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Douglas Emmett Inc - Quarter Report: 2023 September (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 September 30, 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
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Douglas Emmett, Inc.
(Exact name of registrant as specified in its charter)
Maryland20-3073047
(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 ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, $0.01 par value per shareDEINew 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 filerAccelerated filer
Non-accelerated filerSmaller 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 atOctober 27, 2023
Common Stock, $0.01 par value per share 166,737,730shares
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DOUGLAS EMMETT, INC.
FORM 10-Q
Table of Contents
Page
 
 
 
 
 
     Overview
     Other Assets
     Equity
     EPS
 

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Table of Contents
Glossary
Abbreviations used in this Report:

AOCIAccumulated Other Comprehensive Income (Loss)
ASCAccounting Standards Codification
ASUAccounting Standards Update
BOMABuilding Owners and Managers Association
CEOChief Executive Officer
CFOChief Financial Officer
CodeInternal Revenue Code of 1986, as amended
COVID-19Coronavirus Disease 2019
DEIDouglas Emmett, Inc.
EPSEarnings Per Share
Exchange ActSecurities Exchange Act of 1934, as amended
FASBFinancial Accounting Standards Board
FCAFinancial Conduct Authority
FDICFederal Deposit Insurance Corporation
FFOFunds From Operations
FundUnconsolidated Institutional Real Estate Fund
GAAPGenerally Accepted Accounting Principles (United States)
JVJoint Venture
LIBORLondon Interbank Offered Rate
LTIP UnitsLong-Term Incentive Plan Units
NAREITNational Association of Real Estate Investment Trusts
OCIOther Comprehensive Income (Loss)
OP UnitsOperating Partnership Units
Operating PartnershipDouglas Emmett Properties, LP
Partnership XDouglas Emmett Partnership X, LP
PCAOBPublic Company Accounting Oversight Board (United States)
REITReal Estate Investment Trust
ReportQuarterly Report on Form 10-Q
SECSecurities and Exchange Commission
Securities ActSecurities Act of 1933, as amended
SOFRSecured Overnight Financing Rate
TRSTaxable REIT Subsidiary(ies)
USUnited States
USDUnited States Dollar
VIEVariable Interest Entity(ies)

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Table of Contents
Glossary
Defined terms used in this Report:

Annualized RentAnnualized 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 PortfolioIncludes 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 the Leased Rate. For newly developed buildings going through initial lease up, units are included in both the numerator and denominator as they are 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 the Occupancy Rate. For newly developed buildings going through initial lease up, units are included in both the numerator and denominator as they are occupied. 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 ExpendituresBuilding 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.
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Table of Contents
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 RateWe 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 LeasesRepresents 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 PortfolioIncludes our Consolidated Portfolio plus the properties owned by our Fund.
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Forward Looking Statements

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.
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Douglas Emmett, Inc.
Consolidated Balance Sheets
(Unaudited; In thousands, except share data)
 September 30, 2023December 31, 2022
Assets  
Investment in real estate, gross$12,385,477 $12,292,973 
Less: accumulated depreciation and amortization(3,558,336)(3,299,365)
Investment in real estate, net8,827,141 8,993,608 
Ground lease right-of-use asset7,449 7,455 
Cash and cash equivalents526,230 268,837 
Tenant receivables8,555 6,879 
Deferred rent receivables116,987 114,980 
Acquired lease intangible assets, net3,103 3,536 
Interest rate contract assets248,232 270,234 
Investment in unconsolidated Fund47,988 47,976 
Other assets60,394 33,941 
Total Assets$9,846,079 $9,747,446 
Liabilities  
Secured notes payable, net$5,541,846 $5,191,893 
Ground lease liability10,839 10,848 
Interest payable, accounts payable and deferred revenue169,069 140,925 
Security deposits62,403 61,429 
Acquired lease intangible liabilities, net22,775 31,364 
Interest rate contract liabilities— 1,790 
Dividends payable31,691 33,414 
Total Liabilities5,838,623 5,471,663 
Equity  
Douglas Emmett, Inc. stockholders' equity:  
Common Stock, $0.01 par value, 750,000,000 authorized, 166,737,730 and 175,809,682 outstanding at September 30, 2023 and December 31, 2022, respectively
1,667 1,758 
Additional paid-in capital3,384,285 3,493,307 
Accumulated other comprehensive income169,760 187,063 
Accumulated deficit(1,218,457)(1,119,714)
Total Douglas Emmett, Inc. stockholders' equity2,337,255 2,562,414 
Noncontrolling interests1,670,201 1,713,369 
Total Equity4,007,456 4,275,783 
Total Liabilities and Equity$9,846,079 $9,747,446 

See accompanying notes to the consolidated financial statements.
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Douglas Emmett, Inc.
Consolidated Statements of Operations
(Unaudited; in thousands, except per share data)




 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Revenues   
Office rental    
Rental revenues and tenant recoveries$181,106 $182,011 $535,243 $542,535 
Parking and other income27,717 25,916 82,371 74,209 
Total office revenues208,823 207,927 617,614 616,744 
Multifamily rental    
Rental revenues42,864 41,057 131,126 110,235 
Parking and other income3,722 4,679 12,469 12,536 
Total multifamily revenues46,586 45,736 143,595 122,771 
Total revenues255,409 253,663 761,209 739,515 
Operating Expenses    
Office expenses74,631 74,653 220,261 212,006 
Multifamily expenses17,256 13,661 50,470 35,729 
General and administrative expenses12,826 11,272 34,698 34,173 
Depreciation and amortization122,022 96,276 336,771 279,588 
Total operating expenses226,735 195,862 642,200 561,496 
Other income6,229 1,649 12,561 2,490 
Other expenses(175)(199)(820)(561)
Income from unconsolidated Fund290 356 1,177 921 
Interest expense(56,043)(38,394)(151,859)(109,560)
Net (loss) income(21,025)21,213 (19,932)71,309 
Net loss attributable to noncontrolling interests7,663 1,742 17,681 1,534 
Net (loss) income attributable to common stockholders$(13,362)$22,955 $(2,251)$72,843 
Net (loss) income per common share – basic and diluted$(0.08)$0.13 $(0.02)$0.41 
 
See accompanying notes to the consolidated financial statements.
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Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited and in thousands)



 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Net (loss) income$(21,025)$21,213 $(19,932)$71,309 
Other comprehensive (loss) income: cash flow hedges(7,045)108,352 (21,757)342,628 
Comprehensive (loss) income(28,070)129,565 (41,689)413,937 
Comprehensive loss (income) attributable to noncontrolling interests9,571 (31,731)22,135 (102,671)
Comprehensive (loss) income attributable to common stockholders$(18,499)$97,834 $(19,554)$311,266 
 
See accompanying notes to the consolidated financial statements.

