# Hudson Pacific Properties, Inc. (HPP) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Hudson Pacific Properties, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1482512/000148251223000048/hpp-20221231.htm
Accession: 0001482512-23-000048
Filing date: 2023-02-10
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HPP/
All MD&A years: /company/HPP/mda/
Previous year: /company/HPP/mda/fy2021/ (FY 2021)
Next year: /company/HPP/mda/fy2023/ (FY 2023)

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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 in Hudson Pacific Properties, L.P. (our operating partnership) and its subsidiaries, at December 31, 2022, our portfolio of owned real estate included office properties comprising approximately 15.9 million square feet, studio properties comprising approximately 35 sound stages and 1.5 million square feet and land properties comprising approximately 3.6 million square feet of undeveloped density rights. Our production services assets included approximately 1,622 vehicles, lighting and grip, production supplies and other equipment and the lease rights to 27 sound stages.

As of December 31, 2022, our in-service office portfolio was 89.7% leased (including leases not yet commenced). Our same-store studio properties average percent leased for the twelve months ended December 31, 2022 was 84.6%.

Current Year Highlights

Business Acquisitions

On August 31, 2022, the Company acquired 100% of the equity interests in Quixote, which provides sound stages, cast trailers and trucks and other equipment essential for media content production and 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

On April 27, 2022, the Company completed its previously announced acquisition of Washington 1000, a fully entitled office development site in Seattle, Washington for a total purchase price of $85.6 million, before certain credits, prorations and closing costs.

On May 19, 2022, the Company purchased a parcel of land at Sunset Gower Studios that was previously encumbered by a ground lease for a total purchase price of $22.0 million, before certain credits, prorations and closing costs.

On July 15, 2022, the Company purchased 5801 Bobby Foster Road, approximately 29 acres of land with an office/warehouse located in Albuquerque, New Mexico, for the storage of trailers and other rental assets used to serve the surrounding studio production industry. The property was acquired for a total purchase price of $8.0 million, before certain credits, prorations and closing costs.

45

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

During the year ended December 31, 2022, the Company sold its Del Amo, Northview Center and 6922 Hollywood properties for $2.8 million, $46.0 million and $96.0 million, respectively. 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.

Held for Sale

As of December 31, 2022, the Company had one property classified as held for sale—Skyway Landing—as this property was considered non-strategic to the Company’s portfolio. The property was subsequently sold on February 6, 2023 for $102.0 million before certain credits, prorations and closing costs. 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.

Under Construction and Future Development Projects

The following table summarizes the properties currently under construction and future developments as of December 31, 2022:

[[GREPCENT_TABLE]]
[["Location","","Submarket","","Estimated Square Feet(1)","","Estimated Completion Date","","Estimated Stabilization Date"],["Under Construction:"],["Sunset Glenoaks Studios(2)","","Los Angeles","","241,000","","","Q3-2023","","Q2-2024"],["Washington 1000","","Denny Triangle","","546,000","","","Q1-2024","","Q1-2026"],["Total Under Construction","","","","787,000"],["Future Development Pipeline:"],["Burrard Exchange at Bentall Centre(3)","","Downtown Vancouver","","450,000","","","TBD","","TBD"],["Sunset Waltham Cross Studios(4)","","Broxbourne","","1,167,347","","","TBD","","TBD"],["Sunset Gower Studios\u2014Development(5)","","Hollywood","","478,845","","","TBD","","TBD"],["Sunset Las Palmas Studios\u2014Development(5)","","Hollywood","","617,581","","","TBD","","TBD"],["Cloud10","","North San Jose","","350,000","","","TBD","","TBD"],["Element LA\u2014Development","","West Los Angeles","","500,000","","","TBD","","TBD"],["Sunset Bronson Studios Lot D\u2014Development(5)","","Hollywood","","19,816","","","TBD","","TBD"],["Total Future Development Pipeline","","","","3,583,589"],["TOTAL UNDER CONSTRUCTION AND FUTURE DEVELOPMENT PIPELINE","","","","4,370,589"]]
[[/GREPCENT_TABLE]]

_____________

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 interests in the unconsolidated joint venture that owns Sunset Glenoaks Studios.

3.We own 20% of the ownership interests in the unconsolidated joint venture that owns Burrard Exchange.

4.We own 35% of the ownership interests in the unconsolidated joint venture that owns Sunset Waltham Cross Studios.

5.We own 51% of the ownership interests in the consolidated joint venture that owns Sunset Gower Studios, Sunset Las Palmas Studios and Sunset Bronson Studios.

