Douglas Emmett Inc - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2007
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or
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD
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FROM
TO
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Commission
file number: 1-33106
DOUGLAS
EMMETT, INC.
(Exact
name of registrant as specified in its charter)
MARYLAND
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(20-3073047)
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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808
Wilshire Boulevard, 2nd
Floor
Santa
Monica, California 90401
(310)
255-7700
(Address,
Including Zip Code and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Shares, $0.01 par value per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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Yes
x
or No ¨
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15 (d) of the Act.
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Yes
¨
or No x
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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Yes
x
or No ¨
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
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x
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act.
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Large
Accelerated Filer x
Accelerated
Filer ¨
Non-Accelerated
Filer ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
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Yes
¨
or No x
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The
aggregate market value of the common stock, $0.01 par value, held by
non-affiliates of the registrant, as of June 30, 2007, was $2.6
billion.
The
registrant had 120,181,300 shares of its common stock, $0.01 par value,
outstanding as of February 8, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for the fiscal year ended
December 31, 2007 (“Proxy Statement”) to be issued in conjunction with the
registrant’s annual meeting of shareholders to be held in 2008 are incorporated
by reference in Part III of this Report on Form 10-K (this
“Report”). The Proxy Statement will be filed by the registrant with
the Securities and Exchange Commission not later than 120 days after the end of
the registrant’s fiscal year ended December 31, 2007.
DOUGLAS EMMETT, INC.
FORM
10-K TABLE OF CONTENTS
PAGE
NO.
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PART
I.
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Item
1.
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4
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Item
1A.
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8
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Item
1B.
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19
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Item
2.
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Item
3.
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25
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Item
4.
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PART
II.
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Item
5.
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26
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Item
6.
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28
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Item
7.
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29
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Item
7A.
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37
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Item
8.
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38
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Item
9.
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38
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Item
9A.
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38
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Item
9B.
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38
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PART
III.
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Item
10.
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39
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Item
11.
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39
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Item
12.
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39
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Item
13.
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39
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Item
14.
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39
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PART
IV.
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Item
15.
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40
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Exhibit 31.1
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Exhibit 31.2
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Exhibit 32.1
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Exhibit 32.2
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Forward
Looking Statements.
This
Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. You can find many
(but not all) of these statements by looking for words such as “approximates,”
“believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,”
“may” or other similar expressions in this Report. We claim the
protection of the safe harbor contained in the Private Securities Litigation
Reform Act of 1995. We caution investors that any forward-looking
statements presented in this Report, or those which we may make orally or in
writing from time to time, are based on the beliefs of, assumptions made by, and
information currently available to us. Such statements are based on
assumptions and the actual outcome will be affected by known and unknown risks,
trends, uncertainties and factors that are beyond our control or ability to
predict. Although we believe that our assumptions are reasonable, they are
not guarantees of future performance and some will inevitably prove to be
incorrect. As a result, our actual future results can be expected to
differ from our expectations, and those differences may be
material. Accordingly, investors should use caution in relying on
past forward-looking statements, which are based on known results and trends at
the time they are made, to anticipate future results or trends.
Some
of the risks and uncertainties that may cause our actual results, performance or
achievements to differ materially from those expressed or implied by
forward-looking statements include the following: adverse economic or real
estate developments in Southern California and Honolulu; decreased rental rates
or increased tenant incentive and vacancy rates; defaults on, early termination
of, or non-renewal of leases by tenants; increased interest rates and operating
costs; failure to generate sufficient cash flows to service our outstanding
indebtedness; difficulties in identifying properties to acquire and completing
acquisitions; failure to successfully operate acquired properties and
operations; failure to maintain our status as a REIT under the Internal Revenue
Code of 1986, as amended(the Internal Revenue Code); possible adverse changes in
rent control laws and regulations; environmental uncertainties; risks related to
natural disasters; lack or insufficient amount of insurance; inability to
successfully expand into new markets and submarkets; risks associated with
property development; conflicts of interest with our officers; changes in real
estate; zoning laws and increases in real property tax rates; and the
consequences of any future terrorist attacks. For further discussion of these
and other factors, see “Item 1A. Risk Factors” of this
Report.
This
Report and all subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. We do not undertake any obligation to release publicly any
revisions to our forward-looking statements to reflect events or circumstances
after the date of this Report.
PART
I.
Item
1. Business
Overview
We are a
fully integrated, self-administered and self-managed real estate investment
trust (or REIT) and one of the largest owners and operators of high-quality
office and multifamily properties in Los Angeles County, California and in
Honolulu, Hawaii. Our presence in Los Angeles and Honolulu is the
result of a consistent and focused strategy of identifying submarkets that are
supply constrained, have high barriers to entry and exhibit strong economic
characteristics such as population and job growth and a diverse economic
base. In our office portfolio, we focus primarily on owning and
acquiring a substantial share of top-tier office properties within submarkets
located near high-end executive housing and key lifestyle
amenities. In our multifamily portfolio, we focus primarily on owning
and acquiring select properties at premier locations within these same
submarkets.
Our
Competitive Strengths and Growth Strategies
We
believe that we distinguish ourselves from other owners and operators of office
and multifamily properties through the following competitive strengths and
strategies:
•
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Concentration of High Quality
Office Assets and Multifamily Portfolio in Premier
Submarkets. We intend to continue our core strategy of
owning and operating office and multifamily properties within submarkets
that are supply constrained, have high barriers to entry, offer key
lifestyle amenities, are close to high-end executive housing, and exhibit
strong economic characteristics such as population and job growth and a
diverse economic base.
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•
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Disciplined Strategy of
Developing Substantial Market Share. We
believe that establishing and maintaining significant market presence can
provide us with extensive local transactional market information, enable
us to leverage our pricing power in lease and vendor negotiations, and
enhance our ability to identify and seize emerging investment
opportunities.
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•
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Diverse Tenant
Base. Our markets attract a diverse base of office
tenants that operate a variety of professional, financial and other
businesses.
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•
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Proactive Asset and Property
Management. With few exceptions, we provide
our own, fully integrated property management and leasing for our office
and multifamily properties and our own tenant improvement construction
services for our office properties. Our extensive leasing
infrastructure of personnel, policies and procedures allows us to manage
and lease a large property portfolio with a diverse group of smaller
tenants.
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•
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Office and Multifamily
Acquisition Strategy. We intend strategically to
increase our market share in our existing submarkets, and may selectively
enter into other submarkets with similar characteristics, where we believe
we can gain significant market share, both within and outside of Los
Angeles County and Honolulu.
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Insurance
We carry
comprehensive liability, fire, extended coverage, business interruption and
rental loss insurance covering all of the properties in our portfolio under a
blanket insurance policy. We believe the policy specifications and
insured limits are appropriate and adequate given the relative risk of loss, the
cost of the coverage and industry practice; however, our insurance coverage may
not be sufficient to fully cover our losses. We do not carry
insurance for certain losses, including, but not limited to, losses caused by
riots or war. Some of our policies, like those covering losses due to
terrorism, earthquakes and floods, are insured subject to limitations involving
substantial self insurance portions and significant deductibles and co-payments
for such events. In addition, most of our properties are located in
Southern California, an area subject to an increased risk of
earthquakes. While we presently carry earthquake insurance on our
properties, the amount of our earthquake insurance coverage may not be
sufficient to fully cover losses from earthquakes. We may reduce or
discontinue earthquake, terrorism or other insurance on some or all of our
properties in the future if the cost of premiums for any of these policies
exceeds, in our judgment, the value of the coverage discounted for the risk of
loss. In addition, if certain of our properties were destroyed, we
might not be able to rebuild them due to current zoning and land use
regulations. In addition, our title insurance policies may not insure
for the current aggregate market value of our portfolio, and we do not intend to
increase our title insurance coverage as the market value of our portfolio
increases.
Competition
We
compete with a number of developers, owners and operators of office and
commercial real estate, many of which own properties similar to ours in the same
markets in which our properties are located. If our competitors offer
space at rental rates below current market rates, or below the rental rates we
currently charge our tenants, we may lose potential tenants and we may face
pressure to reduce our rental rates below those we currently charge or to offer
more substantial rent abatements, tenant improvements, early termination rights
or below-market renewal options in order to retain tenants when our tenants’
leases expire. In that case, our financial condition, results of
operations, cash flow, per share trading price of our common stock and ability
to satisfy our debt service obligations and to pay dividends to our stockholders
may be adversely affected.
In
addition, all of our multifamily properties are located in developed areas that
include a number of other multifamily properties, as well as single-family
homes, condominiums and other residential properties. The number of
competitive multifamily and other residential properties in a particular area
could have a material adverse effect on our ability to lease units and on our
rental rates.
Property
Management Services
We
provide all property management services for our Los Angeles County properties
and substantially all property management services for our Honolulu
properties.
Taxation
of Douglas Emmett, Inc.
We
believe that we have operated in such a manner as to qualify for taxation as a
REIT under the Internal Revenue Code, commencing with our taxable year ended
December 31, 2006, and we intend to continue to operate in such a manner. No
assurance can be given that we have operated or will be able to continue to
operate in a manner so as to qualify or to remain so qualified. This summary is
qualified in its entirety by the applicable Internal Revenue Code provisions,
rules and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
If we
qualify for taxation as a REIT, we will generally not be required to pay federal
corporate income taxes on the portion of our net income that is currently
distributed to stockholders. This treatment substantially eliminates the “double
taxation” (i.e., at the corporate and stockholder levels) that generally results
from investment in a corporation. However, we will be required to pay federal
income tax under certain circumstances.
The
Internal Revenue Code defines a REIT as a corporation, trust or association (i)
which is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) which would be taxable, but for
Sections 856 through 860 of the Internal Revenue Code, as a domestic
corporation; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Internal Revenue Code; (v) the
beneficial ownership of which is held by 100 or more persons; (vi) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, actually or constructively, by five or fewer
individuals; and (vii) which meets certain other tests, described below,
regarding the amount of its distributions and the nature of its income and
assets. The Internal Revenue Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months.
There are
presently two gross income requirements. First, at least 75% of our gross income
(excluding gross income from “prohibited transactions” as defined below) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property or from certain types of
temporary investment income. Second, at least 95% of our gross income (excluding
gross income from prohibited transactions and qualifying hedges) for each
taxable year must be derived from income that qualifies under the 75% test and
other dividends, interest and gain from the sale or other disposition of stock
or securities. A “prohibited transaction” is a sale or other disposition of
property (other than foreclosure property) held for sale to customers in the
ordinary course of business.
At the
close of each quarter of our taxable year, we must also satisfy four tests
relating to the nature of our assets. First, at least 75% of the value of our
total assets must be represented by real estate assets including shares of stock
of other REITs, certain other stock or debt instruments purchased with the
proceeds of a stock offering or long term public debt offering by us (but only
for the one-year period after such offering), cash, cash items and government
securities. Second, not more than 25% of our total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer’s securities owned
by us may not exceed 5% of the value of our total assets and we may not own more
than 10% of the vote or value of the securities of a non-REIT corporation, other
than certain debt securities and interests in taxable REIT subsidiaries or
qualified REIT subsidiaries, each as defined below. Fourth, not more than 20% of
the value of our total assets may be represented by securities of one or more
taxable REIT subsidiaries.
We own
interests in various partnerships and limited liability companies. In the case
of a REIT that is a partner in a partnership or a member of a limited liability
company that is treated as a partnership under the Internal Revenue Code,
Treasury Regulations provide that for purposes of the REIT income and asset
tests, the REIT will be deemed to own its proportionate share of the assets of
the partnership or limited liability company (determined in accordance with its
capital interest in the entity), subject to special rules related to the 10%
asset test, and will be deemed to be entitled to the income of the partnership
or limited liability company attributable to such share. The ownership of an
interest in a partnership or limited liability company by a REIT may involve
special tax risks, including the challenge by the Internal Revenue Service (the
“Service”) of the allocations of income and expense items of the partnership or
limited liability company, which would affect the computation of taxable income
of the REIT, and the status of the partnership or limited liability company as a
partnership (as opposed to an association taxable as a corporation) for federal
income tax purposes.
We also
own interests in a number of subsidiaries which are intended to be treated as
qualified REIT subsidiaries (each a “QRS”). The Internal Revenue Code provides
that such subsidiaries will be ignored for federal income tax purposes and all
assets, liabilities and items of income, deduction and credit of such
subsidiaries will be treated as our assets, liabilities and such items. If any
partnership, limited liability company, or subsidiary in which we own an
interest were treated as a regular corporation (and not as a partnership,
subsidiary REIT, QRS or taxable REIT subsidiary, as the case may be) for federal
income tax purposes, we would likely fail to satisfy the REIT asset tests
described above and would therefore fail to qualify as a REIT, unless certain
relief provisions apply. We believe that each of the partnerships, limited
liability companies, and subsidiaries (other than taxable REIT subsidiaries) in
which we own an interest will be treated for tax purposes as a partnership,
disregarded entity (in the case of a 100% owned partnership or limited liability
company), REITor QRS, as applicable, although no assurance can be given that the
Service will not successfully challenge the status of any such
organization.
As of
December 31, 2007, we owned interests Douglas Emmett Builders (DEB) which we
have elected, jointly with DEB, to be treated as a taxable REIT
subsidiary. A REIT may own any percentage of the voting stock and
value of the securities of a corporation which jointly elects with the REIT to
be a taxable REIT subsidiary, provided certain requirements are met. A taxable
REIT subsidiary generally may engage in any business, including the provision of
customary or noncustomary services to tenants of its parent REIT and of others,
except a taxable REIT subsidiary may not manage or operate a hotel or healthcare
facility. A taxable REIT subsidiary is treated as a regular corporation and is
subject to federal income tax and applicable state income and franchise taxes at
regular corporate rates. In addition, a 100% tax may be imposed on a REIT if its
rental, service or other agreements with its taxable REIT subsidiary, or the
taxable REIT subsidiary’s agreements with the REIT’s tenants, are not on
arm’s-length terms.
