DOUGLAS EMMETT, INC. 
The following discussion should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 15 of this Report. Our results of operations for the years endedDecember 31, 2019 and 2018 were affected by a property acquisition, consolidation of a JV, development activity, repositionings and loan refinancings - see Acquisitions, Financings, Developments and Repositionings further below.
Business Description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. Through our interest in ourOperating 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 inLos Angeles County, California and inHonolulu, Hawaii . We focus on owning, acquiring, developing and managing a substantial 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 ofDecember 31, 2019 , our portfolio consisted of the following (including ancillary retail space): Consolidated Portfolio(1) Total Portfolio(2) Office Class A Properties 70 72 Rentable Square Feet (in thousands) 17,960 18,346 Leased rate 93.3% 93.3% Occupied rate 91.5% 91.4% Multifamily Properties 11 11 Units 4,161 4,161 Leased rate 98.1% 98.1% Occupied rate 95.2% 95.2%
__________________________________________________
(1) Our Consolidated Portfolio includes the properties in our consolidated
results. Through our subsidiaries, we own 100% of these properties, except
for seventeen office properties totaling 4.3 million square feet and one
residential property with 350 apartments, which we own through four
consolidated JVs. Our Consolidated Portfolio also includes two 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.
See Note 6 to our consolidated financial statements in Item 15 of this Report
for more information about our unconsolidated Fund.
Revenues by Segment and Location
During the year ended
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Acquisitions, Financings, Developments and Repositionings
Acquisitions
OnJune 7, 2019 , we acquired The Glendon, a residential community inWestwood with 350 apartments and approximately 50,000 square feet of retail, for$365.1 million . OnJune 28, 2019 , we completed the contribution of the property to a consolidated JV that we manage and in which we own a twenty percent capital interest. The acquisition and related working capital was funded with a$160.0 million interest-only loan, a$44.0 million capital contribution by us and a$176.0 million capital contribution by other investors. See second quarter financing transactions below for more information regarding the funding for this acquisition. See Note 3 to our consolidated financial statements in Item 15 of this Report for more information regarding this acquisition. OnNovember 21, 2019 , we acquired an additional 16.3% of the equity in one of our previously unconsolidated Funds, Fund X, in exchange for$76.9 million in cash and 332 thousand OP Units valued at$14.4 million , which increased our ownership in the Fund to 89.0%. In connection with this transaction, we restructured the Fund with the one remaining institutional investor. The new JV is a VIE, and as a result of the amended operating agreement, we became the primary beneficiary of the VIE and commenced consolidating the JV onNovember 21, 2019 . The JV owns six Class A office properties totaling 1.5 million square feet in the primeLos Angeles submarkets ofBeverly Hills ,Santa Monica ,Sherman Oaks /Encino and Warner Center. The JV also owns an interest of 9.4% in our remaining unconsolidated Fund, Partnership X, which owns two additional Class A office properties totaling 386,000 square feet inBeverly Hills andBrentwood . The results of the consolidated JV are included in our operating results fromNovember 21, 2019 . Financings
• During the first quarter of 2019:
• InMarch 2019 , we renewed our$400.0 million revolving credit facility, releasing two previously encumbered properties, lowering the borrowing rate and unused facility fees, and extending the maturity date. The renewed facility bears interest at LIBOR + 1.15% and matures onAugust 21, 2023 .
• During the second quarter of 2019:
• We closed a secured, non-recourse$255.0 million
interest-only loan
scheduled to mature in June 2029 . The loan bears interest at LIBOR +
0.98%, which we have effectively fixed through an interest rate swap
at 3.26% until June 2027 . We used the proceeds to pay off a $145.0
million loan that was scheduled to mature in October 2019 .
• We closed a secured, non-recourse $125.0 million interest-only loan
scheduled to mature in June 2029 . The loan bears interest at LIBOR +
0.98%, which we have effectively fixed through interest rate swaps at
2.55% until December 2020 , which then increases to 3.25% until June
2027 . We used the proceeds to pay off a $115.0 million loan that was
scheduled to mature in December 2025 .