Financings

During the year ended December 31, 2022, there were $260.0 million in borrowings on the unsecured revolving credit facility, net of repayments. The Company generally uses the unsecured revolving credit facility to finance the acquisition of properties and businesses, to provide funds for tenant improvements and capital expenditures and to provide for working capital and other corporate purposes.

In July 2022, the Company repaid its in-substance defeased debt in the amount of $126.4 million in full using the proceeds from the maturity of its U.S. Government securities in June 2022.

46

In August 2022, the Company modified the existing loan agreement secured by its 1918 Eighth property, whereby the LIBOR-based floating interest rate was replaced with a term SOFR-based floating interest rate.

In August 2022, the Company acquired Quixote. In conjunction with the acquisition, the Company obtained a $160.0 million note payable from the sellers secured by the assets of Quixote. The loan has an interest rate of 5.00% per annum and is interest-only through the maturity date of December 31, 2023.

In September 2022, the operating partnership completed an underwritten public offering of $350.0 million of 5.95% registered senior notes due in 2028, which were issued at a discount of 99.614% of par and are fully and unconditionally guaranteed by the Company. The net proceeds from the offering, after deducting the underwriting discount and commissions, were approximately $346.5 million and were used to repay the outstanding borrowings under its unsecured revolving credit facility. An amount equal to the net proceeds has been allocated to new or existing eligible green projects.

In September 2022, the operating partnership entered into the First Modification Agreement to the Fourth Amended and Restated Credit Agreement, which replaced the LIBOR-based floating interest rate option with a term SOFR-based floating interest rate option as a benchmark rate for borrowings denominated in U.S. dollars for all purposes under the existing credit agreement.

In November 2022, the Company modified the existing loan agreement secured by its One Westside property, whereby the LIBOR-based floating interest rate was replaced with a term SOFR-based floating interest rate.

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 world-class sustainable office and studio properties within these submarkets allow us to attract and retain quality companies as tenants, many in the increasingly synergistic technology and media and entertainment sectors. The purchase of properties with a value-add component, typically sourced through off-market transactions, also facilitates our long-term growth. These types of assets afford us the opportunity to capture embedded rent growth and occupancy upside, as we strategically invest capital to reposition and redevelop assets to generate additional cash flow. We take a measured approach to ground-up development, with most under-construction, planned or potential projects located on ancillary sites that are part of existing operating assets. We also acquire and operate leading production services companies to further expand the service offerings for our studio platform and our geographic reach to other studios and on-location filming. Management expertise and valuable strategic relationships across disciplines supports execution at all levels of our operations. Specifically, aggressive leasing and proactive asset management, combined with a focus on maintaining a conservative 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 of December 31, 2022, the percent leased for our in-service office properties was approximately 89.7% (or 88.0%, excluding leases signed but not commenced as of that date). As of December 31, 2022, the percent leased, based on a 12-month trailing average, was approximately 84.6% 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

We own real estate primarily in California, the Pacific Northwest, Western Canada and Greater London, United Kingdom. We operate our production services business in key US media markets in California, New Mexico, Louisiana, Atlanta and New York. Positive or negative changes in economic or other conditions in any of the markets in which we own real estate and/or

47

operate, 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 lease 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 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 Subsidiaries

Hudson Pacific Services, Inc., or our services company, is a Maryland 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 Real Estate Properties

Acquisitions

Our acquisitions of real estate 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

48

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.

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

49

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.

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:

[[GREPCENT_TABLE]]
[["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 and leasehold improvements","","Shorter of the estimated useful life or the lease term"]]
[[/GREPCENT_TABLE]]

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 and Acquired Intangible Assets

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, each of which is a reporting unit. The Studio reporting unit consists of Zio and Star Waggons businesses acquired during the year ended December 31, 2021 and Quixote business acquired during the year ended December 31, 2022. 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

50

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 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.

51

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.

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 the Sunset 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 ended December 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 December 31, 2022, we have not established a liability for uncertain tax positions.

We and certain of our TRSs file income tax returns with the U.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 2018. Generally, we have assessed our tax positions for all open years, which as of December 31, 2022 include 2019 to 2021 for Federal purposes and 2018 to 2021 for state purposes, and concluded that there are no material uncertainties to be recognized.

