The following discussion relates to our consolidated financial statements and should be read in conjunction with the consolidated financial statements and the related notes, see Part IV, Item 15(a) "Exhibits, Financial Statement Schedules." Statements in this Item 7 contain forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In particular, information concerning projected future occupancy rates, rental rate increases, property development timing and investment amounts contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including anticipated funds from operations ("FFO") market conditions and demographics) are forward-looking statements. Numerous factors will affect our actual results, some of which are beyond our control. These include the impact of the COVID-19 pandemic, and its impact on our tenants, the strength of commercial and industrial real estate markets, market conditions affecting tenants, competitive market conditions, interest rate levels, volatility in our stock price and capital market conditions. Accordingly, investors should use caution and not place undue reliance on this information, which speaks only as of the date of this report. We expressly disclaim any responsibility to update any forward-looking information, whether as a result of new information, future events, or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws to disclose material information. For a discussion of important risks related to our business, and related to investing in our securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking statements see Part I, Item 1A "Risk Factors." In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. Executive Summary Through our interest inHudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, atDecember 31, 2021 , our office portfolio consisted of approximately 15.8 million square feet of in-service, repositioning, redevelopment and development properties. Additionally, as ofDecember 31, 2021 , our studio portfolio consisted of 1.5 million square feet of in-service, repositioning and development properties and our land portfolio consisted of approximately 3.0 million developable square feet.
As of
Impact of COVID-19
During 2021, the spread of COVID-19 had a significant impact on the global economy, theU.S. economy, the economies of the local markets throughout the west coast in which our properties are located and the broader financial markets. As ofDecember 31, 2021 , the COVID-19 pandemic is ongoing. We continue to closely monitor its impact on all aspects of our business and geographies, including how it will impact our tenants and business partners. We did not incur significant disruptions during the year endedDecember 31, 2021 from the COVID-19 pandemic. In 2021, the economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. With the increased availability of vaccines, we have begun to see increases in physical occupancy at our properties. We cannot predict, however, how the COVID-19 pandemic may impact our operations in the future, including the continued return to office by our tenants, occupancy rates and the demand for office space in the future. Recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. This uncertainty precludes any predictions as to the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition for the future periods. During the pandemic, the commercial real estate market came under pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and "shelter-in-place" or "stay-at-home" orders. As a result, the COVID-19 pandemic has negatively impacted almost every industry directly or indirectly, including industries in which we and our tenants operate. Although these restrictions have now largely been lifted in the west coast markets in which we operate, recovery continues to be gradual, uneven and characterized by meaningful dispersion across sectors and regions, and could be hindered by persistent or resurgent infection rates. Overall, among other unanticipated consequences, there remains significant uncertainty regarding the timing and duration of the economic recovery, the disruptions to, and volatility in, the credit and financial markets and in consumer spending. 46 -------------------------------------------------------------------------------- Given the uncertainty of the COVID-19 pandemic's near- and potential long-term impact on our business, and in order to preserve our liquidity position, our Board of Directors will continue to evaluate our dividend policy. We intend to continue to operate our business in a manner that will allow us to qualify as a REIT forU.S. federal income tax purposes. We derive revenues primarily from rents and reimbursement payments received from tenants under leases at our properties. Our operating results therefore depend materially on the ability of our tenants to make required rental payments. The extent to which the COVID-19 pandemic continues to impact the businesses of our tenants, and our operations and financial condition, will depend on future developments that remain uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and such containment measures, among others. The factors described above, as well as additional factors that we may not currently be aware of, could materially negatively impact our ability to collect rent and could lead to termination of leases by tenants, tenant bankruptcies, decreases in demand for office space at our properties, difficulties in accessing capital, impairment of our long-lived assets and other impacts that could materially and adversely affect our business, results of operations, financial condition and ability to pay distributions to stockholders. See Part I, Item 1A "Risk Factors." For the foregoing reasons, the comparability of our results of operations for the year endedDecember 31, 2021 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with tenants, government officials and business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse developments in our business. For further information regarding the impact of COVID-19 on us, see Part I, Item 1A, "Risk Factors." Current Year Highlights Business Acquisitions OnAugust 16, 2021 , the Company acquired 100% of the equity interests in Zio. OnAugust 31, 2021 , the Company acquired 100% of the equity interests in Star Waggons. The acquired businesses provide transportation and logistics services to studio productions and their acquisition will expand the Company's service offerings for its studio platform. Please refer to Part IV, Item 15 (a) "Exhibits, Financial Statement Schedules-Note 3 to the Consolidated Financial Statements-Business Combinations" for details.
Property Acquisitions
OnJuly 29, 2021 , the Company purchased, through a joint venture entity with Kane Holdco S.A.R.L., an affiliate ofBlackstone Property Partners , the land site for theSunset Waltham Cross Studios development. The Company owns 35% of the ownership interest in the joint venture entity. The Company also owns 35% of the ownership interest in the joint venture entities formed to serve as the general partner and management services company for the property-owning joint venture entity. The joint ventures are not consolidated. Please refer to Part IV, Item 15 (a) "Exhibits, Financial Statement Schedules-Note 6 to the Consolidated Financial Statements-Investment inUnconsolidated Real Estate Entities" for details. OnDecember 23, 2021 , the Company acquired the 197,136 square-foot 5th & Bell office property located inSeattle, Washington . The property is a Class A office building, with the office component of approximately 192,000 square feet fully leased to Amazon. The building is strategically located two blocks from Amazon's global headquarters. Please refer to Part IV, Item 15 (a) "Exhibits, Financial Statement Schedules-Note 4 to the Consolidated Financial Statements-Investment in Real Estate" for details.
Property Dispositions
The Company had no dispositions during the year ended
Held for Sale
As ofDecember 31, 2021 , the Company had four properties classified as held for sale-6922Hollywood ,Skyway Landing ,Del Amo and Northview Center-as these properties were considered non-strategic to the Company's portfolio. During the year endedDecember 31, 2021 , the Company recognized an impairment loss of$2.8 million related to itsDel Amo office property due to a reduction in management's intended hold period from a long-term hold period to a short-term hold period, which resulted in an estimated fair value of the property that was less than its carrying value. Please refer to Part IV, Item 15 (a) 47 --------------------------------------------------------------------------------
"Exhibits, Financial Statement Schedules-Note 4 to the Consolidated Financial Statements-Investment in Real Estate" for details.