In order
to qualify as a REIT, we are required to distribute dividends (other than
capital gain dividends) to our stockholders in an amount at least equal to (A)
the sum of (i) 90% of our “real estate investment trust taxable income”
(computed without regard to the dividends paid deduction and our net capital
gain) and (ii) 90% of the net income, if any (after tax), from foreclosure
property, minus (B) the sum of certain items of non-cash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before we timely file our tax return for such
year, if paid on or before the first regular dividend payment date after such
declaration and if we so elect and specify the dollar amount in our tax return.
To the extent that we do not distribute all of our net long-term capital gain or
distribute at least 90%, but less than 100%, of our REIT taxable income, we will
be required to pay tax thereon at regular corporate tax rates. Furthermore, if
we should fail to distribute during each calendar year at least the sum of (i)
85% of our ordinary income for such year, (ii) 95% of our capital gain income
for such year, and (iii) any undistributed taxable income from prior periods, we
would be required to pay a 4% excise tax on the excess of such required
distributions over the amounts actually distributed.
If we
fail to qualify for taxation as a REIT in any taxable year, and certain relief
provisions do not apply, we will be required to pay tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to our stockholders in any year in which we fail
to qualify will not be deductible by us nor will such distributions be required
to be made. Unless entitled to relief under specific statutory provisions, we
will also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances we would be entitled to the statutory relief.
Failure to qualify for even one year could substantially reduce distributions to
stockholders and could result in our incurring substantial indebtedness (to the
extent borrowings are feasible) or liquidating substantial investments in order
to pay the resulting taxes.
We and
our stockholders may be required to pay state or local tax in various state or
local jurisdictions, including those in which we or they transact business or
reside. The state and local tax treatment of us and our stockholders may not
conform to the federal income tax consequences discussed above.
We may
also be subject to certain taxes applicable to REITs, including taxes in lieu of
disqualification as a REIT, on undistributed income, on income from prohibited
transactions and on built-in gains from the sale of certain assets acquired from
C corporations in tax-free transactions during a specified time
period.
Regulation
General. Our
properties are subject to various covenants, laws, ordinances and regulations,
including regulations relating to common areas and fire and safety
requirements.
Americans With Disabilities
Act. Our properties must comply with Title III of the
Americans with Disabilities Act (ADA) to the extent that such properties are
“public accommodations” as defined by the ADA. Under the ADA, all
public accommodations must meet federal requirements related to access and use
by disabled persons. The ADA may require removal of structural
barriers to access by persons with disabilities in certain public areas of our
properties where such removal is readily achievable. Although we
believe that the properties in our portfolio in the aggregate substantially
comply with present requirements of the ADA, we have not conducted a
comprehensive audit or investigation of all of our properties to determine our
compliance, and we are aware that some particular properties may currently be in
non-compliance with the ADA. Noncompliance with the ADA could result
in the incurrence of additional costs to attain compliance. The
obligation to make readily achievable accommodations is an ongoing one, and we
will continue to assess our properties and to make alterations as appropriate in
this respect.
Environmental
Matters. Environmental laws regulate, and impose liability
for, releases of hazardous or toxic substances into the
environment. Under various provisions of these laws, an owner or
operator of real estate is or may be liable for costs related to soil or
groundwater contamination on, in, or migrating to or from its
property. In addition, persons who arrange for the disposal or
treatment of hazardous or toxic substances may be liable for the costs of
cleaning up contamination at the disposal site. Such laws often
impose liability regardless of whether the person knew of, or was responsible
for, the presence of the hazardous or toxic substances that caused the
contamination. The presence of, or contamination resulting from, any
of these substances, or the failure to properly remediate them, may adversely
affect our ability to sell or rent our property or to borrow using such property
as collateral. In addition, persons exposed to hazardous or toxic
substances may sue for personal injury damages. For example, some
laws impose liability for release or exposure to asbestos-containing materials,
a substance known to be present in a number of our buildings. In
other cases, some of our properties have been (or may have been) affected by
contamination from past operations or from off-site sources. As a
result, in connection with our current or former ownership, operation,
management and development of real properties, we may be potentially liable for
investigation and cleanup costs, penalties, and damages under environmental
laws.
Although
most of our properties have been subjected to Phase I assessments, they were
limited in scope, and may not have included or identified all potential
environmental liabilities or risks associated with the subject
properties. Unless required by applicable laws or regulations, we may
not further investigate, remedy or ameliorate the liabilities disclosed in the
Phase I assessments.
Rent Control. The
City of Los Angeles and Santa Monica have enacted rent control legislation, and
portions of the Honolulu multifamily market are subject to low and
moderate-income housing regulations. Such laws and regulations limit
our ability to increase rents, evict tenants or recover increases in our
operating expenses and could make it more difficult for us to dispose of
properties in certain circumstances. In addition, any failure to
comply with low and moderate-income housing regulations could result in the loss
of certain tax benefits and the forfeiture of rent payments. Although
under current California law we are able to increase rents to market rates once
a tenant vacates a rent-controlled unit, any subsequent increases in rental
rates will remain limited by Los Angeles and Santa Monica rent control
regulations.
Employees
As of
December 31, 2007, we employed approximately 480 persons. We believe
that our relationships with our employees are good.
Corporate
Structure
We were
formed as a Maryland corporation on June 28, 2005 to continue and expand
the operations of our “predecessor”, Douglas Emmett Realty Advisors, Inc. and
its consolidated funds. All of our assets are directly or indirectly
held by, and our operations are run through, our operating partnership, which
was formed as a Delaware limited partnership on July 25,
2005. Our interest in our operating partnership entitles us to share
in cash distributions, profits and losses of our operating partnership in
proportion to our percentage ownership. As the sole stockholder of
the general partner of our operating partnership, under the partnership
agreement of our operating partnership we generally have the exclusive power to
manage and conduct its business, subject to certain limited approval and voting
rights of the other limited partners.
Segments
We
operate in two business segments: Office Properties and Multifamily
Properties. Information related to our business segments for 2007,
2006 and 2005 is set forth in Note 18 to our consolidated financial statements
in Item 8 of this Report.
Principal
Executive Offices
Our
principal executive offices are located in the building we own at 808 Wilshire
Boulevard, Santa Monica, California 90401 (telephone
310-255-7700). We believe that our current facilities are adequate
for our present and future operations, although we may add regional offices or
relocate our headquarters, depending upon our future development
projects.
Available
Information
We make
available free of charge on our website at www.douglasemmett.com our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments thereto, as soon as reasonably practicable after we file
such reports with, or furnish them to, the Securities and Exchange Commission
(“SEC”). None of the information on or hyperlinked from our website is
incorporated into this Report.
Item
1A. Risk Factors
The
following section includes some of the material factors that may adversely
affect our business and operations. This is not an exhaustive list,
and additional factors could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and
it is not possible for us to predict all such risk factors, nor can we assess
the impact of all such risk factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. This
discussion of risk factors includes many forward-looking
statements. For cautions about relying on such forward-looking
statements, please refer to the section entitled “Forward Looking Statements” at
the beginning of this Report immediately prior to Item 1.
Risks
Related to Our Properties and Our Business
All of our properties are located in
Los Angeles County, California and Honolulu, Hawaii, and we are dependent on the
Southern California and Honolulu economies and are susceptible to adverse local
regulations and natural disasters in those areas. Because all of our
properties are concentrated in Los Angeles County, California and Honolulu,
Hawaii, we are exposed to greater economic risks than if we owned a more
geographically dispersed portfolio. Further, within Los Angeles
County, our properties are concentrated in certain submarkets, exposing us to
risks associated with those specific areas. We are susceptible to
adverse developments in the Los Angeles County, Southern California and Honolulu
economic and regulatory environment (such as business layoffs or downsizing,
industry slowdowns, relocations of businesses, increases in real estate and
other taxes, costs of complying with governmental regulations or increased
regulation and other factors) as well as natural disasters that occur in these
areas (such as earthquakes, floods and other events). In addition,
the State of California is also regarded as more litigious and more highly
regulated and taxed than many states, which may reduce demand for office space
in California. Any adverse developments in the economy or real estate
market in Los Angeles County, Southern California in general, or Honolulu, or
any decrease in demand for office space resulting from the California or
Honolulu regulatory or business environment could adversely impact our financial
condition, results of operations, cash flow, the per share trading price of our
common stock and our ability to satisfy our debt service obligations and to pay
dividends to our stockholders. We cannot assure the continued growth
of the Los Angeles County, Southern California or Honolulu economies or of our
company.
Our operating performance is subject
to risks associated with the real estate industry. Real estate
investments are subject to various risks and fluctuations and cycles in value
and demand, many of which are beyond our control. Certain events may
decrease cash available for dividends, as well as the value of our
properties. These events include, but are not limited
to:
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adverse
changes in international, national or local economic and demographic
conditions;
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vacancies
or our inability to rent space on favorable terms, including possible
market pressures to offer tenants rent abatements, tenant improvements,
early termination rights or below-market renewal
options;
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adverse
changes in financial conditions of buyers, sellers and tenants of
properties;
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inability
to collect rent from tenants;
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competition
from other real estate investors with significant capital, including other
real estate operating companies, publicly traded REITs and institutional
investment funds;
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reductions
in the level of demand for commercial space and residential units, and
changes in the relative popularity of
properties;
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increases
in the supply of office space and multifamily
units;
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fluctuations
in interest rates and the availability of credit, which could adversely
affect our ability, or the ability of buyers and tenants of properties, to
obtain financing on favorable terms or at
all;
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increases
in expenses, including, without limitation, insurance costs, labor costs
(the unionization of our employees and our subcontractors’ employees that
provide services to our buildings could substantially increase our
operating costs), energy prices, real estate assessments and other taxes
and costs of compliance with laws, regulations and governmental policies,
and we may be restricted in passing on these increases to our
tenants;
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the
effects of rent controls, stabilization laws and other laws or covenants
regulating rental rates; and
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changes
in, and changes in enforcement of, laws, regulations and governmental
policies, including, without limitation, health, safety, environmental,
zoning and tax laws, governmental fiscal policies and the Americans with
Disabilities Act of 1990, or ADA.
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In
addition, periods of economic slowdown or recession, rising interest rates or
declining demand for real estate, or the public perception that any of these
events may occur, could result in a general decline in rents or an increased
incidence of defaults under existing leases. If we cannot operate our
properties to meet our financial expectations, our financial condition, results
of operations, cash flow, per share trading price of our common stock and
ability to satisfy our debt service obligations and to pay dividends to our
stockholders could be adversely affected. There can be no assurance
that we can achieve our return objectives.
We have a substantial amount of
indebtedness, which may affect our ability to pay dividends, may expose us to
interest rate fluctuation risk and may expose us to the risk of default under
our debt obligations. As of December 31, 2007, our total
consolidated indebtedness was approximately $3.1 billion, excluding loan
premiums, and we may incur significant additional debt for various purposes,
including, without limitation, to fund future acquisition and development
activities and operational needs. In addition, we have approximately
$190 million remaining for use under our $370 million senior secured
revolving credit facility.
Payments
of principal and interest on borrowings may leave us with insufficient cash
resources to operate our properties or to pay the distributions currently
contemplated or necessary to maintain our REIT qualification. Our
substantial outstanding indebtedness, and the limitations imposed on us by our
debt agreements, especially in periods like the present when credit is harder to
obtain, could have significant other adverse consequences, including the
following:
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our
cash flow may be insufficient to meet our required principal and interest
payments;
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we
may be unable to borrow additional funds as needed or on favorable terms,
which could, among other things, adversely affect our ability to
capitalize upon emerging acquisition opportunities or meet operational
needs;
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we
may be unable to refinance our indebtedness at maturity or the refinancing
terms may be less favorable than the terms of our original
indebtedness;
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we
may be forced to dispose of one or more of our properties, possibly on
disadvantageous terms;
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we
may violate restrictive covenants in our loan documents, which would
entitle the lenders to accelerate our debt
obligations;
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we
may be unable to hedge floating rate debt, counterparties may fail to
honor their obligations under our hedge agreements, these agreements may
not effectively hedge interest rate fluctuation risk, and, upon the
expiration of any hedge agreements we do have, we will be exposed to
then-existing market rates of interest and future interest rate volatility
with respect to indebtedness that is currently
hedged;
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we
may default on our obligations and the lenders or mortgagees may foreclose
on our properties that secure their loans and receive an assignment of
rents and leases; and
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our
default under any of our indebtedness with cross default provisions could
result in a default on other
indebtedness.
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If any
one of these events were to occur, our financial condition, results of
operations, cash flow, per share trading price of our common stock and our
ability to satisfy our debt service obligations and to pay dividends to our
stockholders could be adversely affected. In addition, any
foreclosure on our properties could create taxable income without accompanying
cash proceeds, which could adversely affect our ability to meet the REIT
distribution requirements imposed by the Internal Revenue Code.
The actual rents we receive for the
properties in our portfolio may be less than our asking rents, and we may
experience lease roll down from time to time. As a result of
various factors, including competitive pricing pressure in our submarkets,
adverse conditions in the Los Angeles County or Honolulu real estate market, a
general economic downturn and the desirability of our properties compared to
other properties in our submarkets, we may be unable to realize our asking rents
across the properties in our portfolio. In addition, the degree of
discrepancy between our asking rents and the actual rents we are able to obtain
may vary both from property to property and among different leased spaces within
a single property. If we are unable to obtain rental rates that are
on average comparable to our asking rents across our portfolio, then our ability
to generate cash flow growth will be negatively impacted. In
addition, depending on asking rental rates at any given time as compared to
expiring leases in our portfolio, from time to time rental rates for expiring
leases may be higher than starting rental rates for new leases.
Potential losses, including from
adverse weather conditions, natural disasters and title claims, may not be
covered by insurance. Our business operations in Southern California and
Honolulu, Hawaii are susceptible to, and could be significantly affected by,
adverse weather conditions and natural disasters such as earthquakes, tsunamis,
hurricanes, volcanoes, wind, floods, landslides and fires. These
adverse weather conditions and natural disasters could cause significant damage
to the properties in our portfolio, the risk of which is enhanced by the
concentration of our properties’ locations. Our insurance may not be
adequate to cover business interruption or losses resulting from adverse weather
or natural disasters. In addition, our insurance policies include
substantial self insurance portions and significant deductibles and co-payments
for such events, and recent hurricanes in the United States have affected the
availability and price of such insurance. As a result, we may be
required to incur significant costs in the event of adverse weather conditions
and natural disasters. We may discontinue earthquake or any other
insurance coverage on some or all of our properties in the future if the cost of
premiums for any of these policies in our judgment exceeds the value of the
coverage discounted for the risk of loss.
