DOUGLAS EMMETT, INC. 
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. Our results of operations were affected by transactions during the respective period - see Financings, Developments and Repositionings further below. Business DescriptionDouglas 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 ofJune 30, 2020 , 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)(3) 17,939 18,324 Leased rate 91.0% 90.9% Occupancy rate 89.3% 89.3% Multifamily Properties 12 12 Units 4,209 4,209 Leased rate 98.7% 98.7% Occupied rate 92.1% 92.1%
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(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 1 of this Report for more information about our unconsolidated Fund. (3) As ofJune 30, 2020 , we removed approximately 226,000 Rentable Square Feet of vacant space at an office building that we are converting to residential apartments.
Revenues by Segment and Location
During the six months ended
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Impacts of the COVID-19 Pandemic on our Business
Our buildings have remained open and available to our tenants throughout the pandemic. Our rent collections continue to be negatively impacted by the pandemic and our markets' very tenant-oriented lease enforcement moratoriums, which are considerably out of sync with other gateway markets. The cities where we primarily operate,Los Angeles ,Beverly Hills andSanta Monica , have passed unusually punitive ordinances prohibiting evictions and allowing rent deferral for residential, retail, and office tenants, regardless of financial distress. The ordinances cover our residential, retail and office tenants (with some carveouts for large tenants) and generally prohibit landlords not only from evicting tenants but also from imposing any late fees or interest and allow tenants to pay back the deferred rent over a certain period. At the end of the second quarter, we wrote off certain tenant receivables and deferred rent receivables. For the three and six months endedJune 30, 2020 , charges for uncollectible amounts related to tenant receivables and deferred rent receivables, which were primarily due to the COVID-19 pandemic, reduced our rental revenues and tenant recoveries by$29.8 million and$35.0 million , respectively. If we subsequently collect amounts that were previously written off, then the amounts collected will be recorded as an increase to our rental revenues and tenant recoveries. See "Revenue Recognition" in Note 2 to our consolidated financial statements in Item 1 of this Report. We don't know how the COVID-19 pandemic will impact future collections. Our tenant retention was in-line with our pre-COVID expectations. Although the decline in our office occupancy during the quarter was expected, leasing volume would have to improve significantly to recover that occupancy this year. During this time, we had savings from variable expenses which partly offset the write-offs and the decrease in our parking revenues.
Other considerations that could impact our future leasing, rent collections, and revenue include:
•How long the pandemic continues. •Whether the local governments that have authorized rent deferrals in our markets modify or extend the deferral terms, or alternatively allow them to expire as written. •Whether more tenants stop paying rent if the impact to their business grows. •How attendance in our buildings changes and drives parking revenue or rent collection. •How leasing activity and occupancy will evolve.
On the capital front, construction is continuing on our two large multifamily development projects, although the projects may take a little longer under current conditions. We have temporarily suspended work on new office repositioning projects.
Overall, we expect the COVID-19 pandemic to continue to adversely impact many parts of our business, and those impacts have been, and will continue, to be material. For more information of the risks to our business, please see Item 1A "Risk Factors" below and in our quarterly report on Form 10-Q for the quarter endedMarch 31, 2020 , that we filed with theSEC onMay 8, 2020 . 36
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Financings, Developments and Repositionings
Financings
During the first quarter of 2020: •We entered into forward interest rate swaps to hedge future term-loan refinancings. The forward swaps have an initial notional amount of$495.0 million , with effective dates ranging fromJune 2020 toMarch 2021 , and maturity dates ranging fromApril 2025 toJune 2025 , fixing the one-month LIBOR interest rate in a range of 0.74% to 0.91%. During the second quarter of 2020: •OnMay 15, 2020 , we refinanced a loan for one of our consolidated JVs. We closed a secured, non-recourse$450.0 million interest-only loan, which is scheduled to mature inMay 2027 . The loan bears interest at LIBOR + 1.35%, which was effectively fixed at 2.26% following the expiration of the current swaps, for an average fixed interest rate of 2.6% per annum throughApril 2025 . We used part of the proceeds to pay off a$400.0 million loan, secured by the same properties, that was scheduled to mature inJuly 2024 .
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.
