PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto. Also, see "Forward-Looking Statements" preceding Part I of this Annual Report on Form 10-K.
Overview
We were formed onOctober 8, 2008 as aMaryland corporation, elected to be taxed as a real estate investment trust ("REIT") beginning with the taxable year endedDecember 31, 2010 and intend to operate in such manner.Pacific Oak Capital Advisors, LLC ("Pacific Oak Capital Advisors ") is our advisor and the advisory agreement is currently effective throughNovember 1, 2023 ; however, we orPacific Oak Capital Advisors may terminate the advisory agreement without cause or penalty upon providing 60 days' written notice. As our advisor,Pacific Oak Capital Advisors manages our day-to-day operations and our portfolio of investments.Pacific Oak Capital Advisors also has the authority to make all of the decisions regarding our investments, except for our residential homes portfolio. Our residential homes portfolio, held through our subsidiaryPacific Oak Residential Trust, Inc. ("PORT"), is managed by an affiliate ofPacific Oak Capital Advisors . The advisory duties are subject to the limitations in our charter and the direction and oversight of our board of directors.Pacific Oak Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf. We have sought to invest in and manage a diverse portfolio of real estate-related loans, opportunistic real estate, real estate-related debt and equity securities, and other real estate-related investments. We conduct our business primarily through our operating partnership, of which we are the sole general partner. OnJanuary 8, 2009 , we filed a registration statement on Form S-11 with theSEC to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public, of which 100,000,000 shares were registered in our primary offering and 40,000,000 shares were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering onNovember 14, 2012 . We sold 56,584,976 shares of common stock in the primary offering for gross offering proceeds of$561.7 million . Although we offered shares of common stock under the dividend reinvestment plan throughMarch 28, 2023 , no shares were issued under the dividend reinvestment plan in 2021 or 2022 and we indefinitely suspended the plan as ofMarch 28, 2023 to minimize administrative costs. OnOctober 5, 2020 , Pacific Oak Strategic Opportunity REIT II ("POSOR II") merged with an indirect subsidiary of ours (the "Merger"). At the effective time of the Merger, each issued and outstanding share of POSOR II's common stock converted into 0.9643 shares of our common stock or 28,973,906 shares. As ofDecember 31, 2022 , we had sold 6,851,969 shares of common stock under the dividend reinvestment plan for gross offering proceeds of$76.5 million . Also as ofDecember 31, 2022 , we had redeemed 27,951,857 of the shares sold in our offering for$324.1 million . As ofDecember 31, 2022 , we had issued 36,398,447 shares of common stock in connection with special dividends. Additionally, onDecember 29, 2011 andOctober 23, 2012 , we issued 220,994 shares and 55,249 shares of common stock, respectively, for$2.0 million and$0.5 million , respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended. OnMarch 2, 2016 ,Pacific Oak Strategic Opportunity (BVI) Holdings, Ltd. ("Pacific Oak Strategic Opportunity BVI"), our wholly owned subsidiary, filed a final prospectus with theIsrael Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the "Series A Debentures") at an annual interest rate not to exceed 4.25%. OnMarch 1, 2016 , Pacific Oak Strategic Opportunity BVI commenced the institutional tender of the Series A Debentures and accepted application for 842.5 million Israeli new Shekels. OnMarch 7, 2016 , Pacific Oak Strategic Opportunity BVI commenced the public tender of the Series A Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, Pacific Oak Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately$249.2 million as ofMarch 8, 2016 ) in both the institutional and public tenders at an annual interest rate of 4.25%. Pacific Oak Strategic Opportunity BVI issued the Series A Debentures onMarch 8, 2016 . The terms of the Series A Debentures required five equal principal installment payments annually onMarch 1st of each year from 2019 to 2023. During the year endedDecember 31, 2021 , Pacific Oak Strategic Opportunity BVI completed the early pay off of all Series A Debentures. 57 -------------------------------------------------------------------------------- OnFebruary 16, 2020 , Pacific Oak Strategic Opportunity BVI issued 254.1 million Israeli new Shekels (approximately$74.1 million as ofFebruary 16, 2020 ) of Series B debentures (the "Series B Debentures") to Israeli investors pursuant to a public offering registered with theIsrael Securities Authority . The Series B Debentures bear interest at the rate of 3.93% per year. The Series B Debentures have principal installment payments equal to 33.33% of the face amount of the Series B Debentures onJanuary 31st of each year from 2024 to 2026. Pacific Oak Strategic Opportunity BVI issued additional Series B Debentures subsequent to the initial issuance and as ofDecember 31, 2022 , 1.2 billion Israeli new Shekels (approximately$331.2 million asDecember 31, 2022 ) were outstanding. The additional Series B Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series B Debentures, which were initially issued, without any right of precedence or preference between any of them. As ofDecember 31, 2022 , we consolidated eight office properties, one office portfolio consisting of two office buildings and 25 acres of undeveloped land, two apartment properties, one hotel property, one residential home portfolio consisting of 2,456 residential homes, two investments in undeveloped land with approximately 742 developable acres, one office/retail development property and owned three investments in unconsolidated entities and three investments in real estate equity securities.
Market Outlook - Real Estate and Real Estate Finance Markets
Volatility in global financial markets and changing political environments can cause fluctuations in the performance of theU.S. commercial real estate markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Increases in the cost of financing due to higher interest rates may cause difficulty in refinancing debt obligations prior to or at maturity or at terms as favorable as the terms of existing indebtedness. Further, increases in interest rates would increase the amount of our debt payments on our variable rate debt to the extent the interest rates on such debt are not limited by interest rate caps. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.