• We closed a secured, non-recourse $160.0 million interest-only loan
scheduled to mature in June 2029 . The loan bears interest at LIBOR +
0.98%, which we have effectively fixed through an interest rate swap
at 3.25% until July 2027 . We used the proceeds to partially fund the
acquisition of The Glendon property. This loan has been assumed by
the consolidated JV to which we contributed The Glendon property.
• We entered into a forward interest rate swap to extend the fixed-rate
period for a term loan with a principal balance of $102.4 million ,
scheduled to mature in April 2025 , for three years. We also entered
into forward interest rate swaps with an initial notional amount of
$75.0 million , effective as of September 2019 and scheduled to mature
in August 2025 , fixing one-month LIBOR at 1.97%, to hedge the $415.0
million term-loan we closed in the third quarter - see third quarter
financing transactions below.
• We issued 4.9 million shares of our common stock under our ATM
program for net proceeds of $201.0 million . We used a portion of the
funds to partially fund the acquisition of The Glendonproperty, and
a portion of the funds to pay off a $220.0 million loan in the third
quarter - see third quarter financing transactions below.
• Other investors in the consolidated JV to which wecontributed The
Glendon property contributed $176.0 million to the JV to fund the
acquisition of the property, and we contributed $44.0 million to the
JV.
• During the third quarter of 2019:
• We paid off a$220.0 million loan scheduled to mature inDecember 2023 and terminated the related interest rate swaps. • We closed a secured, non-recourse$415.0 million
interest-only loan
scheduled to mature in August 2026 . The loan bears interest at LIBOR
+ 1.10%, which we have effectively fixed through interest rate swaps
at 2.58% until
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April 2020 , which then increases to 3.07% untilAugust 2025 . Part of the proceeds were used to pay-off a$340.0 million loan scheduled to mature inApril 2022 . • We closed a secured, non-recourse$400.0 million
interest-only loan
scheduled to mature in September 2026 . The loan bears interest at
LIBOR + 1.15%, which we have effectively fixed through interest rate
swaps at 2.44% until September 2024 . The proceeds were used to
pay-off a $400.0 million loan scheduled to mature in November 2022 .
• We closed a secured, non-recourse $200.0 million interest-only loan
scheduled to mature in September 2026 . The loan bears interest at
LIBOR + 1.20%, which we have effectively fixed through interest rate
swaps at 2.77% until July 2020 , which then decreases to 2.36% until
October 2024 . Part of the proceeds were used to pay off a
$180.0 million loan scheduled to mature in July 2022 .
• During the fourth quarter of 2019
• We closed a secured, non-recourse$400.0 million
interest-only loan
scheduled to mature in November 2026 . The loan bears interest at
LIBOR + 1.15%, which we have effectively fixed through interest rate
swaps at 2.18% until July 2021 , which increases to 2.31% until
October 2024 . Part of the proceeds were used to pay off a
$360.0 million loan scheduled to mature in June 2023 .
See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and derivatives, respectively.
Developments
• In West Los Angeles, we are building a 34 story high-rise apartment
building with 376 apartments. The tower is being built on a site that is
directly adjacent to an existing office building and a 712 unit residential
property, both of which we own. We expect the cost of the development to be
approximately
of the land which we have owned since 1997. As part of the project, we are
investing additional capital to build a one-acre park on
that will be available to the public and provide a valuable amenity to our
surrounding properties and community. We expect construction to take about
three years.
• At our
construction of an additional 491 new apartments on 28 acres which now join
our existing 680 apartments. We also invested additional capital to upgrade
the existing buildings, improve the parking and landscaping, build a new
leasing and management office, and construct a new fitness center and two
pools.
• In downtown
foot office tower into approximately 500 apartments. We expect the
conversion to occur in phases over a number of years as the office space is
vacated. We currently estimate the construction costs to be approximately
development are compounded by the multi-year and phased nature of the
conversion. Assuming timely city approvals, we expect the first units to be
delivered in 2020. This project will help address the severe shortage of
rental housing in
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.