52

Results of Operations

The following table summarizes our portfolio as of December 31, 2022 :

The following table summarizes our consolidated and unconsolidated portfolio as of December 31, 2022:

[[GREPCENT_TABLE]]
[["","Number of Properties","","Rentable Square Feet(1)","","Percent Occupied(2)","","Percent Leased(2)","","Annualized Base Rent per Square Foot(3)"],["OFFICE"],["Same-store(4)","43","","","12,823,317","","87.7","%","","89.1","%","","$","53.87"],["Stabilized non-same store(5)","4","","","1,100,593","","99.1","","","99.1","","","57.36"],["Total stabilized","47","","","13,923,910","","88.6","","","89.9","","","54.18"],["Lease-up(5)(6)","1","","","725,311","","76.9","","","87.2","","","60.05"],["Total in-service office","48","","","14,649,221","","88.0","","","89.7","","","54.43"],["STUDIO"],["Same-store(7)","3","","","1,230,454","","","84.6","","","84.6","","","44.74"],["Non-same-store(5)","1","","","35,562","","\u2014","","","\u2014","","","\u2014"],["Total","4","","","1,266,016"],["Repositioning(5)(8)","2","","","433,259","","\u2014","","","4.4"],["Development(5)(9)","2","","","787,000","","","\u2014","","","\u2014"],["Held-for-sale(5)(10)","1","","","246,997","","30.1","","","30.1","","","56.37"],["Total repositioning, redevelopment, development and held-for-sale","5","","","1,467,256"],["Total office and studio properties","57","","","17,382,493"],["Land","7","","","3,583,589"],["TOTAL","64","","","20,966,082"]]
[[/GREPCENT_TABLE]]

____________

1.Determined by management based upon estimated leasable square feet, which may be less or more than the Building 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 of December 31, 2022, 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 ended December 31, 2022, divided by (ii) total square feet, expressed as a percentage.

3.Annualized base rent per square foot for office properties is calculated as (i) annualized base rent divided by (ii) square footage under commenced leases as of December 31, 2022. Annualized base rent does not reflect tenant reimbursements. Annualized base rent per square foot for studio portfolios is calculated as (i) annual base rent divided by (ii) square footage under leased as of December 31, 2022.

4.Includes office properties owned and included in our stabilized portfolio as of January 1, 2021 and still owned and included in the stabilized portfolio as of December 31, 2022.

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 of December 31, 2022.

7.Includes studio properties owned and included in our portfolio as of January 1, 2021 and still owned and included in our portfolio as of December 31, 2022.

8.Includes 96,322 square feet at 10850 Pico, 96,240 square feet at 875 Howard, 79,056 square feet at Page Mill Center, 50,847 square feet at Metro Plaza,

36,905 square feet at Rincon Center, 35,905 square feet at 95 Jackson, 18,594 square feet at Sunset Las Palmas, 12,740 square feet at Palo Alto Square, and

6,650 square feet at Sunset Gower as of fourth quarter 2022.

9.Includes 546,000 square feet related to the office development Washington 1000, adjacent to the Washington State Convention Center and 241,000 square feet related to Sunset Glenoaks.

10.Includes Skyway Landing.

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.

53

Comparison of the year ended December 31, 2022 to the year ended December 31, 2021

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 of January 1, 2021 and still owned and included in the stabilized portfolio as of December 31, 2022; 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

54

The following table reconciles net income to NOI (in thousands, except percentage change):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","Dollar Change","","Percentage Change"],["NET (LOSS) INCOME","","$","(16,517)","","","$","29,012","","","$","(45,529)","","","(156.9)","%"],["Adjustments:"],["Income from unconsolidated real estate entities","","(943)","","","(1,822)","","","879","","","(48.2)"],["Fee income","","(7,972)","","","(3,221)","","","(4,751)","","","147.5"],["Interest expense","","149,901","","","121,939","","","27,962","","","22.9"],["Interest income","","(2,340)","","","(3,794)","","","1,454","","","(38.3)"],["Management services reimbursement income\u2014unconsolidated joint ventures","","(4,163)","","","(1,132)","","","(3,031)","","","267.8"],["Management services expense\u2014unconsolidated joint ventures","","4,163","","","1,132","","","3,031","","","267.8"],["Transaction-related expenses","","14,356","","","8,911","","","5,445","","","61.1"],["Unrealized loss (gain) on non-real estate investment","","1,440","","","(16,571)","","","18,011","","","(108.7)"],["Loss on extinguishment of debt","","\u2014","","","6,259","","","(6,259)","","","(100.0)"],["Loss on sale of real estate","","2,164","","","\u2014","","","2,164","","","\u2014"],["Impairment loss","","28,548","","","2,762","","","25,786","","","933.6"],["Other (income) expense","","(8,951)","","","2,553","","","(11,504)","","","(450.6)"],["General and administrative","","79,501","","","71,346","","","8,155","","","11.4"],["Depreciation and amortization","","373,219","","","343,614","","","29,605","","","8.6"],["NOI","","$","612,406","","","$","560,988","","","$","51,418","","","9.2","%"],["Same-store NOI","","$","492,063","","","$","504,657","","","$","(12,594)","","","(2.5)","%"],["Non-same-store NOI","","120,343","","","56,331","","","64,012","","","113.6"],["NOI","","$","612,406","","","$","560,988","","","$","51,418","","","9.2","%"]]
[[/GREPCENT_TABLE]]