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Douglas Emmett, Inc.
Consolidated Statements of Equity
(Unaudited; in thousands, except dividend per share data)

 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Shares of Common StockBeginning balance166,738 175,784 175,810 175,529 
Exchange of OP Units for common stock— — 260 
Repurchases of common stock— — (9,072)— 
Ending balance166,738 175,789 166,738 175,789 
Common StockBeginning balance$1,667 $1,758 $1,758 $1,755 
Exchange of OP units for common stock— — — 
Repurchases of common stock— — (91)— 
Ending balance$1,667 $1,758 $1,667 $1,758 
Additional Paid-in CapitalBeginning balance$3,384,274 $3,492,864 $3,493,307 $3,488,886 
Exchange of OP Units for common stock— 80 — 4,233 
Repurchases of OP Units with cash11 (1)120 (176)
Repurchases of common stock— — (109,142)— 
Ending balance$3,384,285 $3,492,943 $3,384,285 $3,492,943 
Accumulated Other Comprehensive Income (Loss)Beginning balance$174,897 $124,770 $187,063 $(38,774)
Cash flow hedge adjustments(5,137)74,879 (17,303)238,423 
Ending balance$169,760 $199,649 $169,760 $199,649 
Accumulated DeficitBeginning balance$(1,173,415)$(1,084,346)$(1,119,714)$(1,035,798)
Net (loss) income attributable to common stockholders(13,362)22,955 (2,251)72,843 
Dividends(31,680)(49,220)(96,492)(147,656)
Ending balance$(1,218,457)$(1,110,611)$(1,218,457)$(1,110,611)
Noncontrolling InterestsBeginning balance1,686,895 1,693,905 $1,713,369 $1,570,484 
Net loss(7,663)(1,742)(17,681)(1,534)
Cash flow hedge adjustments(1,908)33,473 (4,454)104,205 
Contributions— — 125 81,000 
Distributions(10,145)(14,649)(30,433)(45,376)
Exchange of OP Units for common stock— (80)— (4,236)
Repurchases of OP Units with cash(57)(5)(487)(160)
Stock-based compensation3,079 3,092 9,762 9,611 
Ending balance$1,670,201 $1,713,994 $1,670,201 $1,713,994 
  
Statement continues on the next page.
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Douglas Emmett, Inc.
Consolidated Statements of Equity
(Unaudited; in thousands, except dividend per share data)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Total EquityBeginning balance$4,074,318 $4,228,951 $4,275,783 $3,986,553 
Net (loss) income(21,025)21,213 (19,932)71,309 
Cash flow hedge adjustments(7,045)108,352 (21,757)342,628 
Repurchases of OP Units with cash(46)(6)(367)(336)
Repurchases of common stock— — (109,233)— 
Contributions— — 125 81,000 
Dividends(31,680)(49,220)(96,492)(147,656)
Distributions(10,145)(14,649)(30,433)(45,376)
Stock-based compensation3,079 3,092 9,762 9,611 
Ending balance$4,007,456 $4,297,733 $4,007,456 $4,297,733 
Dividends declared per common share$0.19 $0.28 $0.57 $0.84 

See accompanying notes to the consolidated financial statements.
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Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)

    
 Nine Months Ended September 30,
20232022
Operating Activities  
Net (loss) income$(19,932)$71,309 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:  
Income from unconsolidated Fund(1,177)(921)
Depreciation and amortization336,771 279,588 
Net accretion of acquired lease intangibles(8,156)(8,050)
Straight-line rent(2,007)(880)
Loan premium amortized and written off(344)(344)
Deferred loan costs amortized and written off6,623 5,908 
Amortization of stock-based compensation7,553 7,156 
Operating distributions from unconsolidated Fund957 921 
Purchase of interest rate caps(1,622)— 
Change in working capital components:  
Tenant receivables(1,676)4,156 
Interest payable, accounts payable and deferred revenue41,277 31,825 
Security deposits974 4,508 
Other assets(27,032)(13,507)
Net cash provided by operating activities332,209 381,669 
Investing Activities  
Capital expenditures for improvements to real estate(144,842)(111,495)
Capital expenditures for developments(37,297)(60,762)
Insurance recoveries for damage to real estate1,686 4,274 
Property acquisition— (330,470)
Capital distributions from unconsolidated Fund80 1,454 
Net cash used in investing activities(180,373)(496,999)
Financing Activities  
Proceeds from borrowings505,000 230,000 
Repayment of borrowings(155,642)(55,614)
Loan cost payments(5,678)(1,620)
Purchase of interest rate caps— (481)
Proceeds from sale of interest rate cap— 444 
Contributions from noncontrolling interests in consolidated JVs125 81,000 
Distributions paid to noncontrolling interests(30,433)(45,376)
Dividends paid to common stockholders(98,215)(147,584)
Repurchases of OP Units(367)(336)
Repurchases of common stock(109,233)— 
Net cash provided by financing activities105,557 60,433 
Increase (decrease) in cash and cash equivalents and restricted cash257,393 (54,897)
Cash and cash equivalents and restricted cash - beginning balance268,938 336,006 
Cash and cash equivalents and restricted cash - ending balance$526,331 $281,109 
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Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)

Reconciliation of Ending Cash Balance
September 30, 2023September 30, 2022
Cash and cash equivalents$526,230 $281,008 
Restricted cash101 101 
Cash and cash equivalents and restricted cash$526,331 $281,109 


Supplemental Cash Flows Information

 Nine Months Ended September 30,
 20232022
Cash paid for interest, net of capitalized interest$141,081 $103,666 
Capitalized interest paid$1,296 $7,357 
Non-cash Investing Transactions
Accrual for real estate and development capital expenditures$19,261 $19,508 
Capitalized stock-based compensation for improvements to real estate and developments$2,209 $2,455 
Removal of fully depreciated and amortized buildings, building improvements, tenant improvements and lease intangibles$74,277 $57,177 
Removal of fully amortized acquired lease intangible assets$255 $1,221 
Removal of fully accreted acquired lease intangible liabilities$14,504 $9,831 
Non-cash Financing Transactions
Gain recorded in AOCI - consolidated derivatives$83,157 $318,408 
Gain recorded in AOCI - unconsolidated Fund's derivatives (our share)$1,185 $3,777 
Dividends declared$96,492 $147,656 
Exchange of OP Units for common stock$— $4,236 

See accompanying notes to the consolidated financial statements.

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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited)



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 September 30, 2023, our Consolidated Portfolio consisted of (i) a 17.6 million square foot office portfolio, (ii) 4,594 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 September 30, 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 September 30, 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 PortfolioTotal
Portfolio
Office
Wholly-owned properties5252
Consolidated JV properties1616
Unconsolidated Fund properties2
6870
Multifamily
Wholly-owned properties1212
Consolidated JV properties22
1414
Total8284

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 JVs, was $3.76 billion as of September 30, 2023 and $3.41 billion as of 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 September 30, 2023, our consolidated VIE entities, excluding our Operating Partnership, had:
aggregate consolidated assets of $3.90 billion (of which $3.49 billion related to investment in real estate), and
aggregate consolidated liabilities of $1.89 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:
$0.2 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively, and
$0.5 million and $0.3 million for the nine months ended September 30, 2023 and 2022, respectively.

We restored accrual basis accounting for certain office tenants that were previously determined to be uncollectible and accounted for on a cash basis of accounting, which increased our office revenues by:
$2.3 million and $1.6 million for the three months ended September 30, 2023 and 2022, respectively, and
$4.4 million and $3.3 million for the nine months ended September 30, 2023 and 2022, respectively.

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:
$23.4 million and $22.1 million for the three months ended September 30, 2023, and 2022, respectively, and
$69.1 million and $62.6 million for the nine months ended September 30, 2023 and 2022, respectively.
Office parking receivables, which are included in Tenant receivables on our consolidated balance sheets, were
$1.0 million as of September 30, 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.

















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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
3. Investment in Real Estate

The table below summarizes our investment in real estate:

(In thousands)September 30, 2023December 31, 2022
Land$1,185,977$1,185,977
Buildings and improvements(1)
10,118,96510,055,499
Tenant improvements and lease intangibles1,011,310981,460
Property under development(1)
69,22570,037
Investment in real estate, gross$12,385,477$12,292,973
________________________________________________
(1)    During the nine months ended September 30, 2023, Property under development balances transferred to Building and improvements for real estate placed into service was $34.0 million.