Under Construction and Future Development Projects
The following table summarizes the properties currently under construction and future developments as ofDecember 31, 2021 : Location Submarket Estimated Square Feet(1) Estimated Completion Date Estimated Stabilization DateUnder Construction : Sunset Glenoaks Studios(2) Los Angeles 241,000 Q3-2023 Q2-2024Total Under Construction 241,000 Future Development Pipeline: Washington 1000 Denny Triangle 538,164 TBD TBD Burrard Exchange(3) Downtown Vancouver 450,000 TBD TBD Element LA-Development West Los Angeles 500,000 TBD TBD Sunset Bronson Studios Lot Hollywood 19,816 TBD TBD D-Development(4) Sunset Gower Studios-Development(4) Hollywood 478,845 TBD
TBD
Sunset Las Palmas Studios-Development(4) Hollywood 617,581 TBD TBD Sunset Waltham Cross Broxbourne TBD TBD TBD Studios-Development(5) Cloud10 North San Jose 350,000 TBD TBD Total Future Development Pipeline
2,954,406
TOTAL UNDER CONSTRUCTION AND FUTURE 3,195,406 DEVELOPMENT PIPELINE _____________ 1.Determined by management based upon estimated leasable square feet, which may be less or more than the BOMA rentable area. Square footage may change over time due to re-measurement or re-leasing. 2.We own 50% of the ownership interest in the unconsolidated joint venture that ownsSunset Glenoaks Studios . 3.We own 20% of the ownership interest in the unconsolidated joint venture that owns Burrard Exchange. 4.We own 51% of the ownership interest in the consolidated joint venture that ownsSunset Bronson Studios ,Sunset Gower Studios andSunset Las Palmas Studios . 5.We own 35% of the ownership interest in the unconsolidated joint venture that owns Sunset Waltham Cross Studios-Development.
Financings
During the year endedDecember 31, 2021 , the outstanding borrowings on our unsecured revolving credit facility increased by$125.0 million , net of draws. We use the unsecured revolving credit facility to finance the acquisition of properties, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes. See Part IV, Item 15(a) "Exhibits, Financial Statement Schedules-Note 9 to the Consolidated Financial Statements-Debt" for details on our debt. During the year endedDecember 31, 2021 , the Company paid off the mortgage loan secured by its 10950 Washington property that was originally due onMarch 11, 2022 . InDecember 2021 , the Company entered into the fourth amended and restated credit agreement (the "Amended and Restated Credit Agreement") with various financial institutions, which increased the unsecured revolving credit facility capacity to$1.0 billion and extended its maturity date toDecember 21, 2025 with two six-month extension options. InDecember 2021 , the unconsolidated joint venture that owns theSunset Glenoaks Studios secured a construction loan to finance the said development. The loan has a borrowing capacity of$94.0 million , bears an interest rate of LIBOR + 3.00% and matures onJanuary 9, 2025 .
In
48 -------------------------------------------------------------------------------- InNovember 2021 , the Company completed an underwritten public offering of 17,000,000 shares (including the over-allotment) of 4.750% Series C Preferred Stock with a par value of$0.01 . Net proceeds from the offering were approximately$414.0 million , after deducting underwriting discounts and commissions (before our transaction expenses). The Company will use the proceeds to repay amounts outstanding from time to time under its credit facility and/or other indebtedness, fund development or redevelopment activities, fund potential acquisition opportunities, provide funds for tenant improvements and capital expenditures, and provide for working capital and/or for other general corporate purposes. InAugust 2021 , the joint venture that owns our Hollywood Media Portfolio refinanced its previous$900.0 million loan secured by the Hollywood Media Portfolio, which bore interest at a rate of LIBOR + 2.15%, with a$1.1 billion mortgage loan secured by the Hollywood Media Portfolio with an initial interest rate of LIBOR + 1.17%. The refinanced loan has an initial term of two years from the first payment date with three one-year extension options, subject to certain requirements. The Company used the proceeds to purchase bonds comprising the loan in the amount of$209.8 million .
Factors That May Influence Our Operating Results
Business and Strategy
We invest in Class-A office and studio properties located in high barrier-to-entry, innovation-centric submarkets with significant growth potential. Our positioning within these submarkets allows us to attract and retain quality growth companies as tenants, many of which are in the technology and studio sectors. The purchase of properties with a value-add component, typically through off-market transactions, also facilitates our growth. These types of assets afford us the opportunity to capture embedded rent growth and occupancy upside, and to strategically invest capital to reposition and redevelop assets to generate additional cash flow. We take a more measured approach to ground-up development, with most under-construction, planned or potential projects located on ancillary sites part of existing operating assets. Management expertise across disciplines supports execution at all levels of our operations. In particular, aggressive leasing and proactive asset management, combined with a focus on conservatively managing our balance sheet, are central to our strategy. Rental Revenue The amount of net rental revenue generated by the properties in our portfolio depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that becomes available from lease terminations. As ofDecember 31, 2021 , the percent leased for our in-service office properties was approximately 92.8% (or 91.8%, excluding leases signed but not commenced as of that date). As ofDecember 31, 2021 , the percent leased, based on a 12-month trailing average, was approximately 85.7% for same-store studio properties. The amount of rental revenue generated by us also depends on our ability to maintain or increase rental rates at our properties. We believe that the average rental rates for our office properties are generally below the current average quoted market rate. We believe the average rental rates for our studio properties are generally equal to current average quoted market rates. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. Future economic downturns or regional downturns affecting our submarkets or downturns in our tenants' industries that impair our ability to renew or re-let space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. In addition, growth in rental revenue will also partially depend on our ability to acquire additional properties that meet our investment criteria. Conditions in Our Markets The properties in our portfolio are all located in Northern andSouthern California , thePacific Northwest ,Western Canada andGreater London, United Kingdom . Positive or negative changes in economic or other conditions in Northern andSouthern California , thePacific Northwest ,Western Canada or theUnited Kingdom , including state budgetary shortfalls, employment rates, natural hazards and other factors, may impact our overall performance.
Operating Expenses
Our operating expenses generally consist of utilities, cleaning, engineering, administrative, property, ad valorem taxes and site maintenance costs. Increases in these expenses over tenants' base years are generally passed on to tenants in our full-service gross leased properties and are generally paid in full by tenants in our net lease properties. Certain of our properties have been reassessed for property tax purposes as a result of subsequent acquisition, development, redevelopment and other reassessments that remain pending. In the case of completed reassessments, the amount of property taxes we pay reflects the valuations established with the county assessors for the relevant locations of each property as of IPO or their subsequent 49 --------------------------------------------------------------------------------
acquisition. With respect to pending reassessments, we similarly expect the amount of property taxes we pay to reflect the valuations established with such county assessors.