Liquidity and Capital Resources
Our principal demand for funds during the short and long-term is and will be for the acquisition of real estate and real estate-related investments, payment of operating expenses, capital expenditures and general and administrative expenses, payments under debt obligations, redemptions and purchases of our common stock and payments of distributions to stockholders. As ofDecember 31, 2022 , we have had six primary sources of capital for meeting our cash requirements:
•Proceeds from the primary portion of our initial public offering;
•Proceeds from our dividend reinvestment plan;
•Proceeds from our bond offerings in
•Debt financing;
•Proceeds from the sale of real estate and the repayment of real estate-related investments; and
•Cash flow generated by our real estate and real estate-related investments.
We sold 56,584,976 shares of common stock in the primary portion of our initial public offering for gross offering proceeds of$561.7 million . We ceased offering shares in the primary portion of our initial public offering onNovember 14, 2012 . We have indefinitely suspended offering shares of common stock under the dividend reinvestment plan as ofMarch 28, 2023 . As ofDecember 31, 2022 , we had sold 6,851,969 shares of common stock under the dividend reinvestment plan for gross offering proceeds of$76.5 million . To date, we have invested all of the net proceeds from our initial public offering in real estate and real estate-related investments. We intend to use our cash on hand, proceeds from asset sales, proceeds from debt financing, cash flow generated by our real estate operations and real estate-related investments as our primary sources of immediate and long-term liquidity. Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures and corporate general and administrative expenses. Cash flow from operations from our real estate investments is primarily dependent upon the occupancy levels of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As ofDecember 31, 2022 , our office properties were collectively 69% occupied, our residential home portfolio was 94% occupied and our apartment properties were collectively 95% occupied. 58 -------------------------------------------------------------------------------- Our hotel property generates cash flow in the form of room, food, beverage and convention services, campground and other revenues, which are reduced by hotel expenses, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our hotel property is primarily dependent upon the occupancy levels of our hotel, the average daily rates and how well we manage our expenditures. The following table provides summary information regarding our hotel properties for the year endedDecember 31, 2022 : Average Revenue per Available Room for the Percentage Occupied for the Average Daily Rate for the year ended December 31, Property Number of Rooms year ended December 31, 2022 year ended December 31, 2022 2022
Springmaid Beach Resort 453 61.4% (1)$226.60 (1)$139.05 (1) Q&C Hotel 196 62.5%$190.55 $119.20 _____________________
(1)
Investments in real estate equity securities generate cash flow in the form of dividend income, which is reduced by asset management fees. As ofDecember 31, 2022 , we had three investments in real estate equity securities outstanding with a total carrying value of$60.2 million . Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four fiscal quarters endedDecember 31, 2022 did not exceed the charter-imposed limitation. For the year endedDecember 31, 2022 , our cash needs for capital expenditures, redemptions of common stock and debt servicing were met with proceeds from dispositions of real estate and undeveloped land, proceeds from debt financing, proceeds from our dividend reinvestment plan and cash on hand. Operating cash needs during the same period were met through cash flow generated by our real estate and real estate-related investments and cash on hand. As ofDecember 31, 2021 , we had outstanding debt obligations in the aggregate principal amount of$1.1 billion , with a weighted-average remaining term of 2.1 years. As ofDecember 31, 2022 , we had a total of$412.3 million of debt obligations scheduled to mature within 12 months of that date. In order to satisfy obligations as they mature, we plan to utilize extension options available in the respective loan agreements, may seek to refinance certain debt instruments, may market one or more properties for sale or may negotiate a turnover of one or more secured properties back to the related mortgage lender. Based upon these plans, we believe we will have sufficient liquidity to continue as a going concern. There can be no assurance as to the certainty or timing of any of our plans. We have elected to be taxed as a REIT and intend to operate as a REIT. To maintain our qualification as a REIT, we are required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum distribution level.
Cash Flows from Operating Activities
As ofDecember 31, 2022 , we consolidated eight office properties, one office portfolio consisting of two office buildings and 25 acres of undeveloped land, two apartment properties, one hotel property, one residential home portfolio consisting of 2,456 residential homes, two investments in undeveloped land with approximately 742 developable acres, one office/retail development property and owned three investments in unconsolidated entities and three investments in real estate equity securities. During the year endedDecember 31, 2022 , net cash provided by operating activities was$10.9 million . We expect that our cash flows from operating activities will increase in future periods as a result of leasing additional space that is currently unoccupied and anticipated future acquisitions of real estate and real estate-related investments. However, our cash flows from operating activities may decrease to the extent that we dispose of additional assets.
Cash Flows from Investing Activities
Net cash provided by investing activities was
•Proceeds from sale of real estate of
•Improvements to real estate of
•Contributions to unconsolidated entities of
•Earnest money received of
•Proceeds from advances due from affiliates of
•Funding of
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• Acquisitions of real estate of
Cash Flows from Financing Activities
Net cash used in financing activities was
•$16.9 million of cash used to redeem noncontrolling cumulative convertible redeemable preferred stock;
•$11.0 million of of cash distributions paid;
•$9.5 million of distributions paid to noncontrolling interests;
•$9.0 million of net cash used for principal payments on notes payable of$192.3 million and payments of deferred financing costs of$4.8 million and partially offset by proceeds from notes payable of$188.1 million ;
•$6.7 million of cash used to redeem noncontrolling interest; and
•$6.0 million of cash used for redemptions of common stock.