2022 Property Acquisition

Acquisition of 1221 Ocean Avenue

On April 26, 2022, we paid $330.0 million, excluding acquisition costs, to acquire a luxury multifamily apartment building with 120 units, located at 1221 Ocean Avenue in Santa Monica. We acquired the property through a new consolidated JV that we manage and in which we own a 55% interest. We accounted for the acquisition as an asset acquisition and the acquired property's operating results are included in our consolidated operating results from the date of acquisition. The table below summarizes the purchase price allocation for the acquisition. The contract price and the purchase price allocation total in the table below differ due to acquisition costs, prorations and similar adjustments:

(In thousands)Purchase Price Allocation
Land$22,086 
Buildings and improvements319,666 
Tenant improvements and lease intangibles8,879 
Acquired below-market leases(18,542)
Other liabilities assumed(1,619)
Net assets and liabilities acquired$330,470 


Property to be Removed from Service

During the second quarter of 2023, we filed paperwork to remove our Barrington Plaza Apartments property in Los Angeles from the rental market because of city directives to install fire sprinklers and other life safety improvements. In connection with the removal of the aforementioned property from the rental market, we accelerated and recorded additional depreciation expense of $27.4 million for the three months ended September 30, 2023 and $54.8 million for the nine months ended September 30, 2023, which is included in Depreciation and amortization on our consolidated statements of operations.









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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 September 30, 2023, the ground lease right-of-use asset carrying value was $7.4 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 September 30, 2023 and 2022, and
$549 thousand for each of the nine month periods ended September 30, 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 September 30, 2023:
Twelve months ending September 30:(In thousands)
2024$733 
2025733 
2026733 
2027733 
2028733 
Thereafter42,696 
Total future minimum lease payments$46,361 
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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)September 30, 2023December 31, 2022
Above-market tenant leases$4,712 $4,968 
Above-market tenant leases - accumulated amortization(2,474)(2,309)
Above-market ground lease where we are the lessor1,152 1,152 
Above-market ground lease - accumulated amortization(287)(275)
Acquired lease intangible assets, net$3,103 $3,536 
Below-market tenant leases$50,347 $64,851 
Below-market tenant leases - accumulated accretion(27,572)(33,487)
Acquired lease intangible liabilities, net$22,775 $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 September 30,Nine Months Ended September 30,
 (In thousands)2023202220232022
Net accretion of above- and below-market tenant lease assets and liabilities(1)
$2,466 $3,348 $8,169 $8,063 
Amortization of an above-market ground lease asset(2)
(5)(5)(13)(13)
Total$2,461 $3,343 $8,156 $8,050 
______________________________________________
(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 September 30, 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:
Nine Months Ended September 30,
 (In thousands)20232022
Operating distributions received$957 $921 
Capital distributions received80 1,454 
Total distributions received$1,037 $2,375 


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)September 30, 2023December 31, 2022
Total assets$149,588 $147,853 
Total liabilities$118,942 $119,038 
Total equity$30,646 $28,815 

 Nine Months Ended September 30,
 (In thousands)20232022
Total revenues$14,929 $13,893 
Operating income$4,749 $4,361 
Net income$3,167 $2,387 


7. Other Assets
 (In thousands)September 30, 2023December 31, 2022
Restricted cash$101 $101 
Prepaid expenses30,811 19,871 
Indefinite-lived intangibles1,988 1,988 
Deposit with lender(1)
13,300 — 
Furniture, fixtures and equipment, net7,042 7,144 
Other7,152 4,837 
Total other assets$60,394 $33,941 
_______________________________________________________________________
(1) In connection with the Barrington Plaza loan, Barrington Plaza Apartments have been removed from the rental market. The lender is treating the debt as a construction loan. They have required a $13.3 million cash deposit, which we placed in a collateral account during the third quarter, and they are requiring a construction completion guarantee. See Note 8 for our debt disclosures.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
8. Secured Notes Payable, Net
Description
Maturity
Date(1)
Principal Balance as of September 30, 2023Principal Balance as of December 31, 2022
Variable Interest Rate(2)
Fixed Interest
Rate(3)
Swap Maturity Date
(In thousands)
Consolidated Wholly Owned Subsidiaries
Term loan(4)(5)
3/3/2025$335,000 $335,000 
SOFR + 1.41%
N/AN/A
Fannie Mae loan(4)(5)
4/1/2025102,400 102,400 
SOFR + 1.36%
N/AN/A
Term loan(4)
8/15/2026415,000 415,000 
SOFR + 1.20%
3.07%8/1/2025
Term loan(4)
9/19/2026400,000 400,000 
SOFR + 1.25%
2.44%9/1/2024
Term loan(4)
9/26/2026200,000 200,000 
SOFR + 1.30%
2.36%10/1/2024
Term loan(4)
11/1/2026400,000 400,000 
SOFR + 1.25%
2.31%10/1/2024
Fannie Mae loan(4)(6)
6/1/2027550,000 550,000 
SOFR + 1.48%
N/AN/A
Term loan(4)
5/18/2028300,000 300,000 
SOFR + 1.51%
2.21%6/1/2026
Term loan(4)
1/1/2029300,000 300,000 
SOFR + 1.56%
2.66%1/1/2027
Fannie Mae loan(4)
6/1/2029255,000 255,000 
SOFR + 1.09%
3.26%6/1/2027
Fannie Mae loan(4)
6/1/2029125,000 125,000 
SOFR + 1.09%
3.25%6/1/2027
Fannie Mae loan(4)(7)
8/1/2033350,000 — 
SOFR + 1.37%
N/AN/A
Term loan(8)
6/1/203827,859 28,502 N/A4.55%N/A
Total Wholly-Owned Subsidiary Debt3,760,259 3,410,902 
Consolidated JVs
Term loan(4)(9)
12/19/2024400,000 400,000 
SOFR + 1.40%
N/AN/A
Term loan(4)
5/15/2027450,000 450,000 
SOFR + 1.45%
2.26%4/1/2025
Term loan(4)
8/19/2028625,000 625,000 
SOFR + 1.45%
2.12%6/1/2025
Term loan(4)
4/26/2029175,000 175,000 
SOFR + 1.25%
3.90%5/1/2026
Fannie Mae loan(4)
6/1/2029160,000 160,000 
SOFR + 1.09%
3.25%7/1/2027
Total Consolidated Debt(10)
5,570,259 5,220,902 
Unamortized loan premium, net(11)
3,203 3,547 
Unamortized deferred loan costs, net(12)
(31,616)(32,556)
Total Consolidated Debt, net$5,541,846 $5,191,893 
_______________________________________________________________________
Except as noted below, our loans: (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)LIBOR loans converted to SOFR during the third quarter include a small SOFR adjustment to calculate the interest payable to the lender, which are included in the spreads. The SOFR conversion did not change the swap-fixed interest rates for our swap-fixed loans.
(3)Effective rate as of September 30, 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.
(4)The loan agreement includes a zero-percent SOFR floor. If the loan is swap-fixed then the related swaps do not include such a floor.
(5)The swaps expired on March 1, 2023.
(6)The loan is secured by four residential properties. A portion of the loan totaling $472 million has a lender-required out-of-the-money interest rate cap at a weighted average of 8.99% until July 2026. Barrington Plaza Apartments have been removed from the rental market. See Note 3. For the portion of the loan relating to Barrington Plaza, the lender is treating the debt as a construction loan. They have required a $13.3 million cash deposit, which we placed in a collateral account during the third quarter, and they are requiring a construction completion guarantee. The lender will return the deposit at the earlier of August 2026 or when the loan is paid in full. The deposit is included in Other assets in our balance sheet. See Note 7.
(7)We closed the loan during the third quarter of 2023. The loan has a lender-required out-of-the-money interest rate cap at an interest rate of 7.84% until August 2026. We used part of the proceeds from the loan to pay off the balance on our revolving credit facility, which expired in August 2023. There was no balance outstanding on the credit facility as of December 31, 2022.
(8)The loan requires monthly payments of principal and interest. The principal amortization is based upon a 30-year amortization schedule.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
(9)The swaps expired on January 1, 2023.
(10)The table does not include our unconsolidated Fund's loan - see Note 16. See Note 13 for our fair value disclosures.
(11)Balances are net of accumulated amortization of $4.0 million and $3.7 million at September 30, 2023 and December 31, 2022, respectively.
(12)Balances are net of accumulated amortization of $54.2 million and $54.1 million at September 30, 2023 and December 31, 2022, respectively.