Taxable REIT SubsidiariesHudson Pacific Services, Inc. , or our services company, is aMaryland corporation that is wholly-owned by our operating partnership. We have elected, together with our services company and certain of our subsidiaries, to treat our services company and such other subsidiaries as taxable REIT subsidiaries for federal income tax purposes, and we may form additional taxable REIT subsidiaries in the future. Our taxable REIT subsidiaries generally may provide both customary and non-customary services to our tenants and engage in other activities that we may not engage in directly without adversely affecting our qualification as a REIT. Our services company and its subsidiaries provide a number of services to certain tenants at our studio properties and, from time to time, one or more taxable REIT subsidiaries may provide services to our tenants at these and other properties. In addition, our operating partnership has contributed some or all of its interests in certain subsidiaries or their assets to our services company. We currently lease space to subsidiaries of our services company at our studio properties and may, from time to time, enter into additional leases with one or more taxable REIT subsidiaries. Any income earned by our taxable REIT subsidiaries will not be included in our taxable income for purposes of the 75% or 95% gross income tests, except to the extent such income is distributed to us as a dividend, in which case such dividend income will qualify under the 95%, but not the 75%, gross income test. Because a taxable REIT subsidiary is subject to federal income tax, and state and local income tax (where applicable), as a regular C corporation, the income earned by our taxable REIT subsidiaries generally will be subject to an additional level of tax as compared to the income earned by our other subsidiaries.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to acquiring, developing and assessing the carrying values of our real estate properties, the fair value measurement of contingent consideration, assets acquired and liabilities assumed in business combination transactions, determining the incremental borrowing rate used in the present value calculations of our new or modified operating lessee agreements, our accrued liabilities, and our performance-based equity compensation awards. We base our estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results could materially differ from these estimates. The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements. See Part IV, Item 15(a) "Exhibits, Financial Statement Schedules-Note 2 to the Consolidated Financial Statements-Summary of Significant Accounting Policies" for details on our significant accounting policies.
Investment in
Acquisitions
Our acquisitions are accounted for using the acquisition method. The results of operations for each of these acquisitions are included in our Consolidated Statements of Operations from the date of acquisition.
We evaluate each acquisition of real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted for as a business combination in accordance with ASC 805, Business Combinations. An integrated set of assets and activities would fail to qualify as a business if either (i) substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets or (ii) the integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction). An acquired process is considered substantive if (i) the process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce), that is skilled, knowledgeable, and experienced in performing the process, (ii) the process cannot be replaced without significant cost, effort, or delay or (iii) the process is considered unique or scarce. Acquisitions of real estate will generally not meet the definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings and improvements and related intangible assets or liabilities) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. 50 --------------------------------------------------------------------------------
Acquisitions that do not meet the definition of a business
When we acquire properties that are considered asset acquisitions, the purchase price, which includes transaction-related expenses, is allocated based on relative fair value of the assets acquired and liabilities assumed. Assets acquired and liabilities assumed include, but are not limited to, land, building and improvements, intangible assets related to above-and below-market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. The purchase price accounting is finalized in the period of acquisition. The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant. The fair value of acquired "above- and below-" market leases are based on the estimated cash flow projections utilizing discount rates that reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management's estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the extended below-market term for any leases with below-market renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, we include estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related costs. The fair value debt assumed is based on the estimated cash flow projections utilizing interest rates available for the issuance of debt with similar terms and remaining maturities. The Company applies a cost accumulation and allocation model to acquisitions that meet the definition of an asset acquisition. Under this model, the purchase price is allocated based on the relative fair value of the assets acquired and liabilities assumed. Additionally, acquisition-related expenses associated with an asset acquisition are capitalized as part of the purchase price.
Acquisitions that meet the definition of a business
For acquisitions that meet the definition of a business, the Company estimates the fair value of the identifiable assets and liabilities of the acquired entity on the acquisition date. We measure goodwill as the excess of consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Acquisition-related expenses arising from the transaction are expensed as incurred. The Company includes the results of operations of the businesses that it acquires beginning on the acquisition date. The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company first performs a qualitative assessment and will proceed to a quantitative impairment test only if qualitative factors indicate that it is more likely than not that the fair value of the reporting unit or intangible asset is less than its carrying amount. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method, which reflects the pattern in which the assets are consumed. The estimated useful lives for acquired intangible assets range from five to seven years. The Company assesses its intangible assets with finite lives for impairment when indicators of impairment are identified.
Cost Capitalization
We capitalize costs associated with development and redevelopment activities, capital improvements, tenant improvements and leasing activity. Costs associated with development and redevelopment that are capitalized include interest, property taxes, insurance and other costs directly related and essential to the acquisition, development or construction of a real estate project. 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. Construction and development costs are capitalized while substantial activities are ongoing to prepare an asset for its intended use. We consider a construction project as substantially complete and held available for occupancy upon the completion of tenant improvements 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 they are incurred. Costs previously capitalized related to abandoned acquisitions or developments are charged to earnings. Expenditures for repairs and maintenance are expensed as they are incurred. 51 --------------------------------------------------------------------------------
Operating Properties
The properties are generally carried at cost less accumulated depreciation and amortization. We compute depreciation and amortization using the straight-line method over the estimated useful lives of the assets as represented in the table below: Asset Description Estimated Useful Life (Years) Building and improvements Shorter of the ground lease term or 39 Land improvements 15 Furniture and fixtures 5 to 7 Tenant improvements Shorter
of the estimated useful life or
the lease term
We amortize above- and below-market lease intangibles over the remaining non-cancellable lease terms and bargain renewal periods, if applicable. The in-place lease intangibles are amortized over the remaining non-cancellable lease term. When tenants vacate prior to the expiration of their lease, the amortization of intangible assets and liabilities is accelerated. We amortize above- and below-market ground lease intangibles over the remaining non-cancellable lease terms.
Impairment of Long-Lived Assets
In accordance with GAAP, we assess the carrying value of real estate assets and related intangibles for impairment on a quarterly basis and whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable over the life of the asset or its intended holding period. Impairment losses are recorded on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. We recognize impairment losses to the extent the carrying amount exceeds the fair value of the properties.