In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets; however, we may exceed that limit if a majority of the conflicts committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As ofDecember 31, 2022 , our borrowings and other liabilities were both approximately 70% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets, respectively. OnFebruary 16, 2020 , Pacific Oak Strategic Opportunity BVI issued 254.1 million Israeli new Shekels (approximately$74.1 million as ofFebruary 16, 2020 ) of Series B debentures (the "Series B Debentures") to Israeli investors pursuant to a public offering registered with theIsrael Securities Authority . The Series B Debentures bear interest at the rate of 3.93% per year. The Series B Debentures have principal installment payments equal to 33.33% of the face amount of the Series B Debentures onJanuary 31st of each year from 2024 to 2026. Pacific Oak Strategic Opportunity BVI issued additional Series B Debentures subsequent to the initial issuance and as ofDecember 31, 2022 , 1.2 billion Israeli new Shekels (approximately$331.2 million asDecember 31, 2022 ) were outstanding. The additional Series B Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series B Debentures, which were initially issued, without any right of precedence or preference between any of them. In addition to making investments in accordance with our investment objectives, we use or have used our capital resources to make certain payments to our advisor and our dealer manager. During our offering stage, these payments included payments to our dealer manager for selling commissions and dealer manager fees related to sales in our primary offering and payments to our dealer manager and our advisor for reimbursement of certain organization and other offering expenses related both to the primary offering and the dividend reinvestment plan. During our acquisition and development stage, we have continued to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us as well as for any dispositions of assets (including the discounted payoff of non-performing loans). The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee. Among the fees payable to our advisor is an asset management fee. With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment, inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire or fund such investment and (ii) the outstanding principal amount of such loan or other investment, plus the fees and expenses related to the acquisition or funding of such investment, as of the time of calculation. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the sum of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property, and inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire such investment. In the case of investments made through joint ventures, the asset management fee will be determined based on our proportionate share of the underlying investment, inclusive of our proportionate share of any fees and expenses related thereto. 60 -------------------------------------------------------------------------------- Investments made in or through PORT are excluded from the calculation of the asset management fee we pay to our advisor. In addition to other fees described in the advisory agreement between PORT and PORA, PORT pays PORA a quarterly asset management fee equal to 0.25% (1.0% annually) on the aggregate value of PORT's assets, as determined in accordance with PORT's valuation guidelines, as of the end of each quarter. Contractual Commitments and Contingencies The following is a summary of our contractual obligations as ofDecember 31, 2022 (in thousands):
Payments Due During the Years Ending
Contractual Obligations Total 2023 2024-2025 2026-2027 Thereafter
Outstanding debt obligations (1)
$ 379,145 $ 274,629 $ - Interest payments on outstanding debt obligations (2) 78,001 44,503 32,469 1,029 - Finance lease obligations 53,676 360 753 792 51,771 _____________________
(1) Amounts include principal payments only.
(2) Projected interest payments are based on the outstanding principal amounts, maturity dates, foreign currency rates and interest rates in effect atDecember 31, 2022 . We incurred interest expense of$48.5 million , excluding amortization of deferred financing costs of$3.7 million and unrealized gains on interest rate caps of$1.5 million and including interest capitalized of$2.5 million , for the year endedDecember 31, 2022 . Results of Operations Overview As ofDecember 31, 2021 , we consolidated eight office properties, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, two apartment properties, two hotel properties, one residential home portfolio consisting of 1,814 residential homes and two investments in undeveloped land with approximately 800 developable acres, one office/retail development property and owned four investments in unconsolidated joint ventures and three investments in real estate equity securities. As ofDecember 31, 2022 , we consolidated eight office properties, one office portfolio consisting of two office buildings and 25 acres of undeveloped land, two apartment properties, one hotel property, one residential home portfolio consisting of 2,456 residential homes, two investments in undeveloped land with approximately 742 developable acres, one office/retail development property and owned three investments in unconsolidated entities and three investments in real estate equity securities. Our results of operations for the year endedDecember 31, 2022 may not be indicative of those in future periods due to acquisition and disposition activities. Additionally, the occupancy in our office properties has not been stabilized. As ofDecember 31, 2022 , our office properties were collectively 69% occupied, our residential home portfolio was 94% occupied and our apartment properties were 95% occupied. However, due to the amount of near-term lease expirations, we do not put significant emphasis on annual changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to "terminal values" that may be realized upon the disposition of the assets in the portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees the occupancy of our assets will increase, or that we will recognize a gain on the sale of our assets. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of leasing additional space and acquiring additional assets but decrease due to disposition activity. 