Developments
•Residential High-Rise Tower ,Brentwood, California InWest 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$180 million to$200 million , which does not include the cost 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 onWilshire Boulevard that will be available to the public and provide a valuable amenity to our surrounding properties and community. Construction continues on the project, although we may face some delays as a result of the impact of the COVID-19 pandemic on permitting and other logistics. We currently expect the first units to be delivered in 2022. •1132Bishop Street ,Honolulu, Hawaii In downtownHonolulu , we are converting a 25 story, 490 thousand square foot office tower into approximately 500 apartments. This project will help address the severe shortage of rental housing inHonolulu and revitalize the central business district. The conversion is occurring in phases over a number of years as the office space is vacated. We currently estimate the construction costs to be approximately$80 million to$100 million , although the inherent uncertainties of development are compounded by the multi-year and phased nature of the conversion and potential impacts from the COVID-19 pandemic. We began leasing the new units during the second quarter of 2020.
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. We
have temporarily suspended work on new office repositioning projects due to the
COVID-19 pandemic.
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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 during the respective periods:
Six Months Ended Year Ended December 31,
June 30, 2020 2019 2018 2017 2016
Average straight-line
rental rate(1)(2) $43.61 $49.65 $48.77 $44.48 $43.21
Annualized lease
transaction costs(3) $5.26 $6.02 $5.80 $5.68 $5.74 ___________________________________________________
(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 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 landlord's request.
Office
The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio:
Six Months Ended June 30, 2020
Expiring
Rent Roll(1)(2) Rate(2) New/Renewal Rate(2) Percentage Change
Cash Rent $39.85 $43.10 8.2%
Straight-line Rent $35.92 $43.61 21.4%
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(1)Represents the average annual initial stabilized cash and straight-line rents
per square foot on new and renewed leases signed during the quarter 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 at landlord's request, 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.
(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:
Six Months Ended Year Ended December 31,
June 30, 2020 2019 2018 2017 2016
Average annual
rental rate - new
tenants(1) $28,064 $28,350 $27,542 $28,501 $28,435 _____________________________________________________
(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 ourMoanalua Hillside Apartments development inHonolulu , where the rental rates are lower than the average in 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 ourMoanalua Hillside Apartments development.
Multifamily Rent Roll
The rent on leases subject to rent change during the six months endedJune 30, 2020 (new tenants and existing tenants undergoing annual rent review) was 0.1% lower 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: June 30, 2020 2019 2018 2017 2016
Office portfolio 89.3% 91.4% 90.3% 89.8% 90.4%
Multifamily portfolio(2) 92.1% 95.2% 97.0% 96.4% 97.9%
Six Months Ended Year Ended December 31,
Average Occupancy
Rates(1)(3): June 30, 2020 2019 2018 2017 2016
Office portfolio 90.5% 90.7% 89.4% 89.5% 90.6%
Multifamily portfolio(2) 94.5% 96.5% 96.6% 97.2% 97.6%
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(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 a large number of leases signed inJune 2020 that took occupancy after quarter end, an acquisition in 2019, and new units at ourMoanalua Hillside Apartments development inHonolulu in 2019 and 2018. (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. 39
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Office Lease Expirations
As of
[[Image Removed: nysedei-20200630_g4.jpg]]____________________________________________________
(1) Average of the percentage of leases atJune 30, 2017 , 2018, and 2019 with the same remaining duration as the leases for the labeled year had atJune 30, 2020 . Acquisitions are included in the prior year average commencing in the quarter after the acquisition. 40
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Results of Operations