Debt Statistics

The table below summarizes our consolidated fixed and floating rate debt:
(In thousands)Principal Balance as of September 30, 2023Principal Balance as of December 31, 2022
Aggregate swapped to fixed rate loans$3,805,000 $4,642,400 
Aggregate fixed rate loans27,859 28,502 
Aggregate capped rate loans822,000 — 
Aggregate floating rate loans915,400 550,000 
Total Debt$5,570,259 $5,220,902 

The table below summarizes certain consolidated debt statistics as of September 30, 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)4.3 years
Weighted average remaining fixed interest period2.1 years
Weighted average annual interest rate2.65%


Future Principal Payments

At September 30, 2023, the minimum future principal payments due on our consolidated secured notes payable were as follows:
Twelve months ending September 30:
Including Maturity Extension Options(1)
(In thousands)
2024$891 
2025838,333 
20261,015,976 
20271,401,022 
2028926,069 
Thereafter1,387,968 
Total future principal payments$5,570,259 
________________________________________________
(1)     Some of our loan agreements require that we meet certain minimum financial thresholds to be able to extend the loan maturity.


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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
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 September 30,Nine Months Ended September 30,
(In thousands)2023202220232022
Loan premium amortized and written off$(116)$(116)$(344)$(344)
Deferred loan costs amortized and written off2,261 2,030 6,623 5,908 
Loan costs expensed59 79 110 
Total$2,204 $1,922 $6,358 $5,674 


9. Interest Payable, Accounts Payable and Deferred Revenue

(In thousands)September 30, 2023December 31, 2022
Interest payable$18,028 $13,529 
Accounts payable and accrued liabilities99,805 80,244 
Deferred revenue51,236 47,152 
Total interest payable, accounts payable and deferred revenue$169,069 $140,925 

































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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
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 also enter into interest rate cap agreements from time to time to cap the interest rates on our floating rate loans. 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 September 30, 2023:
Number of Interest Rate ContractsNotional
(In thousands)
Derivatives Designated as Cash Flow Hedges:
Consolidated derivatives - swaps(1)(2)(3)
24$3,805,000 
Consolidated derivatives - caps(2)(3)(4)
5$822,000 
Unconsolidated Fund's derivatives - swaps(2)(3)(5)
2$115,000 
Derivatives Not Designated as Cash Flow Hedges:
Consolidated derivatives - caps(6)
$— 
___________________________________________________
(1)The notional amount includes 100%, not our pro-rata share, of our consolidated JVs' derivatives. See Note 8 for more information about our hedged consolidated debt.
(2)Our derivative contracts do not provide for right of offset between derivative contracts.
(3)See Note 13 for our derivative fair value disclosures.
(4)We purchased five interest rate caps with a notional amount of $822.0 million during the third quarter of 2023. See Note 8 for more information about our hedged consolidated debt.
(5)The notional amount reflects 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. See Note 6 for more information about our Fund, including our equity interest percentage.
(6)Five interest rate caps with a total aggregate notional amount of $1.10 billion expired on July 1, 2023.


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)September 30, 2023December 31, 2022
Consolidated derivatives(1)
$262,322 $281,982 
Unconsolidated Fund's derivatives(2)
$12,877 $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.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
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)Nine Months Ended September 30,
 20232022
Derivatives Designated as Cash Flow Hedges:  
Consolidated derivatives:
Gains recorded in AOCI before reclassifications(1)
$83,157 $318,408 
(Gains) losses reclassified from AOCI to Interest Expense(1)
$(104,891)$20,505 
Interest expense presented on the consolidated statements of operations$(151,859)$(109,560)
Unconsolidated Fund's derivatives (our share)(2):
Gains recorded in AOCI before reclassifications(1)
$1,185 $3,777 
Gains reclassified from AOCI to Income from unconsolidated Fund(1)
$(1,208)$(62)
Income from unconsolidated Fund presented on the consolidated statements of operations$1,177 $921 
Derivatives Not Designated as Cash Flow Hedges:
Consolidated derivatives:
Loss recorded as interest expense(3)
$— $38 
___________________________________________________
(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 non-designated interest rate caps offset each other during the periods presented. The respective caps expired on July 1, 2023.


Future Reclassifications from AOCI

At September 30, 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 is as follows:

(In thousands)
Consolidated derivatives:
Gains to be reclassified from AOCI to Interest Expense$150,054 
Unconsolidated Fund's derivatives (our share)(1):
Gains to be reclassified from AOCI to Income from unconsolidated Fund$1,741 
___________________________________________________
(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.










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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
11.  Equity

Transactions
    
During the Nine Months Ended September 30, 2023
We repurchased 9.1 million shares of our common stock for $109.1 million in cash, excluding transaction costs, in open market transactions. The average purchase price was $12.03 per share.
We acquired 29 thousand OP Units for $367 thousand in cash.

During the Nine Months Ended September 30, 2022
We acquired 260 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 10 thousand OP Units for $336 thousand in cash.
We acquired a multifamily apartment building through a new consolidated JV that we manage and in which we own a 55% interest. See Note 3 for more information regarding the property we purchased. We contributed $99.0 million to the JV and an outside investor contributed $81.0 million to the JV.

Noncontrolling Interests

Our noncontrolling interests consist of interests in our Operating Partnership and consolidated JVs which are not owned by us. As of September 30, 2023, noncontrolling interests in our Operating Partnership owned 32.5 million OP Units and fully-vested LTIP Units, which represented approximately 16.3% of our Operating Partnership's total outstanding interests, and we owned 166.7 million OP Units (to match our 166.7 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.

Changes in our Ownership Interest in our Operating Partnership

The table below presents the effect on our equity from net (loss) income attributable to common stockholders and changes in our ownership interest in our Operating Partnership:
 Nine Months Ended September 30,
(In thousands)20232022
Net (loss) income attributable to common stockholders$(2,251)$72,843 
Transfers from noncontrolling interests:
Exchange of OP Units with noncontrolling interests— 4,236 
Repurchases of OP Units from noncontrolling interests120 (176)
Net transfers from noncontrolling interests120 4,060 
Change from net (loss) income attributable to common stockholders and transfers from noncontrolling interests$(2,131)$76,903 



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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
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:
Nine Months Ended September 30,
(In thousands)20232022
Accumulated Other Comprehensive Income (Loss) - Beginning balance$187,063 $(38,774)
Consolidated derivatives:
Other comprehensive income before reclassifications83,157 318,408 
Reclassification of (gains) losses from AOCI to Interest Expense(104,891)20,505 
Unconsolidated Fund's derivatives (our share)(2):
Other comprehensive income before reclassifications1,185 3,777 
Reclassification of gains from AOCI to Income from unconsolidated Fund(1,208)(62)
Net current period OCI(21,757)342,628 
OCI attributable to noncontrolling interests4,454 (104,205)
OCI attributable to common stockholders(17,303)238,423 
Accumulated Other Comprehensive Income - Ending balance$169,760 $199,649 
___________________________________________________
(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.


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.
On May 24, 2023, we held our 2023 annual meeting of stockholders. At the annual meeting, our stockholders approved an amendment to the 2016 Plan to, among other things, increase the number of shares of common stock available for future awards by 19 million. As of September 30, 2023, we had an aggregate of 21.3 million shares of common stock available for future awards.