61 -------------------------------------------------------------------------------- Comparison of the year endedDecember 31, 2022 versus the year endedDecember 31, 2021 $ Change Due to For the Years EndedDecember 31 , Investments Held Increase $ Change Due to Merger and other Throughout 2022 2021 (Decrease) Percentage Change Acquisitions/Originations/Dispositions (1) Both Periods (2) Rental income$ 121,859 $ 123,436 $ (1,577) (1) % $ (3,069) $ 1,492 Hotel revenues 30,749 30,806 (57) - % (4,220) 4,163 Other operating income 3,859 4,027 (168) (4) % (664) 496 Dividend income from real estate equity securities 5,591 9,658 (4,067) (42) % - (4,067) Operating, maintenance, and management costs 44,317 42,519 1,798 4 % (131) 1,929 Real estate taxes and insurance 21,132 20,768 364 2 % (294) 658 Hotel expenses 19,252 20,990 (1,738) (8) % (1,287) (451) Asset management fees to affiliate 13,678 14,012 (334) (2) % 81 (415) General and administrative expenses 10,700 9,853 847 9 % n/a n/a Foreign currency transaction (gain) loss, net (29,038) 7,445 (36,483) (490) % n/a n/a Depreciation and amortization 51,930 58,871 (6,941) (12) % (1,851) (5,090) Interest expense 48,130 40,510 7,620 19 % (1,765) 9,385 Impairment charges on real estate and related intangibles 18,493 10,971 7,522 69 % n/a n/a Impairment charges on goodwill 8,098 2,808 5,290 188 % n/a n/a Loss from unconsolidated entities (8,019) (1,373) (6,646) 484 % - (6,646) Casualty-related gain - 27 (27) (100) % n/a n/a Other interest income 228 194 34 18 % n/a n/a (Loss) gain on real estate equity securities (51,943) 28,632 (80,575) 281 % n/a n/a Gain on sale of real estate 46,513 30,261 16,252 (54) % 16,252 - Gain (loss) on extinguishment of debt 2,367 (4,757) 7,124 (150) % n/a n/a Gain from consolidation of previously unconsolidated entity 18,742 - 18,742 100 % 18,742 - Transaction and related costs - (2,984) 2,984 100 % n/a n/a Subordinated performance fee due upon termination to affiliate - (1,678) 1,678 (100) % n/a n/a Income tax provision (4,924) - (4,924) 100 % n/a n/a _____________________ (1) Represents the dollar amount increase (decrease) for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 attributable to the real estate and real estate related investments acquired, repaid or disposed on or afterJanuary 1, 2021 . (2) Represents the dollar amount increase (decrease) for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented. Rental income decreased from$123.4 million for the year endedDecember 31, 2021 to$121.9 million for the year endedDecember 31, 2022 , primarily due to the disposition ofCity Tower , which attributed$8.6 million of rental income during 2021, an overall decrease in occupancy rates related to properties held throughout both periods and partially offset by properties acquired in 2022, including assets acquired as part of the PORT II consolidation. Annualized base rent per square foot related to office properties held throughout both periods were consistent. We expect rental income to increase in future periods as a result of owning the properties acquired during 2022 for an entire period, leasing additional space and to the extent we acquire additional properties, but to decrease to the extent we dispose of properties. The occupancy of our office properties, collectively, held throughout both periods decreased from 73% as ofDecember 31, 2021 to 69% as ofDecember 31, 2022 . Hotel revenues slightly decreased from$30.8 million for the year endedDecember 31, 2021 to$30.7 million for the year endedDecember 31, 2022 as a result of the disposition of theSpringmaid Beach Resort during the year endedDecember 31, 2022 and partially offset by the increase in occupancy from 47.8% to 62.5% and average daily rate from$139.56 to$190.55 for theQ&C Hotel . Dividend income from real estate equity securities decreased from$9.7 million during the year endedDecember 31, 2021 to$5.6 million for the year endedDecember 31, 2022 , primarily as a result of a reduction in quarterly dividends related to our investment in the FSP equity securities. We expect dividend income from real estate equity securities to vary in future periods as a result of the timing of dividends declared and investment activity. 62 -------------------------------------------------------------------------------- Property operating costs and real estate taxes and insurance increased from$42.5 million and$20.8 million , respectively, for the year endedDecember 31, 2021 to$44.3 million and$21.1 million , respectively, for the year endedDecember 31, 2022 , primarily as a result of properties acquired in 2022 and partially offset by the disposition ofCity Tower , which attributed to a$2.0 million decrease. We expect property operating costs and real estate taxes and insurance to increase in future periods to the extent we acquire additional properties, increasing occupancy of our real estate assets and general inflation, but to decrease to the extent we dispose of properties. Hotel expenses decreased from$21.0 million for the year endedDecember 31, 2021 to$19.3 million for the year endedDecember 31, 2022 as a result of theSpringmaid Beach Resort disposition onSeptember 1, 2022 and partially offset by the increase in occupancy from 47.8% to 62.5% for theQ&C Hotel . Asset management fees decreased from$14.0 million for the year endedDecember 31, 2021 to$13.7 million for the year endedDecember 31, 2022 , primarily as a result of properties disposed in 2021 and 2022 and partially offset by acquisitions in 2022. We expect asset management fees to increase in future periods as a result of capital expenditures and to the extent we acquire additional properties, but to decrease to the extent we dispose of properties. General and administrative expenses increased from$9.9 million for the year endedDecember 31, 2021 to$10.7 million for the year endedDecember 31, 2022 , primarily due to increased accounting and advisory expenses. We expect general and administrative expenses to fluctuate in future periods based on investment and disposition activity as well as costs incurred to evaluate strategic transactions. Foreign currency transaction (gain) loss, net, increased from$7.4 million loss for the year endedDecember 31, 2021 to a$29.0 million gain for the year endedDecember 31, 2022 related to the debentures inIsrael . These debentures are denominated in Israeli new Shekels and we expect to recognize foreign transaction gains and losses based on changes in foreign currency exchange rates, but expect our exposure to be limited to the extent that we have entered into foreign currency options and foreign currency collars. During the year endedDecember 31, 2021 , we recognized a$1.2 million gain related to the foreign currency option and collars, which is shown net against$8.6 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the year endedDecember 31, 2022 , we recognized a$4.1 million loss related to the foreign currency option and collars, which is shown net against$33.1 million of foreign currency transaction gain in the accompanying consolidated statements of operations as foreign currency transaction (gain) loss, net. Depreciation and amortization decreased from$58.9 million for the year endedDecember 31, 2021 to$51.9 million for the year endedDecember 31, 2022 , primarily as a result of the disposition ofCity Tower and intangibles that were fully amortized in 2021, which attributed to decreases of$2.4 million and$3.4 million , respectively and partially offset by properties acquired in 2022. We expect depreciation and amortization to increase in future periods to the extent we acquire additional properties, but to decrease as a result of amortization of tenant origination costs related to lease expirations and disposition of properties. Interest expense