Comparison of three months endedJune 30, 2020 to three months endedJune 30, 2019 Three Months Ended June 30, Favorable 2020 2019 (Unfavorable) % Commentary (In thousands) Revenues The decrease was primarily due to a decrease of$26.6 million of rental revenues and tenant recoveries from properties that we owned throughout both periods, which was primarily due to the Office rental write-off of revenue and$ 158,813 $ 171,674 $ (12,861) (7.5) % uncollectible tenant tenant receivables and the recoveries associated deferred rent receivables as a result of the COVID-19 pandemic, partly offset by an increase of$13.1 million of rental revenue and tenant recoveries from a JV we consolidated in November 2019. The decrease was due to a decrease of$13.7 million in parking and other income from properties we owned throughout both periods, which was Office parking primarily due to a and other$ 18,176 $ 30,515 $ (12,339) (40.4) % decrease in parking income activity as a result of the COVID-19 pandemic, partly offset by an increase of$1.3 million of parking and other income from a JV we consolidated in November 2019. The increase was due to an increase of$2.3 million in revenues from a property that we purchased in the second quarter of 2019 (see note 3 to our consolidated financial statements in item 1 of this Report), and an increase of$0.8 million in revenues from our new units at our Moanalua Hillside apartments development, partly offset by a decrease Multifamily of$0.7 million in revenue$ 30,807 $ 28,345 $ 2,462 8.7 % revenues from properties we owned throughout both periods. The decrease of$0.7 from properties we owned throughout both periods was primarily due to write-offs of uncollectible tenant receivables and lower rental revenues at a property where units are temporarily unoccupied as a result of a fire, partly offset by$2.6 million of insurance proceeds for lost rental revenue at the respective property. Operating expenses The decrease was due to a decrease of$8.5 million in rental expenses from properties that we owned throughout both periods, partly offset by an increase of$4.2 million in rental expenses from a JV we consolidated Office rental$ 60,301 $ 64,308 $ 4,007 6.2 % in November 2019. The expenses decrease in rental expenses from properties that we owned throughout both periods was primarily due to a decrease in scheduled services expenses and utility expenses, as a result of lower utilization caused by the COVID-19 pandemic. 41
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Three Months Ended June 30, Favorable
2020 2019 (Unfavorable) % Commentary
(In thousands)
The increase was
due to an increase
of $1.1 million in
Multifamily $ 8,856 $ 7,712 $ (1,144) (14.8) % rental expenses
rental expenses from a property
that we purchased
in the second
quarter of 2019.
General and The increase was
administrative $ 9,863 $ 9,159 $ (704) (7.7) % primarily due to an
expenses increase in
personnel expenses.
The increase was
due to (i) an
increase of $9.1
million of
depreciation and
amortization from
an office building
we are converting
to a residential
building in Hawaii,
due to accelerated
depreciation of the
Depreciation and building, (ii) $8.7
amortization $ 98,765 $ 78,724 $ (20,041) (25.5) % million of
depreciation and
amortization from a
JV we consolidated
in November 2019,
and (iii) an
increase of $1.4
million in
depreciation and
amortization from a
property we
purchased in the
second quarter of
2019.
Non-Operating Income and Expenses
The decrease was
due to (i) a
decrease of $1.4
million in revenues
from a health club
in Honolulu that we
own and operate,
caused by the
COVID-19 pandemic,
(ii) a decrease of
$0.6 million in
interest income due
to lower money
market balances and
interest rates, and
(iii) a decrease of
Other income $ 325 $ 2,892 $ (2,567) (88.8) % $0.5 million in
revenues related to
our Fund that was
consolidated as a
JV in November
2019. Other income
includes a $1.2
million asset
write-down for the
estimated property
damage to a
building impacted
by fire offset by
the associated $1.2
million of
insurance proceeds
received for
property damage.
The decrease was
primarily due to a
decrease of $1.1
million in expenses
for the health club
in Honolulu, due to
lower utilization
Other expenses $ (478) $ (1,807) $ 1,329 73.5 % caused by the
COVID-19 pandemic,
and a decrease of
$0.3 million in
expenses related to
our Fund that was
consolidated as a
JV in November
2019.
The decrease was
primarily due to a
net loss in 2020
for our remaining
unconsolidated Fund
compared to net
income for our
Funds in 2019 (one
of our Funds was
consolidated as a
JV in November
(Loss) income 2019). The net loss
from $ (140) $ 2,207 $ (2,347) (106.3) % in 2020 for our
unconsolidated remaining Fund was
Funds primarily due to
(i) the write-off
of uncollectible
tenant receivables
and the associated
deferred rent
receivables, and
(ii) a decrease in
parking income,
both as a result of
the COVID-19
pandemic.
The increase was
primarily due to
higher debt
balances from a JV
that was
Interest expense $ (35,190) $ (34,063) $ (1,127) (3.3) % consolidated in
November 2019 and a
property that we
purchased in the
second quarter of
2019.