Goodwill is an unidentifiable intangible asset and is recognized as a residual, generally measured as the excess of consideration transferred in a business combination over the identifiable assets acquired and liabilities assumed.Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination. We test our goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired.Goodwill is tested for impairment at the reporting unit to which it is assigned, which can be an operating segment or one level below an operating segment. We have three operating segments: the management entity, Office, and Studio. The management entity and the Office operating segments are each a reporting unit. Within the Studio operating segment, there are two reporting units:Studio Properties and Studio Services, the latter of which consists of the Zio and Star Waggons businesses acquired in the year endedDecember 31, 2021 . The assessment of goodwill for impairment may initially be performed based on qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill. If so, a quantitative assessment is performed, and to the extent the carrying value of the reporting unit exceeds its fair value, impairment is recognized for the excess up to the amount of goodwill assigned to the reporting unit. Alternatively, the Company may bypass a qualitative assessment and proceed directly to a quantitative assessment. A qualitative assessment considers various factors such as macroeconomic, industry and market conditions to the extent they affect the earnings performance of the reporting unit, changes in business strategy and/or management of the reporting unit, changes in composition or mix of revenues and/or cost structure of the reporting unit, financial performance and business prospects of the reporting unit, among other factors. In a quantitative assessment, significant judgment, assumptions and estimates are applied in determining the fair value of reporting units. The Company generally uses the income approach to estimate fair value by discounting the projected net cash flows of the reporting unit, and may corroborate with market-based data where available and appropriate. Projection of future cash flows is based upon various factors, including, but not limited to, our strategic plans in regard to our business and operations, internal forecasts, terminal year residual revenue multiples, operating profit margins, pricing of similar businesses and comparable transactions where applicable, and risk-adjusted discount rates to present value future cash flows. Given the level of sensitivity in the inputs, a change in the value of any one input, in isolation or in combination, could significantly affect the overall estimation of fair value of the reporting unit. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method, which reflects the pattern in which the assets are consumed. The estimated useful lives for acquired intangible assets range from five to 52 --------------------------------------------------------------------------------
seven years. The Company assesses its intangible assets with finite lives for impairment when indicators of impairment are identified.
Revenue Recognition
The recognition of revenues related to lease components is governed by ASC 842. The revenue related to non-lease components is subject to ASC 606, Revenue from Contracts with Customers ("ASC 606").
We capitalize direct incremental costs of signing a lease. Internal direct compensation costs and external legal fees related to the execution of successful lease agreements that do not meet the definition of initial direct costs under ASC 842 are accounted for as office operating expense or studio operating expense in our Consolidated Statements of Operations.
We elected the lessor's practical expedient to present revenues on the Consolidated Statement of Operations as a single lease component that combines rental, tenant recoveries, and other tenant-related revenues for the office portfolio. For our rentals at the studio properties, total lease consideration is allocated to lease and non-lease components on a relative standalone basis. We recognize rental revenue from tenants on a straight-line basis over the lease term when collectability is probable and the tenant has taken possession or controls the physical use of the leased asset. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
•whether the lease stipulates how and on what a tenant improvement allowance may be spent;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
•whether the tenant improvements are expected to have any residual value at the end of the lease.
Other property-related revenue is revenue that is derived from the tenants' use of lighting, equipment rental, parking, power, HVAC and telecommunications (telephone and internet). Other property-related revenue is recognized based on a five-step model and revenue is recognized once all performance obligations are satisfied. Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period during which the applicable expenses are incurred. The reimbursements are recognized and presented gross, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and bear the associated credit risk. We evaluate the sales of real estate based on transfer of control. If a real estate sale contract includes ongoing involvement by the seller with the sold property, we evaluate each promised good or service under the contract to determine whether it represents a performance obligation, constitutes a guarantee or prevents the transfer of control.
Stock-Based Compensation
Compensation cost of restricted stock, restricted stock units and performance units under our equity incentive award plans are accounted for under ASC 718, Compensation-Stock Compensation ("ASC 718"). For time-based awards, stock-based compensation is valued based on the quoted closing price of our common stock on the applicable grant date and discounted for any hold restrictions. For performance-based awards, stock-based compensation is valued utilizing a Monte Carlo Simulation to estimate the probability of the performance vesting conditions being satisfied. The stock-based compensation is amortized through the final vesting period on a straight-line basis and graded vesting basis for time-based awards and performance-based awards, respectively. We account for forfeitures of awards as they occur. Share-based payments granted to non-employees are accounted for in the same manner as share-based payments granted to employees. 53 -------------------------------------------------------------------------------- Our compensation committee will regularly consider the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs.
Income Taxes
Our property-owning subsidiaries are limited liability companies and are treated as pass-through entities or disregarded entities (or, in the case of the entities that own the 1455 Market, Hill7,Ferry Building and 1918 Eighth properties, REITs) for federal income tax purposes. In the case of the Bentall Centre property and theSunset Waltham Cross Studios development, the Company owns its interest in the properties through non-U.S entities treated as TRSs for federal income tax purposes. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements for the activities of these entities. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year endedDecember 31, 2010 . We believe that we have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes commencing with such taxable year, and we intend to continue operating in such manner. To qualify as a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding net capital gains, to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided that we continue to qualify for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders. If we were to fail to qualify as a REIT in any taxable year, and were unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal corporate income tax. Unless entitled to relief under specific statutory provisions, we would be ineligible to elect to be treated as a REIT for the four taxable years following the year for which we lose our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief. We own and may acquire direct or indirect interests in one or more Subsidiary REITs. A Subsidiary REIT is subject to the various REIT qualification requirements and other limitations described herein that are applicable to us. If a Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to federal income tax, (ii) shares in such REIT would cease to be qualifying assets for purposes of the asset tests applicable to REITs and (iii) it is possible that we would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions. We believe that our operating partnership is properly treated as a partnership for federal income tax purposes. As a partnership, our operating partnership is not subject to federal income tax on its income. Instead, each of its partners, including us, is allocated, and may be required to pay tax with respect to, its share of our operating partnership's income. As such, no provision for federal income taxes has been included for the operating partnership. We have elected, together with certain of our subsidiaries, to treat such subsidiaries as taxable REIT subsidiaries ("TRSs") for federal income tax purposes. Certain activities that we may undertake, such as non-customary services for our tenants and holding assets that we cannot hold directly, will be conducted by a TRS. A TRS is subject to federal and, where applicable, state and local income taxes on its net income.
We are subject to the statutory requirements of the states in which we conduct business.