The following table summarizes certain statistics of our consolidated same-store office and studio properties:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["Same-store office"],["Number of properties","42","","","42"],["Rentable square feet","11,311,594","","11,311,594"],["Ending % leased","88.3","%","","92.7","%"],["Ending % occupied","86.9","%","","91.5","%"],["Average % occupied for the period","89.0","%","","92.3","%"],["Average annual rental rate per square foot","$","57.46","","","$","54.40"],["Same-store studio"],["Number of properties","3","","","3"],["Rentable square feet","1,230,454","","1,230,454"],["Average % occupied over period(1)","84.6","%","","85.7","%"]]
[[/GREPCENT_TABLE]]

_____________ 

1.Percent occupied for same-store studio is the average percent occupied for the 12 months ended December 31, 2022.

55

The following table gives further detail on our consolidated NOI (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","Same-store","Non-same-store","Total","","Same-store","Non-same-store","Total"],["REVENUES"],["Office"],["Rental","$","701,375","","$","133,033","","$","834,408","","","$","703,644","","$","79,092","","$","782,736"],["Service and other revenues","14,242","","4,050","","18,292","","","10,125","","2,509","","12,634"],["Total office revenues","715,617","","137,083","","852,700","","","713,769","","81,601","","795,370"],["Studio"],["Rental","51,980","","7,692","","59,672","","","49,436","","549","","49,985"],["Service and other revenues","33,417","","80,435","","113,852","","","30,959","","20,521","","51,480"],["Total studio revenues","85,397","","88,127","","173,524","","","80,395","","21,070","","101,465"],["Total revenues","801,014","","225,210","","1,026,224","","","794,164","","102,671","","896,835"],["OPERATING EXPENSES"],["Office operating expenses","259,182","","49,486","","308,668","","","244,392","","35,942","","280,334"],["Studio operating expenses","49,769","","55,381","","105,150","","","45,115","","10,398","","55,513"],["Total operating expenses","308,951","","104,867","","413,818","","","289,507","","46,340","","335,847"],["Office NOI","456,435","","87,597","","544,032","","","469,377","","45,659","","515,036"],["Studio NOI","35,628","","32,746","","68,374","","","35,280","","10,672","","45,952"],["NOI","$","492,063","","$","120,343","","$","612,406","","","$","504,657","","$","56,331","","$","560,988"]]
[[/GREPCENT_TABLE]]

56

The following table gives further detail on our change in consolidated NOI (in thousands, except percentage change):

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022 as compared to the Year Ended December 31, 2021"],["","Same-store","","Non-same-store","","Total"],["","Dollar change","Percentage change","","Dollar change","Percentage change","","Dollar change","Percentage change"],["REVENUES"],["Office"],["Rental","$","(2,269)","","(0.3)","%","","$","53,941","","68.2","%","","$","51,672","","6.6","%"],["Service and other revenues","4,117","","40.7","","","1,541","","61.4","","","5,658","","44.8"],["Total office revenues","1,848","","0.3","","","55,482","","68.0","","","57,330","","7.2"],["Studio"],["Rental","2,544","","5.1","","","7,143","","1301.1","","","9,687","","19.4"],["Service and other revenues","2,458","","7.9","","","59,914","","292.0","","","62,372","","121.2"],["Total studio revenues","5,002","","6.2","","","67,057","","318.3","","","72,059","","71.0"],["Total revenues","6,850","","0.9","","","122,539","","119.4","","","129,389","","14.4"],["OPERATING EXPENSES"],["Office operating expenses","14,790","","6.1","","","13,544","","37.7","","","28,334","","10.1"],["Studio operating expenses","4,654","","10.3","","","44,983","","432.6","","","49,637","","89.4"],["Total operating expenses","19,444","","6.7","","","58,527","","126.3","","","77,971","","23.2"],["Office NOI","(12,942)","","(2.8)","","","41,938","","91.9","","","28,996","","5.6"],["Studio NOI","348","","1.0","","","22,074","","206.8","","","22,422","","48.8"],["NOI","$","(12,594)","","(2.5)","%","","$","64,012","","113.6","%","","$","51,418","","9.2","%"]]
[[/GREPCENT_TABLE]]

NOI increased $51.4 million, or 9.2%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily resulting from:

•a $64.0 million increase in non-same-store NOI driven by:

•an increase in office NOI of $41.9 million primarily due to:

•a $53.9 million increase in rental revenues mainly resulting from the delivery of the entire premises of our One Westside development property to Google in November 2021, a lease commencement at our Harlow property (Company 3) in April 2021 and subsequent expansions of the same lease and the acquisition of our 5th & Bell property in December 2021; and

•a $1.5 million increase in service and other revenues predominantly due to lease cancellation fees received at our Skyway Landing property, partially offset by a decrease arising from lease cancellation fees received at our 10850 Pico property in the prior period that did not recur in the current period;

•partially offset by a $13.5 million increase in operating expenses corresponding to the increase in rental revenues.