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Comparison of six months endedJune 30, 2020 to six months endedJune 30, 2019 Six Months Ended June 30, Favorable 2020 2019 (Unfavorable) % Commentary (In thousands) Revenues The increase was primarily due to rental revenue and tenant recoveries of$28.3 million from a JV we consolidated in November 2019, partly offset by a decrease of$24.3 million in rental revenue and tenant Office rental recoveries from revenue and properties that we tenant$ 344,640 $ 338,909 $ 5,731 1.7 % owned throughout recoveries both periods. The decrease from properties that we owned throughout both periods was primarily due to the write-off of uncollectible tenant receivables and the associated deferred rent receivables as a result of the COVID-19 pandemic. The decrease was due to a decrease of$12.9 million in parking and other income from properties we owned throughout both periods, Office parking primarily due to a and other$ 52,238 $ 60,570 $ (8,332) (13.8) % decrease in income parking activity as a result of the COVID-19 pandemic, partly offset by an increase of$4.2 million of parking and other income from a JV we consolidated in November 2019. The increase was due to an increase of (i)$6.6 million in revenue from a property that we purchased in the second quarter of 2019, and (ii) an increase of$1.9 million in revenues from the new apartments at our Moanalua Hillside Apartments development, partly offset by (a) a decrease of$1.5 million in revenues from properties we Multifamily$ 62,268 $ 55,241 $ 7,027 12.7 % owned throughout revenue both periods. The decrease of$1.5 from properties we owned throughout both periods was primarily due to write-offs of uncollectible tenant receivables and lower rental revenues at a property where units are temporarily unoccupied as a result of a fire, partly offset by$2.6 million of insurance proceeds for lost rental revenue at the respective property. Operating expenses The increase was due to an increase of$9.5 million in rental expenses from a JV we consolidated in November 2019, and an increase of$0.7 million in rental expenses from a property we purchased in the second quarter of 2019, partly offset by a decrease of$8.0 million in rental Office rental expenses from expenses$ 129,965 $ 127,757 $
(2,208) (1.7) % properties that we
owned throughout
both periods. The
decrease in rental
expenses from
properties that we
owned throughout
both periods was
due to a decrease
in scheduled
services expenses,
utility expenses,
and repairs and
maintenance
expenses, as a
result of lower
utilization caused
by the COVID-19
pandemic.
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Six Months Ended June 30, Favorable
2020 2019 (Unfavorable) % Commentary
(In thousands)
The increase
was due to an
increase of
$2.6 million in
rental expenses
from the
property we
purchased in
the second
Multifamily $ 18,212 $ 15,267 $ (2,945) (19.3) % quarter of
rental expenses 2019, and an
increase of
$0.3 million in
rental expenses
from the new
apartments at
our Moanalua
Hillside
Apartments
development.
The increase
General and was primarily
administrative $ 20,198 $ 18,991 $ (1,207) (6.4) % due to an
expenses increase in
personnel
expenses.
The increase
was due to (i)
depreciation
and
amortization of
$17.6 million
from a JV we
consolidated in
November 2019,
(ii) an
increase of
$17.1 million
in depreciation
and
amortization
from an office
building we are
Depreciation and $ 196,542 $ 158,597 $ (37,945) (23.9) % converting to a
amortization residential
building in
Hawaii, due to
accelerated
depreciation of
the building,
and (iii) an
increase of
$3.7 million in
depreciation
and
amortization
from the
property we
purchased in
the second
quarter of
2019.
Non-Operating Income and Expenses
The decrease
was due to (i)
a decrease of
$1.6 million in
revenue from a
health club in
Honolulu that
we own and
operate, caused
by the COVID-19
pandemic, (ii)
a decrease of
$1.0 million in
revenue related
to our Fund
that was
consolidated as
a JV in
November 2019,
and (iii) a
decrease of
Other income $ 2,314 $ 5,790 $ (3,476) (60.0) % $0.9 million in
interest income
due to lower
money market
balances and
interest rates.
Other income
includes a $4.0
million asset
write-down for
the estimated
property damage
to a building
impacted by
fire offset by
the associated
$4.0 million of
insurance
proceeds
received for
property
damage.