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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:
Year Ended December 31,
2019 2018 2017 2016 2015
Average straight-line rental rate(1)(2)
Annualized lease transaction costs(3)
___________________________________________________
(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 of each lease, including rent concessions and
escalations, we believe that it may provide a better comparison thanending 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 sellerin the case of acquired properties and leases for tenants relocated
from space being taken out of service.
Office
The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio:
Year Ended December 31, 2019
Expiring
Rent Roll(1)(2) Rate(2) New/Renewal Rate(2) Percentage Change
Cash Rent $42.91 $47.25 10.1%
Straight-line Rent $38.92 $49.65 27.6%
___________________________________________________
(1) Represents the average annual initial stabilized cash and
straight-line rents per square foot on new and renewed leases signed
during the year compared to the prior leases for the same space.
Excludes Short Term Leases, leases where the prior lease was
terminated more than a year before signing of the new lease, leases
for tenants relocated from space being taken out of service, and
leases in acquired buildings where we believe the information about
the prior agreement is incomplete or where we believe base rent
reflects other off-market inducements to the tenant that are not
reflected in the prior lease document.
(2) Our office rent roll can fluctuate from period to period as a result
of changes in our submarkets, buildings and term of the expiring
leases, making these metrics difficult to predict.
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Multifamily Rental Rates
The table below presents the average annual rental rate per leased unit for new
tenants:
Year Ended December 31,
2019 2018 2017 2016 2015
Average annual rental rate - new
tenants(1)$ 28,350 $ 27,542 $ 28,501 $ 28,435 $ 27,936
_____________________________________________________
(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)
the average for 2018 decreased from 2017 because we added a significant
number of units at our
portfolio, and (ii) the average for 2019 increased from 2018 because we
acquired The Glendon where higher rental rates offset the effect of
adding additional units at our
Multifamily Rent Roll The rent on leases subject to rent change during the year endedDecember 31, 2019 (new tenants and existing tenants undergoing annual rent review) was 0.9% higher than the prior rent on the same unit.
Occupancy Rates - Total Portfolio
The tables below present the occupancy rates for our total office portfolio and multifamily portfolio:
December 31,
Occupancy Rates(1) as of: 2019 2018 2017 2016 2015
Office portfolio 91.4 % 90.3 % 89.8 % 90.4 % 91.2 %
Multifamily portfolio(2) 95.2 % 97.0 % 96.4 % 97.9 % 98.0 %
Year Ended December 31,
Average Occupancy Rates(1)(3): 2019 2018 2017 2016 2015
Office portfolio 90.7 % 89.4 % 89.5 % 90.6 % 90.9 %
Multifamily portfolio(2) 96.5 % 96.6 % 97.2 % 97.6 % 98.2 %
___________________________________________________
(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) The Occupancy Rate for our multifamily portfolio was impacted by an
acquisition in 2019 and by new units at our
development in
Developments and Repositionings" above.
(3) Average occupancy rates are calculated by averaging the occupancy rates
at the end of each of the quarters in the period and at the end of the
quarter immediately prior to the start of the period.
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As of
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(1) Average of the percentage of leases at
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Results of Operations
Comparison of 2019 to 2018
Year Ended December 31, Favorable
2019 2018 (Unfavorable) % Commentary
(In thousands)
Revenues
The increase was due to (i) an
increase of $25.4 million of
rental revenue and tenant
recoveries from properties that
we owned throughout both periods,
due to higher rental and
occupancy rates, (ii) $6.6
Office million of rental revenue and
rental
tenant recoveries from a JV we
revenue and
tenant and (iii)$2.5 million of rental recoveries revenue and tenant recoveries from retail space at the residential community we acquired inJune 2019 , partly offset by (iv) a decrease of$1.3 million of rental revenue and tenant recoveries at an office building we are converting to a residential building inHawaii . The increase was due to (i) an increase in parking and other income of$3.9 million from properties we owned throughout both periods, due to higher occupancy and rates, (ii)$1.2 million of parking and other Office income from a JV we consolidated
parking and
other million of parking and other
income income from retail space at the
residential community we acquired
in June 2019, partly offset by
(iv) a decrease of $0.3 million
in parking and other income at an
office building we are converting
to a residential building in
Hawaii.