increased from$40.5 million for the year endedDecember 31, 2021 to$48.1 million for the year endedDecember 31, 2022 , primarily due to increasing benchmark rates affecting our variable rate debt, increase in notes payable balance of$86.5 million related to the PORT II consolidation, and partially offset by a decrease in the notes payable balance of$53.1 million related to the disposition of theSpringmaid Beach Resort . Our interest expense in future periods will vary based on interest rate fluctuations, the amount of interest capitalized and our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives and will decrease to the extent we dispose of properties and pay down debt. During the year endedDecember 31, 2022 , we recognized impairment charges of$4.4 million ,$11.6 million and$2.5 million on210 West 31st Street ,Oakland City Center and theSpringmaid Beach Resort , respectively. During the year endedDecember 31, 2021 , we recognized impairment charges of$6.6 million on210 West 31st Street and$4.4 million on Lincoln Court. During the year endedDecember 31, 2022 , we recognized impairment charges on goodwill of$5.5 million and$2.6 million onOakland City Center and theSpringmaid Beach Resort , respectively. During the year endedDecember 31, 2021 , we recognized impairment charges on goodwill of$1.6 million related to Lincoln Court and$1.2 million related to210 West 31st Street . 63 -------------------------------------------------------------------------------- Loss from unconsolidated entities increased from a loss of$1.4 million for the year endedDecember 31, 2021 to a loss of$8.0 million for the year endedDecember 31, 2022 , primarily related to the 353 Sacramento Joint Venture loss of$4.7 million , primarily as a result of the allowance for credit losses. Loss on real estate equity securities was$51.9 million for the year endedDecember 31, 2022 , all of which are unrealized losses on real estate securities held atDecember 31, 2022 . Gain on real estate equity securities was$28.6 million for the year endedDecember 31, 2021 , which was composed of$25.6 million unrealized gain on real estate securities held atDecember 31, 2021 and a$3.0 million realized gain on real estate securities sold during the year endedDecember 31, 2021 . During the year endedDecember 31, 2022 , we sold two office properties, one hotel and approximately 67 acres of developable land and recognized a gain on sale of real estate of$46.5 million . Additionally, due to the sale of the 67 acres of developable land, we recognized an income tax provision of$4.9 million . During the year endedDecember 31, 2021 , we sold one office property and approximately 193 acres of developable land and recognized a gain on sale of real estate of$30.3 million . During the year endedDecember 31, 2022 , we recognized a gain on extinguishment of debt of$2.4 million related to the forgiveness of theQ&C Hotel and Springmaid Beach Resort PPP loans. During the year endedDecember 31, 2021 , we recognized a loss on extinguishment of debt of$4.8 million , which is primarily related to the early payoff of the Series A Debentures of$6.7 million and partially offset by the forgiveness of the Springmaid Beach Resort PPP loan of$1.3 million and the payoff of the 1180 Raymond Bond of$0.8 million .
During the year ended
For a discussion of the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , please refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , which was filed with theSEC onMarch 28, 2022 and is incorporated herein by reference.
Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations
We believe that funds from operations ("FFO") is a beneficial indicator of the
performance of an equity REIT. We compute FFO in accordance with the current
National Association of Real Estate Investment Trusts ("NAREIT") definition. FFO
represents net income, excluding gains and losses from sales of operating real
estate assets (which can vary among owners of identical assets in similar
conditions based on historical cost accounting and useful-life estimates),
impairment losses on real estate assets, depreciation and amortization of real
estate assets, and adjustments for unconsolidated partnerships and joint
ventures. In addition, we elected the option to exclude mark-to-market changes
in value recognized on equity securities in the calculation of FFO. We believe
FFO facilitates comparisons of operating performance between periods and among
other REITs. However, our computation of FFO may not be comparable to other
REITs that do not define FFO in accordance with the NAREIT definition or that
interpret the current NAREIT definition differently than we do. Our management
believes that historical cost accounting for real estate assets in accordance
with GAAP implicitly assumes 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 the presentation of operating results for real estate companies that
use historical cost accounting to be insufficient by themselves. As a result, we
believe that the use of FFO, together with the required GAAP presentations,
provides a more complete understanding of our performance relative to our
competitors and provides a more informed and appropriate basis on which to make
decisions involving operating, financing, and investing activities.
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Changes in accounting rules have resulted in a substantial increase in the
number of non-operating and non-cash items included in the calculation of FFO.
As a result, our management also uses modified funds from operations ("MFFO") as
an indicator of our ongoing performance as well as our dividend sustainability.
MFFO excludes from FFO: acquisition fees and expenses (to the extent that such
fees and expenses have been recorded as operating expenses); adjustments related
to contingent purchase price obligations; amounts relating to straight-line
rents and amortization of above- and below-market intangible lease assets and
liabilities; accretion of discounts and amortization of premiums on debt
investments; amortization of closing costs relating to debt investments;
impairments of real estate-related investments; mark-to-market adjustments
included in net income; and gains or losses included in net income for the
extinguishment or sale of debt or hedges. We compute MFFO in accordance with the
definition of MFFO included in the practice guideline issued by the Institute
for Portfolio Alternatives ("IPA") in November 2010 as interpreted by
management. Our computation of MFFO may not be comparable to other REITs that do
not compute MFFO in accordance with the current IPA definition or that interpret
the current IPA definition differently than we do.
In addition, our management uses an adjusted MFFO ("Adjusted MFFO") as an
indicator of our ongoing performance, as well as our dividend sustainability.
Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses
that are capitalized with respect to certain of our investments in undeveloped
land and to increase MFFO related to subordinated performance fee due upon
termination to affiliate.