The decrease
was primarily
due to a
decrease of
$1.2 million in
expenses for
the health club
in Honolulu,
due to lower
utilization
Other expenses $ (1,874) $ (3,652) $ 1,778 48.7 % caused by the
COVID-19
pandemic, and a
decrease in
expenses of
$0.6 million
related to our
Fund that was
consolidated as
a JV in
November 2019.
The decrease
was primarily
Income from due to the
unconsolidated $ 183 $ 3,758 $ (3,575) (95.1) % consolidation
Funds of one of our
Funds as a JV
in November
2019.
The increase
was primarily
due to higher
debt balances
related to a JV
we consolidated
Interest expense $ (70,610) $ (67,356) $
(3,254) (4.8) % in November
2019 and a
property that
we purchased in
the second
quarter of
2019.
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Non-GAAP Supplemental Financial Measure: FFO
Usefulness to Investors
We report FFO because it is a widely reported measure of the performance of equity REITs, and is also used by some investors to identify the impact of trends in occupancy rates, rental rates and operating costs from year to year, excluding impacts from changes in the value of our real estate, and to compare our performance with other REITs. FFO is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. FFO should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other REITs. See "Results of Operations" above for a discussion of the items that impacted our net income.
Comparison of three months ended
For the three months endedJune 30, 2020 , FFO decreased by$23.4 million , or 21.7%, to$84.4 million , compared to$107.8 million for the three months endedJune 30, 2019 . The decrease was primarily due to a decrease in the operating income from our office portfolio (office revenues less office rental expenses), partly offset by an increase in the operating income from our multifamily portfolio (multifamily revenues less multifamily rental expenses). The decrease in operating income from our office portfolio was primarily due to (i) the write-off of uncollectible tenant receivables and the associated deferred rent receivables, and (ii) a decrease in parking income, partly offset by office rental expense savings, all as a result of the COVID-19 pandemic. The increase in operating income from our multifamily portfolio was primarily due to a multifamily property we purchased inJune 2019 and the new apartments from ourMoanalua Hillside Apartments development.
Comparison of six months ended
For the six months endedJune 30, 2020 , FFO decreased by$14.6 million , or 6.9%, to$196.3 million , compared to$210.9 million for the six months endedJune 30, 2019 . The decrease was primarily due to the same reasons listed above.
Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in ourOperating Partnership - which includes our share of our consolidated JVs and our unconsolidated Funds FFO) to net income attributable to common stockholders computed in accordance with GAAP: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 2020 2019
Net income attributable to
common stockholders
Depreciation and
amortization of real estate
assets(1) 98,765 78,724 196,542 158,597
Net (loss) income
attributable to
noncontrolling interests(1) (7,502) 5,894 (4,711) 9,981
Adjustments attributable to
unconsolidated Funds(1)(2) 696 4,336 1,350 8,850
Adjustments attributable to
consolidated JVs(1)(3) (9,581) (15,119) (25,844) (29,196) FFO$ 84,408 $ 107,801 $ 196,290 $ 210,899
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(1)We restructured one of our unconsolidated Funds inNovember 2019 after which it was consolidated as a JV. The various adjustments in the reconciliation of FFO are therefore not directly comparable to the comparable period. See Note 6 to our consolidated financial statements in our 2019 Annual Report on Form 10-K for more information. (2)Adjusts for our share of our unconsolidated Funds' depreciation and amortization of real estate assets. (3)Adjusts for the net income (loss) and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in our consolidated JVs. 45
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Non-GAAP Supplemental Financial Measure: Same Property NOI
Usefulness to Investors
We report Same Property NOI to facilitate a comparison of our operations between reported periods. Many investors use Same Property NOI to evaluate our operating performance and to compare our operating performance with other REITs, because it can reduce the impact of investing transactions on operating trends. Same Property NOI is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. We report Same Property NOI because it is a widely recognized measure of the performance of equity REITs, and is used by some investors to identify trends in occupancy rates, rental rates and operating costs and to compare our operating performance with that of other REITs. Same Property NOI has limitations as a measure of our performance because it excludes depreciation and amortization expense, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. Other REITs may not calculate Same Property NOI in the same manner. As a result, our Same Property NOI may not be comparable to the Same Property NOI of other REITs. Same Property NOI should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends.