We periodically evaluate our tax positions to determine whether it is more
likely than not that such positions would be sustained upon examination by a tax
authority for all open tax years, as defined by the statute of limitations,
based on their technical merits. As of
We and certain of our TRSs file income tax returns with theU.S. federal government and various state and local jurisdictions. We and our TRSs are no longer subject to tax examinations by tax authorities for years prior to 2017. Generally, we have assessed our tax positions for all open years, which as ofDecember 31, 2021 include 2018 to 2020 for Federal purposes and 2017 to 2020 for state purposes, and concluded that there are no material uncertainties to be recognized. 54 --------------------------------------------------------------------------------
Results of Operations
As ofDecember 31, 2021 , our portfolio consists of 66 properties (42 wholly-owned properties, 16 properties owned by joint ventures and eight land properties) located in elevenCalifornia , threeSeattle , oneWestern Canada and oneGreater London, United Kingdom submarkets, totaling approximately 20.2 million square feet. The following table summarizes our consolidated and unconsolidated portfolio as ofDecember 31, 2021 : Annualized Base Rent Number of Properties Rentable Square Feet(1) Percent Occupied(2) Percent Leased(2) per Square Foot(3) OFFICE Same-store(4) 41 11,982,460 92.1 % 93.1 % $ 51.99 Stabilized non-same store(5) 5 1,725,189 97.6 98.5 46.69 Total stabilized 46 13,707,649 92.8 93.8 51.29 Lease-up(5)(6) 3 1,039,130 78.4 79.8 60.67 Total in-service office 49 14,746,779 91.8 92.8 51.85 STUDIO Same-store(7) 3 1,205,809 85.7 85.7 42.89 Total 3 1,205,809 Repositioning(5)(8) 1 295,675 - 1.8 Development(5) 1 241,000 - - Held-for-sale(9) 4 745,171 61.9 61.9 47.21 Total repositioning, redevelopment, 6
1,281,846
development and held-for-sale Total office and studio properties 58 17,234,434 Land 8 2,954,406 (10) TOTAL 66 20,188,840 ____________ 1.Determined by management based upon estimated leasable square feet, which may be less or more than theBuilding Owners and Managers Association ("BOMA") rentable area. Square footage may change over time due to re-measurement or re-leasing. Represents 100% share of consolidated and unconsolidated joint ventures. 2.Percent occupied for office properties is calculated as (i) square footage under commenced leases as ofDecember 31, 2021 , divided by (ii) total square feet, expressed as a percentage. Percent leased for office properties includes uncommenced leases. Percent leased for studio properties is calculated as (i) average square footage under commenced leases for the 12 months endedDecember 31, 2021 , divided by (ii) total square feet, expressed as a percentage. 3.Office portfolio calculated as (i) annualized base rent divided by (ii) square footage under commenced leases as ofDecember 31, 2021 . Annualized base rent does not reflect tenant reimbursements. Studio portfolio calculated as annual base rent per leased square foot calculated as (i) annual base rent divided by (ii) square footage under leased as ofDecember 31, 2021 . 4.Includes office properties owned and included in our stabilized portfolio as ofJanuary 1, 2020 and still owned and included in the stabilized portfolio as ofDecember 31, 2021 . 5.Included in our non-same-store property group. 6.Includes office properties that have not yet reached 92.0% occupancy since the date they were acquired or placed under redevelopment or development as ofDecember 31, 2021 . 7.Includes studio properties owned and included in our portfolio as ofJanuary 1, 2020 and still owned and included in our portfolio as ofDecember 31, 2021 . 8.Includes 79,056 square feet at Page Mill Center, 61,066 square feet atMetro Plaza , 51,409 square feet at 10850 Pico, 36,905 square feet at Rincon Center, 35,905 square feet at 95 Jackson, 18,594 square feet at Sunset Las Palmas, and 12,740 square feet atPalo Alto Square as of fourth quarter 2021. 9.Includes Northview Center,Skyway Landing , 6922 Hollywood andDel Amo . 10.Includes 538,164 square feet related to the office developmentWashington 1000, adjacent to theWashington State Convention Center , to which we purchased rights during first quarter 2019. All amounts and percentages used in this discussion of our results of operations are calculated using the numbers presented in the financial statements contained in this report rather than the rounded numbers appearing in this discussion. The dollar amounts included in the tables in this discussion of our results of operations are presented in thousands. 55 --------------------------------------------------------------------------------
Comparison of the year ended
Net Operating Income We evaluate performance based upon property net operating income ("NOI"). NOI is not a measure of operating results or cash flows from operating activities or cash flows as measured by GAAP and should not be considered an alternative to net income, as an indication of our performance, or as an alternative to cash flows as a measure of liquidity, or our ability to make distributions. All companies may not calculate NOI in the same manner. We consider NOI to be a useful performance measure to investors and management because when compared across periods, NOI reflects the revenues and expenses directly associated with owning and operating our properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing a perspective not immediately apparent from net income. We calculate NOI as net income (loss) excluding corporate general and administrative expenses, depreciation and amortization, impairments, gains/losses on sales of real estate, interest expense, transaction-related expenses and other non-operating items. We define NOI as operating revenues (including rental revenues, other property-related revenue, tenant recoveries and other operating revenues), less property-level operating expenses (which includes external management fees, if any, and property-level general and administrative expenses). NOI on a cash basis is NOI adjusted to exclude the effect of straight-line rent and other non-cash adjustments required by GAAP. We believe that NOI on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent and other non-cash adjustments to revenue and expenses.
Management further analyzes NOI by evaluating the performance from the following property groups:
•Same-store properties, which include all of the properties owned and included in our stabilized portfolio as ofJanuary 1, 2020 and still owned and included in the stabilized portfolio as ofDecember 31, 2021 ; and •Non-same-store, which includes: •Stabilized non-same store properties •Lease-up properties •Repositioning properties •Development properties •Redevelopment properties •Held for sale properties •Operating results from studio service-related businesses 56 -------------------------------------------------------------------------------- The following table reconciles net income to NOI (in thousands, except percentage change): Year Ended December 31, 2021 2020 Dollar Change Percentage Change NET INCOME$ 29,012 $ 16,430 $ 12,582 76.6 % Adjustments: Income from unconsolidated real estate entities (1,822) (736) (1,086) 147.6 Fee income (3,221) (2,815) (406) 14.4 Interest expense 121,939 113,823 8,116 7.1 Interest income (3,794) (4,089) 295 (7.2) Management services reimbursement (1,132) - (1,132) 100.0 income-unconsolidated joint ventures Management services expense-unconsolidated joint 1,132 - 1,132 100.0
ventures
Transaction-related expenses 8,911 440 8,471 1,925.2 Unrealized (gain) loss on non-real estate investment (16,571) 2,463 (19,034) (772.8) Loss on extinguishment of debt 6,259 2,654 3,605 135.8 Impairment loss 2,762 - 2,762 100.0 Other expense (income) 2,553 (548) 3,101 (565.9) General and administrative 71,346 77,882 (6,536) (8.4) Depreciation and amortization 343,614 299,682 43,932 14.7 NOI$ 560,988 $ 505,186 $ 55,802 11.0 % Same-store NOI$ 460,843 $ 454,156 $ 6,687 1.5 % Non-same-store NOI 100,145 51,030 49,115 96.2 NOI$ 560,988 $ 505,186 $ 55,802 11.0 %