•an increase in studio NOI of $22.1 million primarily due to the acquisition of Zio and Star Waggons in August 2021 and Quixote in August 2022.

•partially offset by a $12.6 million decrease in same-store NOI driven by:

•a decrease in office NOI of $12.9 million primarily due to:

•a $14.8 million increase in operating expenses predominantly utilities and cleaning, resulting from higher utilization of office space due to an increase in the number of tenant employees returning to in-person work; and

•a $2.3 million decrease in rental revenues primarily resulting from lease expirations at our Skyport Plaza, 505 First, 901 Market and 875 Howard properties and the collection of rents previously deemed uncollectible at the 901 Market property during 2021, which did not recur in 2022. The overall decrease was partially offset by increases in rental revenues at our Maxwell, 1455 Market, Clocktower Square

57

and 11601 Wilshire properties generally due to lease commencements and higher tenant recoveries corresponding to the increase in operating expenses;

•partially offset by a $4.1 million increase in service and other revenues primarily resulting from lease cancellation fees received at our 11601 Wilshire and Concourse properties and increases in visitor parking at several properties across our same-store portfolio.

•an increase in studio NOI of $0.3 million primarily due to:

•a $2.5 million increase in rental revenues primarily driven by an expansion related to Neftlix at Sunset Gower Studios partially offset by lease terminations at Sunset Bronson Studios; and

•a $2.5 million increase in service and other revenues predominantly resulting from increased services activity at our Sunset Gower, Sunset Bronson and Sunset Las Palmas studio properties;

•partially offset by a $4.7 million increase in operating expenses primarily due to higher payroll and payroll-related costs, a supplemental property tax assessment at Sunset Gower Studios recorded in the current period and a favorable supplemental property tax assessment at Sunset Las Palmas Studios recorded in the prior period that did not recur in the current period.

Other (Income) Expense

Income from unconsolidated real estate entities

Income from our unconsolidated real estate entities decreased by $0.9 million, or 48.2%, to $0.9 million of income for the year ended December 31, 2022 compared to $1.8 million of income for the year ended December 31, 2021. The decrease was primarily driven by higher interest expense at the unconsolidated entities due to an increase in the average reference rates for variable rate debt.

Fee income

Fee income increased by $4.8 million, or 147.5%, to $8.0 million for the year ended December 31, 2022 compared to $3.2 million for the year ended December 31, 2021. Fee income represents the management fee income earned from the unconsolidated real estate entities. The increase is primarily due to the commencement of development oversight services provided to the Sunset Waltham Cross joint venture during the year.

Interest expense

Comparison of the year ended December 31, 2022 to the year ended December 31, 2021 is as follows (in thousands, except percentage change):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Dollar Change","","Percentage Change"],["Gross interest expense","$","154,038","","","$","133,165","","","$","20,873","","","15.7","%"],["Capitalized interest","(18,031)","","","(21,689)","","","3,658","","","(16.9)"],["Amortization of deferred financing costs/loan discount","13,894","","","10,463","","","3,431","","","32.8"],["TOTAL","$","149,901","","","$","121,939","","","$","27,962","","","22.9","%"]]
[[/GREPCENT_TABLE]]

Gross interest expense increased by $20.9 million, or 15.7%, to $154.0 million for the year ended December 31, 2022 compared to $133.2 million for the year ended December 31, 2021. The increase was primarily driven by an increase in the average reference rates for the Company’s variable rate debt, increases in the outstanding borrowings on the Company’s unsecured revolving credit facility and One Westside construction loan and interest incurred on the Quixote secured note and the 5.95% registered senior notes, which were issued in August 2022 and September 2022, respectively. The overall increase was partially offset by the mark-to-market adjustment recorded to reflect an increase in the fair value of the Company’s interest rate cap, which was not designated as a cash flow hedge for accounting purposes prior to December 2022, and decreases in interest expense due to the repayment of the mortgage loan secured by the 10950 Washington property and the in-substance defeased debt in December 2021 and July 2022, respectively.

Capitalized interest decreased $3.7 million, or 16.9%, to $18.0 million for the year ended December 31, 2022 compared to $21.7 million for the year ended December 31, 2021. The decrease was primarily driven by the completion of the One Westside and Harlow development properties, partially offset by capitalized interest on the newly-acquired Washington 1000 development.