Comparison of three months ended
OurSame Properties for 2020 included 60 office properties, aggregating 16.1 million Rentable Square Feet, and 8 multifamily properties with an aggregate 1,928 units. The amounts presented include 100% (not our pro-rata share). Our Same Property results of operations for the three months endedJune 30, 2020 were primarily impacted by the COVID-19 pandemic. Three Months Ended June 30, Favorable 2020 2019 (Unfavorable) % Commentary (In thousands) The decrease was primarily due to (i) a decrease in rental revenues due to the write-off of uncollectible tenant receivables and the associated deferred rent receivables, Office revenues$ 158,516 $ 197,353 $ (38,837) (19.7) % (ii) a decrease in tenant recoveries due to a decrease in recoverable operating costs and the write-off of uncollectible tenant receivables, and (iii) a decrease in parking income. The decrease was primarily due to a decrease in Office expenses (53,762) (61,690) 7,928 12.9 % parking expenses, utility expenses, and janitorial expenses. Office NOI 104,754 135,663 (30,909) (22.8) % The decrease was primarily due to a decrease in rental revenues Multifamily revenues 14,597 15,674 (1,077) (6.9) % due to the write-off of uncollectible tenant receivables and a decrease in occupancy. The decrease was primarily due to a decrease in repairs and maintenance expenses and utility Multifamily expenses (3,925) (3,948)
23 0.6 % expenses,
partly offset
by an increase
in personnel
expenses,
scheduled
services
expenses and
property taxes.
Multifamily NOI 10,672 11,726 (1,054) (9.0) % Total NOI$ 115,426 $ 147,389 $ (31,963) (21.7) % 46
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Reconciliation to GAAP
The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders:
Three Months Ended June 30,
(In thousands) 2020 2019
Same Property NOI $ 115,426 $ 147,389
Non-comparable office revenues 18,473 4,836
Non-comparable office expenses (6,539) (2,618)
Non-comparable multifamily revenues 16,210 12,671
Non-comparable multifamily expenses (4,931) (3,764)
NOI 138,639 158,514
General and administrative expenses (9,863) (9,159)
Depreciation and amortization (98,765) (78,724)
Operating income 30,011 70,631
Other income 325 2,892
Other expenses (478) (1,807)
Income from unconsolidated Funds (140) 2,207
Interest expense (35,190) (34,063)
Net (loss) income (5,472) 39,860
Less: Net loss (income) attributable to
noncontrolling interests 7,502 (5,894)
Net income attributable to common stockholders $ 2,030 $ 33,966
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Comparison of six months ended
OurSame Properties for 2020 included 60 office properties, aggregating 16.1 million Rentable Square Feet, and 8 multifamily properties with an aggregate 1,928 units. The amounts presented include 100% (not our pro-rata share). Our Same Property results of operations for the six months endedJune 30, 2020 were primarily impacted by the COVID-19 pandemic. Six Months Ended June 30, Favorable 2020 2019 (Unfavorable) % Commentary (In thousands) The decrease was primarily due to (i) a decrease in rental revenues due to the write-off of uncollectible tenant receivables and the associated deferred rent receivables, Office revenues$ 355,576 $ 390,138 $ (34,562) (8.9)% (ii) a decrease in tenant recoveries due to a decrease in recoverable operating costs and the write-off of uncollectible tenant receivables, and (iii) a decrease in parking income. The decrease was primarily due to a decrease in Office expenses (115,710) (122,566) 6,856 5.6% parking expenses, utility expenses, and janitorial expenses. Office NOI 239,866 267,572 (27,706) (10.4)% The decrease was primarily due to a decrease in rental revenues Multifamily revenues 30,254 31,507 (1,253) (4.0)% due to the write-off of uncollectible tenant receivables and a decrease in occupancy. The increase was primarily due to an increase in scheduled services expenses, Multifamily expenses (8,083) (7,969)
(114) (1.4)% personnel
expenses and
property taxes,
partly offset
by a decrease
in repairs and
maintenance
expenses.