Furthermore,
we do not carry insurance for certain losses, including, but not limited to,
losses caused by certain environmental conditions, such as mold or asbestos,
riots or war. In addition, our title insurance policies may not
insure for the current aggregate market value of our portfolio, and we do not
intend to increase our title insurance coverage as the market value of our
portfolio increases. As a result, we may not have sufficient coverage
against all losses that we may experience, including from adverse title
claims.
If we
experience a loss that is uninsured or which exceeds policy limits, we could
incur significant costs and lose the capital invested in the damaged properties
as well as the anticipated future cash flows from those
properties. In addition, if the damaged properties are subject to
recourse indebtedness, we would continue to be liable for the indebtedness, even
if these properties were irreparably damaged.
In
addition, many of our properties could not be rebuilt to their existing height
or size at their existing location under current land-use laws and
policies. In the event that we experience a substantial or
comprehensive loss of one of our properties, we may not be able to rebuild such
property to its existing specifications and otherwise may have to upgrade such
property to meet current code requirements.
Terrorism and other factors affecting
demand for our properties could harm our operating
results. The strength and profitability of our business
depends on demand for and the value of our properties. Future
terrorist attacks in the United States, such as the attacks that occurred in New
York and Washington, D.C. on September 11, 2001, and other acts of terrorism or
war may have a negative impact on our operations. Such terrorist
attacks could have an adverse impact on our business even if they are not
directed at our properties. In addition, the terrorist attacks of
September 11, 2001 have substantially affected the availability and price of
insurance coverage for certain types of damages or occurrences, and our
insurance policies for terrorism include large deductibles and
co-payments. The lack of sufficient insurance for these types of acts
could expose us to significant losses and could have a negative impact on our
operations.
We face intense competition, which
may decrease or prevent increases of the occupancy and rental rates of our
properties. We compete with a number of developers, owners and
operators of office and multifamily real estate, many of which own properties
similar to ours in the same markets in which our properties are
located. If our competitors offer space at rental rates below current
market rates, or below the rental rates we currently charge our tenants, we may
lose existing or potential tenants and we may be pressured to reduce our rental
rates below those we currently charge or to offer more substantial rent
abatements, tenant improvements, early termination rights or below-market
renewal options in order to retain tenants when our tenants’ leases
expire. In that case, our financial condition, results of operations,
cash flow, per share trading price of our common stock and ability to satisfy
our debt service obligations and to pay dividends to our stockholders may be
adversely affected.
In
addition, all of our multifamily properties are located in developed areas that
include a significant number of other multifamily properties, as well as
single-family homes, condominiums and other residential
properties. The number of competitive multifamily and other
residential properties in a particular area could have a material adverse effect
on our ability to lease units and on our rental rates.
We may be unable to renew leases or
lease vacant space. As of December 31, 2007, leases
representing approximately 11.4% of the square footage of the properties in our
office portfolio will expire in 2008, and an additional 4.3% of the square
footage of the properties in our office portfolio was available for
lease. In addition, as of December 31, 2007, approximately 1.3% of
the units in our multifamily portfolio were available for lease, and
substantially all of the leases in our multifamily portfolio are renewable on an
annual basis at the tenant’s option and, if not renewed or terminated,
automatically convert to month-to-month terms. We cannot assure you
that leases will be renewed or that our properties will be re-leased at rental
rates equal to or above our existing rental rates or that substantial rent
abatements, tenant improvements, early termination rights or below-market
renewal options will not be offered to attract new tenants or retain existing
tenants. Accordingly, portions of our office and multifamily
properties may remain vacant for extended periods of time. In
addition, some existing leases currently provide tenants with options to renew
the terms of their leases at rates that are less than the current market rate or
to terminate their leases prior to the expiration date thereof.
Furthermore,
as part of our business strategy, we have focused and intend to continue to
focus on securing smaller-sized companies as tenants for our office
portfolios. Smaller tenants may present greater credit risks and be
more susceptible to economic downturns than larger tenants, and may be more
likely to cancel or elect not to renew their leases. In addition, we
intend to actively pursue opportunities for what we believe to be well-located
and high quality buildings that may be in a transitional phase due to current or
impending vacancies. We cannot assure you that any such vacancies
will be filled following a property acquisition, or that any new tenancies will
be established at or above-market rates. If the rental rates for our
properties decrease or other tenant incentives increase, our existing tenants do
not renew their leases or we do not re-lease a significant portion of our
available space, our financial condition, results of operations, cash flow, per
share trading price of our common stock and our ability to satisfy our debt
service obligations and to pay dividends to our stockholders would be adversely
affected.
Real estate investments are generally
illiquid. Our real estate investments are relatively difficult
to sell quickly. Return of capital and realization of gains, if any,
from an investment generally will occur upon disposition or refinance of the
underlying property. We may be unable to realize our investment
objectives by sale, other disposition or refinance at attractive prices within
any given period of time or may otherwise be unable to complete any exit
strategy. In particular, these risks could arise from weakness in or
even the lack of an established market for a property, changes in the financial
condition or prospects of prospective purchasers, changes in national or
international economic conditions, and changes in laws, regulations or fiscal
policies of jurisdictions in which the property is
located. Furthermore, certain properties may be adversely affected by
the contractual rights, such as rights of first offer.
Because we own real property, we are
subject to extensive environmental regulation, which creates uncertainty
regarding future environmental expenditures and
liabilities. Environmental laws regulate, and impose
liability for, releases of hazardous or toxic substances into the
environment. Under various provisions of these laws, an owner or
operator of real estate is or may be liable for costs related to soil or
groundwater contamination on, in, or migrating to or from its
property. In addition, persons who arrange for the disposal or
treatment of hazardous or toxic substances may be liable for the costs of
cleaning up contamination at the disposal site. Such laws often
impose liability regardless of whether the person knew of, or was responsible
for, the presence of the hazardous or toxic substances that caused the
contamination. The presence of, or contamination resulting from, any
of these substances, or the failure to properly remediate them, may adversely
affect our ability to sell or rent our property or to borrow using such property
as collateral. In addition, persons exposed to hazardous or toxic
substances may sue for personal injury damages. For example, some
laws impose liability for release of or exposure to asbestos-containing
materials, a substance known to be present in a number of our
buildings. In other cases, some of our properties have been (or may
have been) impacted by contamination from past operations or from off-site
sources. As a result, in connection with our current or former
ownership, operation, management and development of real properties, we may be
potentially liable for investigation and cleanup costs, penalties, and damages
under environmental laws.
Although
most of our properties have been subjected to preliminary environmental
assessments, known as Phase I assessments, by independent environmental
consultants that identify certain liabilities, Phase I assessments are limited
in scope, and may not include or identify all potential environmental
liabilities or risks associated with the property. Unless required by
applicable laws or regulations, we may not further investigate, remedy or
ameliorate the liabilities disclosed in the Phase I assessments.
We cannot
assure you that these or other environmental studies identified all potential
environmental liabilities, or that we will not incur material environmental
liabilities in the future. If we do incur material environmental
liabilities in the future, we may face significant remediation costs, and we may
find it difficult to sell any affected properties.
We may incur significant costs
complying with laws, regulations and covenants that are applicable to our
properties. The properties in our portfolio are subject to various
covenants and local laws and regulatory requirements, including permitting and
licensing requirements. Local regulations, including municipal or
local ordinances, zoning restrictions and restrictive covenants imposed by
community developers may restrict our use of our properties and may require us
to obtain approval from local officials or community standards organizations at
any time with respect to our properties, including prior to acquiring a property
or when undertaking renovations of any of our existing
properties. Among other things, these restrictions may relate to fire
and safety, seismic, asbestos-cleanup or hazardous material abatement
requirements. There can be no assurance that existing regulatory
policies will not adversely affect us or the timing or cost of any future
acquisitions or renovations, or that additional regulations will not be adopted
that increase such delays or result in additional costs. Our growth
strategy may be affected by our ability to obtain permits, licenses and zoning
relief. Our failure to obtain such permits, licenses and zoning
relief could have a material adverse effect on our business, financial condition
and results of operations.
In
addition, federal and state laws and regulations, including laws such as the
ADA, impose further restrictions on our operations. Under the ADA,
all public accommodations must meet federal requirements related to access and
use by disabled persons. Some of our properties may currently be in
non-compliance with the ADA. If one or more of the properties in our
portfolio is not in compliance with the ADA or any other regulatory
requirements, we may be required to incur additional costs to bring the property
into compliance and we might incur governmental fines. In addition,
we do not know whether existing requirements will change or whether future
requirements will require us to make significant unanticipated expenditures that
will adversely impact our financial condition, results of operations, cash flow,
the per share trading price of our common stock and our ability to satisfy our
debt service obligations and to pay dividends to our stockholders.
Rent control or rent stabilization
legislation and other regulatory restrictions may limit our ability to increase
rents and pass through new or increased operating costs to our
tenants. Certain states and municipalities have adopted laws
and regulations imposing restrictions on the timing or amount of rent increases
or have imposed regulations relating to low- and moderate-income
housing. Currently, neither California nor Hawaii have state mandated
rent control, but various municipalities within Southern California, such as the
City of Los Angeles and Santa Monica, have enacted rent control
legislation. All, but one, of the properties in our Los Angeles
County multifamily portfolio are affected by these laws and
regulations. In addition, we have agreed to provide low- and
moderate-income housing in many of the units in our Honolulu multifamily
portfolio in exchange for certain tax benefits. We presently expect
to continue operating and acquiring properties in areas that either are subject
to these types of laws or regulations or where legislation with respect to such
laws or regulations may be enacted in the future. Such laws and
regulations limit our ability to charge market rents, increase rents, evict
tenants or recover increases in our operating expenses and could make it more
difficult for us to dispose of properties in certain
circumstances. Similarly, compliance procedures associated with rent
control statutes and low- and moderate-income housing regulations could have a
negative impact on our operating costs, and any failure to comply with low- and
moderate-income housing regulations could result in the loss of certain tax
benefits and the forfeiture of rent payments. In addition, such low-
and moderate-income housing regulations require us to rent a certain number of
units at below-market rents, which has a negative impact on our ability to
increase cash flow from our properties subject to such
regulations. Furthermore, such regulations may negatively impact our
ability to attract higher-paying tenants to such properties.
We may be unable to complete
acquisitions that would grow our business, and even if consummated, we may fail
to successfully integrate and operate acquired
properties. Our planned growth strategy includes the
disciplined acquisition of properties as opportunities arise. Our
ability to acquire properties on favorable terms and successfully integrate and
operate them is subject to the following significant risks:
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we
may be unable to acquire desired properties because of competition from
other real estate investors with more capital, including other real estate
operating companies, publicly traded REITs and investment
funds;
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we
may acquire properties that are not accretive to our results upon
acquisition, and we may not successfully manage and lease those properties
to meet our expectations;
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competition
from other potential acquirers may significantly increase the purchase
price of a desired property;
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we
may be unable to generate sufficient cash from operations, or obtain the
necessary debt or equity financing to consummate an acquisition or, if
obtainable, financing may not be on favorable
terms;
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our
cash flow may be insufficient to meet our required principal and interest
payments;
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we
may need to spend more than budgeted amounts to make necessary
improvements or renovations to acquired
properties;
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agreements
for the acquisition of office properties are typically subject to
customary conditions to closing, including satisfactory completion of due
diligence investigations, and we may spend significant time and money on
potential acquisitions that we do not
consummate;
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the
process of acquiring or pursuing the acquisition of a new property may
divert the attention of our senior management team from our existing
business operations;
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we
may be unable to quickly and efficiently integrate new acquisitions,
particularly acquisitions of portfolios of properties, into our existing
operations;
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market
conditions may result in higher than expected vacancy rates and lower than
expected rental rates; and
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we
may acquire properties without any recourse, or with only limited
recourse, for liabilities, whether known or unknown, such as clean-up of
environmental contamination, claims by tenants, vendors or other persons
against the former owners of the properties and claims for indemnification
by general partners, directors, officers and others indemnified by the
former owners of the properties.
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If we
cannot complete property acquisitions on favorable terms, or operate acquired
properties to meet our goals or expectations, our financial condition, results
of operations, cash flow, per share trading price of our common stock and
ability to satisfy our debt service obligations and to pay dividends to our
stockholders could be adversely affected.
We may be unable to successfully
expand our operations into new markets. If the opportunity
arises, we may explore acquisitions of properties in new
markets. Each of the risks applicable to our ability to acquire and
successfully integrate and operate properties in our current markets are also
applicable to our ability to acquire and successfully integrate and operate
properties in new markets. In addition to these risks, we will not
possess the same level of familiarity with the dynamics and market conditions of
any new markets that we may enter, which could adversely affect our ability to
expand into those markets. We may be unable to build a significant
market share or achieve a desired return on our investments in new
markets. If we are unsuccessful in expanding into new markets, it
could adversely affect our financial condition, results of operations, cash
flow, per share trading price of our common stock and ability to satisfy our
debt service obligations and to pay dividends to our stockholders.
We are exposed to risks associated
with property development. We may engage in development and
redevelopment activities with respect to certain of our
properties. To the extent that we do so, we will be subject to
certain risks, including, without limitation:
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the
availability and pricing of financing on favorable terms or at
all;
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the
availability and timely receipt of zoning and other regulatory approvals;
and
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the
cost and timely completion of construction (including risks beyond our
control, such as weather or labor conditions, or material
shortages).
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These
risks could result in substantial unanticipated delays or expenses and, under
certain circumstances, could prevent completion of development activities once
undertaken, any of which could have an adverse effect on our financial
condition, results of operations, cash flow, per share trading price of our
common stock and ability to satisfy our debt service obligations and to pay
dividends to our stockholders.
