligations.
Contractual Commitments
Development Projects
In downtown Honolulu, we are converting a 25 story, 493,000 square foot office tower into approximately 493 apartments in phases over a number of years as the office space is vacated. As of March 31, 2023, we had an aggregate remaining contractual commitment for this development project and other development projects of approximately $32.5 million.
Other Contractual Commitments
As of March 31, 2023, we had an aggregate remaining contractual commitment for repositionings, capital expenditure projects and tenant improvements of approximately $24.1 million.
Guarantees
Unconsolidated Fund Guarantees
Our unconsolidated Fund, Partnership X, has a $115.0 million floating-rate term loan that matures on September 14, 2028. The loan carries interest at LIBOR + 1.35% (with a zero-percent LIBOR floor), which has been effectively fixed at 2.19% until October 1, 2026 with interest rate swaps (which do not have zero-percent LIBOR floors). The loan is secured by two properties held by Partnership X and is non-recourse.
We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs for Partnership X's loan, and we have also guaranteed the related swaps. Partnership X has agreed to indemnify us for any amounts that we would be required to pay under these agreements. As of March 31, 2023, assuming that LIBOR does not decrease below zero-percent, the maximum future interest payments for the swaps were $3.4 million. As of March 31, 2023, all of the obligations under the related loan and swap agreements have been performed in accordance with the terms of those agreements. See Note 6 for more information regarding Partnership X.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
17. Subsequent Events
During April 2023, we repurchased 4.6 million shares of common stock for $57.4 million in cash, excluding transaction costs, in open market transactions. The average purchase price was $12.57 per share.
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Item 2. 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 Part I, Item 1 of this Report. During the three months ended March 31, 2023, our results of operations were impacted by debt and equity transactions, and development and repositioning projects - see "Debt and Equity Transactions, Development and Repositioning Projects" further below.
Business Description
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 March 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) | 17,594 | 17,980 | |||||||||||||||
Leased rate | 85.6% | 85.5% | |||||||||||||||
Occupancy rate | 83.5% | 83.5% | |||||||||||||||
Multifamily | |||||||||||||||||
Properties | 14 | 14 | |||||||||||||||
Units | 5,032 | 5,032 | |||||||||||||||
Leased rate(4) | 99.3% | 99.3% | |||||||||||||||
Occupancy rate(4) | 97.2% | 97.2% | |||||||||||||||
______________________________________________________________________
(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 4,562 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 1 of this Report for more information about Partnership X.
(3) As of March 31, 2023, we removed 493,000 Rentable Square Feet for an office building that we are converting to residential apartments. See "Debt and Equity Transactions, Development and Repositioning Projects" further below.
(4) Calculations exclude 117 units at one property temporarily unoccupied as a result of a fire. For newly developed buildings going through initial lease up, units are included in both the numerator and denominator as they are leased.
Revenues by Segment and Location
During the three months ended March 31, 2023, revenues from our Consolidated Portfolio were derived as follows:
![2087](https://www.sec.gov/Archives/edgar/data/0001364250/000136425023000033/nysedei-20230331_g2.jpg)
![2092](https://www.sec.gov/Archives/edgar/data/0001364250/000136425023000033/nysedei-20230331_g3.jpg)
33
Debt and Equity Transactions, Development and Repositioning Projects
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 JV's, 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.
See Notes 8, 10 and 11 to our consolidated financial statements in Item 1 of this Report for more information regarding our debt, derivatives and equity, respectively.
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 March 31, 2023, we had delivered seventy-six-percent of the planned units and leased all of the units delivered. The conversion will continue in phases through 2025 as the remaining office space is vacated, therefore, the expected timing of the remaining spending is uncertain.
Repositionings
We often strategically purchase properties with large vacancies or expected near-term lease roll-over and use our knowledge of the property and submarket to reposition the property for the optimal use and tenant mix. In addition, we may reposition properties already in our portfolio. The work we undertake to reposition a building typically takes months or even years, and could involve a range of improvements from a complete structural renovation to a targeted remodeling of selected spaces. During the repositioning, the affected property may display depressed rental revenue and occupancy levels that impact our results and, therefore, comparisons of our performance from period to period.