The increase was due to (i)
revenues of $9.7 million from the
residential community we acquired
in June 2019, (ii) an increase in
revenues of $4.8 million from the
Multifamily new apartments at our Moanalua
revenue $ 119,927 $ 103,385 $ 16,542 16.0 % Hillside Apartments development,
and (iii) an increase in revenues
of $2.0 million at our other
residential properties, which was
primarily due to an increase in
rental revenues due to higher
rental rates.
Operating expenses
The increase was due to (i) an
increase of $9.0 million of
rental expenses from properties
that we owned throughout both
periods, (ii) $2.4 million of
rental expenses from a JV we
consolidated in November 2019,
and (iii) $0.8 million of rental
expenses from retail space at the
residential community we acquired
Office in June 2019, partly offset by
rental
expenses in rental expenses at an office
building we are converting to a
residential building in Hawaii .
The increase in rental expenses
from properties that we owned
throughout both periods was due
to an increase in utility
expenses, property taxes,
personnel expenses, repairs and
maintenance expenses, scheduled
services expenses and insurance
expense.
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Year Ended December 31, Favorable
2019 2018 (Unfavorable) % Commentary
(In thousands)
The increase was due to (i) $3.2
million of rental expenses from
the residential community we
acquired in June 2019, (ii) an
increase in rental expenses of
$1.3 million at our residential
properties that we owned
throughout both periods, and
Multifamily (iii) an increase in rental
rental $ 33,681 $ 28,116 $ (5,565 ) (19.8
)% expenses of
expenses new apartments at our Moanalua
Hillside Apartments development.
The increase in rental expenses
from properties that we owned
throughout both periods was due
to an increase in property taxes,
scheduled services expenses,
personnel expenses and repairs
and maintenance expenses.General and
administrative
% The decrease was primarily due to
expenses a decrease in personnel expenses.
The increase was due to (i) an
increase in depreciation and
amortization of $28.0 million
from an office building we are
converting to a residential
building in Hawaii , due to
accelerated depreciation of the
building, (ii) $6.0 million of
depreciation and amortization
from the residential community
Depreciation
that we acquired in
and$ 357,743 $ 309,864 $ (47,879 ) (15.5
)% (iii)
amortization consolidated inNovember 2019 , (iv) an increase in depreciation and amortization of$2.3 million from the new apartments at ourMoanalua Hillside Apartments development, and (v) an increase of$8.7 million at our other properties, which reflects activity at our repositioning properties and an increase in investment in real estate balances.
Non-Operating Income and Expenses
The increase was primarily due to
an increase in interest income
Other income
% and an increase in revenue from
the health club that we own and
operate.
The decrease was primarily due to
a decrease in expenses related to
Other expenses
% our property management and other
services we provide to our Funds
and a decrease in acquisition
expenses.
The increase was primarily due to
Income from an increase in net income from
unconsolidated
% our unconsolidated Funds, which
Funds was primarily due to an increase
in revenues due to an increase in
occupancy and rental rates.
The increase was primarily due to
Interest loan costs incurred in connection
expense$ (143,308 ) $ (133,402 ) $ (9,906 ) (7.4 )% with our debt refinancing activities during the current year. The gain is due to the Gain from
consolidation of a JV in November
consolidation
% 2019 that was previously
of JV accounted for as an
unconsolidated Fund using the
equity method.
Comparison of 2018 to 2017
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended
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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 trends in occupancy rates, rental rates and operating costs from year to year, and to compare our performance with other REITs. FFO is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. FFO should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other REITs. See "Results of Operations" above for a discussion of the items that impacted our net income.