58

Amortization of deferred financing costs and loan discounts/premiums increased by $3.4 million, or 32.8% to $13.9 million for the year ended December 31, 2022 compared to $10.5 million for the year ended December 31, 2021. The increase was primarily driven by the amortization of new issuance costs related to the $1.1 billion loan secured by the Hollywood Media Portfolio, which was refinanced in August 2021; the unsecured revolving facility, which was amended in December 2021 and September 2022; and the 5.95% registered senior notes, which were issued in September 2022.

Interest income

Interest income decreased $1.5 million, or 38%, to $2.3 million for the year ended December 31, 2022 compared to $3.8 million for the year ended December 31, 2021. The decrease was primarily driven by the maturity of the U.S. Government securities in June 2022.

Transaction-related expenses

Transaction-related expenses increased $5.4 million, or 61%, to $14.4 million for the year ended December 31, 2022, which primarily related to the Quixote acquisition in August 2022, compared to $8.9 million for the year ended December 31, 2021, which primarily related to the acquisition of Zio and Star Waggons in August 2021.

Unrealized loss (gain) on non-real estate investments

We recognized an unrealized loss on non-real estate investments of $1.4 million for the year ended December 31, 2022 compared to an unrealized gain on non-real estate investments of $16.6 million for the year ended December 31, 2021. 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 ended December 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. No loss on extinguishment of debt was recognized during the year ended December 31, 2022.

Loss on sale of real estate

During the year ended December 31, 2022, we recognized a $2.2 million loss on sale of real estate in connection with the dispositions of our Del Amo, Northview Center and 6922 Hollywood properties. No loss on sale was recognized during the year ended December 31, 2021.

Impairment loss

During the year ended December 31, 2022, we recognized an impairment loss of $28.5 million, of which $20.0 million was related to reductions in the estimated fair values of our Del Amo, Northview Center and 6922 Hollywood properties and $8.5 million was due to the full impairment of the Zio trade name in connection with a rebranding of the business. During the year ended December 31, 2021, we recognized an impairment loss of $2.8 million related to a reduction in the estimated hold period of our Del Amo property.

Other (income) expense

Other income increased $11.5 million, or 450.6%, to of $9.0 million for the year ended December 31, 2022 compared to other expense of $2.6 million for the year ended December 31, 2021. The increase was predominantly related to an income tax benefit recorded in 2022 primarily related to the studio service-related businesses.

General and administrative expenses

General and administrative expenses increased $8.2 million, or 11.4%, to $79.5 million for the year ended December 31, 2022 compared to $71.3 million for the year ended December 31, 2021. The increase was primarily driven by lower non-cash compensation expense during 2021 due to the forfeiture of stock awards granted to certain departing members of management, which did not recur in 2022, in addition to higher professional fees, personnel-related and office expenses during 2022.

59

Depreciation and amortization expense

Depreciation and amortization expense increased $29.6 million, or 8.6%, to $373.2 million for the year ended December 31, 2022 compared to $343.6 million for the year ended December 31, 2021. The increase was primarily related to the completion of the One Westside development in November 2021, the depreciation and amortization of property, plant and equipment and finite-lived intangible assets acquired as part of the Zio and Star Waggons transactions in August 2021 and the Quixote transaction in August 2022 and the acquisition of the 5th & Bell property in December 2021. These increases were partially offset by the cessation of depreciation related to the Del Amo, Northview Center and 6922 Hollywood properties, which were sold during 2022 and Skyway Landing, which was held for sale as of December 31, 2021 and 2022.

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

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 ended December 31, 2021 to the year ended December 31, 2020” of the Form 10-K for the fiscal year ended December 31, 2021.

60

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 construction loan (unconsolidated joint venture); and

•proceeds from additional secured, unsecured debt financings or offerings.

Liquidity Sources

We had approximately $255.8 million of cash and cash equivalents at December 31, 2022. 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 through December 31, 2022. 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 of December 31, 2022, we had total borrowing capacity of $1.0 billion under our unsecured revolving credit facility, $385.0 million of which had been drawn. As of December 31, 2022, we had total borrowing capacity of $414.6 million under our construction loan secured by our One Westside and 10850 Pico properties, $316.6 million of which had been drawn. As of December 31, 2022, the total borrowing capacity under the Sunset Glenoaks construction loan (unconsolidated joint venture) was $100.6 million, of which $41.3 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.