The table below presents our stock-based compensation expense:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2023202220232022
Stock-based compensation expense$2,327 $2,266 $7,553 $7,156 
Capitalized stock-based compensation$752 $826 $2,209 $2,455 










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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
12. EPS

We calculate basic EPS by dividing the net income (loss) 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 (loss) 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 September 30,Nine Months Ended September 30,
 2023202220232022
Numerator (In thousands):    
Net (loss) income attributable to common stockholders$(13,362)$22,955 $(2,251)$72,843 
Allocation to participating securities: Unvested LTIP Units(271)(218)(831)(666)
Net (loss) income attributable to common stockholders - basic and diluted$(13,633)$22,737 $(3,082)$72,177 
Denominator (In thousands):
Weighted average shares of common stock outstanding - basic and diluted(1)
166,738 175,784 170,553 175,742 
Net (loss) income per common share - basic and diluted$(0.08)$0.13 $(0.02)$0.41 
____________________________________________________
(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 or loss (equal on a per unit basis to the Net income or loss per common share - diluted) was already deducted in calculating Net income (loss) 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 September 30,Nine Months Ended September 30,
 (In thousands)2023202220232022
OP Units31,698 30,158 30,720 29,626 
Vested LTIP Units851 690 1,816 1,255 














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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 September 30, 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, 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, the carrying value includes unamortized loan premium and excludes unamortized deferred loan fees:

(In thousands)September 30, 2023December 31, 2022
Fair value$5,476,975 $5,115,548 
Carrying value$5,573,462 $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)September 30, 2023December 31, 2022
Fair value$4,226 $4,466 
Carrying value$10,839 $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)September 30, 2023December 31, 2022
Derivative Assets:
Fair value - consolidated derivatives(1)
$248,232 $270,234 
Fair value - unconsolidated Fund's derivatives(2)
$12,356 $12,426 
Derivative Liabilities:
Fair value - consolidated derivatives(1)
$— $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 September 30,Nine Months Ended September 30,
2023202220232022
Office Segment
Total office revenues$208,823 $207,927 $617,614 $616,744 
Office expenses(74,631)(74,653)(220,261)(212,006)
Office segment profit134,192 133,274 397,353 404,738 
Multifamily Segment
Total multifamily revenues46,586 45,736 143,595 122,771 
Multifamily expenses(17,256)(13,661)(50,470)(35,729)
Multifamily segment profit29,330 32,075 93,125 87,042 
Total profit from all segments$163,522 $165,349 $490,478 $491,780 


The table below presents a reconciliation of the total profit from all segments to net (loss) income attributable to common stockholders:

(In thousands)Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Total profit from all segments$163,522 $165,349 $490,478 $491,780 
General and administrative expenses(12,826)(11,272)(34,698)(34,173)
Depreciation and amortization(122,022)(96,276)(336,771)(279,588)
Other income6,229 1,649 12,561 2,490 
Other expenses(175)(199)(820)(561)
Income from unconsolidated Fund290 356 1,177 921 
Interest expense(56,043)(38,394)(151,859)(109,560)
Net (loss) income(21,025)21,213 (19,932)71,309 
Net loss attributable to noncontrolling interests7,663 1,742 17,681 1,534 
Net (loss) income attributable to common stockholders$(13,362)$22,955 $(2,251)$72,843 
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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 September 30, 2023:
Twelve months ending September 30: (In thousands)
2024$616,384 
2025507,320 
2026405,771 
2027321,408 
2028231,391 
Thereafter678,380 
Total future minimum base rentals(1)
$2,760,654 
___________________________________
(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.  We are currently in litigation with the insurance providers in 2020 for Barrington Plaza to recover certain costs associated with reconstruction. 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 nine months ended September 30, 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 September 30, 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 September 30, 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 September 30, 2023, we had an aggregate remaining contractual commitment for this development project and other development projects of approximately $19.3 million.

Other Contractual Commitments

As of September 30, 2023, we had an aggregate remaining contractual commitment for repositionings, capital expenditure projects and tenant improvements of approximately $15.0 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 SOFR + 1.46% (with a zero-percent SOFR floor), which has been effectively fixed at 2.19% until October 1, 2026 with interest rate swaps (which do not have zero-percent SOFR floors). The loan and related swaps were converted to SOFR from LIBOR during the third quarter of 2023, resulting in a small SOFR adjustment to calculate the interest payable to the lender (which is included in the loan spread above). The conversion to SOFR did not change the swap-fixed interest rate. 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 September 30, 2023, assuming that SOFR does not decrease below zero-percent, the maximum future interest payments for the swaps were $2.9 million. As of September 30, 2023, all of the obligations under the related loan and swap agreements have been performed in accordance with the terms of those agreements. As of September 30, 2023, we estimate the risk of loss for the various indemnities and guarantees to be low. See Note 6 for more information regarding Partnership X.
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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 nine months ended September 30, 2023, our results of operations were impacted by various transactions - see "Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions" 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 September 30, 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 6870
Rentable Square Feet (in thousands)(3)
17,59517,981
Leased rate83.8%83.8%
Occupancy rate81.8%81.8%
Multifamily(4)
Properties1414
Units4,5944,594
Leased rate98.9%98.9%
Occupancy rate97.6%97.6%
______________________________________________________________________
(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 4,124 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 September 30, 2023, we removed 77,000 Rentable Square Feet for an office building that we are converting to residential apartments. See "Debt and Equity Transactions, Development and Repositioning Projects, and other Transactions" further below.
(4) Unit totals exclude units vacated to perform the fire life safety work at Barrington Plaza. The leased and occupancy rates exclude the impact of Barrington Plaza. See "Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions" further below.

Revenues by Segment and Location
During the nine months ended September 30, 2023, revenues from our Consolidated Portfolio were derived as follows:
2182____2187
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Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions

Debt and Equity Transactions
During the first quarter of 2023:
Interest rate swaps, which fixed the interest rate on a $400.0 million interest-only, floating-rate term loan that matures in December 2024 for one of our consolidated JVs, expired on January 1, 2023, and the interest rate on the respective loan is now floating.
Interest rate swaps, which fixed the interest rate on a $335.0 million interest-only, floating-rate term loan that matures in March 2025 for one of our wholly-owned subsidiaries, expired on March 1, 2023, and the interest rate on the respective loan is now floating.
An interest rate swap that fixed the interest rate on a $102.4 million interest-only, floating-rate term loan that matures in April 2025 for one of our wholly-owned subsidiaries, expired on March 1, 2023, and the interest rate on the respective loan is now floating.
We repurchased 1.4 million shares of common stock for $16.5 million in cash, excluding transaction costs, in open market transactions. The average purchase price was $11.50 per share.
We acquired 5 thousand OP Units for $89 thousand in cash.

During the second quarter of 2023:
We repurchased 7.6 million shares of common stock for $92.6 million in cash, excluding transaction costs, in open market transactions. The average purchase price was $12.13 per share.
We acquired 20 thousand OP Units for $232 thousand in cash.

During the third quarter of 2023:
We closed a new $350.0 million secured, non-recourse interest-only term loan that matures in August 2033. The loan accrues interest at SOFR plus 1.37% and is secured by our Landmark Los Angeles and Bishop Place properties. The interest rate is capped with lender-required out-of-the-money interest rate caps at 7.84% until August 2026. We used part of the proceeds to pay off the balance on our revolving credit facility, which expired in August 2023.
We purchased three lender-required out-of-the-money interest rate caps with an aggregate notional amount of $472.0 million to hedge $472.0 million of a $550.0 million loan. The interest rate is capped at a weighted average of 8.99% until July 2026.
We converted our LIBOR loans and swaps to SOFR. See Item 3 in Part I for our SOFR transition disclosures.
In connection with the Barrington Plaza loan, Barrington Plaza Apartments have been removed from the rental market. The lender is treating the debt as a construction loan. They have required a $13.3 million cash deposit, which we placed in a collateral account during the third quarter, and they are requiring a construction completion guarantee. See "Property to be Removed from Service" further below for more information about Barrington Plaza.
We acquired 3 thousand OP Units for $46 thousand in cash.