We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing
operating performance because they exclude costs that management considers more
reflective of investing activities and other non-operating items included in
FFO. Management believes that excluding acquisition costs, prior to our early
adoption of ASU No. 2017-01 on January 1, 2017 , from MFFO and Adjusted MFFO
provides investors with supplemental performance information that is consistent
with management's analysis of the operating performance of the portfolio over
time, including periods after our acquisition stage. MFFO and Adjusted MFFO
also exclude non-cash items such as straight-line rental revenue. Additionally,
we believe that MFFO and Adjusted MFFO provide investors with supplemental
performance information that is consistent with the performance indicators and
analysis used by management, in addition to net income and cash flows from
operating activities as defined by GAAP, to evaluate the sustainability of our
operating performance. MFFO provides comparability in evaluating the operating
performance of our portfolio with other non-traded REITs which typically have
limited lives with short and defined acquisition periods and targeted exit
strategies. MFFO, or an equivalent measure, is routinely reported by non-traded
REITs, and we believe often used by analysts and investors for comparison
purposes.
FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent
net income as defined by GAAP. Net income as defined by GAAP is the most
relevant measure in determining our operating performance because FFO, MFFO and
Adjusted MFFO include adjustments that investors may deem subjective, such as
adding back expenses such as depreciation and amortization and the other items
described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be
considered as alternatives to net income as an indicator of our current and
historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do
not represent cash flows from operating activities determined in accordance with
GAAP and should not be considered an indication of our liquidity. We believe
FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from
operating activities as defined by GAAP, are meaningful supplemental performance
measures.
Although MFFO includes other adjustments, the exclusion of straight-line rent,
the amortization of above- and below-market leases, the amortization of
discounts and closing costs, acquisition fees and expenses (as applicable), mark
to market foreign currency transaction adjustments, extinguishment of debt,
gains from consolidation of unconsolidated entities, and impairment of goodwill
are the most significant adjustments for the periods presented. We have
excluded these items based on the following economic considerations:
•Adjustments for straight-line rent. These are adjustments to rental revenue as
required by GAAP to recognize contractual lease payments on a straight-line
basis over the life of the respective lease. We have excluded these adjustments
in our calculation of MFFO to more appropriately reflect the current economic
impact of our in-place leases, while also providing investors with a useful
supplemental metric that addresses core operating performance by removing rent
we expect to receive in a future period or rent that was received in a prior
period;
•Amortization of above- and below-market leases. Similar to depreciation and
amortization of real estate assets and lease related costs that are excluded
from FFO, GAAP implicitly assumes that the value of intangible lease assets and
liabilities diminishes predictably over time and requires that these charges be
recognized currently in revenue. Since market lease rates in the aggregate have
historically risen or fallen with local market conditions, management believes
that by excluding these charges, MFFO provides useful supplemental information
on the realized economics of the real estate;
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•Transaction and related costs. Transaction and related costs related to
business combinations are expensed when incurred. Additionally, previously
capitalized offering costs were expensed due to termination of the NAV REIT
conversion. We exclude them from MFFO to more appropriately present the ongoing
operating performance of our real estate investments on a comparative basis. We
believe this exclusion is useful to investors as it allows investors to more
accurately evaluate the sustainability of our operating performance;
•Amortization of premium or discount on bond and notes payable. These are
adjustments to interest expense as required by GAAP to recognize bond and notes
payable discount and premiums on a straight-line basis over the life of the
respective bond or notes payable. We have excluded these adjustments in our
calculation of MFFO to appropriately reflect the current economic impact of our
bond and notes payable and related interest expense;
•Loss or gain on extinguishment of debt. A loss or gain on extinguishment of
debt, which includes prepayment fees related to the extinguishment of debt,
represents the difference between the carrying value of any consideration
transferred to the lender in return for the extinguishment of a debt and the net
carrying value of the debt at the time of settlement. We have excluded the loss
or gain from extinguishment of debt in our calculation of MFFO because these
losses or gains do not impact the current operating performance of our
investments and do not provide an indication of future operating performance;
and
•Mark-to-market foreign currency transaction adjustments. The U.S. Dollar is our
functional currency. Transactions denominated in currency other than our
functional currency are recorded upon initial recognition at the exchange rate
on the date of the transaction. After initial recognition, monetary assets and
liabilities denominated in foreign currency are remeasured at each reporting
date into the foreign currency at the exchange rate on that date. In addition,
we have entered into foreign currency collars and foreign currency options that
results in a foreign currency transaction adjustment. These amounts can increase
or reduce net income. We exclude them from MFFO to more appropriately present
the ongoing operating performance of our real estate investments on a
comparative basis;
•Gain from measurement of prior equity interest. A gain from measurement of
prior equity interest, represents a fair value gain on our previous investment
in shares of Battery Point Series A-3 Preferred Stock that was eliminated during
the acquisition of Battery Point . We have excluded the gain from measurement of
prior equity interest in our calculation of MFFO because these gains do not
impact the current operating performance of our investments and do not provide
an indication of future operating performance; and
•Gain from consolidation of previously unconsolidated entity. The gain was
recognized as part of a consolidation process of a previously unconsolidated
entity, where we became the primary beneficiary. We excluded the gain from MFFO
to more appropriately present the ongoing operating performance of our real
estate investments on a comparative basis.
Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes,
income tax provision, impairment of goodwill, property insurance and financing
costs which are capitalized with respect to certain of our investments in
undeveloped land. We have included adjustments for the costs incurred necessary
to bring these investments to their intended use, as these costs are recurring
operating costs that are capitalized in accordance with GAAP and not reflected
in our net income (loss), FFO and MFFO.