34
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:
Three Months Ended | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
March 31, 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
Average straight-line rental rate(1)(2)(4) | $44.14 | $46.78 | $44.99 | $45.26 | $49.65 | |||||||||||||||||||||||||||||||||
Annualized lease transaction costs(3)(4) | $5.37 | $5.85 | $4.77 | $5.11 | $6.02 | |||||||||||||||||||||||||||||||||
___________________________________________________
(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.
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:
Three Months Ended March 31, 2023 | |||||||||||||||||||||||
Rent Roll(1)(2) | Expiring Rate(2) | New/Renewal Rate(2) | Percentage Change | ||||||||||||||||||||
Cash Rent | $45.62 | $42.59 | (6.7)% | ||||||||||||||||||||
Straight-line Rent | $41.66 | $44.14 | 6.0% | ||||||||||||||||||||
___________________________________________________
(1)Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the period 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.
35
Multifamily Rental Rates
The table below presents the average annual rental rate per leased unit for new tenants:
Three Months Ended | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
March 31, 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
Average annual rental rate - new tenants(1)(2) | $34,036 | $31,763 | $29,837 | $28,416 | $28,350 | |||||||||||||||||||||||||||||||||
_____________________________________________________
(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 the three months ended March 31, 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.
(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 the three months ended March 31, 2023 (new tenants and existing tenants undergoing annual rent review) was 1.2% higher on average than the prior rent on the same unit.
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: | March 31, 2023 | 2022 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
Office portfolio(2) | 83.5% | 83.7% | 84.9% | 87.4% | 91.4% | |||||||||||||||||||||||||||||||||
Multifamily portfolio(3)(5) | 97.2% | 98.1% | 98.0% | 94.2% | 95.2% | |||||||||||||||||||||||||||||||||
Three Months Ended | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
Average Occupancy Rates(1)(4): | March 31, 2023 | 2022 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
Office portfolio(2) | 83.6% | 84.2% | 85.7% | 89.5% | 90.7% | |||||||||||||||||||||||||||||||||
Multifamily portfolio(3)(5) | 97.6% | 97.9% | 96.8% | 94.2% | 96.5% | |||||||||||||||||||||||||||||||||
___________________________________________________
(1)Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were below that of our existing portfolio.
(2)Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022.
(3)Our Occupancy Rates may not be directly comparable from year to year, as they can be impacted by acquisitions, dispositions, development and redevelopment projects. Multifamily calculations exclude 117 units at one property temporarily unoccupied as a result of a fire.
(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.
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Office Lease Expirations
As of March 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:
![195](https://www.sec.gov/Archives/edgar/data/0001364250/000136425023000033/nysedei-20230331_g4.jpg)
____________________________________________________
(1) Average of the percentage of leases at March 31, 2020, 2021, and 2022 with the same remaining duration as the leases for the labeled year had at March 31, 2023. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
Results of Operations
Comparison of three months ended March 31, 2023 to three months ended March 31, 2022
Our operating results were adversely impacted by the effects of inflation and higher interest rates during the three months ended March 31, 2023, and by the COVID-19 pandemic during the three months ended March 31, 2022.