If we default on the leases to which
some of our properties are subject, our business could be adversely
affected. We have leasehold interests in certain of our
properties. If we default under the terms of these leases, we may be
liable for damages and could lose our leasehold interest in the property or our
options to purchase the fee interest in such properties. If any of
these events were to occur, our business and results of operations would be
adversely affected.
The cash available for distribution
to stockholders may not be sufficient to pay dividends at expected levels, nor
can we assure you of our ability to make distributions in the
future. We may use borrowed funds to make
distributions. Our annual distributions may exceed estimated
cash available from operations. While we intend to fund the
difference out of excess cash or borrowings under our senior secured revolving
credit facility, our inability to make the expected distributions could result
in a decrease in the market price of our common stock.
Our property taxes could increase due
to property tax rate changes or reassessment, which would impact our cash
flows. Even as a REIT for federal income tax purposes, we are
required to pay some state and local taxes on our properties. The
real property taxes on our properties may increase as property tax rates change
or as our properties are assessed or reassessed by taxing
authorities. In California, under current law reassessment occurs
primarily as a result of a “change in ownership”. The impact of a
potential reassessment may take a considerable amount of time, during which the
property taxing authorities make a determination of the occurrence of a “change
of ownership”, as well as the actual reassessed value. Therefore, the
amount of property taxes we pay could increase substantially from what we have
paid in the past. If the property taxes we pay increase, our cash
flow would be impacted, and our ability to pay expected dividends to our
stockholders could be adversely affected.
Risks
Related to Our Organization and Structure
Tax consequences to holders of
operating partnership units upon a sale or refinancing of our properties may
cause the interests of our senior management to differ from the interests of
other stockholders. As a result of the unrealized
built-in gain attributable to the contributed property at the time of
contribution, some holders of operating partnership units, including our
principals, may suffer different and more adverse tax consequences than holders
of our common stock upon the sale or refinancing of the properties owned by our
operating partnership, including disproportionately greater allocations of items
of taxable income and gain upon a realization event. As those holders
will not receive a correspondingly greater distribution of cash proceeds, they
may have different objectives regarding the appropriate pricing, timing and
other material terms of any sale or refinancing of certain properties, or
whether to sell or refinance such properties at all.
Our senior management team will have
significant influence over our affairs. At December 31,
2007, our senior management team owned approximately 10% of our outstanding
common stock, or approximately 25% assuming that they convert all of their
interests in our operating partnership and exercise all of their
options. As a result, our senior management team, to the extent they
vote their shares in a similar manner, will have influence over our affairs and
could exercise such influence in a manner that is not in the best interests of
our other stockholders, including by attempting to delay, defer or prevent a
change of control transaction that might otherwise be in the best interests of
our stockholders. If our senior management team exercises their
redemption rights with respect to their operating partnership units and we issue
common stock in exchange for those units, our senior management team’s influence
over our affairs would increase substantially.
We have limited experience operating
as a publicly traded REIT. We had no experience operating as a
publicly traded REIT prior to our October 30, 2006 IPO. In addition, certain
members of our board of directors and all but one of our executive officers had
no experience in operating a publicly traded REIT. We cannot assure you that our
past experience will be sufficient to successfully operate our company as a REIT
or a publicly traded company in the future, including the requirements to meet
disclosure requirements and comply with the Sarbanes-Oxley Act of 2002. Failure
to do so would have an adverse effect on our financial condition, results of
operations, cash flow, per share trading price of our common stock and ability
to satisfy our debt service obligations and to pay dividends to
you.
Our growth depends on external
sources of capital which are outside of our control. In order
to qualify as a REIT, we are required under the Internal Revenue Code to
distribute annually at least 90% of our “real estate investment trust” taxable
income, determined without regard to the dividends paid deduction and by
excluding any net capital gain. To the extent that we do not
distribute all of our net long-term capital gain or distribute at least 90%, of
our REIT taxable income, we will be required to pay tax thereon at regular
corporate tax rates. Because of these distribution requirements, we
may not be able to fund future capital needs, including any necessary
acquisition financing, from operating cash flow. Consequently, we
rely on third-party sources to fund our capital needs. We may not be
able to obtain financing on favorable terms or at all. Any additional
debt we incur will increase our leverage. Our access to third-party
sources of capital depends, in part, on:
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general
market conditions;
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the
market’s perception of our growth
potential;
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our
current debt levels;
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our
current and expected future
earnings;
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our
cash flow and cash dividends; and
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the
market price per share of our common
stock.
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In recent
months, the credit markets have been subject to significant
disruptions. If we cannot obtain capital from third-party sources, we
may not be able to acquire or develop properties when strategic opportunities
exist, meet the capital and operating needs of our existing properties, satisfy
our debt service obligations or pay dividends to our stockholders necessary to
maintain our qualification as a REIT.
Our
charter, the partnership agreement of our operating partnership and Maryland law
contain provisions that may delay or prevent a change of control
transaction.
Our charter
contains a 5.0% ownership limit. Our charter,
subject to certain exceptions, contains restrictions on ownership that limit,
and authorizes our directors to take such actions as are necessary and desirable
to limit, any person to actual or constructive ownership of no more than 5.0% in
value of the outstanding shares of our stock and no more than 5.0% of the value
or number, whichever is more restrictive, of the outstanding shares of our
common stock. Our board of directors, in its sole discretion, may
exempt a proposed transferee from the ownership limit. However, our
board of directors may not grant an exemption from the ownership limit to any
proposed transferee whose ownership, direct or indirect, of more than 5.0% of
the value or number of our outstanding shares of our common stock could
jeopardize our status as a REIT. The ownership limit contained in our
charter and the restrictions on ownership of our common stock may delay or
prevent a transaction or a change of control that might involve a premium price
for our common stock or otherwise be in the best interest of our
stockholders.
Our board of
directors may create and issue a class or series of preferred stock without
stockholder approval. Our board of directors is empowered
under our charter to amend our charter to increase or decrease the aggregate
number of shares of our common stock or the number of shares of stock of any
class or series that we have authority to issue, to designate and issue from
time to time one or more classes or series of preferred stock and to classify or
reclassify any unissued shares of our common stock or preferred stock without
stockholder approval. Our board of directors may determine the
relative rights, preferences and privileges of any class or series of preferred
stock issued. As a result, we may issue series or classes of
preferred stock with preferences, dividends, powers and rights, voting or
otherwise, senior to the rights of holders of our common stock. The
issuance of preferred stock could also have the effect of delaying or preventing
a change of control transaction that might otherwise be in the best interests of
our stockholders.
Certain
provisions in the partnership agreement for our operating partnership may delay
or prevent unsolicited acquisitions of us. Provisions in the
partnership agreement for our operating partnership may delay or make more
difficult unsolicited acquisitions of us or changes in our
control. These provisions could discourage third parties from making
proposals involving an unsolicited acquisition of us or change of our control,
although some stockholders might consider such proposals, if made,
desirable. These provisions include, among others:
Ÿ
|
redemption
rights of qualifying parties;
|
Ÿ
|
transfer
restrictions on our operating partnership
units;
|
Ÿ
|
the
ability of the general partner in some cases to amend the partnership
agreement without the consent of the limited partners;
and
|
Ÿ
|
the
right of the limited partners to consent to transfers of the general
partnership interest and mergers under specified
circumstances.
|
Any
potential change of control transaction may be further limited as a result of
provisions of the partnership unit designation for certain long-term incentive
units or LTIP units, which require us to preserve the rights of LTIP unit
holders and may restrict us from amending the partnership agreement for our
operating partnership in a manner that would have an adverse effect on the
rights of LTIP unit holders.
Certain
provisions of Maryland law could inhibit changes in
control. Certain provisions of the Maryland General
Corporation Law, or MGCL, may have the effect of inhibiting a third party from
making a proposal to acquire us or impeding a change of control under
circumstances that otherwise could provide our stockholders with the opportunity
to realize a premium over the then-prevailing market price of our common stock,
including:
Ÿ
|
“business
combination” provisions that, subject to limitations, prohibit certain
business combinations between us and an “interested stockholder” (defined
generally as any person who beneficially owns 10% or more of the voting
power of our shares or an affiliate thereof) for five years after the most
recent date on which the stockholder becomes an interested stockholder,
and thereafter impose special appraisal rights and special stockholder
voting requirements on these combinations;
and
|
Ÿ
|
“control
share” provisions that provide that “control shares” of our company
(defined as shares which, when aggregated with other shares controlled by
the stockholder, entitle the stockholder to exercise one of three
increasing ranges of voting power in electing directors) acquired in a
“control share acquisition” (defined as the direct or indirect acquisition
of ownership or control of “control shares”) have no voting rights except
to the extent approved by our stockholders by the affirmative vote of at
least two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
|
We have
elected to opt out of these provisions of the MGCL, in the case of the business
combination provisions of the MGCL, by resolution of our board of directors, and
in the case of the control share provisions of the MGCL, pursuant to a provision
in our bylaws. However, our board of directors may by resolution
elect to repeal the foregoing opt-outs from the business combination provisions
of the MGCL and we may, by amendment to our bylaws, opt in to the control share
provisions of the MGCL in the future.
Our
charter, bylaws, the partnership agreement for our operating partnership and
Maryland law also contain other provisions that may delay, defer or prevent a
transaction or a change of control that might involve a premium price for our
common stock or otherwise be in the best interest of our
stockholders.
Under their employment agreements,
certain of our executive officers will have the right to terminate their
employment and receive severance if there is a change of
control. In connection with our IPO, we entered into
employment agreements with Messrs. Kaplan, Panzer and Kamer. These
employment agreements provide that each executive may terminate his employment
under certain conditions, including after a change of control, and receive
severance based on two or three times (depending on the officer) his annual
total of salary, bonus and incentive compensation such as LTIP units, options or
out performance grants plus a “gross up” for any excise taxes under Section 280G
of the Internal Revenue Code. In addition, these executive officers
would not be restricted from competing with us after their
departure.
Our fiduciary duties as sole
stockholder of the general partner of our operating partnership could create
conflicts of interest. We, as the sole stockholder of the
general partner of our operating partnership, have fiduciary duties to the other
limited partners in our operating partnership, the discharge of which may
conflict with the interests of our stockholders. The limited partners
of our operating partnership have agreed that, in the event of a conflict in the
fiduciary duties owed by us to our stockholders and, in our capacity as general
partner of our operating partnership, to such limited partners, we are under no
obligation to give priority to the interests of such limited
partners. In addition, those persons holding operating partnership
units will have the right to vote on certain amendments to the operating
partnership agreement (which require approval by a majority in interest of the
limited partners, including us) and individually to approve certain amendments
that would adversely affect their rights. These voting rights may be
exercised in a manner that conflicts with the interests of our
stockholders. For example, we are unable to modify the rights of
limited partners to receive distributions as set forth in the operating
partnership agreement in a manner that adversely affects their rights without
their consent, even though such modification might be in the best interest of
our stockholders.
The loss of any member of our senior
management or certain other key executives could significantly harm our
business. Our ability to maintain our competitive
position is dependent to a large degree on the efforts and skills of our senior
management team, including Dan A. Emmett, Jordan L. Kaplan, Kenneth M. Panzer
and William Kamer. If we lose the services of any member of our
senior management, our business may be significantly impaired. In
addition, many of our senior executives have strong industry reputations, which
aid us in identifying acquisition and borrowing opportunities, having such
opportunities brought to us, and negotiating with tenants and sellers of
properties. The loss of the services of these key personnel could
materially and adversely affect our operations because of diminished
relationships with lenders, existing and prospective tenants, property sellers
and industry personnel.
If we fail to maintain an effective
system of integrated internal controls, we may not be able to accurately report
our financial results. Effective internal and disclosure
controls are necessary for us to provide reliable financial reports and
effectively prevent fraud and to operate successfully as a public company. If we
cannot provide reliable financial reports or prevent fraud, our reputation and
operating results would be harmed. As part of our ongoing monitoring of internal
controls we may discover material weaknesses or significant deficiencies in our
internal controls As a result of weaknesses that may be identified in our
internal controls, we may also identify certain deficiencies in some of our
disclosure controls and procedures that we believe require remediation. If we
discover weaknesses, we will make efforts to improve our internal and disclosure
controls. However, there is no assurance that we will be successful. Any failure
to maintain effective controls or timely effect any necessary improvement of our
internal and disclosure controls could harm operating results or cause us to
fail to meet our reporting obligations, which could affect our ability to remain
listed with the New York Stock Exchange. Ineffective internal and disclosure
controls could also cause investors to lose confidence in our reported financial
information, which would likely have a negative effect on the trading price of
our securities.
Since
completion of our IPO, we have continued to develop, refine and document
appropriate internal and disclosure controls to comply with our reporting
requirements. If we are not successful in any of these tasks, we may
have to disclose material weaknesses, our results of operations could be harmed
or we could fail to meet our reporting obligations.
Our board of directors may change
significant corporate policies without stockholder
approval. Our investment, financing, borrowing and dividend
policies and our policies with respect to all other activities, including
growth, debt, capitalization and operations, will be determined by our board of
directors. These policies may be amended or revised at any time and
from time to time at the discretion of the board of directors without a vote of
our stockholders. In addition, the board of directors may change our
policies with respect to conflicts of interest provided that such changes are
consistent with applicable legal requirements. A change in these
policies could have an adverse effect on our financial condition, results of
operations, cash flow, per share trading price of our common stock and ability
to satisfy our debt service obligations and to pay dividends to our
stockholders.
Compensation awards to our management
may not be tied to or correspond with our improved financial results or share
price. The compensation committee of our board of directors is
responsible for overseeing our compensation and employee benefit plans and
practices, including our executive compensation plans and our incentive
compensation and equity-based compensation plans. Our compensation
committee has significant discretion in structuring compensation packages and
may make compensation decisions based on any number of factors. As a
result, compensation awards may not be tied to or correspond with improved
financial results at our company or the share price of our common
stock.