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Our calculation of FFO, which we believe is consistent with the calculation of
FFO as defined by NAREIT, is presented in the following table, along with our
calculations of MFFO and Adjusted MFFO, for the years ended December 31, 2022 ,
2021 and 2020 (in thousands). No conclusions or comparisons should be made from
the presentation of these periods.
For the Year Ended
2022 2021 2020
Net loss attributable to common stockholders $ (43,242) $ (10,955) $ (49,008)
Depreciation and amortization 51,930 58,871 45,041
Impairment charges on real estate and related intangibles 18,493
10,971 -
(Gain) loss on sale of real estate (1) (46,513) (30,261) 110
Loss (gain) on real estate equity securities 51,943 (28,632) 14,814
Adjustments for noncontrolling interests - consolidated entities (2)
(2,375) (2,858) (846)
Adjustments for investments in unconsolidated entities (3) (5,460)
1,479 6,718
FFO attributable to common stockholders (4) 24,776 (1,385) 16,829
Straight-line rent and amortization of above- and
below-market leases (3,590) (3,166) (4,299)
Transaction and related costs - 2,984 6,018Amortization of net premium/discount on bond and notes payable
4,784 2,721 602
(Gain) loss on extinguishment of debt (2,367) 4,757 (415)
Unrealized (gain) loss on interest rate caps (1,530) 11 27
Foreign currency transaction (gain) loss, net (29,038) 7,445 2,912
Gain from remeasurement of prior equity interest - - (2,009)
Gain from consolidation of previously unconsolidated entity (18,742)
- -
Adjustments for noncontrolling interests - consolidated entities (2)
(108) (161) (100)
Adjustments for investments in unconsolidated entities (3) 3,135
1,213 (4,649)
MFFO attributable to common stockholders (22,680) 14,419 14,916
Other capitalized operating expenses (4) (3,128) (2,620) (3,376)
Impairment charges on goodwill 8,098 2,808 -
Income tax provision 4,924 - -
Casualty gain - (27) (51)Subordinated performance fee due upon termination to affiliate
- 1,678 (1,720)
Adjusted MFFO attributable to common stockholders $ (12,786) $ 16,258 $ 9,769
_____________________
(1) Reflects an adjustment to eliminate loss or gain on sale of real estate, which includes undepreciated land sales.
(2) Reflects adjustments to eliminate the noncontrolling interest holders' share of the adjustments to convert our net income (loss) attributable to common stockholders to FFO, MFFO and Adjusted MFFO.
(3) Reflects adjustments to add back our noncontrolling interest share of the
adjustments to convert our net income (loss) attributable to common stockholders
to FFO, MFFO and Adjusted MFFO for our equity investments in unconsolidated
joint ventures.
(4) Reflects real estate taxes, property insurance and financing costs that are
capitalized with respect to certain of our investments in undeveloped land.
During the periods in which we are incurring costs necessary to bring these
investments to their intended use, certain normal recurring operating costs are
capitalized in accordance with GAAP and not reflected in our net income (loss),
FFO and MFFO.
FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain
capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as
tenant improvements, building improvements and deferred leasing costs. We expect
FFO, MFFO and Adjusted MFFO to improve in future periods to the extent that we
continue to lease up vacant space and acquire additional assets. We expect FFO,
MFFO and Adjusted MFFO to decrease as a result of dispositions.
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--------------------------------------------------------------------------------Distributions
Distributions declared, distributions paid and cash flows provided by operations
related to common stockholders were as follows during 2022 (in thousands, except
per share amounts):
Distributions Distributions Paid Cash Flows (Used
Distribution Declared in) Provided by
Period Declared Per Share Cash Reinvested Total Operations
First Quarter 2022 $ - $ - $ 11,016 $ 99,094 $ 110,110 $ 315
Second Quarter 2022 - - - - - 12,016
Third Quarter 2022 - - - - - (3,671)
Fourth Quarter 2022 - - - - - 2,208
$ - $ - $ 11,016 $ 99,094 $ 110,110 $ 10,868
On December 28, 2021 , our board of directors authorized a special dividend of
$1.17 per share of common stock payable in either shares of our common stock or
cash to, and at the election of, the stockholders of record as of December 30,
2021 . The special dividend was paid in January 2022 to stockholders of record as
of the close of business on the record date. If stockholders elected all cash,
their election was subject to adjustment such that the aggregate amount of cash
to be distributed by us will be a maximum of 10% of the total special dividend,
with the remainder to be paid in shares of common stock. The aggregate amount of
cash paid by us pursuant to the special dividend and the actual number of shares
of common stock issued pursuant to the special dividend depended upon the number
of stockholders who elected cash or stock and whether the maximum cash
distribution was met.
Our net loss attributable to common stockholders for the year ended December 31,
2022 was $41.4 million and cash flow provided by operations was $10.9 million .
Our cumulative distributions paid and net loss attributable to common
stockholders from inception through December 31, 2022 was $495.8 million . We
have funded our cumulative distributions paid, which includes net cash
distributions and distributions reinvested by stockholders, with prior period
cash flow from operating activities in excess of distributions paid and with
cash from gains realized from the disposition of properties. To the extent that
we pay distributions from sources other than our cash flow from operations or
gains from asset sales, we will have fewer funds available for investment in
real estate-related loans, opportunistic real estate, real estate-related debt
securities, real estate equity securities and other real estate-related
investments, the overall return to our stockholders may be reduced and
subsequent investors may experience dilution.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies that management considers
critical in that they involve significant management judgments and assumptions,
require estimates about matters that are inherently uncertain and because they
are important for understanding and evaluating our reported financial results.
These judgments will affect the reported amounts of assets and liabilities and
our disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the
reporting periods. With different estimates or assumptions, materially different
amounts could be reported in our financial statements. Additionally, other
companies may utilize different estimates that may impact the comparability of
our results of operations to those of companies in similar businesses.