Three Months Ended March 31, | Favorable (Unfavorable) | |||||||||||||||||||||||||||||||||||||
2023 | 2022 | Change | % | Commentary | ||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||
Office rental revenue and tenant recoveries | $ | 176,345 | $ | 180,427 | $ | (4,082) | (2.3) | % | The decrease was primarily due to lower occupancy and tenant recoveries, partly offset by higher rental rates and better collections. | |||||||||||||||||||||||||||||
Office parking and other income | $ | 27,013 | $ | 22,713 | $ | 4,300 | 18.9 | % | The increase was primarily due to an increase in parking income due to an increase in parking activity. | |||||||||||||||||||||||||||||
Multifamily revenue | $ | 49,035 | $ | 35,742 | $ | 13,293 | 37.2 | % | The increase was primarily due to: (i) revenues from our 1221 Ocean Avenue property in Santa Monica that we purchased in the second quarter of 2022, (ii) an increase in revenues from new units at our Landmark Los Angeles development project and our Residences at Bishop Place conversion project, and (iii) higher rental rates. | |||||||||||||||||||||||||||||
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Three Months Ended March 31, | Favorable (Unfavorable) | |||||||||||||||||||||||||||||||||||||
2023 | 2022 | Change | % | Commentary | ||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||||||||
Office rental expenses | $ | 72,768 | $ | 67,374 | $ | (5,394) | (8.0) | % | The increase was primarily due to an increase in utility, insurance, janitorial and parking expenses. | |||||||||||||||||||||||||||||
Multifamily rental expenses | $ | 16,888 | $ | 10,173 | $ | (6,715) | (66.0) | % | The increase was primarily due to: (i) rental expenses from our 1221 Ocean Avenue property in Santa Monica that we purchased in the second quarter of 2022, (ii) an increase in rental expenses from new units at our development projects, (iii) an increase in property taxes, and (iv) and increase in utility, personnel, insurance and security expenses. | |||||||||||||||||||||||||||||
General and administrative expenses | $ | 10,940 | $ | 11,240 | $ | 300 | 2.7 | % | The decrease was primarily due to a decrease in personnel and advocacy expenses, partly offset by an increase in leasing expenses. | |||||||||||||||||||||||||||||
Depreciation and amortization | $ | 93,176 | $ | 89,365 | $ | (3,811) | (4.3) | % | The increase was primarily due to depreciation from the property we purchased in the second quarter of 2022, and depreciation from the Landmark Los Angeles development project. The increase was partly offset by a decrease in depreciation from our Residences at Bishop Place conversion project. | |||||||||||||||||||||||||||||
Non-Operating Income and Expenses | ||||||||||||||||||||||||||||||||||||||
Other income | $ | 3,283 | $ | 367 | $ | 2,916 | 794.6 | % | The increase was primarily due to an increase in interest income due to higher interest rates. | |||||||||||||||||||||||||||||
Other expenses | $ | (520) | $ | (183) | $ | (337) | (184.2) | % | The increase was primarily due to transaction costs. | |||||||||||||||||||||||||||||
Income from unconsolidated Fund | $ | 289 | $ | 247 | $ | 42 | 17.0 | % | The increase was due to an increase in the net income of our fund, Partnership X, which was primarily due to better collections and higher parking and interest income. | |||||||||||||||||||||||||||||
Interest expense | $ | (45,511) | $ | (34,902) | $ | (10,609) | (30.4) | % | The increase was primarily due to higher interest rates, higher debt, and a decrease in interest capitalized related to development activity. | |||||||||||||||||||||||||||||
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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 is the most directly comparable GAAP financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. FFO should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other REITs. See "Results of Operations" above for a discussion of the items that impacted our net income.
Comparison of three months ended March 31, 2023 to three months ended March 31, 2022
For the three months ended March 31, 2023, FFO decreased by $5.2 million, or 5.0%, to $98.6 million, compared to $103.8 million for the three months ended March 31, 2022. The decrease was primarily due to a decrease in NOI from our office portfolio and higher interest expense, partly offset by an increase in NOI from our multifamily portfolio and higher interest income. The decrease in NOI from our office portfolio was primarily due to lower occupancy and tenant recoveries, and higher rental expenses. The increase in interest expense was primarily due to higher interest rates, higher debt, and a decrease in interest capitalized related to development activity. The increase in NOI from our multifamily portfolio was primarily due to: (i) our acquisition of the 1221 Ocean Avenue property in Santa Monica in the second quarter of 2022, (ii) new units from our development projects, and (iii) higher rental rates. The increase in interest income was primarily due to higher interest rates.
Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in our Operating Partnership - which includes our share of our consolidated JVs and our unconsolidated Fund's FFO) to net income attributable to common stockholders (the most directly comparable GAAP measure):
Three Months Ended March 31, | |||||||||||||||||
(In thousands) | 2023 | 2022 | |||||||||||||||
Net income attributable to common stockholders | $ | 18,373 | $ | 25,514 | |||||||||||||
Depreciation and amortization of real estate assets | 93,176 | 89,365 | |||||||||||||||
Net (loss) income attributable to noncontrolling interests | (2,211) | 745 | |||||||||||||||
Adjustments attributable to unconsolidated Fund(1) | 745 | 694 | |||||||||||||||
Adjustments attributable to consolidated JVs(2) | (11,471) | (12,555) | |||||||||||||||
FFO | $ | 98,612 | $ | 103,763 | |||||||||||||
________________________________________________________________
(1)Adjusts for our share of Partnership X's depreciation and amortization of real estate assets.
(2)Adjusts for the net income (loss) and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in our consolidated JVs.
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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 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 three months ended March 31, 2023 to three months ended March 31, 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 the three months ended March 31, 2023 and by the COVID-19 pandemic during the three months ended March 31, 2022.
Three Months Ended March 31, | Favorable (Unfavorable) | ||||||||||||||||||||||||||||||||||
2023 | 2022 | Change | % | Commentary | |||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Office revenues | $ | 202,182 | $ | 200,019 | $ | 2,163 | 1.1% | The increase was primarily due to an increase in parking income, partly offset by: (i) a decrease in rental revenues due to a decrease in occupancy, and (ii) a decrease in tenant recoveries. | |||||||||||||||||||||||||||
Office expenses | (72,595) | (66,177) | (6,418) | (9.7)% | The increase was primarily due to an increase in utility, insurance, janitorial and parking expenses. | ||||||||||||||||||||||||||||||
Office NOI | 129,587 | 133,842 | (4,255) | (3.2)% | |||||||||||||||||||||||||||||||
Multifamily revenues | 29,789 | 27,558 | 2,231 | 8.1% | The increase was primarily due to an increase in rental revenues due to higher rental rates. | ||||||||||||||||||||||||||||||
Multifamily expenses | (9,465) | (8,560) | (905) | (10.6)% | The increase was primarily due to an increase in utility, personnel, insurance and security expenses. | ||||||||||||||||||||||||||||||
Multifamily NOI | 20,324 | 18,998 | 1,326 | 7.0% | |||||||||||||||||||||||||||||||
Total NOI | $ | 149,911 | $ | 152,840 | $ | (2,929) | (1.9)% | ||||||||||||||||||||||||||||
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Reconciliation to GAAP
The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders (the most directly comparable GAAP measure):
Three Months Ended March 31, | |||||||||||||||||
(In thousands) | 2023 | 2022 | |||||||||||||||
Same Property NOI | $ | 149,911 | $ | 152,840 | |||||||||||||
Non-comparable office revenues | 1,176 | 3,121 | |||||||||||||||
Non-comparable office expenses | (173) | (1,197) | |||||||||||||||
Non-comparable multifamily revenues | 19,246 | 8,184 | |||||||||||||||
Non-comparable multifamily expenses | (7,423) | (1,613) | |||||||||||||||
NOI | 162,737 | 161,335 | |||||||||||||||
General and administrative expenses | (10,940) | (11,240) | |||||||||||||||
Depreciation and amortization | (93,176) | (89,365) | |||||||||||||||
Other income | 3,283 | 367 | |||||||||||||||
Other expenses | (520) | (183) | |||||||||||||||
Income from unconsolidated Fund | 289 | 247 | |||||||||||||||
Interest expense | (45,511) | (34,902) | |||||||||||||||
Net income | 16,162 | 26,259 | |||||||||||||||
Net loss (income) attributable to noncontrolling interests | 2,211 | (745) | |||||||||||||||
Net income attributable to common stockholders | $ | 18,373 | $ | 25,514 | |||||||||||||
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 the three months ended March 31, 2023, we generated cash from operations of $145.5 million. As of March 31, 2023, we had $302.0 million of cash and cash equivalents, and we had no balance outstanding on our $400.0 million revolving credit facility. Our earliest term loan maturity is December 2024. See Note 8 to our consolidated financial statements in Item 1 of this Report for more information regarding our debt. Excluding acquisitions and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand, cash generated by operations and our revolving credit facility.