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 September 30, 2023, we had delivered eighty-six-percent of the planned units and leased ninety-nine-percent of the units delivered. The conversion will continue in phases through 2025 as the remaining office space is vacated, therefore, the expected timing of the remaining spending is uncertain.
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Repositionings
We often strategically purchase properties with large vacancies or expected near-term lease roll-over and use our knowledge of the property and submarket to reposition the property for the optimal use and tenant mix. In addition, we may reposition properties already in our portfolio. The work we undertake to reposition a building typically takes months or even years, and could involve a range of improvements from a complete structural renovation to a targeted remodeling of selected spaces. During the repositioning, the affected property may display depressed rental revenue and occupancy levels that impact our results and, therefore, comparisons of our performance from period to period.

Property to be Removed from Service
During the second quarter of 2023, we filed paperwork to remove our Barrington Plaza Apartments property in Los Angeles from the rental market because of city directives to install fire sprinklers and other life safety improvements. A reconstruction of this property is expected to take a number of years at a cost of several hundred million dollars. We are currently in litigation with the insurance providers in 2020 for Barrington Plaza to recover certain costs associated with reconstruction. As of September 30, 2023, a significant majority of the tenants have vacated. Tenants occupying 170 units have the right to remain until May 2024, and we expect them to move out at an uneven pace over the intervening period. That schedule could be impacted by legal or regulatory actions. During any period when the property is unoccupied, we will not generate any revenue from it. In connection with the removal of the aforementioned property from the rental market, we accelerated and recorded additional depreciation expense of $27.4 million for the three months ended September 30, 2023 and $54.8 million for the nine months ended September 30, 2023, which is included in Depreciation and amortization on our consolidated statements of operations.


Rental Rate Trends - Total Portfolio

Office Rental Rates

The table below presents the average annual rental rate per leased square foot and the annualized lease transaction costs per leased square foot for leases executed in our total office portfolio during the respective periods:
 Nine Months EndedYear Ended December 31,
September 30, 20232022202120202019
Average straight-line rental rate(1)(2)(4)
$43.24$46.78$44.99$45.26$49.65
Annualized lease transaction costs(3)(4)
$5.44$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.


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Office Rent Roll

The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio:
Nine Months Ended September 30, 2023
Rent Roll(1)(2)
Expiring
Rate(2)
New/Renewal Rate(2)
Percentage Change
Cash Rent$45.59$41.95(8.0)%
Straight-line Rent$41.43$43.244.4%
___________________________________________________
(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.

Multifamily Rental Rates

The table below presents the average annual rental rate per leased unit for new tenants:
 Nine Months EndedYear Ended December 31,
September 30, 20232022202120202019
Average annual rental rate - new tenants(1)(2)
$36,200$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 nine months ended September 30, 2023, the average was impacted by leasing of units at our newly developed West Los Angeles property, where the rental rates were higher than the average in our portfolio. Barrington Plaza was removed from this metric beginning with the third quarter of 2023.
(2)    Our multifamily rental rates were adversely impacted by the COVID-19 pandemic in 2020 but improved in 2021 and 2022.

Multifamily Rent Roll

The rent on leases subject to rent change during the nine months ended September 30, 2023 (new tenants and existing tenants undergoing annual rent review) was 2.5% higher on average than the prior rent on the same unit.


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Occupancy Rates - Total Portfolio

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

 December 31,
Occupancy Rates(1) as of:
September 30, 20232022202120202019
Office portfolio(2)
81.8%83.7%84.9%87.4%91.4%
Multifamily portfolio(3)(5)
97.6%98.1%98.0%94.2%95.2%

 Nine Months EndedYear Ended December 31,
Average Occupancy Rates(1)(4):
September 30, 20232022202120202019
Office portfolio(2)
83.0%84.2%85.7%89.5%90.7%
Multifamily portfolio(3)(5)
97.0%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. Excludes units vacated to perform the fire life safety work at Barrington Plaza until June of 2023 and excludes impact of Barrington Plaza entirely starting in July 2023.
(4)Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period.
(5)Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020 but recovered during 2021 and 2022.

Office Lease Expirations

As of September 30, 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:

196
____________________________________________________
(1) Average of the percentage of leases at September 30, 2020, 2021, and 2022 with the same remaining duration as the leases for the labeled year had at September 30, 2023. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
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Results of Operations
Comparison of three months ended September 30, 2023 to three months ended September 30, 2022
Our operating results were adversely impacted by the effects of inflation and higher interest rates during the three months ended September 30, 2023, and by the COVID-19 pandemic during the three months ended September 30, 2022.

Three Months Ended September 30,Favorable (Unfavorable)
20232022Change%Commentary
(In thousands)
Revenues
Office rental revenue and tenant recoveries$181,106 $182,011 $(905)(0.5)%The decrease was primarily due to lower occupancy, lower collections, and our office to residential conversion project at Bishop Place. The decrease was partly offset by higher tenant recoveries and higher rental rates.
Office parking and other income$27,717 $25,916 $1,801 6.9 %The increase was primarily due to an increase in parking income due to an increase in parking activity.
Multifamily revenue$46,586 $45,736 $850 1.9 %The increase was primarily due to an increase in revenues from new units at our Landmark Los Angeles development project and our Residences at Bishop Place conversion project. The increase was partly offset by a decrease in revenues from units removed from service at our Barrington Plaza property commencing during the second quarter of 2023.
Operating expenses
Office rental expenses$74,631 $74,653 $22 — %The office rental expenses were relatively flat compared to the prior period. Security, repairs and maintenance, janitorial and personnel expenses increased, and those increases were offset by lower property taxes and a decrease in rental expenses from our office to residential conversion project at Bishop Place.
Multifamily rental expenses$17,256 $13,661 $(3,595)(26.3)%The increase was primarily due to rental expenses from new units at our Landmark Los Angeles development project and our Residences at Bishop Place conversion project.
General and administrative expenses$12,826 $11,272 $(1,554)(13.8)%The increase was primarily due to higher legal expenses, partly offset by a decrease in personnel and advocacy expenses.
Depreciation and amortization$122,022 $96,276 $(25,746)(26.7)%The increase was primarily due to accelerated depreciation related to removing units from service at our Barrington Plaza property commencing during the second quarter of 2023.
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Three Months Ended September 30,Favorable (Unfavorable)
20232022Change%Commentary
(In thousands)
Non-Operating Income and Expenses
Other income$6,229 $1,649 $4,580 277.7 %The increase was primarily due to an increase in interest income due to higher interest rates and higher cash and cash equivalent balances.
Other expenses$(175)$(199)$24 12.1 %The decrease was primarily due to a decrease in expenses related to property management and other services provided to our unconsolidated fund and transaction expenses in the comparable period.
Income from unconsolidated Fund$290 $356 $(66)(18.5)%The decrease was due to a decrease in the net income of our fund, Partnership X, which was primarily due to lower occupancy, lower tenant recoveries, higher rental expenses and higher depreciation expense. The decrease was partly offset by higher interest income.
Interest expense$(56,043)$(38,394)$(17,649)(46.0)%The increase was primarily due to higher interest rates on our floating rate debt, higher debt and a decrease in interest capitalized related to development activity.

Results of Operations
Comparison of nine months ended September 30, 2023 to nine months ended September 30, 2022
Our operating results were adversely impacted by the effects of inflation and higher interest rates during the nine months ended September 30, 2023, and by the COVID-19 pandemic during the nine months ended September 30, 2022.