The following table summarizes certain statistics of our consolidated same-store office and studio properties:
Year Ended December 31, 2021 2020 Same-store office Number of properties 40 40 Rentable square feet 10,482,170 10,482,170 Ending % leased 92.6 % 95.1 % Ending % occupied 91.5 % 94.2 % Average % occupied for the period 91.9 % 94.7 % Average annual rental rate per square foot$ 55.32 $ 52.85 Same-store studio Number of properties 3 3 Rentable square feet 1,205,809 1,205,809 Average % occupied over period(1) 85.7 %
90.0 %
_____________
1.Percent occupied for same-store studio is the average percent occupied for the
12 months ended
57 -------------------------------------------------------------------------------- The following table gives further detail on our consolidated NOI (in thousands): Year Ended December 31, 2021 2020 Same-store Non-same-store Total Same-store Non-same-store Total REVENUES Office Rental$ 643,695 $ 139,041 $ 782,736 $ 631,566 $ 89,720 $ 721,286 Service and other revenues 9,578 3,056 12,634 12,611 2,022 14,633 Total office revenues 653,273 142,097 795,370 644,177 91,742 735,919 Studio Rental 49,435 550 49,985 48,756 - 48,756 Service and other revenues 30,959 20,521 51,480 20,290 - 20,290 Total studio revenues 80,394 21,071 101,465 69,046 - 69,046 Total revenues 733,667 163,168 896,835 713,223 91,742 804,965 OPERATING EXPENSES Office operating expenses 227,709 52,625 280,334 221,487 40,712 262,199 Studio operating expenses 45,115 10,398 55,513 37,580 - 37,580 Total operating expenses 272,824 63,023 335,847 259,067 40,712 299,779 Office NOI 425,564 89,472 515,036 422,690 51,030 473,720 Studio NOI 35,279 10,673 45,952 31,466 - 31,466 NOI$ 460,843 $ 100,145 $ 560,988 $ 454,156 $ 51,030 $ 505,186 58
--------------------------------------------------------------------------------
The following table gives further detail on our change in consolidated NOI (in thousands, except percentage change):
Year Ended December
31, 2021 as compared to the Year Ended
Same-store Non-same-store Total Dollar change Percentage change Dollar change Percentage change Dollar change Percentage change REVENUES Office Rental$ 12,129 1.9 %$ 49,321 55.0 %$ 61,450 8.5 % Service and other revenues (3,033) (24.1) 1,034 51.1 (1,999) (13.7) Total office revenues 9,096 1.4 50,355 54.9 59,451 8.1 Studio Rental 679 1.4 550 - 1,229 2.5 Service and other revenues 10,669 52.6 20,521 - 31,190 153.7 Total studio revenues 11,348 16.4 21,071 - 32,419 47.0 Total revenues 20,444 2.9 71,426 77.9 91,870 11.4 OPERATING EXPENSES Office operating expenses 6,222 2.8 11,913 29.3 18,135 6.9 Studio operating expenses 7,535 20.1 10,398 - 17,933 47.7 Total operating expenses 13,757 5.3 22,311 54.8 36,068 12.0 Office NOI 2,874 0.7 38,442 75.3 41,316 8.7 Studio NOI 3,813 12.1 10,673 - 14,486 46.0 NOI$ 6,687 1.5 %$ 49,115 96.2 %$ 55,802 11.0 %
NOI increased
•a$49.1 million increase in non-same-store NOI driven by: •an increase in office NOI of$38.4 million primarily due to: •a$49.3 million increase in rental revenues primarily resulting from the acquisition of our 1918 Eighth property inDecember 2020 , beneficial occupancy of our One Westside property (November 2021 and a lease commenced at our Harlow property (Company 3); and •a$1.0 million increase in service and other revenues primarily resulting from a lease cancellation fee at our 10850 Pico property; •partially offset by a$11.9 million increase in operating expenses primarily resulting from the acquisition of our 1918 Eighth property. •an increase in studio NOI of$10.7 million primarily due to the acquisition of Zio and Star Waggons inAugust 2021 . •a$6.7 million increase in same-store NOI driven by: •an increase in studio NOI of$3.8 million primarily due to: •$10.7 million increase in service and other revenues primarily resulting from an increase in lighting and grip services at our studio properties; •partially offset by a$7.5 million increase in operating expenses primarily resulting from higher lighting rental, utilities, cleaning and security expenses driven by the increase in studio services activity and one time property tax savings in 2020, partially offset by a favorable prior period property tax assessment for our Sunset Las Palmas studio property in 2021. •an increase in office NOI of$2.9 million primarily due to: •$12.1 million increase in rental revenues primarily resulting from lease renewals atClocktower Square (Rivian Automotive) and 3400 Hillview ($6.2 million increase in operating expenses primarily resulting from higher parking expenses at our EPIC property and a prior period property tax assessment for our ICON and CUE properties; and •a$3.0 million decrease in service and other revenues primarily resulting from a decrease in parking revenue at our ICON property due to continued reduced activity resulting from the COVID-19 pandemic and higher lease cancellation fees at our 11601 Wilshire property during 2020.
Other Income (Expense)
Income from unconsolidated real estate entities
Income from our unconsolidated real estate entities increased by$1.1 million , or 147.6%, to$1.8 million of income for the year endedDecember 31, 2021 compared to$0.7 million of income for the year endedDecember 31, 2020 . The increase was primarily driven by an increase in rental revenue at the unconsolidated entities for the year endedDecember 31, 2021 due to higher average occupancy at Bentall Centre during the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 .
Fee income
Fee income increased by$0.4 million , or 14.4%, to$3.2 million for the year endedDecember 31, 2021 compared to$2.8 million for the year endedDecember 31, 2020 . The fee income primarily represents the management fee income earned from the unconsolidated real estate entities.
Interest expense
Comparison of the year ended
Year Ended December 31, 2021 2020 Dollar Change Percentage Change Gross interest expense$ 134,071 $ 126,447 $ 7,624 6.0 % Capitalized interest (22,595) (19,509) (3,086) 15.8 Amortization of deferred financing 10,463 6,885 3,578 52.0 costs/loan discount TOTAL$ 121,939 $ 113,823 $ 8,116 7.1 % Gross interest expense increased by$7.6 million , or 6.0%, to$134.1 million for the year endedDecember 31, 2021 compared to$126.4 million for the year endedDecember 31, 2020 . The increase was primarily driven by the issuance of a$900.0 million loan secured by the Hollywood Media Portfolio inJuly 2020 , the closing of a$314.3 million loan secured by our 1918 Eighth property inDecember 2020 and$135.3 million in draws on the construction loan secured by our One Westside and 10850 Pico properties during the year, partially offset by the paydown of Term Loan B, Term Loan D, theMet Park North loan, theRevolving Sunset Bronson Studios /ICON/CUE facility and outstanding borrowings on our unsecured revolving credit facility all inJuly 2020 . Capitalized interest increased$3.1 million , or 15.8%, to$22.6 million for the year endedDecember 31, 2021 compared to$19.5 million for the year endedDecember 31, 2020 . The increase was primarily driven by interest capitalized on our One Westside redevelopment project and our Page Mill Center,Metro Plaza and 95 Jackson repositioning projects, partially offset by the completion of our Harlow development property. Amortization of deferred financing costs and loan discounts/premiums increased by$3.6 million , or 52.0% to$10.5 million for the year endedDecember 31, 2021 compared to$6.9 million for the year endedDecember 31, 2020 . The increase was primarily driven by the amortization of new issuance costs associated with the original$900.0 million loan and refinanced$1.1 billion loan secured by the Hollywood Media Portfolio and the$314.3 million loan secured by our 1918 Eighth property. 60 --------------------------------------------------------------------------------
Transaction-related expenses
Transaction-related expenses increased$8.5 million , or 1,925%, to$8.9 million for the year endedDecember 31, 2021 compared to$0.4 million for the year endedDecember 31, 2020 . The increase is attributable to the acquisition of Zio and Star Waggons inAugust 2021 .