Long-term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to REIT federal tax rules which require that we distribute at least 90% of our income on an annual basis. We plan to meet our long-term liquidity needs through long-term secured non-recourse debt, the issuance of equity securities, including common stock and OP Units, as well as property dispositions and JV transactions. We have an ATM program which would allow us, subject to market conditions, to sell up to $400.0 million of shares of common stock.
We only use non-recourse debt secured by our properties. As of March 31, 2023, approximately 45% of our total office portfolio was unencumbered, and approximately 14% of our residential portfolio was unencumbered. To mitigate the impact of changing interest rates on our cash flows from operations, we generally enter into interest rate swap agreements with respect to our loans with floating interest rates. These swap agreements generally expire two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. See Notes 8 and 10 to our consolidated financial statements in Item 1 of this Report for more information regarding our debt and derivative contracts, respectively. See Item 3 "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.
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Certain Contractual Obligations
See the following notes to our consolidated financial statements in Item 1 of this Report for information regarding our contractual commitments:
•Note 4 - minimum future ground lease payments;
•Note 8 - minimum future principal payments for our secured notes payable and revolving credit facility, and the interest rates that determine our future periodic interest payments; and
•Note 16 - 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 March 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 16 to our consolidated financial statements in Item 1 of this Report for more information about our Fund's debt and swaps, and the respective guarantees.
Cash Flows
Comparison of three months ended March 31, 2023 to three months ended March 31, 2022
Our operating cash flows were adversely impacted by the effects of inflation and higher interest rates during the three months ended March 31, 2023 and by the COVID-19 pandemic during the three months ended March 31, 2022.
Three Months Ended March 31, | Increase (Decrease) In Cash | ||||||||||||||||||||||||||||
2023 | 2022 | % | |||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
Net cash provided by operating activities(1) | $ | 145,474 | $ | 139,470 | $ | 6,004 | 4.3 | % | |||||||||||||||||||||
Net cash used in investing activities(2) | $ | (51,403) | $ | (72,944) | $ | 21,541 | 29.5 | % | |||||||||||||||||||||
Net cash used in financing activities(3) | $ | (60,929) | $ | (65,157) | $ | 4,228 | (6.5) | % | |||||||||||||||||||||
________________________________________________________________________
(1) Our cash flows from operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectibility of tenant receivables, the level of our operating and general and administrative expenses, and interest expense. The increase in cash from operating activities of $6.0 million was primarily due to an increase in NOI from our multifamily portfolio, an increase in cash from working capital, and higher interest income, partly offset by a decrease in NOI from our office portfolio and higher interest paid.
(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 $21.5 million was primarily due to: (i) a deposit of $25.0 million for a property acquisition during the three months ended March 31, 2022, and (ii) a decrease in capital expenditures for developments of $8.8 million, partly offset by an increase in capital expenditures for improvements to real estate of $11.5 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 $4.2 million was primarily due to a decrease in dividends paid to common stockholders of $15.7 million, and a decrease in distributions paid to noncontrolling interests of $5.3 million, partly offset by cash paid to repurchase common stock of $16.5 million..
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Critical Accounting Policies
We have not made any changes to our critical accounting policies disclosed in our 2022 Annual Report on Form 10-K. 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. Some of our estimates are subject to adjustment as we believe appropriate, based on revised estimates, and reconciliation to actual results when available.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Hedging our Floating Rate Borrowings
As of March 31, 2023, the interest rates for 73% of our consolidated borrowings were fixed or swap-fixed with interest rate swaps. Our use of interest rate swaps exposes us to credit risk from the potential inability of our counterparties to perform under the terms of those agreements. We attempt to minimize this credit risk by contracting with a variety of financial counterparties with investment grade ratings. As of March 31, 2023, the interest expense for our floating rate borrowings that are not hedged would increase by $14.1 million per year for every one hundred basis point increase in the related benchmark interest rate. See Note 8 to our consolidated financial statements in Item 1 of this Report for our future swap expirations. Higher interest rates would cause an increase in our future interest expense, which would reduce our future net income and cash flows from operations.