Nine Months Ended September 30,Favorable (Unfavorable)
20232022Change%Commentary
 (In thousands)
Revenues
Office rental revenue and tenant recoveries$535,243 $542,535 $(7,292)(1.3)%The decrease was primarily due to lower occupancy, lower collections, lower accretion from below-market leases and our office to residential conversion project at Bishop Place. The decrease was partly offset by higher tenant recoveries and higher rental rates.
Office parking and other income$82,371 $74,209 $8,162 11.0 %The increase was primarily due to an increase in parking income due to an increase in parking activity.
Multifamily revenue$143,595 $122,771 $20,824 17.0 %The increase was primarily due to: (i) an increase in revenues from new units at our Landmark Los Angeles development project and our Residences at Bishop Place conversion project, (ii) an increase in revenues from our 1221 Ocean Avenue property in Santa Monica that we purchased in the second quarter of 2022 and (iii) higher rental rates at our other multifamily properties. The increase was partly offset by a decrease in revenues from units removed from service at our Barrington Plaza property commencing during the second quarter of 2023.
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Nine Months Ended September 30,Favorable (Unfavorable)
20232022Change%Commentary
 (In thousands)
Operating expenses
Office rental expenses$220,261 $212,006 $(8,255)(3.9)%The increase was primarily due to an increase in utility, insurance, janitorial and security expenses. The increase was partly offset by a decrease in rental expenses from our office to residential conversion project at Bishop Place and lower property taxes.
Multifamily rental expenses$50,470 $35,729 $(14,741)(41.3)%The increase was primarily due to: (i) an increase in rental expenses from new units at our development projects, (ii) an increase in rental expenses from our 1221 Ocean Avenue property in Santa Monica that we purchased in the second quarter of 2022, and (iii) an increase in personnel, security, and insurance expenses at our other multifamily properties.
General and administrative expenses$34,698 $34,173 $(525)(1.5)%The increase was primarily due to higher legal and leasing expenses, partly offset by a decrease in advocacy and personnel expenses.
Depreciation and amortization$336,771 $279,588 $(57,183)(20.5)%The increase was primarily due to accelerated depreciation related to removing units from service at our Barrington Plaza property commencing during the second quarter of 2023.
Non-Operating Income and Expenses
Other income$12,561 $2,490 $10,071 404.5 %The increase was primarily due to an increase in interest income due to higher interest rates and higher cash and cash equivalent balances.
Other expenses$(820)$(561)$(259)(46.2)%The increase was primarily due to transaction costs, partly offset by a decrease in expenses related to property management and other services provided to our unconsolidated fund.
Income from unconsolidated Fund$1,177 $921 $256 27.8 %The increase was due to an increase in the net income of our fund, Partnership X, which was primarily due to better collections and higher interest income, partly offset by higher rental expenses and depreciation expense.
Interest expense$(151,859)$(109,560)$(42,299)(38.6)%The increase was primarily due to higher interest rates on our floating rate debt, higher debt, and a decrease in interest capitalized related to development activity.
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Non-GAAP Supplemental Financial Measure: FFO
Usefulness to Investors
We report FFO because it is a widely reported measure of the performance of equity REITs, and is also used by some investors to identify the impact of trends in occupancy rates, rental rates and operating costs from year to year, excluding impacts from changes in the value of our real estate, and to compare our performance with other REITs. FFO is a non-GAAP financial measure for which we believe that net income (loss) is the most directly comparable GAAP financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. FFO should be considered only as a supplement to net income (loss) as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other REITs. See "Results of Operations" above for a discussion of the items that impacted our net income (loss).
FFO Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in our Operating Partnership - which includes our share of our consolidated JVs and our unconsolidated Fund's FFO) to net (loss) income attributable to common stockholders (the most directly comparable GAAP measure):
 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2023202220232022
Net (loss) income attributable to common stockholders$(13,362)$22,955 $(2,251)$72,843 
Depreciation and amortization of real estate assets122,022 96,276 336,771 279,588 
Net loss attributable to noncontrolling interests(7,663)(1,742)(17,681)(1,534)
Adjustments attributable to unconsolidated Fund(1)
742 716 2,232 2,112 
Adjustments attributable to consolidated JVs(2)
(12,358)(13,046)(34,646)(38,863)
FFO$89,381 $105,159 $284,425 $314,146 
________________________________________________________________
(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.
Comparison of three months ended September 30, 2023 to three months ended September 30, 2022
For the three months ended September 30, 2023, FFO decreased by $15.8 million, or 15.0%, to $89.4 million, compared to $105.2 million for the three months ended September 30, 2022. The decrease was primarily due to higher interest expense and a decrease in NOI from our multifamily portfolio, partly offset by higher interest income and an increase in NOI from our office portfolio. The increase in interest expense was primarily due to higher interest rates on our floating rate debt, higher debt and a decrease in interest capitalized related to development activity. The decrease in NOI from our multifamily portfolio was primarily due to a decrease in revenues from units removed from service at our Barrington Plaza property commencing during the second quarter of 2023. The increase in interest income was primarily due to higher interest rates and higher cash and cash equivalents balances. The increase in NOI from our office portfolio was primarily due to higher parking income and higher tenant recoveries.
Comparison of nine months ended September 30, 2023 to nine months ended September 30, 2022
For the nine months ended September 30, 2023, FFO decreased by $29.7 million, or 9.5%, to $284.4 million, compared to $314.1 million for the nine months ended September 30, 2022. The decrease was primarily due to higher interest expense and a decrease in NOI from our office portfolio, partly offset by higher interest income and an increase in NOI from our multifamily portfolio. The reasons for the higher interest expense are the same as those described above. The decrease in NOI from our office portfolio was primarily due to: (i) lower occupancy, (ii) lower collections, (iii) lower accretion from below-market leases, (iv) our office to residential conversion project at Bishop Place, and (v) higher rental expenses. The reasons for the higher interest income are the same as those described above. The increase in NOI from our multifamily portfolio was primarily due to: (i) new units from our development projects, (ii) our acquisition of the 1221 Ocean Avenue property in Santa Monica in the second quarter of 2022, and (iii) higher rental rates at our other multifamily properties.
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Non-GAAP Supplemental Financial Measure: Same Property NOI

Usefulness to Investors

We report Same Property NOI to facilitate a comparison of our operations between reported periods. Many investors use Same Property NOI to evaluate our operating performance and to compare our operating performance with other REITs, because it can reduce the impact of investing transactions on operating trends. Same Property NOI is a non-GAAP financial measure for which we believe that net income (loss) is the most directly comparable GAAP financial measure.  We report Same Property NOI because it is a widely recognized measure of the performance of equity REITs, and is used by some investors to identify trends in occupancy rates, rental rates and operating costs and to compare our operating performance with that of other REITs.  Same Property NOI has limitations as a measure of our performance because it excludes depreciation and amortization expense, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. Other REITs may not calculate Same Property NOI in the same manner. As a result, our Same Property NOI may not be comparable to the Same Property NOI of other REITs. Same Property NOI should be considered only as a supplement to net income (loss) as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends.

Comparison of three months ended September 30, 2023 to three months ended September 30, 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 September 30, 2023 and by the COVID-19 pandemic during the three months ended September 30, 2022.

Three Months Ended September 30,Favorable (Unfavorable)
20232022Change%Commentary
(In thousands)
Office revenues$207,766 $205,588 $2,178 1.1 %
The increase was primarily due to an increase in tenant recoveries and parking income. The increase was partly offset by a decrease in rental revenues due to lower occupancy and collections.
Office expenses(74,476)(73,184)(1,292)(1.8)%The increase was primarily due to an increase in security, repairs and maintenance, janitorial and personnel expenses. The increase was partly offset by lower property taxes.
Office NOI133,290 132,404 886 0.7 %
Multifamily revenues29,652 29,155 497 1.7 %The increase was primarily due to an increase in rental revenues due to higher rental rates, which was partly offset by lower collections.
Multifamily expenses(9,204)(8,998)(206)(2.3)%The increase was primarily due to an increase in security and personnel expenses, partly offset by a decrease in utility costs.
Multifamily NOI20,448 20,157 291 1.4 %
Total NOI$153,738 $152,561 $1,177 0.8 %
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Reconciliation to GAAP

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

Three Months Ended September 30,
(In thousands)20232022
Same Property NOI$153,738 $152,561 
Non-comparable office revenues1,057 2,339 
Non-comparable office expenses(155)(1,469)
Non-comparable multifamily revenues16,934 16,581 
Non-comparable multifamily expenses(8,052)(4,663)
NOI163,522 165,349 
General and administrative expenses(12,826)(11,272)
Depreciation and amortization(122,022)(96,276)
Other income6,229 1,649 
Other expenses(175)(199)
Income from unconsolidated Fund290 356 
Interest expense(56,043)(38,394)
Net (loss) income(21,025)21,213 
Net loss attributable to noncontrolling interests7,663 1,742 
Net (loss) income attributable to common stockholders$(13,362)$22,955 




























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Comparison of nine months ended September 30, 2023 to nine months ended September 30, 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 nine months ended September 30, 2023 and by the COVID-19 pandemic during the nine months ended September 30, 2022.