Tax
Risks Related to Ownership of REIT Shares
Our failure to qualify as a REIT
would result in higher taxes and reduce cash available for
dividends. We currently operate and have operated commencing
with our taxable year ended December 31, 2006 in a manner that is intended to
allow us to qualify as a REIT for federal income tax
purposes. Qualification as a REIT involves the application of highly
technical and complex Internal Revenue Code provisions for which there are only
limited judicial and administrative interpretations. The determination of
various factual matters and circumstances not entirely within our control may
affect our ability to qualify as a REIT. To qualify as a REIT, we
must satisfy certain asset, income, organizational, distribution, stockholder
ownership and other requirements on a continuing basis. For example,
to qualify as a REIT, at least 95% of our gross income in any year must be
derived from qualifying sources, at least 75% of the value of our total assets
must be represented by certain real estate assets including shares of stock of
other REITs, certain other stock or debt instruments purchased with the proceeds
of a stock offering or long term public debt offering by us (but only for the
one-year period after such offering), cash, cash items and government
securities, and we must make distributions to our stockholders aggregating
annually at least 90% of our REIT taxable income, excluding capital
gains. Our ability to satisfy the asset tests depends upon our
analysis of the characterization and fair market values of our assets, some of
which are not susceptible to a precise determination, and for which we will not
obtain independent appraisals. Our compliance with the REIT income
and quarterly asset requirements also depends upon our ability to successfully
manage the composition of our income and assets on an ongoing basis. The fact
that we hold most of our assets through the operating partnership further
complicates the application of the REIT requirements. Even a
technical or inadvertent mistake could jeopardize our REIT
status. In addition, legislation, new regulations,
administrative interpretations or court decisions might significantly change the
tax laws with respect to the requirements for qualification as a REIT or the
federal income tax consequences of qualification as a REIT Although
we believe that we have been organized and have operated in a manner that is
intended to allow us to qualify for taxation as a REIT, we can give no assurance
that we have qualified or will continue to qualify as a REIT for tax purposes.
We have not requested and do not plan to request a ruling from the Internal
Revenue Service regarding our qualification as a REIT.
If we
were to fail to qualify as a REIT in any taxable year, we would be subject to
federal income tax, including any applicable alternative minimum tax, on our
taxable income at regular corporate rates, and distributions to stockholders
would not be deductible by us in computing our taxable income. Any
such corporate tax liability could be substantial and would reduce the amount of
cash available for distribution to our stockholders, which in turn could have an
adverse impact on the value of, and trading prices for, our common
stock. Unless entitled to relief under certain Internal Revenue Code
provisions, we also would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to qualify as a
REIT. In addition, if we fail to qualify as a REIT, we will not be
required to make distributions to stockholders, and all distributions to
stockholders will be subject to tax as dividend income to the extent of our
current and accumulated earnings and profits. As a result of all
these factors, our failure to qualify as a REIT also could impair our ability to
expand our business and raise capital, and would adversely affect the value of
our common stock. If we fail to qualify as a REIT for federal income tax
purposes and are able to avail ourselves of one or more of the relief provisions
under the Internal Revenue Code in order to maintain our REIT status, we would
nevertheless be required to pay penalty taxes of $50,000 or more for each such
failure.
Even if we qualify as a REIT, we will
be required to pay some taxes. Even if we qualify as a REIT
for federal income tax purposes, we will be required to pay certain federal,
state and local taxes on our income and property. For example, we will be
subject to income tax to the extent we distribute less than 100% of our REIT
taxable income (including capital gains). Moreover, if we have net income from
“prohibited transactions,” that income will be subject to a 100% tax. In
general, prohibited transactions are sales or other dispositions of property
held primarily for sale to customers in the ordinary course of
business.
In
addition, any net taxable income earned directly by our taxable REIT subsidiary,
or through entities that are disregarded for federal income tax purposes as
entities separate from our taxable REIT subsidiary, will be subject to federal
and possibly state corporate income tax. We have elected to treat Douglas Emmett
Builders (DEB) as a taxable REIT subsidiary, and we may elect to treat other
subsidiaries as taxable REIT subsidiaries in the future. In this
regard, several provisions of the laws applicable to REITs and their
subsidiaries ensure that a taxable REIT subsidiary will be subject to an
appropriate level of federal income taxation. For example, a taxable REIT
subsidiary is limited in its ability to deduct interest payments made to an
affiliated REIT. In addition, the REIT has to pay a 100% tax on some payments
that it receives or on some deductions taken by its taxable REIT subsidiaries if
the economic arrangements between the REIT, the REIT’s tenants, and the taxable
REIT subsidiary are not comparable to similar arrangements between unrelated
parties. Finally, some state and local jurisdictions may tax some of our income
even though as a REIT we are not subject to federal income tax on that income
because not all states and localities treat REITs the same as they are treated
for federal income tax purposes. To the extent that we and our affiliates are
required to pay federal, state and local taxes, we will have less cash available
for distributions to our stockholders.
REIT distribution requirements could
adversely affect our liquidity. We generally must distribute
annually at least 90% of our REIT taxable income, excluding any net capital
gain, in order to qualify as a REIT. To the extent that we do not
distribute all of our net long-term capital gain or distribute at least 90%, of
our REIT taxable income, we will be required to pay tax thereon at regular
corporate tax rates. We intend to make distributions to our
stockholders to comply with the requirements of the Internal Revenue Code for
REITs and to minimize or eliminate our corporate income tax
obligation. However, differences between the recognition of taxable
income and the actual receipt of cash could require us to sell assets or borrow
funds on a short-term or long-term basis to meet the distribution requirements
of the Internal Revenue Code. Certain types of assets generate
substantial mismatches between taxable income and available
cash. Such assets include rental real estate that has been financed
through financing structures which require some or all of available cash flows
to be used to service borrowings. As a result, the requirement to
distribute a substantial portion of our taxable income could cause us to sell
assets in adverse market conditions; borrow on unfavorable terms; or distribute
amounts that would otherwise be invested in future acquisitions, capital
expenditures or repayment of debt in order to comply with REIT
requirements. Further, amounts distributed will not be available to
fund our operations.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties
Our
existing portfolio of office properties is located in the Brentwood, Olympic
Corridor, Century City, Beverly Hills, Santa Monica, Westwood, Sherman
Oaks/Encino, Warner Center/Woodland Hills and Burbank submarkets of Los Angeles
County, California, and in Honolulu, Hawaii. Presented below is an
overview of certain information regarding our existing office portfolio as of
December 31, 2007:
Submarket
|
Number
of
Properties
|
Rentable
Square
Feet (1)
|
Percent
of
Total
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
13
|
1,390,630 | 11.8 | % | ||||||||
Olympic
Corridor
|
5 | 1,096,014 | 9.3 | |||||||||
Century City
|
3 | 915,979 | 7.7 | |||||||||
Santa
Monica
|
7 | 860,200 | 7.3 | |||||||||
Beverly
Hills
|
4 | 572,446 | 4.8 | |||||||||
Westwood
|
2 | 396,807 | 3.4 | |||||||||
San
Fernando Valley
|
||||||||||||
Sherman
Oaks/Encino
|
9 | 2,879,170 | 24.4 | |||||||||
Warner
Center/Woodland Hills
|
2 | 2,597,843 | 22.0 | |||||||||
Tri-Cities
|
||||||||||||
Burbank
|
1 | 420,949 | 3.6 | |||||||||
Honolulu
|
2 | 679,337 | 5.7 | |||||||||
Total
|
48 | 11,809,375 | 100.0 | % |
(1)
|
Based
on Building Owners and Managers Association (BOMA) 1996
remeasurement. Total consists of 11,169,174 leased square feet
(includes 84,684 square feet with respect to signed leases not commenced),
508,118 available square feet, 66,199 building management use square feet,
and 65,884 square feet of BOMA 1996 adjustment on leased
space.
|
The
following table presents our office portfolio occupancy and in-place rents as of
December 31, 2007:
Submarket
|
Percent
Leased
(1)
|
Annualized
Rent
(2)
|
Annualized
Rent
Per
Occupied
Square
Foot (3)
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
97.8 | % | $ | 48,073,101 | $ | 35.65 | ||||||
Olympic
Corridor
|
94.8 | 29,910,408 | 29.50 | |||||||||
Century City
|
99.0 | 30,464,094 | 34.34 | |||||||||
Santa
Monica (4)
|
99.0 | 39,942,421 | 47.14 | |||||||||
Beverly
Hills
|
99.0 | 22,134,788 | 39.99 | |||||||||
Westwood
|
95.9 | 13,022,028 | 34.64 | |||||||||
San
Fernando Valley
|
||||||||||||
Sherman
Oaks/Encino
|
95.8 | 79,597,132 | 29.36 | |||||||||
Warner
Center/Woodland Hills
|
92.5 | 64,260,873 | 27.54 | |||||||||
Tri-Cities
|
||||||||||||
Burbank
|
100.0 | 14,118,629 | 33.54 | |||||||||
Honolulu
|
90.4 | 18,581,686 | 31.33 | |||||||||
Total
|
95.7 | % | $ | 360,105,160 | $ | 32.49 |
(1)
|
Includes
84,684 square feet with respect to signed leases not yet
commenced.
|
(2)
|
Represents
annualized monthly cash rent under leases commenced as of December 31,
2007. The amount reflects total cash rent before
abatements. For our Burbank and Honolulu office properties,
annualized rent is converted from triple net to gross by adding expense
reimbursements to base rent.
|
(3)
|
Represents
annualized rent divided by leased square feet (excluding 84,684 square
feet with respect to signed leases not commenced) as set forth in note (1)
above for the total.
|
(4)
|
Includes
$1,108,103 of annualized rent attributable to our corporate headquarters
at our Lincoln/Wilshire
property.
|
The
following table presents our submarket office concentration as of December 31,
2007:
Submarket
|
Douglas
Emmett
Rentable
Square
Feet
(1)
|
Submarket
Rentable
Square
Feet
(2)
|
Douglas
Emmett
Market
Share
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
1,390,630 | 3,356,126 | 41.4 | % | ||||||||
Olympic
Corridor
|
1,096,014 | 3,022,969 | 36.3 | |||||||||
Century City
|
915,979 | 10,345,099 | 8.9 | |||||||||
Santa
Monica
|
860,200 | 8,432,207 | 10.2 | |||||||||
Beverly
Hills
|
572,446 | 7,343,316 | 7.8 | |||||||||
Westwood
|
396,807 | 4,408,094 | 9.0 | |||||||||
San
Fernando Valley
|
||||||||||||
Sherman
Oaks/Encino
|
2,879,170 | 5,721,621 | 50.3 | |||||||||
Warner
Center/Woodland Hills
|
2,597,843 | 6,922,261 | 37.5 | |||||||||
Tri-Cities
|
||||||||||||
Burbank
|
420,949 | 5,929,318 | 7.1 | |||||||||
Subtotal/Weighted
Average Los Angeles County
|
11,130,038 | 55,481,011 | 20.1 | |||||||||
Honolulu CBD
|
679,337 | 5,198,734 | 13.1 | |||||||||
Total
|
11,809,375 | 60,679,745 | 19.5 | % |
Source:
CB Richard Ellis (other than Douglas Emmett data).
(1)
|
Based
on BOMA 1996 remeasurement. Total consists of 11,169,174 leased
square feet (includes 84,684 square feet with respect to signed leases not
commenced), 508,118 available square feet, 66,199 building management use
square feet, and 65,884 square feet of BOMA 1996 adjustment on leased
space.
|
(2)
|
Represents
competitive office space in our nine Los Angeles County submarkets
and Honolulu submarket per CB Richard
Ellis.
|
Tenant
Diversification
Our
office portfolio is currently leased to more than 1,700 tenants in a variety of
industries, including entertainment, real estate, technology, legal and
financial services. The following table sets forth information regarding tenants
with greater than 1.0% of portfolio annualized rent in our office portfolio as
of December 31, 2007:
Number
of
Leases
|
Number
of
Properties
|
Lease
Expiration(1)
|
Total
Leased
Square
Feet
|
Percent
of
Rentable
Square
Feet
|
Annualized
Rent(2)
|
Percent
of
Annualized
Rent
|
||||||||||||||||||||||
Time
Warner(3)
|
4 | 4 |
2008-2019
|
642,845 | 5.4 | % | $ | 21,734,656 | 6.0 | % | ||||||||||||||||||
AIG
SunAmerica
|
1 | 1 |
2013
|
182,010 | 1.5 | 5,211,950 | 1.4 | |||||||||||||||||||||
The
Endeavor Agency, LLC
|
2 | 1 |
2019
|
103,421 | 0.9 | 4,202,029 | 1.2 | |||||||||||||||||||||
Blue
Shield of California
|
1 | 1 |
2009
|
135,106 | 1.1 | 3,939,691 | 1.1 | |||||||||||||||||||||
Metrocities
Mortgage, LLC
|
2 | 2 |
2010-2015
|
138,040 | 1.2 | 3,895,165 | 1.1 | |||||||||||||||||||||
Pacific
Theatres Exhibition Corp(4)
|
1 | 1 |
2016
|
88,300 | 0.8 | 3,567,320 | 1.0 | |||||||||||||||||||||
Total
|
11 | 10 | 1,289,722 | 10.9 | % | $ | 42,550,811 | 11.8 | % |
(1)
|
Expiration
dates are per leases and do not assume exercise of renewal, extension or
termination options. For tenants with multiple leases,
expirations are shown as a range.
|
(2)
|
Represents
annualized monthly cash rent under leases commenced as of December 31,
2007. The amount reflects total cash rent before abatements.
For our Burbank and Honolulu office properties, annualized rent is
converted from triple net to gross by adding expense reimbursements to
base rent.
|
(3)
|
Includes
a 10,000 square foot lease expiring in October 2008, a 62,000 square foot
lease expiring in June 2010, a 150,000 square foot lease expiring in April
2016, and a 421,000 square foot lease expiring in September
2019.
|
(4)
|
Annualized
rent excludes rent determined as a percentage of
sales.