Comparison of 2019 to 2018
Our FFO increased by$25.1 million , or 6.3%, to$424.8 million for 2019 compared to$399.7 million for 2018, which was primarily due to (i) an increase in operating income from our office portfolio due to an increase in occupancy and rental rates, and operating income from retail space at The Glendon residential community we acquired inJune 2019 , and (ii) an increase in operating income from our residential portfolio due to operating income from apartments at The Glendon residential community and leasing of new units at ourMoanalua Hillside Apartments development, which was partially offset by (iii) loan costs incurred in connection with the new loans we closed.
Comparison of 2018 to 2017
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended
Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in ourOperating Partnership - which includes our share of our consolidated JVs and our unconsolidated Funds FFO) to net income attributable to common stockholders computed in accordance with GAAP: Year Ended December 31, (In thousands) 2019 2018
Net income attributable to common stockholders
Depreciation and amortization of real estate assets 357,743
309,864
Net income attributable to noncontrolling interests 54,985
12,526
Adjustments attributable to unconsolidated Funds (1) 15,815
16,702
Adjustments attributable to consolidated JVs (2) (59,505 )
(55,448 )
Gain from consolidation of JV (307,938 ) - FFO$ 424,813 $ 399,730
___________________________________________________
(1) Adjusts for our share of our unconsolidated Funds
depreciation and
amortization of real estate assets.
(2) Adjusts for the net income and depreciation and amortization of
real estate assets that is attributable to the noncontrolling
interests in our consolidated JVs.
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Non-GAAP Supplemental Financial Measure: Same Property NOI
Usefulness to Investors
We report Same Property NOI to facilitate a comparison of our operations between reported periods. Many investors use Same Property NOI to evaluate our operating performance and to compare our operating performance with other REITs, because it can reduce the impact of investing transactions on operating trends. Same Property NOI is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. We report Same Property NOI because it is a widely recognized measure of the performance of equity REITs, and is used by some investors to identify trends in occupancy rates, rental rates and operating costs and to compare our operating performance with that of other REITs. Same Property NOI has limitations as a measure of our performance because it excludes depreciation and amortization expense, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. Other REITs may not calculate Same Property NOI in the same manner. As a result, our Same Property NOI may not be comparable to the Same Property NOI of other REITs. Same Property NOI should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends.
Comparison of 2019 to 2018:
Our 2019 same properties included 60 office properties, aggregating 15.5 million Rentable Square Feet, and 9 multifamily properties with an aggregate 2,640 units. The amounts presented include 100% (not our pro-rata share).
Year Ended December 31, Favorable
2019 2018 (Unfavorable) % Commentary
(In thousands)
The increase was
primarily due to (i)
an increase in rental
revenues due to an
increase in rental
and occupancy rates,
Office revenues $ 760,616 $ 726,096 $ 34,520 4.8 % (ii) an increase in
tenant recoveries due
to an increase in
recoverable operating
costs and (iii) an
increase in parking
and other income.
The increase was
primarily due to an
increase in property
Office expenses (241,130 ) (232,377 ) (8,753 ) (3.8 )% taxes, insurance,
utility expenses,
personnel expenses
and repairs and
maintenance expenses.
Office NOI 519,486 493,719 25,767 5.2 %
The increase was
primarily due to (i)
an increase in rental
Multifamily revenues 85,716 84,601 1,115 1.3 % revenues due to an
increase in rental
rates and (ii)
parking and other
income.
The increase was
primarily due to an
increase in personnel
expenses, repairs and
maintenance expenses
Multifamily expenses (21,997 ) (21,522 ) (475 ) (2.2 )% and utility expenses.