The following table sets forth our ratio of debt to total market capitalization (counting series A preferred units as debt) as of December 31, 2022 (in thousands, except percentage):

[[GREPCENT_TABLE]]
[["Market Capitalization","","December 31, 2022"],["Unsecured and secured debt(1)","","$","4,610,088"],["Series A redeemable preferred units","","9,815"],["Total consolidated debt","","4,619,903"],["Equity capitalization(2)","","1,833,281"],["TOTAL CONSOLIDATED MARKET CAPITALIZATION","","$","6,453,184"],["Total consolidated debt/total consolidated market capitalization","","71.6","%"]]
[[/GREPCENT_TABLE]]

_____________

1.Excludes joint venture partner debt and unamortized deferred financing costs and loan discount.

2.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 $9.73, as reported by the NYSE, on December 30, 2022 as well as the aggregate value of the Series C preferred stock liquidation preference as of December 30, 2022.

61

Outstanding Indebtedness

The following table sets forth information as of December 31, 2022 and December 31, 2021 with respect to our outstanding indebtedness, excluding unamortized deferred financing costs and loan discounts (in thousands):

[[GREPCENT_TABLE]]
[["","December 31, 2022","","December 31, 2021"],["Unsecured debt","$","2,660,000","","","$","2,050,000"],["Secured debt","$","1,950,088","","","$","1,714,874"],["In-substance defeased debt","$","\u2014","","","$","128,212"],["Joint venture partner debt","$","66,136","","","$","66,136"]]
[[/GREPCENT_TABLE]]

The operating partnership was in compliance with its financial covenants as of December 31, 2022.

Credit Ratings

The following table provides information with respect to our credit ratings at December 31, 2022:

[[GREPCENT_TABLE]]
[["Agency","","Credit Rating"],["Moody\u2019s","","Baa3"],["Standard and Poor\u2019s","","BBB-"],["Fitch","","BBB-"]]
[[/GREPCENT_TABLE]]

Liquidity Uses

Contractual Obligations

The following table provides information with respect to our commitments at December 31, 2022, including any guaranteed or minimum commitments under contractual obligations (in thousands):

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["Contractual Obligation","","Total","","Less than 1 Year","","1-3 Years","","3-5 Years","","More than 5 Years"],["Principal payments on unsecured and secured debt","","$","4,610,088","","","$","320,000","","","$","1,057,902","","","$","1,881,186","","","$","1,351,000"],["Principal payments on joint venture partner debt","","66,136","","","\u2014","","","\u2014","","","\u2014","","","66,136"],["Interest payments\u2014fixed rate(1)(2)","","541,311","","","114,109","","","207,942","","","158,279","","","60,981"],["Interest payments\u2014variable rate(1)(3)","","166,605","","","92,108","","","74,497","","","\u2014","","","\u2014"],["Operating leases(4)","","745,388","","","39,054","","","78,746","","","73,063","","","554,525"],["TOTAL","","$","6,129,528","","","$","565,271","","","$","1,419,087","","","$","2,112,528","","","$","2,032,642"]]
[[/GREPCENT_TABLE]]

_____________

1.Interest rates with respect to indebtedness are calculated on the basis of a 360-day year for the actual days elapsed.

2.Reflects our projected interest obligations for fixed rate debts, which includes $17.2 million of projected interest related to our joint venture partner debt.

3.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 an applicable LIBOR or SOFR margin . We used the average December LIBOR or SOFR, as applicable, and the applicable margin as of December 31, 2022.

4.Reflects minimum lease payments through the contractual lease expiration date, including the impact of the extension options which the Company is reasonably certain to exercise. Refer to Part IV, Item 15(a) “Exhibits, Financial Statement Schedules—Note 11 to the Consolidated Financial Statements—Future Minimum Base Rents and Lease Payments” for details of our lease agreements.

The Company has entered into a number of construction agreements related to capital improvement activities at various properties. As of December 31, 2022, the Company had $254.2 million in outstanding obligations under the agreements, of which $201.7 million is expected to be incurred within one year from December 31, 2022.

The Company invests in several non-real estate funds with an aggregate commitment to contribute up $48.0 million. As of December 31, 2022, the Company has contributed $33.2 million, net of recallable distributions, with $14.8 million remaining to be contributed.

62

The terms of the securities purchase agreement for the acquisition of Zio require the Company to pay up to $20.0 million of additional consideration to the business’s former shareholders in 2024, subject to certain performance thresholds being met (the “earnout”). As of December 31, 2022, the recorded fair value of the earnout liability was $9.3 million.

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 of December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","Principal Amount","","Interest Rate","","Contractual Maturity Date","","Company\u2019s Share"],["Bentall Centre(1)","$","490,319","","","CDOR + 1.75%","","7/1/2024","","$","98,064"],["Sunset Glenoaks Studios(2)","$","41,318","","","SOFR + 3.10%","","1/9/2025","","$","20,659"]]
[[/GREPCENT_TABLE]]

_____________

(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 in U.S. dollars using the foreign currency exchange rate as of December 31, 2022. The interest on the full principal amount has been effectively capped at 6.31% per annum (4.56% strike rate + 1.75% spread) through the use of an interest rate cap.