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Real Estate Acquisition Valuation
As a result of our adoption of ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, acquisitions of real estate beginningJanuary 1, 2017 could qualify as asset acquisitions (as opposed to business combinations). We record the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination or an asset acquisition. If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, then the set is not a business. For purposes of this test, land and buildings can be combined along with the intangible assets for any in-place leases and accordingly, most acquisitions of investment properties would not meet the definition of a business and would be accounted for as an asset acquisition. To be considered a business, a set must include an input and a substantive process that together significantly contributes to the ability to create an output. All assets acquired and liabilities assumed in a business combination are measured at their acquisition date fair values. For asset acquisitions, the cost of the acquisition is allocated to individual assets and liabilities on a relative fair value basis. Acquisition costs associated with business combinations are expensed as incurred. Acquisition costs associated with asset acquisitions are capitalized. Intangible assets include the value of in-place leases, which represents the estimated value of the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. Acquired in-place lease value will be amortized to expense over the average remaining terms of the respective in-place leases, including any below-market renewal periods. We assess the acquisition date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant. We record above-market and below-market in-place lease values for acquired properties based on the present value (using a discount that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases and for the initial term plus any extended term for any leases with below-market renewal options. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods. We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease up periods, considering current market conditions. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods.
We amortize the value of tenant origination and absorption costs to depreciation and amortization expense over the remaining non-cancelable terms of the leases.
Estimates of the fair values of the tangible assets, identifiable intangibles
and assumed liabilities require us to make significant assumptions to estimate
market lease rates, property-operating expenses, carrying costs during lease-up
periods, discount rates, market absorption periods, and the number of years the
property will be held for investment. The use of inappropriate assumptions would
result in an incorrect valuation of our acquired tangible assets, identifiable
intangibles and assumed liabilities, which would impact the amount of our net
income.
Direct investments in undeveloped land or properties without leases in place at
the time of acquisition are accounted for as an asset acquisition and not as a
business combination. Acquisition fees and expenses are capitalized into the
cost basis of an asset acquisition. Additionally, during the time in which we
are incurring costs necessary to bring these investments to their intended use,
certain costs such as legal fees, real estate taxes and insurance and financing
costs are also capitalized.
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Depreciation and Amortization
Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. We consider the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements are capitalized and amortized over the shorter of the tenant's lease term or expected useful life. We anticipate the estimated useful lives of our assets by class to be generally as follows: Land N/A Buildings 25-40 yearsBuilding Improvements 10-40 years Tenant Improvements Shorter of lease term or
expected useful life Tenant origination and absorption costs Remaining term of related leases, including
below-market renewal periods
Real estate subsidies & tax abatements Remaining term of agreement Furniture, fixtures & equipment
3-12 years
Impairment of Real Estate and Related Intangibles
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangibles may not be recoverable or realized. When indicators of potential impairment suggest that the carrying value of real estate and related intangibles may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the real estate and related intangibles through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate and related intangibles, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangibles. Consequently, we recognized impairment charges of$18.5 million during the year endedDecember 31, 2022 for changes to the fair value of the real estate and related intangibles impairment testing purposes. Projecting future cash flows involves estimating expected future operating income and expenses related to the real estate and its related intangibles as well as market and other trends. Using inappropriate assumptions to estimate cash flows could result in incorrect fair values of the real estate and its related intangibles and could result in the overstatement of the carrying values of our real estate and related intangibles and an overstatement of our net income.
Impairment of
We continually assess whether there has been a triggering event requiring a review of goodwill. Independent appraisal valuations were performed as ofSeptember 30, 2022 for the underlying properties and we updated projected cash flows for real estate held in certain reporting units. The appraisals and projected cash flow decline represented a triggering event in the fourth quarter of 2022 to the estimated fair value of goodwill. Consequently, we recognized impairment charges of$8.1 million for changes to the fair value of the reporting unit for goodwill impairment testing purposes.
We concluded that the estimated fair value for all of the other reporting units
with goodwill substantially exceeded their related carrying values and no
further impairment was necessary as of
The carrying value of each reporting unit for the purpose of the goodwill
impairment test is determined by considering the reporting units' appraisals,
3-year NOI projections and other macroeconomic factors related to the reporting
units. In estimating the fair value of reporting units, we applied a combination
of the market approach and the income approach. Under the market approach,
consideration is given to price to projected appraised value for similarly
comparable real estate assets and prices paid in recent transactions that have
occurred in its geographical area. Under the income approach, a discount rate is
applied that reflects the risk and uncertainty related to the reporting unit's
projected net operating income, which was determined by our asset management
team. In determining the estimated fair value, we relied upon the latest 3-year
NOI projections, which included significant management assumptions and estimates
based on our view of current and future economic conditions. Estimates of our
future earnings potential, and that of the reporting units, involve considerable
judgment, including management's view on future changes in market cycles, the
return-to-work environment, the anticipated result of the office sector,
competitive factors and assumptions concerning the market conditions.
We engaged the services of an independent valuation specialist to assist in the
valuation of certain reporting units. The results of the impairment evaluation
of each reporting unit's goodwill would be significantly impacted by adverse
changes in the underlying parameters used in the valuation process. If actual
outcomes or the future outlook adversely differ from management's best estimates
of the key economic assumptions and associated cash flows applied in the
valuation of the reporting unit, we could potentially incur material impairment
charges in the future.
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--------------------------------------------------------------------------------Subsequent Events
We evaluate subsequent events up until the date the consolidated financial statements are issued.
Park Highlands Land Sales
On
On
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