Multifamily NOI 63,719 63,079 640 1.0 % Total NOI$ 583,205 $ 556,798 $ 26,407 4.7 % 43
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Table of Contents Reconciliation to GAAP
The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders:
Year Ended December 31,
(In thousands) 2019 2018
Same Property NOI $ 583,205 $ 556,798
Non-comparable office revenues 56,139 51,835
Non-comparable office expenses (23,352 ) (20,374 )
Non-comparable multifamily revenues 34,211 18,784
Non-comparable multifamily expenses (11,684 ) (6,594 )
NOI 638,519 600,449
General and administrative expenses (38,068 ) (38,641 )
Depreciation and amortization (357,743 ) (309,864 )
Operating income 242,708 251,944
Other income 11,653 11,414
Other expenses (7,216 ) (7,744 )
Income from unconsolidated Funds 6,923 6,400
Interest expense (143,308 ) (133,402 )
Gain from consolidation of JV 307,938 -
Net income 418,698 128,612
Less: Net income attributable to
noncontrolling interests (54,985 ) (12,526 )
Net income attributable to common
stockholders $ 363,713 $ 116,086
Comparison of 2018 to 2017
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended
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Liquidity and Capital Resources
Short-term liquidity
Excluding acquisitions, development projects and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand, cash generated by operations, and our revolving credit facility. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our revolving credit facility.
Long-term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development projects and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to the requirement to distribute a substantial majority of our income on an annual basis imposed by REIT federal tax rules. We plan to meet our long-term liquidity needs through long-term secured non-recourse indebtedness, the issuance of equity securities, including common stock and OP Units, as well as property dispositions and JV transactions. We have an ATM program which would allow us, subject to market conditions, to sell up to an additional$198 million of shares of common stock as of the date of this Report. 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 between one to two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and derivative contracts, respectively.
Contractual obligations as of
Payment due by period
Less than 2-3 4-5
(In thousands) Total 1 year years years Thereafter
Term loan principal
payments(1) $ 4,653,264 $ 752 $ 301,610 $ 1,716,764 $ 2,634,138
Term loan interest
payments(2) 828,601 140,779 281,923 205,247 200,652
Ground lease payments(3) 49,110 733 1,466 1,466 45,445
Development commitments(4) 233,374 122,623 110,750 - -
Capital expenditures and
tenant improvements
commitments(5) 24,600 24,600 - - -
Total $ 5,788,949 $ 289,487 $ 695,749 $ 1,923,477 $ 2,880,235 ____________________________________________________
(1) Reflects the future principal payments due on our consolidated secured
notes payable and revolving credit facility, excluding any maturity
extension options. See Note 8 to our consolidated financial statements in
Item 15 of this Report.
(2) Reflects the future interest payments due on our consolidated secured
notes payable and revolving credit facility, excluding any maturity
extension options. The interest payments include the effect of interest
rate swaps when relevant, and are based on the USD one -month LIBOR rate
as of December 31, 2019 when floating. Future interest payments on our
revolving credit facility are based on the balance as of December 31,
2019 . See Note 8 to our consolidated financial statements in Item 15 of
this Report.
(3) Reflects the future minimum ground lease payments. See Note 4 to our
consolidated financial statements in Item 15 of this Report.
(4) See "Acquisitions, Financings, Developments and Repositionings" for a
discussion of our developments.
(5) Reflects the aggregate remaining contractual commitment for capitalexpenditure projects and repositionings, as well as tenant improvements.
See "Acquisitions, Financings, Developments and Repositionings" for a
discussion of our repositionings.
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Off-Balance Sheet Arrangements
Our unconsolidated Fund has its own secured non-recourse debt, and we have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to that loan. We have also guaranteed the related swap. Our Fund has agreed to indemnify us for any amounts that we would be required to pay under that agreement. As ofDecember 31, 2019 , all of the obligations under the respective loan and swap agreements have been performed in accordance with the terms of those agreements. For information regarding our Fund and our Fund's debt, see Notes 6 and 17, respectively, to our consolidated financial statements in Item 15 of this Report. Cash Flows Comparison of 2019 to 2018 Increase 2019 2018 (Decrease) % (In thousands) Net cash provided by operating activities(1)$ 469,586 $ 432,982 $ 36,604 8.5 % Net cash used in investing activities(2)$ (649,668 ) $ (249,551 ) $ 400,117 160.3 % Cash provided by (used in) financing activities(3)$ 187,538 $ (213,849 ) $ 401,387 187.7 %
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(1) Our cash flows provided by operating activities are primarily dependent
upon the occupancy and rental rates of our portfolio, the collectability
of rent and recoveries from our tenants, and the level of our operating
expenses and general and administrative expenses, and interest
expense. The increase was primarily due to: (i) an increase in operating
income from our office portfolio due to an increase in occupancy and
rental rates, and operating income from retail space at The Glendon
residential community we acquired in June 2019 , and (ii) an increase inoperating income from our residential portfolio due to operating income
from apartments at The Glendon residential community and leasing of new
units at our Moanalua Hillside Apartments development.