|
Industry
Diversification
The
following table sets forth information relating to tenant diversification by
industry in our office portfolio based on annualized rent as of December 31,
2007:
Industry
|
Number
of
Leases
|
Annualized
Rent
as a
Percent
of
Total
|
||||||
Legal
|
306 | 15.9 | % | |||||
Financial
Services
|
263 | 15.8 | ||||||
Entertainment
|
118 | 12.1 | ||||||
Real
Estate
|
154 | 9.0 | ||||||
Accounting
& Consulting
|
169 | 8.6 | ||||||
Health
Services
|
269 | 8.1 | ||||||
Insurance
|
81 | 7.9 | ||||||
Retail
|
155 | 6.7 | ||||||
Technology
|
68 | 3.9 | ||||||
Advertising
|
49 | 3.0 | ||||||
Public
Administration
|
31 | 2.2 | ||||||
Educational
Services
|
9 | 0.7 | ||||||
Other
|
227 | 6.1 | ||||||
Total
|
1,899 | 100.0 | % |
Lease
Distribution
The
following table sets forth information relating to the distribution of leases in
our office portfolio, based on rentable square feet leased as of December 31,
2007:
Square
Feet Under Lease
|
Number
of
Leases
|
Leases
as
a
Percent
of
Total
|
Rentable
Square
Feet(1)
|
Square
Feet
as a
Percent
of
Total
|
Annualized
Rent(2)
|
Annualized
Rent
as a
Percent
of
Total
|
||||||||||||||||||
2,500
or less
|
934 | 49.2 | % | 1,250,331 | 10.6 | % | $ | 42,573,897 | 11.8 | % | ||||||||||||||
2,501-10,000
|
714 | 37.6 | 3,456,248 | 29.3 | 111,156,003 | 30.9 | ||||||||||||||||||
10,001-20,000
|
164 | 8.6 | 2,298,648 | 19.4 | 74,025,194 | 20.5 | ||||||||||||||||||
20,001-40,000
|
59 | 3.1 | 1,641,739 | 13.9 | 54,605,892 | 15.2 | ||||||||||||||||||
40,001-100,000
|
21 | 1.1 | 1,190,566 | 10.1 | 39,186,253 | 10.9 | ||||||||||||||||||
Greater
than 100,000
|
7 | 0.4 | 1,246,958 | 10.5 | 38,557,921 | 10.7 | ||||||||||||||||||
Subtotal
|
1,899 | 100.0 | % | 11,084,490 | 93.8 | % | $ | 360,105,160 | 100.0 | % | ||||||||||||||
Available
|
- | - | 508,118 | 4.3 | - | - | ||||||||||||||||||
BOMA
Adjustment(3)
|
- | - | 65,884 | 0.6 | - | - | ||||||||||||||||||
Building
Management Use
|
- | - | 66,199 | 0.6 | - | - | ||||||||||||||||||
Signed
leases not commenced
|
- | - | 84,684 | 0.7 | - | - | ||||||||||||||||||
Total
|
1,899 | 100.0 | % | 11,809,375 | 100.0 | % | $ | 360,105,160 | 100.0 | % |
(1)
|
Based
on BOMA 1996 remeasurement. Total consists of 11,169,174 leased
square feet (includes 84,684 square feet with respect to signed leases not
commenced), 508,118 available square feet, 66,199 building management use
square feet, and 65,884 square feet of BOMA 1996 adjustment on leased
space.
|
(2)
|
Represents
annualized monthly cash rent under leases commenced as of December 31,
2007. The amount reflects total cash rent before abatements.
For our Burbank and Honolulu office properties, annualized rent is
converted from triple net to gross by adding expense reimbursements to
base rent.
|
(3)
|
Represents
square footage adjustments for leases that do not reflect BOMA 1996
remeasurement.
|
Lease
Expirations
The
following table sets forth a summary schedule of lease expirations for leases in
place as of December 31, 2007, plus available space, for each of the ten years
beginning January 1, 2008 and thereafter in our office portfolio (Unless
otherwise stated in the footnotes, the information set forth in the table
assumes that tenants exercise no renewal options and no early termination
rights):
Year
of Lease Expiration
|
Number
of
Leases
Expiring
|
Rentable
Square
Feet(1)
|
Expiring
Square
Feet
as
a Percent
of
Total
|
Annualized
Rent(2)
|
Annualized
Rent
as a
Percent
of
Total
|
Annualized
Rent
Per
Leased
Square
Foot(3)
|
Annualized
Rent
Per
Leased
Square
Foot
at
Expiration(4)
|
|||||||||||||||||||||
2008
|
368 | 1,351,575 | 11.4 | % | $ | 41,550,926 | 11.5 | % | $ | 30.74 | $ | 30.96 | ||||||||||||||||
2009
|
374 | 1,524,053 | 12.9 | 48,256,616 | 13.4 | 31.66 | 32.83 | |||||||||||||||||||||
2010
|
348 | 1,571,128 | 13.3 | 52,772,732 | 14.6 | 33.59 | 36.04 | |||||||||||||||||||||
2011
|
283 | 1,440,723 | 12.2 | 46,723,697 | 13.0 | 32.43 | 36.18 | |||||||||||||||||||||
2012
|
242 | 1,334,973 | 11.3 | 43,944,325 | 12.2 | 32.92 | 38.02 | |||||||||||||||||||||
2013
|
115 | 1,047,698 | 8.9 | 34,848,233 | 9.7 | 33.26 | 40.94 | |||||||||||||||||||||
2014
|
67 | 672,627 | 5.7 | 21,140,179 | 5.9 | 31.43 | 39.39 | |||||||||||||||||||||
2015
|
33 | 428,269 | 3.6 | 13,311,846 | 3.7 | 31.08 | 39.45 | |||||||||||||||||||||
2016
|
28 | 602,246 | 5.1 | 19,299,796 | 5.4 | 32.05 | 39.55 | |||||||||||||||||||||
2017
|
22 | 233,831 | 2.0 | 7,481,197 | 2.1 | 31.99 | 42.55 | |||||||||||||||||||||
Thereafter
|
19 | 877,367 | 7.4 | 30,775,613 | 8.5 | 35.08 | 46.67 | |||||||||||||||||||||
Available
|
- | 508,118 | 4.3 | - | - | - | - | |||||||||||||||||||||
BOMA
Adjustment(5)
|
- | 65,884 | 0.6 | - | - | - | - | |||||||||||||||||||||
Building
Management Use
|
- | 66,199 | 0.6 | - | - | - | - | |||||||||||||||||||||
Signed
leases not commenced
|
- | 84,684 | 0.7 | - | - | - | - | |||||||||||||||||||||
Total/Weighted
Average
|
1,899 | 11,809,375 | 100.0 | % | $ | 360,105,160 | 100.0 | % | $ | 32.49 | $ | 39.92 |
(1)
|
Based
on BOMA 1996 remeasurement. Total consists of 11,169,174 leased
square feet (includes 84,684 square feet with respect to signed leases not
commenced), 508,118 available square feet, 66,199 building management use
square feet, and 65,884 square feet of BOMA 1996 adjustment on leased
space.
|
(2)
|
Represents
annualized monthly cash rent under leases commenced as of December 31,
2007. The amount reflects total cash rent before abatements.
For our Burbank and Honolulu office properties, annualized rent is
converted from triple net to gross by adding expense reimbursements to
base rent.
|
(3)
|
Represents
annualized rent divided by leased square
feet.
|
(4)
|
Represents
annualized rent at expiration divided by leased square
feet.
|
(5)
|
Represents
square footage adjustments for leases that do not reflect BOMA 1996
remeasurement.
|
Multifamily
Portfolio
The
following table presents an overview of our multifamily portfolio, including
occupancy and in-place rents, as of December 31, 2007:
Submarket
|
Number
of
Properties
|
Number
of
Units
|
Percent
of
Total
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
5 | 950 | 33 | % | ||||||||
Santa
Monica
|
2 | 820 | 29 | |||||||||
Honolulu
|
2 | 1,098 | 38 | |||||||||
Total
|
9 | 2,868 | 100 | % | ||||||||
Submarket
|
Percent
Leased
|
Annualized
Rent
(1)
|
Rent
Per
Unit
Leased
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
98.9 | % | $ | 23,440,056 | $ | 2,078 | ||||||
Santa
Monica (2)
|
99.8 | 19,948,278 | 2,032 | |||||||||
Honolulu
|
97.7 | 18,481,044 | 1,435 | |||||||||
Total
|
98.7 | % | $ | 61,869,378 | $ | 1,821 |
(1)
|
Represents
December 2007 multifamily rental income
annualized.
|
(2)
|
Excludes
10,013 square feet of ancillary retail space, which generated $285,766 of
annualized rent as of December 31,
2007.
|
Historical
Tenant Improvements and Leasing Commissions
The
following table sets forth certain historical information regarding tenant
improvement and leasing commission costs for tenants at the properties in our
office portfolio through December 31, 2007:
Year
Ended December 31,
|
||||||||||||
2007
|
2006
|
2005(1)
|
||||||||||
Renewals(2)
|
||||||||||||
Number
of leases
|
247 | 252 | 253 | |||||||||
Square
feet
|
905,306 | 908,982 | 1,151,775 | |||||||||
Tenant
improvement costs per square foot(3)
(5)
|
$ | 7.50 | $ | 7.28 | $ | 12.48 | ||||||
Leasing
commission costs per square foot(3)
|
5.10 | 5.86 | 7.59 | |||||||||
Total
tenant improvement and leasing commission costs(3)
|
$ | 12.60 | $ | 13.14 | $ | 20.07 | ||||||
New
leases(4)
|
||||||||||||
Number
of leases
|
225 | 239 | 215 | |||||||||
Square
feet
|
890,962 | 840,994 | 849,038 | |||||||||
Tenant
improvement costs per square foot(3)
(5)
|
$ | 16.65 | $ | 16.29 | $ | 16.27 | ||||||
Leasing
commission costs per square foot(3)
|
7.16 | 7.45 | 7.77 | |||||||||
Total
tenant improvement and leasing commission costs(3)
|
$ | 23.81 | 23.74 | 24.04 | ||||||||
Total
|
||||||||||||
Number
of leases
|
472 | 491 | 468 | |||||||||
Square
Feet
|
1,796,268 | 1,749,976 | 2,000,813 | |||||||||
Tenant
improvement costs per square foot(3)
(5)
|
$ | 12.04 | $ | 11.61 | $ | 14.09 | ||||||
Leasing
commission costs per square foot(3)
|
6.12 | 6.63 | 7.67 | |||||||||
Total
tenant improvement and leasing commission costs(3)
|
$ | 18.16 | $ | 18.24 | $ | 21.76 |
(1)
|
Includes
the Trillium, which was acquired in January
2005.
|
(2)
|
Includes
retained tenants that have relocated to new space or expanded into new
space.
|
(3)
|
Assumes
all tenant improvement and leasing commissions are paid in the calendar
year in which the lease commenced, which may be different than the year in
which they were actually paid.
|
(4)
|
Does
not include retained tenants that have relocated or expanded into new
space within our portfolio.
|
(5)
|
Tenant
improvement costs are based on negotiated tenant improvement allowances
set forth in leases, or, for any lease in which a tenant improvement
allowance was not specified, the aggregate cost originally budgeted, at
the time the lease commenced.
|
Historical
Capital Expenditures
The
following table sets forth certain information regarding historical recurring
capital expenditures at the properties in our office portfolio through December
31, 2007:
Office
|
||||||||||||
Year
Ended December 31, 2007
|
||||||||||||
2007
|
2006
|
2005(1)(2)
|
||||||||||
Recurring
capital expenditures
|
$ | 5,331,325 | $ | 5,812,721 | $ | 2,604,883 | ||||||
Total
square feet
|
11,666,107 | 11,554,829 | 11,554,216 | |||||||||
Recurring
capital expenditures per square foot
|
$ | 0.46 | $ | 0.50 | $ | 0.23 |
(1)
|
Includes
the Trillium, which was acquired in January 2005.
|
(2)
|
Recurring
capital expenditures for properties acquired during the period are
annualized.
|
The
following table sets forth certain information regarding historical recurring
capital expenditures at the properties in our multifamily portfolio through
December 31, 2007:
Multifamily
|
||||||||||||
Year
Ended December 31, 2007
|
||||||||||||
2007
|
2006(1)(2)
|
2005(2)(3)
|
||||||||||
Recurring
capital expenditures
|
$ | 1,348,063 | $ | 1,950,713 | $ | 451,393 | ||||||
Total
units
|
2,868 | 2,868 | 2,466 | |||||||||
Recurring
capital expenditures per unit
|
$ | 470 | $ | 680 | $ | 183 |
(1)
|
Includes
The Villas at Royal Kunia acquired in March
2006.
|
(2)
|
Recurring
capital expenditures for properties acquired during the period are
annualized.
|
(3)
|
Includes
Moanalua Hillside Apartments acquired in January
2005.
|
Our
multifamily portfolio contains a large number of units that, due to Santa Monica
rent control laws, have had only insignificant rent increases since
1979. Historically, when a tenant has vacated one of these units, we
have spent between $15,000 and $30,000 per unit, depending on apartment size, to
bring the unit up to our standards. We have characterized these
expenditures as non-recurring capital expenditures. Our make-ready
costs associated with the turnover of our other units are included in recurring
capital expenditures.
Item
3. Legal Proceedings
From time
to time, we are party to various lawsuits, claims and other legal proceedings
that arise in the ordinary course of our business. We are not
currently a party, as plaintiff or defendant, to any legal proceedings which,
individually or in the aggregate, would be expected to have a material adverse
effect on our business, financial condition or results of operation if
determined adversely to us.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
PART
II.
Item
5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market
for Common Stock; Dividends
Our IPO
was completed on October 30, 2006. Our common stock is traded on the
New York Stock Exchange under the symbol “DEI”. On February 8, 2008,
the reported closing sale price per share of our common stock on the New York
Stock Exchange was $21.16. The following table shows our dividends,
and the high and low sales prices for our common stock as reported by the New
York Stock Exchange, for the periods indicated:
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
2007
|
||||||||||||||||
Dividend
|
$ | 0.175 | $ | 0.175 | $ | 0.175 | $ | 0.175 | ||||||||
Common
Stock Price
|
||||||||||||||||
High
|
29.01 | 27.15 | 25.75 | 27.44 | ||||||||||||
Low
|
24.99 | 24.74 | 22.81 | 22.61 | ||||||||||||
2006
|
||||||||||||||||
Dividend
|
- | - | - | 0.12 | ||||||||||||
Common
Stock Price
|
- | - | - | |||||||||||||
High
|
- | - | - | 26.60 | ||||||||||||
Low
|
- | - | - | 22.99 |
Holders
of Record
We had 61
holders of record of our common stock on February 8, 2008.