Unrealized (gain) loss on non-real estate investments
We recognized an unrealized gain on non-real estate investments of$16.6 million for the year endedDecember 31, 2021 compared to an unrealized loss on non-real estate investments of$2.5 million for the year endedDecember 31, 2020 . The activity in both periods is due to the observable changes in the fair value of the investments.
Loss on extinguishment of debt
During the year endedDecember 31, 2021 we completed a refinancing of the loan secured by the Hollywood Media Portfolio and recognized a loss on extinguishment of debt of$6.3 million primarily representing the write-off of unamortized deferred financing costs associated with the extinguished portion of the loan. During the year endedDecember 31, 2020 we recognized a loss on extinguishment of debt of$2.7 million representing the write-off of unamortized deferred financing costs related to the early repayment of Term Loan B, Term Loan D and theRevolving Sunset Bronson Studios /ICON/CUE facility.
Impairment loss
We recognized an impairment loss of$2.8 million during the year endedDecember 31, 2021 related to a reduction in the estimated hold period of ourDel Amo property. We did not recognize any impairment charges during the year endedDecember 31, 2020 . Other expense (income) Other expense increased$3.1 million , or 565.9%, to$2.6 million for the year endedDecember 31, 2021 compared to other income of$0.5 million for the year endedDecember 31, 2020 . The increase was primarily related to an increase in tax expense due to an unrealized gain on our non-real estate investment.
General and administrative expenses
General and administrative expenses decreased$6.5 million , or 8.4%, to$71.3 million for the year endedDecember 31, 2021 compared to$77.9 million for the year endedDecember 31, 2020 . General and administrative expenses include wages and salaries for corporate-level employees, accounting, legal and other professional services, office supplies, entertainment, travel and automobile expenses, telecommunications and computer-related expenses and other miscellaneous items. The decrease was primarily attributable to political contributions made for statewide ballot measures in 2020 that did not reoccur in 2021.
Depreciation and amortization expense
Depreciation and amortization expense increased$43.9 million , or 14.7%, to$343.6 million for the year endedDecember 31, 2021 compared to$299.7 million for the year endedDecember 31, 2020 . The increase was primarily related to our acquisition of 1918 Eighth, the accelerated depreciation of tenant improvements resulting from a termination at our Maxwell property, the accelerated amortization of lease intangibles resulting from a termination at our 625 Second property and the depreciation and amortization of non-real estate property, plant and equipment and finite-lived intangible assets acquired as part of the Zio and Star Waggons transactions inAugust 2021 .
Comparison of the year ended
Refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Comparison of the year endedDecember 31, 2020 to the year endedDecember 31, 2019 " of the Form 10-K for the fiscal year endedDecember 31, 2020 . 61 --------------------------------------------------------------------------------
Liquidity and Capital Resources
We have remained capitalized since our initial public offering through public offerings, private placements, joint ventures and continuous offerings under our at-the-market ("ATM") program. We currently expect that our principal sources of funds to meet our short-term and long-term liquidity requirements for working capital, strategic acquisitions, capital expenditures, tenant improvements, leasing costs, dividends and distributions, share repurchases and repayments of outstanding debt financing will include:
•cash on hand, cash reserves and net cash provided by operations;
•proceeds from additional equity securities;
•our ATM program;
•borrowings under the operating partnership's unsecured revolving credit facility and One Westside construction loan;
•proceeds from joint venture partners;
•proceeds from Sunset Glenoaks constructions loan (unconsolidated joint venture); and
•proceeds from additional secured, unsecured debt financings or offerings.
Liquidity Sources
We had approximately$96.6 million of cash and cash equivalents atDecember 31, 2021 . Our principal source of operating cash flow is related to leasing and operating the properties in our portfolio. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund quarterly dividend and distribution requirements. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us. We have an ATM program that allows us to sell up to$125.0 million of common stock,$65.8 million of which has been sold throughDecember 31, 2021 . Any future sales will depend on several factors, including, but not limited to, market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program. As ofDecember 31, 2021 , we had total borrowing capacity of$1.0 billion under our unsecured revolving credit facility,$125.0 million of which had been drawn. As ofDecember 31, 2021 , we had total borrowing capacity of$414.6 million under our construction loan, secured by our One Westside and 10850 Pico properties,$241.4 million of which had been drawn. As ofDecember 31, 2021 , we had total borrowing capacity of$94.0 million under the Sunset Glenoaks construction loan (unconsolidated joint venture), of which$3.3 million had been drawn. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase. 62 -------------------------------------------------------------------------------- The following table sets forth our ratio of debt to total market capitalization (counting series A preferred units as debt) as ofDecember 31, 2021 (in thousands, except percentage): Market Capitalization December 31, 2021 Unsecured and secured debt(1)$ 3,764,874 Series A redeemable preferred units 9,815 Total consolidated debt 3,774,689 Common equity capitalization(2) 4,248,939 TOTAL CONSOLIDATED MARKET CAPITALIZATION$ 8,023,628 Total consolidated debt/total consolidated market capitalization 47.0 %
_____________
1.Excludes in-substance defeased debt, joint venture partner debt and unamortized deferred financing costs and loan discount. 2.Common equity capitalization represents the shares of common stock outstanding (including unvested restricted shares), OP units outstanding, restricted performance units and dilutive shares multiplied by the closing price of$24.71 , reported by the NYSE, onDecember 31, 2021 as well as the series C preferred stock liquidation preference as ofDecember 31, 2021 .