(2) Our cash flows used in investing activities are generally used to fund
property acquisitions, developments and redevelopment projects, and
Recurring and non-Recurring Capital Expenditures. The increase is
primarily due to
in 2019 and an increase of
unconsolidated Funds in 2019, partially offset by $39.2 million of cash
assumed from the consolidation of a JV.
(3) Our cash flows provided by 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 is primarily due to (i)
proceeds from the issuance of common stock, (ii)
contributions from noncontrolling interests in consolidated JVs, and (iii)
an increase of
increase in loan cost payments of $18.4 million , (b) an increase in
distributions to noncontrolling interests of $12.4 million , and (c) an
increase in dividends paid to common stockholders of $9.8 million .
Comparison of 2018 to 2017
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended
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Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP, which requires us to make estimates of certain items which affect the reported amounts of our assets, liabilities, revenues and expenses. While we believe that our estimates are based upon reasonable assumptions and judgments at the time that they are made, some of our estimates could prove to be incorrect, and those differences could be material. Below is a discussion of our critical accounting policies, which are the policies we believe require the most estimate and judgment. See Note 2 to our consolidated financial statements included in Item 15 of this Report for the summary of our significant accounting policies. Investment in Real Estate
Acquisitions and Initial Consolidation of VIEs
We account for property acquisitions as asset acquisitions. We allocate the purchase price for asset acquisitions, which includes the capitalized transaction costs, and for the properties upon the initial consolidation of VIEs not determined to be a business, on a relative fair value basis to: (i) land, (ii) buildings and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place at-market leases, (iv) acquired above- and below-market ground and tenant leases, and if applicable (v) assumed debt, based upon comparable sales for land, and the income approach using our estimates of expected future cash flows and other valuation techniques, which include but are not limited to, our estimates of rental rates, revenue growth rates, capitalization rates and discount rates, for other assets and liabilities. We estimate the relative fair values of the tangible assets on an ''as-if-vacant'' basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the property to the occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We evaluate the time period over which we expect such occupancy level to be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period. Above and below-market ground and tenant leases are recorded as an asset or liability based upon the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid or received pursuant to the in-place ground or tenant leases, respectively, and our estimate of fair market rental rates for the corresponding in-place leases, over the remaining non-cancelable term of the leases. Assumed debt is recorded at fair value based upon the present value of the expected future payments and current interest rates. These estimates require judgment, involve complex calculations, and the allocations have a direct and material impact on our results of operations because, for example, (i) there would be less depreciation if we allocate more value to land (which is not depreciated), or (ii) if we allocate more value to buildings than to tenant improvements, the depreciation would be recognized over a much longer time period, because buildings are depreciated over a longer time period than tenant improvements.