Sales
of Unregistered Securities
None.
Repurchases
of Equity Securities
Purchases. We
made the following purchases of our share equivalents during the quarter ended
December 31, 2007.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
||||||||
Period
|
(a)
Total Number of Share
Equivalents
Purchased
|
(b)
Average Price
Paid
per Share
(or
Unit)
|
||||||
October
2007
|
- | - | ||||||
November
2007
|
638,298 | $ | 23.50 | |||||
December
2007
|
1,111,111 | $ | 22.50 | |||||
Total
|
1,749,409 | $ | 22.86 |
None of
these purchases were made pursuant to a publicly announced
program. All purchases were made in private unsolicited
transactions.
Securities
Authorized for Issuance Under Equity Compensation Plan
The
following table provides information as of December 31, 2007 with respect to
shares of our common stock that may be issued under our existing stock incentive
plan (in thousands, except per share amounts):
Plan
Category
|
Number
of shares of common
stock
to be issued upon exercise
of
outstanding options, warrants
and
rights
|
Weighted-average
exercise price
of
outstanding options, warrants
and
rights
|
Number
of shares of common
stock
remaining available for
future
issuance under equity
compensation
plans (excluding
shares
reflected In column (a))
|
|||||||||
(a)
|
||||||||||||
Equity
compensation Plans approved by stockholders
|
5,698 | $ | 21.00 | 9,715 |
For a
description of our Omnibus Incentive Plan, please see Note 14 to our
consolidated financial statements included in this Report. We did not
have any other equity compensation plans as of December 31, 2007.
Performance
Graph
The stock price performance graph below
is required by the Securities and Exchange Commission and shall not be deemed to
be incorporated by reference by any general statement incorporating by reference
this Report into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that we specifically
incorporate this information by reference and shall not otherwise be deemed
soliciting material or filed under such acts.
The following graph compares the
cumulative total stockholder return on the Common Stock of Douglas Emmett Inc.
from October 24, 2006 to December 31, 2007 with the cumulative total return on
the New York Stock Exchange and an appropriate “peer group” index (assuming the
investment of $100 in our Common Stock and in each of the indexes on October 30,
2006).
![Graph](https://www.sec.gov/Archives/edgar/data/0001364250/000114036108004902/graph1.jpg)
Period Ending | ||||||||||||||||||||||||
Index
|
10/24/06
|
12/31/06
|
03/31/07
|
06/30/07
|
09/30/07
|
12/31/07
|
||||||||||||||||||
Douglas
Emmett, Inc.
|
100.00 | 112.95 | 109.20 | 106.57 | 107.30 | 98.85 | ||||||||||||||||||
S&P
500
|
100.00 | 103.39 | 104.06 | 110.59 | 112.83 | 109.07 | ||||||||||||||||||
NAREIT
Equity
|
100.00 | 109.47 | 113.26 | 103.02 | 105.69 | 92.29 |
Item
6. Selected Financial Data
The
following table sets forth summary financial and operating data on an historical
basis for our “predecessor” prior to our IPO and Douglas Emmett, Inc. subsequent
to our IPO. Our “predecessor” owned 42 office properties, the fee
interest in two parcels of land leased to third parties under long-term ground
leases and six multifamily properties prior to the formation
transactions. We have not presented historical financial information
for Douglas Emmett, Inc. for periods prior to October 31, 2006 because we
believe that a discussion of the results of Douglas Emmett, Inc. would not be
meaningful since it was not involved in any significant activity prior to that
date.
You
should read the following summary financial and operating data in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operation”, and the other financial statements included elsewhere in this
Report.
The
summary historical consolidated financial and operating data as of and for the
years ended December 31, 2003, 2004, 2005, 2006 and 2007 have been derived from
our audited historical consolidated financial statements subsequent to our IPO
and those of our predecessor prior to our IPO.
Douglas Emmett, Inc.
|
The Predecessor
|
|||||||||||||||||||||||
Year Ended
|
October
31, 2006-
|
January
1, 2006-
|
Year Ended December 31,
|
|||||||||||||||||||||
December 31,
2007
|
December 31, 2006
|
October 30, 2006
|
2005
|
2004
|
2003
|
|||||||||||||||||||
(in
thousands, except shares and per share data)
|
||||||||||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||||||||||
Total
office revenues
|
$ | 448,746 | $ | 75,706 | $ | 300,939 | $ | 348,566 | $ | 286,638 | $ | 283,312 | ||||||||||||
Total
multifamily revenues
|
69,474 | 11,289 | 45,729 | 45,222 | 33,793 | 31,994 | ||||||||||||||||||
Total
revenues
|
518,220 | 86,995 | 346,668 | 393,788 | 320,431 | 315,306 | ||||||||||||||||||
Operating
income (loss)
|
141,232 | (3,417 | ) | 113,784 | 138,935 | 106,853 | 109,016 | |||||||||||||||||
(Loss)
income from continuing operations
|
(13,008 | ) | (20,591 | ) | (16,362 | ) | (16,520 | ) | (56,765 | ) | 7,386 | |||||||||||||
Per
Share Data:
|
||||||||||||||||||||||||
(Loss)
earnings per share –basic and diluted
|
$ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) | $ | (254,154 | ) | $ | (870,631 | ) | $ | 117,308 | |||||||
Weighted
average commonshares outstanding – basic and diluted
|
112,645,587 | 115,005,860 | 65 | 65 | 65 | 65 | ||||||||||||||||||
Dividends
declared per common share
|
$ | 0.70 | $ | 0.12 | - | - | - | - |
Douglas Emmett, Inc.
|
The Predecessor
|
|||||||||||||||||||
as
of December 31,
|
||||||||||||||||||||
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
(in
thousands, except property data)
|
||||||||||||||||||||
Balance
Sheet Data (at end of period):
|
||||||||||||||||||||
Total
assets
|
$ | 6,189,968 | $ | 6,200,118 | $ | 2,904,647 | $ | 2,585,697 | $ | 2,356,296 | ||||||||||
Secured
notes payable
|
3,105,677 | 2,789,702 | 2,223,500 | 1,982,655 | 1,716,200 | |||||||||||||||
Other
Data:
|
||||||||||||||||||||
Number
of properties (at end of period)
|
57 | 55 | 47 | 45 | 43 |
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward
Looking Statements.
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes many forward-looking statements. For cautions
about relying on such forward looking statements, please refer to the section
entitled “Forward Looking Statements” at the beginning of this Report
immediately prior to “Item 1”.
Executive
Summary
Through
our interest in Douglas Emmett Properties, LP (our operating partnership) and
its subsidiaries, at December 31, 2007 our office portfolio consisted of 48
properties with approximately 11.8 million rentable square feet, and our
multifamily portfolio consisted of nine properties with a total of 2,868
units. As of December 31, 2007, our office portfolio was 95.7%
leased, and our multifamily properties were 98.7% leased. Our office
portfolio contributed approximately 85.3% of our annualized rent as of December
31, 2007, while our multifamily portfolio contributed the remaining
14.7%. As of December 31, 2007, our Los Angeles County office and
multifamily portfolio contributed approximately 91.2% of our annualized rent,
and our Honolulu, Hawaii office and multifamily portfolio contributed the
remaining 8.8%. Our properties are concentrated in nine premier Los Angeles
County submarkets—Brentwood, Olympic Corridor, Century City, Santa Monica,
Beverly Hills, Westwood, Sherman Oaks/Encino, Warner Center/Woodland Hills and
Burbank—as well as in Honolulu, Hawaii.
Acquisitions,
Dispositions, Repositionings and Financings.
Acquisitions. During
2007, we completed the following acquisition transactions:
|
Ÿ
|
Century Park
West. In May 2007, we acquired an approximate 50,000
rentable square foot Class A office building located in our Century City
submarket for a contract price of $32 million. In addition, we
obtained the ground leasehold in the property and the option to acquire
fee title to the land for a fixed price of $800,000 in conjunction with
the acquisition. We exercised the option and acquired fee title
to the land at the end of 2007.
|
|
Ÿ
|
Cornerstone
Plaza. In October 2007, we acquired an 8-story, Class A
office building located in the Olympic Corridor of Los Angeles comprised
of approximately 174,000 square feet for a contract price of $84
million. This acquisition increases our assets within the
Olympic Corridor submarket to 5 office buildings, totaling approximately
1.1 million rentable square feet.
|
Repositionings. We generally
select a property for repositioning at the time we purchase it. We
often strategically purchase properties with large vacancies or expected
near-term lease roll-over and use our knowledge of the property and submarket to
determine the optimal use and tenant mix. A repositioning can consist
of a range of improvements to a property. A repositioning may involve
a complete structural renovation of a building to significantly upgrade the
character of the property, or it may involve targeted remodeling of common areas
and tenant spaces to make the property more attractive to certain identified
tenants. Because each repositioning effort is unique and determined
based on the property, tenants and overall trends in the general market and
specific submarket, the results are varying degrees of depressed rental revenue
and occupancy levels for the affected property, which impacts our results and,
accordingly, comparisons of our performance from period to
period. The repositioning process generally occurs over the course of
months or even years. During 2007, we had on-going repositioning
efforts on three of our office properties representing 13 buildings and
approximately 3.1 million rentable square feet. The
repositioning properties exclude properties acquired during 2007 as these
properties are discussed within the context of acquisitions.
Financings. During 2007, we
completed the following financing transactions:
|
•
|
Increase in secured notes
payable. In
June 2007, we borrowed an additional $150 million of long term
variable rate debt. This included an increase of
$132 million in our existing loan facilities with Fannie Mae, plus
additional loan facilities with Fannie Mae totaling
$18 million. These loans are secured by our residential
properties with maturity dates ranging from June 1, 2012 to June 1,
2017. Concurrent with the incremental borrowings, we entered
into interest rate contracts to swap the underlying variable rates to
fixed rates. These contracts are designated as hedges and
result in a weighted average fixed interest rate of approximately
5.87%.
|
|
•
|
Increase in available credit
line. We have a revolving credit facility with a group
of banks led by Bank of America, N.A. and Banc of America Securities LLC.
In 2007, we increased the availability of our revolving credit facility by
$120 million, bringing the total available revolver to $370
million.
|
Basis
of Presentation
For the
periods subsequent to October 31, 2006, the financial statements presented
are the consolidated financial statements of Douglas Emmett, Inc. and its
subsidiaries including our operating partnership. Douglas
Emmett, Inc. is a Maryland corporation formed on June 28, 2005, which did
not have any meaningful operating activity until the consummation of our IPO and
the related acquisition of our predecessor and certain other entities in October
2006. For a detailed description of this transaction and our
resulting organization, see Note 1 to our consolidated financial statements
included in this Report. The financial statements for the periods prior to
October 31, 2006 are the consolidated financial statements of our
predecessor. They include the accounts of Douglas Emmett Realty Advisors (DERA)
and certain institutional funds, but do not include the accounts of other
entities which were acquired at the time of our IPO. Because the 2007 and 2006
periods reflect significant differences in both the assets included and the
ongoing economic impact resulting from our formation transactions, the results
are in many cases not directly comparable and we urge readers to be even more
than usually cautious in using them to predict future results. As a
result of these facts, investors are urged to exercise caution in using these
past results as an indicator for our future performance.
Critical
Accounting Policies
Our
discussion and analysis of the historical financial condition and results of
operations of Douglas Emmett, Inc. and our predecessor are based upon their
respective consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP). The
preparation of these financial statements in conformity with GAAP requires us to
make estimates of certain items and judgments as to certain future events, for
example with respect to the allocation of the purchase price of acquired
property among land, buildings, improvements, equipment, and any related
intangible assets and liabilities, or the effect of a property tax reassessment
of our properties in connection with the IPO. These determinations,
even though inherently subjective and subject to change, affect the reported
amounts of our assets, liabilities, revenues and expenses. While we
believe that our estimates are based on reasonable assumptions and judgments at
the time they are made, some of our assumptions, estimates and judgments will
inevitably prove to be incorrect. As a result, actual outcomes will
likely differ from our accruals, and those differences—positive or
negative—could be material. Some of our accruals are subject to
adjustment as we believe appropriate based on revised estimates and
reconciliation to the actual results when available.
Investment in Real
Estate. Acquisitions of properties and other business
combinations are accounted for utilizing the purchase method and, accordingly,
the results of operations of acquired properties are included in our results of
operations from the respective dates of acquisition. Estimates of
future cash flows and other valuation techniques are used to allocate the
purchase price of acquired property between land, buildings and improvements,
equipment and identifiable intangible assets and liabilities such as amounts
related to in-place at-market leases, acquired above- and below-market leases
and tenant relationships. Initial valuations are subject to change
until such information is finalized no later than 12 months from the acquisition
date. Each of these estimates requires a great deal of judgment, and
some of the estimates involve complex calculations. These allocation
assessments have a direct impact on our results of operations because if we were
to allocate more value to land there would be no depreciation with respect to
such amount. If we were to allocate more value to the buildings as
opposed to allocating to the value of tenant leases, this amount would be
recognized as an expense over a much longer period of time, since the amounts
allocated to buildings are depreciated over the estimated lives of the buildings
whereas amounts allocated to tenant leases are amortized over the remaining
terms of the leases.
The fair
values of tangible assets are determined on an ‘‘as-if-vacant’’
basis. The ‘‘as-if-vacant’’ fair value is allocated to land, where
applicable, buildings, tenant improvements and equipment based on comparable
sales and other relevant information obtained in connection with the acquisition
of the property.
The
estimated fair value of acquired in-place at-market leases are the costs we
would have incurred to lease the property to the occupancy level of the property
at the date of acquisition. Such estimates include the fair value of
leasing commissions and legal costs that would be incurred to lease the property
to this occupancy level. Additionally, we evaluate the time period
over which such occupancy level would be achieved and we include an estimate of
the net operating costs (primarily real estate taxes, insurance and utilities)
incurred during the lease-up period, which is generally six months.