Outstanding Indebtedness
The following table sets forth information as of
December 31, 2021 December 31, 2020 Unsecured debt$ 2,050,000 $ 1,925,000 Secured debt$ 1,714,874 $ 1,507,276 In-substance defeased debt $ 128,212 $ 131,707 Joint venture partner debt $ 66,136 $ 66,136
The operating partnership was in compliance with its financial covenants as of
Credit Ratings The following table provides information with respect to our credit ratings atDecember 31, 2021 : Agency Credit Rating Moody's Baa2 Standard and Poor's BBB- Fitch BBB- 63
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Liquidity Uses Contractual Obligations
The following table provides information with respect to our commitments at
Payments Due by Period Less than 1 More than 5 Contractual Obligation Total Year 1-3 Years 3-5 Years Years Principal payments on unsecured and secured debt$ 3,764,874
$ -
128,212 128,212 - -
-
Principal payments on joint venture partner debt 66,136 - - -
66,136
Interest payments-fixed rate(2)(3) 542,144 98,347 175,215 149,462
119,120
Interest payments-variable rate(2)(4) 55,784 25,046 24,993 5,745 - Ground leases(5) 628,728 21,191 41,971 41,689 523,877 TOTAL$ 5,185,878 $ 272,796 $ 1,533,753 $ 1,213,196 $ 2,166,133 _____________ 1.Will be repaid with proceeds from sale of theU.S. Government securities that will happen when the in-substance defeased debt reaches maturity. 2.Interest rates with respect to indebtedness are calculated on the basis of a 360-day year for the actual days elapsed. 3.Reflects our projected interest obligations for fixed rate debts, which includes$4.8 million of projected interest related to our in-substance defeased debt and$20.2 million of projected interest related to our joint venture partner debt. 4.Reflects our projected interest obligations for variable rate debts, including those that are effectively fixed as a result of derivatives and in instances where interest is paid based on a LIBOR margin. We used the average December LIBOR and current margin based on the leverage ratio as ofDecember 31, 2021 . 5.Reflects minimum lease payments through the contractual lease expiration date before the impact of extension options. Refer to Part IV, Item 15(a) "Exhibits, Financial Statement Schedules-Note 12 to the Consolidated Financial Statements-Future Minimum Base Rents and Lease Payments" for details of our ground lease agreements. The Company has entered into a number of construction agreements related to capital improvement activities at various properties. As ofDecember 31, 2021 , the Company had$244.8 million in outstanding obligations under the agreements, of which$193.3 million are expected to be incurred within one year fromDecember 31, 2021 .
The Company invests in several non-real estate funds with an aggregate
commitment to contribute up
Off-Balance Sheet Arrangements
Joint Venture Indebtedness
We have investments in unconsolidated real estate entities accounted for using the equity method of accounting. The following table provides information about joint venture indebtedness as ofDecember 31, 2021 (in thousands): Principal Amount Interest Rate Contractual Maturity Date Company's Share Bentall Centre(1) $ 518,126 CDOR + 1.75% 7/1/2024$ 103,625 Sunset Glenoaks Studios(2) $ 3,300 LIBOR + 3.00% 1/9/2025 $ 1,650 _____________ (1)We own 20% of the ownership interest in the unconsolidated real estate investment that owns Bentall Centre. The loan was transacted in Canadian dollars. The principal balance is shown inU.S. dollars using the foreign currency exchange rate as ofDecember 31, 2021 . The interest on the full amount has been effectively capped at 5.25% per annum through the use of an interest rate cap. (2)We own 50% of the ownership interest in the unconsolidated real estate investment that owns theSunset Glenoaks Studios development. This loan has an initial interest rate of LIBOR plus 3.00% per annum and is interest-only through its term. The total capacity of the loan is$94.0 million , as ofDecember 31, 2021 we have$90.7 million undrawn. 64 --------------------------------------------------------------------------------
Cash Flows
Comparison of the cash flow activity for the year ended
Year Ended
2021 2020 Dollar Change Percentage Change
Net cash provided by operating activities
4.2 %
Net cash used in investing activities
(25.1) %
Net cash provided by financing activities
(38.9) %
Cash and cash equivalents and restricted cash were
Operating Activities
Net cash provided by operating activities increased by$12.8 million , or 4.2%, to$314.9 million for the year endedDecember 31, 2021 as compared to$302.0 million for the year endedDecember 31, 2020 . The change resulted primarily from the operating activities of our recent acquisitions of 1918 Eighth property inDecember 2020 and Zio and Star Waggons inAugust 2021 , partially offset by an increase in interest expense and transaction costs related to the business combination of Zio and Star Waggons.
Investing Activities
Net cash used in investing activities decreased by$252.6 million , or 25.1%, to$0.8 billion for the year endedDecember 31, 2021 as compared to$1.0 billion for the year endedDecember 31, 2020 . The change resulted primarily from$475.0 million lower consideration paid for the 5th & Bell property acquisition in 2021 compared to the consideration paid for the 1918 Eighth in 2020, partially offset by$209.9 million spent on the 2021 acquisitions of Zio and Star Waggons. Additional drivers of the change included a$63.7 million decrease in capital expenditures and a$58.8 million increase in contributions to unconsolidated entities in 2021 as compared to 2020.
Financing Activities
Net cash provided by financing activities decreased by$309.4 million , or 38.9%, to$486.7 million for the year endedDecember 31, 2021 as compared to$796.1 million for the year endedDecember 31, 2020 . The change resulted primarily from$367.5 million proceeds from sale of non-controlling interest in theHollywood Media Portfolio in 2020,$254.2 million higher proceeds from notes payable, net of repayments, in 2021 as compared to 2020, as well as$113.4 million lower contributions from non-controlling members in consolidated real estate entities in 2021 as compared to 2020. The increase was partially offset by$413.0 million proceeds from issuance of Series C preferred stock in 2021. Additional drivers of the change included$45.0 million from sales of common stock in 2021,$34.1 million less spent on common stock repurchases in 2021 as compared to 2020, and$84.0 million higher distributions to con-controlling members in consolidated real estate entities in 2021 as compared to 2020.
Non-GAAP Supplemental Financial Measures
We calculate FFO in accordance with the White Paper issued inDecember 2018 on FFO approved by theBoard of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with generally accepted accounting principles inthe United States ("GAAP"), excluding gains and losses from sales of depreciable real estate, gains and losses from sale of certain real estate assets and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. The calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. In theDecember 2018 White Paper, NAREIT provided an option to include value changes in mark-to-market equity securities in the calculation of FFO. We elected this option retroactively during fourth quarter 2018. We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. 65 --------------------------------------------------------------------------------
However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide. We use FFO per share to calculate annual cash bonuses for certain employees. However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from operations. The following table presents a reconciliation of net income to FFO (in thousands): Year Ended December 31, 2021 2020 Net income$ 29,012 $ 16,430 Adjustments: Depreciation and amortization-Consolidated 343,614 299,682 Depreciation and amortization-Corporate-related (7,719) (2,286) Depreciation and amortization-Company's share from unconsolidated real estate 6,020 5,605 investments Impairment loss 2,762 - Unrealized (gain) loss on non-real estate investments (16,571) 2,463 Tax impact of unrealized gain on non-real estate investment 3,849 - FFO attributable to non-controlling interests (64,388) (37,644) FFO attributable to preferred units (2,893) (612) FFO TO COMMON STOCKHOLDERS AND UNITHOLDERS$ 293,686 $ 283,638
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