Cost capitalization
We capitalize development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related to the development of real estate. Indirect development costs, including salaries and benefits, office rent, and associated costs for those individuals directly responsible for and who spend their time on development activities are also capitalized and allocated to the projects to which they relate. Development costs are capitalized while substantial activities are ongoing to prepare an asset for its intended use. We consider a development project to be substantially complete when the residential units or office space is available for occupancy but no later than one year after cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred. Costs previously capitalized related to abandoned developments are charged to earnings. Expenditures for repairs and maintenance are expensed as incurred. The capitalization of development costs requires judgment, and can directly and materially impact our results of operations because, for example, (i) if we don't capitalize costs that should be capitalized, then our operating expenses would be overstated during the development period, and the subsequent depreciation of the developed real estate would be understated, or (ii) if we capitalize costs that should not be capitalized, then our operating expenses would be understated during the development period, and the subsequent depreciation of the real estate would be overstated. We capitalized development costs of$75.3 million ,$78.7 million and$66.0 million during 2019, 2018 or 2017, respectively. 47
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Impairment of Long-Lived Assets
We assess our investment in real estate and our investment in our Funds for impairment on a periodic basis, and whenever events or changes in circumstances indicate that the carrying value of our investments may not be recoverable. If the undiscounted future cash flows expected to be generated by the asset are less than the carrying value of the asset, and our evaluation indicates that we may be unable to recover the carrying value, then we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. Our estimates of future cash flows are based in part upon assumptions regarding future occupancy, rental rates and operating costs, and could differ materially from actual results. We record real estate held for sale at the lower of carrying value or estimated fair value, less costs to sell, and similarly recognize impairment losses if we believe that we cannot recover the carrying value. Our evaluation of market conditions for assets held for sale requires judgment, and our expectations could differ materially from actual results. Impairment losses would reduce our net income and could be material. Based upon such periodic assessments we did not record any impairment losses for our long-lived assets during 2019, 2018 or 2017. In downtownHonolulu ,1132 Bishop Street , we are converting a 25 story, 490,000 square foot office tower into approximately 500 apartments. We expect the conversion to occur in phases over a number of years as the office space is vacated. Due to the significant change in planned use of the property, we performed an impairment assessment by comparing the property's expected undiscounted cash flows to the property's carrying value plus the expected development costs and concluded that there was no impairment as ofDecember 31, 2019 . We determined the undiscounted cash flows using our estimates of the expected future cash flows which included, but were not limited to, our estimates of property's net operating income, and capitalization rates.
Revenue Recognition for Tenant Recoveries
Our tenant recovery revenues for recoverable operating expenses are recognized as revenue in the period that the recoverable expenses are incurred. Subsequent to year-end, we perform reconciliations on a lease-by-lease basis and bill or credit each tenant for any differences between the estimated expenses we billed to the tenant and the actual expenses incurred. Estimating tenant recovery revenues requires an in-depth analysis of the complex terms of each underlying lease. Examples of estimates and judgments made when determining the amounts recoverable include: • estimating the recoverable expenses;
• estimating the impact of changes to expense and occupancy during the year;
• estimating the fixed and variable components of operating expenses for
each building;
• conforming recoverable expense pools to those used in the base year for
the underlying lease; and
• judging whether an expense or capital expenditure is recoverable pursuant
to the terms of the underlying lease.
These estimates require judgment and involve complex calculations. If our estimates prove to be incorrect, then our tenant recovery revenues and net income could be materially and adversely affected in future periods when we perform our reconciliations. The impact of changing our current year tenant recovery billings by 5% would result in a change to our tenant recovery revenues and net income of$2.6 million ,$2.4 million and$2.1 million during 2019, 2018 and 2017, respectively. Stock-Based Compensation We award stock-based compensation to certain employees and non-employee directors in the form of LTIP Units. We recognize the fair value of the awards over the requisite vesting period, which is based upon service. The fair value of the awards is based upon the market value of our common stock on the grant date and a discount for post-vesting restrictions. Our estimate of the discount for post-vesting restrictions requires judgment. If our estimate of the discount is too high or too low it would result in the fair value of the awards that we make being too low or too high, respectively, which would result in an under- or over-expense of stock-based compensation, respectively, and this under- or over-expensing of stock-based compensation could be material to our net income. Stock-based compensation expense was$18.4 million ,$22.3 million and$18.5 million for 2019, 2018 and 2017, respectively. The impact of changing the discount rate by 5% would result in a change to our stock-based compensation expense and net income of$0.9 million ,$1.1 million and$0.9 million during 2019, 2018 and 2017, respectively. 48
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