(2)We own 50% of the ownership interest in the unconsolidated real estate investment that owns the Sunset Glenoaks Studios development. This loan has an initial interest rate of SOFR + 3.10% per annum until the construction at Sunset Glenoaks Studios is complete and certain performance targets have been met, at which time the effective interest rate will decrease to SOFR + 2.50%. This loan is interest-only through its term. The total capacity of the loan is $100.6 million. As of December 31, 2022, we have $59.3 million undrawn. The interest on the full principal amount has been effectively capped at 7.60% per annum (4.50% strike rate + 3.10% spread) through the use of an interest rate cap.

Cash Flows

Comparison of the cash flow activity for the year ended December 31, 2022 to the year ended December 31, 2021 is as follows (in thousands, except percentage change):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","Dollar Change","","Percentage Change"],["Net cash provided by operating activities","$","369,501","","","$","314,863","","","$","54,638","","","17.4","%"],["Net cash used in investing activities","$","(378,094)","","","$","(754,208)","","","$","376,114","","","(49.9)","%"],["Net cash provided by financing activities","$","97,448","","","$","486,681","","","$","(389,233)","","","(80.0)","%"]]
[[/GREPCENT_TABLE]]

Cash and cash equivalents and restricted cash were $285.7 million and $196.9 million at December 31, 2022 and 2021, respectively.

Operating Activities

Net cash provided by operating activities increased by $54.6 million, or 17.4%, to $369.5 million for the year ended December 31, 2022 as compared to $314.9 million for the year ended December 31, 2021. The change primarily resulted from operating cash flow contributions from Quixote, which was acquired in August 2022, and Zio, Star Waggons and 5th & Bell, which were acquired in August 2021, August 2021 and December 2021, respectively.

Investing Activities

Net cash used in investing activities decreased by $376.1 million, or 49.9%, to $378.1 million for the year ended December 31, 2022 as compared to $754.2 million for the year ended December 31, 2021. The change resulted primarily from proceeds from the sales of real estate in the amount of $137.7 million, a $123.5 million increase in proceeds from maturities of U.S. Government securities, a $61.8 million decrease in additions to investment in real estate, a $35.5 million decrease in contributions to unconsolidated real estate entities and a $22.4 million decrease in expenditures on property acquisitions during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Financing Activities

Net cash provided by financing activities decreased by $389.2 million, or 80.0%, to $97.4 million for the year ended December 31, 2022 as compared to $486.7 million for the year ended December 31, 2021. The change primarily resulted from the 2021 proceeds from the issuance of Series C preferred stock and common stock of $413.0 million and $45.0 million, respectively,

63

with no corresponding activity in 2022, a $252.9 million decrease in proceeds from notes payable, a $200.0 million cash outflow related to the accelerated share repurchase program and a $124.7 million increase in payments of in-substance defeased debt during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease was partially offset by a $602.9 million decrease in payments of notes payable and a $38.2 million decrease in distributions to non-controlling members in consolidated real estate entities.

Non-GAAP Supplemental Financial Measures

We calculate FFO in accordance with the White Paper issued in December 2018 on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), excluding gains and losses from sales of depreciable real estate 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 the December 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 of 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. 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 (loss) income to FFO (in thousands):

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2022","","2021"],["Net (loss) income","","","","","$","(16,517)","","","$","29,012"],["Adjustments:"],["Depreciation and amortization\u2014Consolidated","","","","","373,219","","","343,614"],["Depreciation and amortization\u2014Non-real estate assets","","","","","(23,110)","","","(7,719)"],["Depreciation and amortization\u2014Company\u2019s share from unconsolidated real estate entities","","","","","5,322","","","6,020"],["Loss on sale of real estate","","","","","2,164","","","\u2014"],["Impairment loss\u2014Real estate assets","","","","","20,048","","","2,762"],["Unrealized loss (gain) on non-real estate investments","","","","","1,440","","","(16,571)"],["Tax impact of unrealized gain on non-real estate investment","","","","","\u2014","","","3,849"],["FFO attributable to non-controlling interests","","","","","(71,100)","","","(64,388)"],["FFO attributable to preferred shares and units","","","","","(21,043)","","","(2,893)"],["FFO TO COMMON STOCKHOLDERS AND UNITHOLDERS","","","","","$","270,423","","","$","293,686"]]
[[/GREPCENT_TABLE]]

64