Nine Months Ended September 30,Favorable (Unfavorable)
20232022Change%Commentary
(In thousands)
Office revenues$614,308 $608,626 $5,682 0.9%
The increase was primarily due to an increase in parking income and tenant recoveries, partly offset by lower rental revenues. The lower rental revenues were primarily due to lower occupancy, lower collections and lower accretion from below-market leases.
Office expenses(219,792)(208,188)(11,604)(5.6)%The increase was primarily due to an increase in utility, insurance, janitorial and security expenses. The increase was partly offset by lower property taxes.
Office NOI394,516 400,438 (5,922)(1.5)%
Multifamily revenues89,339 85,216 4,123 4.8%The increase was primarily due to an increase in rental revenues due to higher rental rates.
Multifamily expenses(28,025)(26,284)(1,741)(6.6)%The increase was primarily due to an increase in personnel, security, and insurance expenses.
Multifamily NOI61,314 58,932 2,382 4.0%
Total NOI$455,830 $459,370 $(3,540)(0.8)%

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Reconciliation to GAAP

The table below presents a reconciliation of our Same Property NOI to net (loss) income attributable to common stockholders (the most directly comparable GAAP measure):
Nine Months Ended September 30,
(In thousands)20232022
Same Property NOI$455,830 $459,370 
Non-comparable office revenues3,306 8,118 
Non-comparable office expenses(469)(3,818)
Non-comparable multifamily revenues54,256 37,555 
Non-comparable multifamily expenses(22,445)(9,445)
NOI490,478 491,780 
General and administrative expenses(34,698)(34,173)
Depreciation and amortization(336,771)(279,588)
Other income12,561 2,490 
Other expenses(820)(561)
Income from unconsolidated Fund1,177 921 
Interest expense(151,859)(109,560)
Net (loss) income(19,932)71,309 
Net loss attributable to noncontrolling interests17,681 1,534 
Net (loss) income attributable to common stockholders$(2,251)$72,843 


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 nine months ended September 30, 2023, we generated cash from operations of $332.2 million. As of September 30, 2023, we had $526.2 million of cash and cash equivalents. 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 and cash generated by operations.

Long-term liquidity

Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to REIT federal tax rules which require that we distribute at least 90% of our income on an annual basis. We plan to meet our long-term liquidity needs through long-term secured non-recourse debt, the issuance of equity securities, including common stock and OP Units, as well as property dispositions and JV transactions.

We only use non-recourse debt secured by our properties. As of the date of this report, approximately 45% of our total office portfolio was unencumbered. To mitigate the impact of changing interest rates on our cash flows from operations, we generally enter into interest rate swap agreements with respect to our loans with floating interest rates.  These swap agreements generally expire two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. We also enter into interest rate cap agreements from time to time to cap the interest rates on our floating rate loans. See Notes 8 and 10 to our consolidated financial statements in Item 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 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 September 30, 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 nine months ended September 30, 2023 to nine months ended September 30, 2022

Our operating cash flows were adversely impacted by the effects of inflation and higher interest rates during the nine months ended September 30, 2023 and by the COVID-19 pandemic during the nine months ended September 30, 2022.

Nine Months Ended September 30,Increase (Decrease) In Cash
20232022%
(In thousands)
Net cash provided by operating activities(1)
$332,209 $381,669 $(49,460)(13.0)%
Net cash used in investing activities(2)
$(180,373)$(496,999)$316,626 63.7 %
Net cash provided by financing activities(3)
$105,557 $60,433 $45,124 74.7 %
________________________________________________________________________
(1)    Our cash flows from operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectibility of tenant receivables, the level of our operating and general and administrative expenses, and interest expense.  The decrease in cash from operating activities of $49.5 million was primarily due to: (i) higher interest expense, (ii) cash used to fund working capital, and (iii) a decrease in NOI from our office portfolio, partly offset by higher interest income and an increase in NOI from our multifamily portfolio.
(2)    Our cash flows from investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The increase in cash from investing activities of $316.6 million was primarily due to: (i) $330.5 million for a property acquisition during the nine months ended September 30, 2022, and (ii) a decrease in capital expenditures for developments of $23.5 million, partly offset by an increase in capital expenditures for improvements to real estate of $33.3 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 $45.1 million was primarily due to: (i) an increase in net borrowings of $175.0 million, (ii) a decrease in dividends paid to common stockholders of $49.4 million, and (iii) lower distributions paid to noncontrolling interests of $14.9 million, partly offset by cash paid to repurchase common stock of $109.2 million and a decrease in contributions from noncontrolling interests in our consolidated JVs of $80.9 million.

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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

Fixed-Rate Borrowings and Hedged Borrowings

As of September 30, 2023, the interest rates for 69% of our consolidated borrowings were fixed or swap-fixed with interest rate swaps, and 15% were capped with interest rate caps. Our use of interest rate swaps and caps 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 September 30, 2023, the maximum amount the interest expense on our capped-rate borrowings could increase by is $14.5 million per year. Higher interest rates would cause an increase in our future interest expense on our capped-rate debt, which would reduce our future net income, cash flows from operations and FFO.

Unhedged Floating-Rate Borrowings

As of September 30, 2023, the interest rates for 16% of our consolidated borrowings were floating. As of September 30, 2023, the interest expense for our floating-rate borrowings that are not hedged would increase by $9.3 million per year for every one hundred basis point increase in the related benchmark interest rate. Higher interest rates would cause an increase in our future interest expense on our floating-rate debt, which would reduce our future net income, cash flows from operations and FFO.

See Note 8 to our consolidated financial statements in Item 1 of this Report for our more information regarding our debt and our future swap and cap expirations. See Note 10 to our consolidated financial statements in Item 1 of this Report for more information regarding our swaps and caps.

Market Transition to SOFR from LIBOR

During the third quarter of 2023, we converted all of our LIBOR loans and swaps to SOFR. The LIBOR loans converted to SOFR include a small SOFR adjustment (an increase to the SOFR rate) to calculate the interest payable to the lender. The SOFR conversion did not change the swap-fixed interest rates for our swap-fixed loans. See Notes 8 and 10 to our consolidated financial statements in Item 1 of this Report for more information regarding our debt and derivatives, respectively.


Item 4.  Controls and Procedures
 
As of September 30, 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 September 30, 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. See "Legal Proceedings" in Note 16 to our consolidated financial statements in Part I, Item 1 of this Report.

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

None.
 
Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

(a) None.
(b) None.
(c) During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each such term is defined in Item 408(a) of Regulation S-K.




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Item 6.  Exhibits

Exhibit NumberDescriptionFootnote
3.1(1)
3.2(2)
3.3(3)
3.4(4)
31.1
31.2
32.1
(5)
32.2
(5)
101.INS
Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (embedded within the Inline XBRL document)
________________________________________________
(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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SIGNATURES

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:November 3, 2023By:/s/ JORDAN L. KAPLAN
  Jordan L. Kaplan
  President and CEO
Date:November 3, 2023By:/s/ PETER D. SEYMOUR
  Peter D. Seymour
  CFO

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