Multifamily NOI 22,171 23,538 (1,367) (5.8)%
Total NOI $ 262,037 $ 291,110 $
(29,073) (10.0)%
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Reconciliation to GAAP
The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders:
Six Months Ended June 30,
(In thousands) 2020 2019
Same Property NOI $ 262,037 $ 291,110
Non-comparable office revenues 41,302 9,341
Non-comparable office expenses (14,255) (5,191)
Non-comparable multifamily revenues 32,014 23,734
Non-comparable multifamily expenses (10,129) (7,298)
NOI 310,969 311,696
General and administrative expenses (20,198) (18,991)
Depreciation and amortization (196,542) (158,597)
Operating income 94,229 134,108
Other income 2,314 5,790
Other expenses (1,874) (3,652)
Income from unconsolidated Funds 183 3,758
Interest expense (70,610) (67,356)
Net income 24,242 72,648
Less: Net loss (income) attributable to
noncontrolling interests 4,711 (9,981)
Net income attributable to common stockholders $ 28,953 $ 62,667
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Liquidity and Capital Resources
Short-term liquidity
During the six months endedJune 30, 2020 , we generated cash from operations of$236.8 million . As ofJune 30, 2020 , we had$176.4 million of cash and cash equivalents, and we had a zero balance on our$400.0 million revolving credit facility. Our earliest debt maturity isFebruary 28, 2023 . 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 1 of this Report for more information regarding our debt. 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 only use property level, non-recourse debt. As ofJune 30, 2020 , approximately 41% of our total office portfolio is totally 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 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 1 of this Report for more information regarding our debt and derivative contracts, respectively. Contractual Obligations
See the following notes to our consolidated financial statements in Item 1 of this Report for information regarding our contractual commitments:
•Note 4 - minimum future ground lease payments; •Note 8 - minimum future principal payments for our secured notes payable and revolving credit facility, and the interest rates that determine our future periodic interest payments; and •Note 16 - developments, capital expenditure projects and repositionings.
Off-Balance Sheet Arrangements
Our 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 these agreements. As ofJune 30, 2020 , all of the obligations under the respective loan and swap agreements have been performed in accordance with the terms of those agreements. See Note 16 to our consolidated financial statements in Item 1 of this Report for more information about our Fund's debt. 50
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Cash Flows
Comparison of six months endedJune 30, 2020 to six months endedJune 30, 2019 Six Months Ended June 30, Increase 2020 2019 (Decrease) % (In thousands)
Net cash provided by operating
activities(1) $ 236,809 $ 228,176 $ 8,633 3.8 %
Net cash used in investing
activities(2) $ (129,959) $ (482,444) Net cash (used in) provided by
financing activities(3) $ (84,140) $ 412,003 ________________________________________________________________________
(1) Our cash flows from operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectibility of rent and recoveries from our tenants, and the level of our operating expenses and general and administrative expenses, and interest expense. The increase in cash provided by operating activities was primarily due to: (i) an increase in cash operating income from our office portfolio (office cash revenues less office cash rental expenses) primarily due to an increase in our ownership interest in a JV we consolidated inNovember 2019 , and (ii) an increase in cash operating income from our multifamily portfolio (multifamily cash revenues less multifamily cash rental expenses) primarily due to our acquisition inJune 2019 of The Glendon residential community, and the leasing of new units at ourMoanalua Hillside Apartments development. (2) Our cash flows from investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The decrease in cash used in investing activities was primarily due to: (i)$364.5 million paid for a property that we purchased inJune 2019 , (ii) a decrease of$9.8 million in capital expenditures for improvements to real estate, partly offset by (iii) an increase of$23.5 million in capital expenditures for developments. (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 difference in cash used in financing activities during the six months endedJune 30, 2020 , compared to the cash provided by financing activities during the six months endedJune 30, 2019 , was primarily due to: (i)$201.0 million of net proceeds from the issuance of common stock in 2019, (ii)$163.6 million of contributions from noncontrolling interests in consolidated JVs in 2019, (iii) a decrease of$125.0 million in net borrowings, and (iv) an increase of$9.6 million in dividends paid to our common stock holders.
Critical Accounting Policies
We did not adopt any new ASUs during the second quarter of 2020. We adopted ASUs
during the first quarter of 2020 - see Note 2 to our consolidated financial
statements in Item 1 of this Report for a discussion of the ASUs. The adoption
of the ASUs did not have a material impact on our financial statements. We have
not made any other changes to our critical accounting policies disclosed in our
2019 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.
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