Market Transition to SOFR from USD-LIBOR
On March 5, 2021, the FCA announced that USD-LIBOR would no longer be published after June 30, 2023. This announcement has several implications, including setting the type of SOFR to which LIBOR is converted (e.g., Term SOFR, Daily Simple SOFR or Daily Compounded SOFR) and agreeing on a spread that may be applied when converting contracts from USD-LIBOR to SOFR. As of March 31, 2023, most of our floating rate borrowings and interest rate swaps are indexed to USD-LIBOR, and we currently expect that all of these loans and interest rate swaps will be converted to SOFR by July 1, 2023. We are evaluating issues relating to transitioning contracts to SOFR, which include, among other issues, the calculation of: (i) loan interest payments, (ii) swap interest payments, and (iii) the value of, and accounting for, loans and swaps. While we currently expect USD-LIBOR to be available in substantially its current form until at least June 30, 2023, it is possible that USD-LIBOR will become unavailable prior to that time. This could occur if, for example, sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to SOFR will be accelerated and potentially magnified.
See Notes 8 and 10 to our consolidated financial statements in Item 1 of this Report for more information regarding our debt and interest rate swaps.
Item 4. Controls and Procedures
As of March 31, 2023, the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of management, including our CEO and CFO, regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the foregoing, our CEO and CFO concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow for timely decisions regarding required disclosure. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. Excluding ordinary routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
We are not aware of any material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of equity securities by the issuer and affiliated purchasers.
In December 2022, our board authorized the repurchase of up to $300 million of our outstanding common shares under a newly established share repurchase program. Purchases may be made from time to time in the open market, through privately negotiated transactions or through other means as permitted by federal securities laws, including through the use of trading plans intended to qualify under Rule 10b5-1. The timing, manner, price and amount of any repurchases will be determined in the discretion of company’s management depending on business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, alternative uses for capital and other considerations. The program may be suspended or discontinued at any time and does not obligate us to make any purchases of our stock.
The table below summarizes the repurchases of our common stock during the first quarter of 2023:
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum dollar value of shares that may yet be purchased under the program | ||||||||||
March 1 - March 31, 2023 | 1,435,189 | $11.50 | 1,435,189 | $283,500,000 |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit Number | Description | Footnote | |||||||||
3.1 | (1) | ||||||||||
3.2 | (2) | ||||||||||
3.3 | (3) | ||||||||||
3.4 | (4) | ||||||||||
31.1 | |||||||||||
31.2 | |||||||||||
32.1 | (5) | ||||||||||
32.2 | (5) | ||||||||||
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________________________________________________
(1) Filed with Amendment No. 6 to Form S-11 on October 19, 2006 and incorporated herein by this reference. (File number 333-135082).
(2) Filed with Form 8-K on September 6, 2013 and incorporated herein by this reference. (File number 001-33106).
(3) Filed with Form 8-K on October 30, 2006 and incorporated herein by this reference. (File number 001-33106).
(4) Filed with Form 8-K on April 9, 2018 and incorporated herein by this reference. (File number 001-33106).
(5) In accordance with SEC Release No. 33-8212, these exhibits are being furnished, and are not being filed as part of this Report on Form 10-Q or as a separate disclosure document, and are not being incorporated by reference into any Securities Act registration statement.
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Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DOUGLAS EMMETT, INC. | ||||||||||||||
Date: | May 4, 2023 | By: | /s/ JORDAN L. KAPLAN | |||||||||||
Jordan L. Kaplan | ||||||||||||||
President and CEO | ||||||||||||||
Date: | May 4, 2023 | By: | /s/ PETER D. SEYMOUR | |||||||||||
Peter D. Seymour | ||||||||||||||
CFO |
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