Above-market
and below-market in-place lease values are recorded as an asset or liability
based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between the contractual
amounts to be received or paid pursuant to the in-place tenant or ground leases,
respectively, and our estimate of fair market lease rates for the corresponding
in-place leases, measured over a period equal to the remaining noncancelable
term of the lease.
Expenditures
for repairs and maintenance are expensed to operations as
incurred. Significant betterments are
capitalized. Interest, insurance and property tax costs incurred
during the period of construction of real estate facilities are
capitalized. When assets are sold or retired, their costs and related
accumulated depreciation are removed from the accounts with the resulting gains
or losses reflected in net income or loss for the period.
The
values allocated to land, buildings, site improvements, tenant improvements, and
in-place leases are depreciated on a straight-line basis using an estimated life
of 40 years for buildings, 15 years for site improvements, a portfolio average
term of existing leases for in-place lease values and the respective remaining
lease terms for tenant improvements and leasing costs. The values of
above- and below-market tenant leases are amortized over the remaining life of
the related lease and recorded as either an increase (for below-market tenant
leases) or a decrease (for above-market tenant leases) to rental
income. The value of above- and below-market ground leases are
amortized over the remaining life of the related lease and recorded as either an
increase (for below-market ground leases) or a decrease (for above-market ground
leases) to office rental operating expense. The amortization of
acquired in-place leases is recorded as an adjustment to depreciation and
amortization in the consolidated statements of operations. If a lease
were to be terminated prior to its stated expiration, all unamortized amounts
relating to that lease would be written off.
Impairment of Long-Lived
Assets. We assess whether there has been impairment in the
value of our long-lived assets whenever events or changes in circumstances
indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount to the undiscounted future cash flows
expected to be generated by the asset. We consider factors such as
future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If our evaluation indicates
that we may be unable to recover the carrying value of a real estate investment,
an impairment loss is recorded to the extent that the carrying value exceeds the
estimated fair value of the property. These losses have a direct
impact on our net income because recording an impairment loss results in an
immediate negative adjustment to net income. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less costs to
sell. The evaluation of anticipated cash flows is highly subjective
and is based in part on assumptions regarding future occupancy, rental rates and
capital requirements that could differ materially from actual results in future
periods. If our strategy changes or market conditions otherwise
dictate an earlier sale date, an impairment loss may be recognized and such loss
could be material.
Income Taxes. As a
REIT, we are permitted to deduct distributions paid to its stockholders,
eliminating the federal taxation of income represented by such distributions at
the corporate level. REITs are subject to a number of organizational
and operational requirements. If we fail to qualify as a REIT in any
taxable year, we will be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate tax
rates.
Revenue
Recognition. Revenue and gain is recognized in accordance with
Staff Accounting Bulletin No. 104 of the Securities and Exchange Commission,
Revenue Recognition in
Financial Statements (SAB 104), as amended. SAB 104 requires
that four basic criteria must be met before revenue can be recognized:
persuasive evidence of an arrangement exists; the delivery has occurred or
services rendered; the fee is fixed and determinable; and collectibility is
reasonably assured. All leases are classified as operating
leases. For all lease terms exceeding one year, rental income is
recognized on a straight-line basis over the terms of the
leases. Deferred rent receivables represent rental revenue recognized
on a straight-line basis in excess of billed rents. Reimbursements
from tenants for real estate taxes and other recoverable operating expenses are
recognized as revenues in the period the applicable costs are
incurred. In addition, we record a capital asset for leasehold
improvements constructed by us that are reimbursed by tenants, with the
offsetting side of this accounting entry recorded to deferred revenue which is
included in accounts payable and accrued expenses. The deferred
revenue is amortized as additional rental revenue over the life of the related
lease. Rental revenue from month-to-month leases or leases with no
scheduled rent increases or other adjustments is recognized on a monthly basis
when earned.
Recoveries
from tenants for real estate taxes, common area maintenance and other
recoverable costs are recognized in the period that the expenses are
incurred. Lease termination fees, which are included in rental income
in the accompanying consolidated statements of operations, are recognized when
the related leases are canceled and we have no continuing obligation to provide
services to such former tenants.
We
recognize gains on sales of real estate pursuant to the provisions of Statement
of Financial Accounting Standards (FAS) No. 66, Accounting for Sales of Real
Estate (FAS 66). The specific timing of a sale is measured
against various criteria in FAS 66 related to the terms of the transaction and
any continuing involvement in the form of management or financial assistance
associated with the property. If the sales criteria are not met, we
defer gain recognition and account for the continued operations of the property
by applying the finance, installment or cost recovery method.
Monitoring of Rents and Other
Receivables. We maintain an allowance for estimated losses
that may result from the inability of tenants to make required
payments. If a tenant fails to make contractual payments beyond any
allowance, we may recognize bad debt expense in future periods equal to the
amount of unpaid rent and deferred rent. We generally do not require
collateral or other security from our tenants, other than security deposits or
letters of credit. If our estimates of collectibility differ from the
cash received, the timing and amount of our reported revenue could be
impacted.
Stock-Based
Compensation. We have awarded stock-based compensation to
certain key employees and members of our Board of Directors in the form of stock
options and long-term incentive plan units (LTIP units). These awards
are accounted for under FAS No. 123R (revised 2004), Share-Based Payment (FAS
123R), which was effective beginning January 1, 2006. We had no
stock-based compensation awards outstanding prior to our IPO in October
2006. This pronouncement requires that we estimate the fair value of
the awards and recognize this value over the requisite vesting
period. We utilize a Black-Scholes model to calculate the fair value
of options, which uses assumptions related to the stock, including volatility
and dividend yield, as well as assumptions related to the stock award itself,
such as the expected term and estimated forfeiture rate. Option
valuation models require the input of somewhat subjective assumptions for which
we have relied on observations of both historical trends and implied estimates
as determined by independent third parties. For LTIP units, the fair
value is based on the market value of our common stock on the date of grant and
a discount for post-vesting restrictions estimated by a third-party
consultant.
Financial
Instruments. The estimated fair values of financial
instruments are determined using available market information and appropriate
valuation methods. Considerable judgment is necessary to interpret
market data and develop estimated fair values. The use of different
market assumptions or estimation methods may have a material effect on the
estimated fair value amounts. Accordingly, estimated fair values are
not necessarily indicative of the amounts that could be realized in current
market exchanges.
Interest Rate
Agreements. We manage our interest rate risk associated with
borrowings by obtaining interest rate swap and interest rate cap
contracts. No other derivative instruments are used. We
recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
and the changes in fair value must be reflected as income or
expense. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income, which is a
component of our stockholders’ equity account. The ineffective
portion of a derivative’s change in fair value is immediately recognized in
earnings.
Results
of Operations
Our
results of operations in 2007, 2006 and 2005 were affected by our acquisition
and repositioning activities in all years including the acquisition of six
office properties, three multifamily properties and the fee interest in one
parcel of land that we lease to a third-party under a long-term ground lease
that we acquired from our non-predecessor entities at the time of our IPO and
subsequently. As a consequence, our results are not comparable from
period to period due to the varying timing of individual property acquisitions,
the impact of the formation transactions and lease up or increased vacancy
resulting from repositioning activities. Our repositioning efforts
have also impacted our operating results, and we expect that to
continue. Upon completion of our repositioning efforts, we expect
that we will be able to stabilize occupancy at these properties at levels
consistent with the rest of our portfolio.
In our
office portfolio, our repositioning properties include Warner Center Towers, The
Trillium and Bishop Place for all periods presented. In addition,
Harbor Court, Sherman Oaks Galleria and 9601 Wilshire were repositioning
properties in 2006 and 2005. Our acquisition properties in our office
portfolio include Brentwood Court, Brentwood Medical Plaza, Brentwood San
Vicente Medical and San Vicente Plaza, which were acquired at the time of our
IPO, as well as Century Park West and Cornerstone Plaza, which were acquired in
2007. As of December 31, 2007, the repositioning and acquisition
properties represented 42.3% of our total office portfolio based on rentable
square feet. In addition, we acquired five properties in our
multifamily portfolio: Moanalua Hillside Apartments in January 2005, Royal Kunia
in March 2006 and Barrington/Kiowa, Barry and Kiowa at the time of our
IPO. As of December 31, 2007, our multifamily acquisitions
represented 42.7% of the total units in our multifamily
portfolio. During the periods discussed, we had no multifamily
repositioning properties.
As
discussed under “Basis of Presentation”, our results of operations for 2006
contain the consolidated results of Douglas Emmett, Inc. and its subsidiaries,
including our operating partnership, for the period from October 31, 2006
through December 31, 2006. The results of operations for the period
January 1, 2006 through October 30, 2006 consist of our predecessor, which
includes the accounts of DERA and the institutional funds. In our
analysis below, we have combined the results for the year ended
December 31, 2006 to compare to our consolidated results for 2007 and our
predecessor’s results for 2005.
Comparison
of year ended December 31, 2007 to year ended December 31,
2006
Revenue
Office
Revenue
Total Office
Revenue. Total office revenue consists of rental revenue,
tenant recoveries and parking and other income. Total office
portfolio revenue increased by $72.1 million, or 19.1 %, to $448.7 million for
2007 compared to $376.6 million for 2006 for the reasons described
below.
Rental
Revenue. Rental revenue includes rental revenues from our
office properties, percentage rent on the retail space contained within office
properties, and lease termination income. Total office rental revenue
increased by $61.8 million, or 19.6%, to $376.9 million for 2007 compared to
$315.1 million for 2006. This increase is primarily due to
incremental rent from the four properties we acquired at the time of our IPO in
October 2006, the two additional properties we acquired in the second and fourth
quarters of 2007 as described above, and gains in occupancy at our repositioning
properties. Rent also increased for the remainder of our office
portfolio that was not acquired or repositioned during the periods presented,
primarily due to gains in occupancy and increases in average rental rates for
new and renewal leases signed since January 1, 2006. In addition, we
recognized approximately $25.7 million of incremental rent related to the
amortization of net below-market rents that resulted from the mark to market
adjustments to our leases that we recorded in connection with our
IPO.
Tenant
Recoveries. Total office tenant recoveries increased by $4.5
million, or 22.0%, to $25.2 million for 2007 compared to $20.6 million for 2006
primarily due to incremental recoveries from the four properties acquired in the
fourth quarter of 2006, and the two additional properties we acquired in
2007. The overall increase is also attributable to increases in
tenant recoveries at our repositioning properties resulting from increases in
occupancy, as well as an increase in recoverable scheduled services, payroll
expense and property taxes as described in office rental expenses
below.
Parking and Other
Income. Total office parking and other income increased by
$5.7 million, or 14.0%, to $46.6 million for 2007 compared to $40.9 million for
2006. This increase was primarily due to gains in occupancy in our
repositioning and acquisition properties and parking rate increases implemented
in July 2006 and July 2007 across the portfolio.
Multifamily
Revenue
Total Multifamily
Revenue. Total multifamily revenue consists of rent, parking
income and other income. Total multifamily revenue increased by $12.5
million, or 21.8%, to $69.5 million for 2007 compared to $57.0 million for 2006,
primarily due to the three multifamily property acquisitions in our formation
transactions, as well as Villas at Royal Kunia, which we acquired in March
2006. In addition, a significant number of our Santa Monica
multifamily units were under leases signed prior to a 1999 change in California
Law that allows landlords to reset rents to market rates when a tenant moves
out. A portion of the multifamily increase was due to the rollover to
market rents of several of these rent-controlled units, or “Pre-1999 Units”,
since January 1, 2006. The remainder of the increase was
primarily due to increases in rents charged to other existing and new
tenants. In addition, we recognized approximately $6.4 million
of incremental rent related to the amortization of net below-market rents that
resulted from the mark to market adjustments to our leases that we recorded in
connection with our IPO.
Operating
Expenses
Office Rental
Expenses. Total office rental expense was relatively flat
between 2007 and 2006. Expenses increased due to higher levels of
scheduled services, payroll expense and property tax expense, reflecting both
additional properties acquired at and after our IPO, as well as higher costs at
existing properties between comparative periods. The increased
expense was offset by lower operating expenses in 2007 that resulted from the
elimination of fees for property management services, which were provided by
DECO in 2006 prior to the acquisition and consolidation of DECO in the formation
transactions.
Multifamily Rental
Expenses. Total multifamily rental expense decreased by $1.1
million, or 5.9%, to $17.2 million for 2007 compared to $18.2 million for 2006,
primarily due to the elimination of DECO property management fees as described
under “Office Rental Expenses” above. The decrease was partially
offset by higher property tax and payroll expense resulting from the
consolidation of non-predecessor multifamily properties since our IPO in October
2006.
General and Administrative
Expenses. General and administrative expenses for 2007
decreased $26.6 million to $21.5 million for 2007, compared to $48.1 million for
2006. The level of general and administrative expenses for 2006 was primarily
attributable to one-time non-cash compensation costs at the time of our IPO
totaling approximately $27.7 million and the payment by our predecessor of $13.2
million in one-time discretionary cash bonuses prior to the consummation of our
IPO. There were no such costs during 2007, however, these savings
were partially offset by publicly-traded REIT-related costs subsequent to our
IPO, including legal and audit fees, directors and officers insurance and costs
related to our compliance with section 404 of Sarbanes-Oxley.
Depreciation and
Amortization. Depreciation and amortization expense increased
$81.6 million, or 63.8%, to $209.6 million for 2007 compared to $128.0 million
for 2006. The increase was primarily due to depreciation of the
higher cost basis for each existing property in our portfolio as a result of
recording these real estate assets at market value in connection with our IPO
and formation transactions, as well as incremental depreciation related to the
ten office and multifamily properties we acquired as described
above.
Non-Operating
Income and Expenses
Gain on Investments in Interest Rate
Contracts, Net. We recognized a net gain of $6.8 million on
investments in interest rate contracts in 2006 due to changes in the fair market
value of our in-place interest rate swap contracts during the ten-month period
of 2006 prior to our formation transactions. In conjunction with our
IPO, we entered into a series of interest rate swaps that effectively offset any
future changes in the fair value of our predecessor’s existing interest rate
contracts. Therefore, no comparable gain or loss was recognized
during 2007.
Interest
Expense. Interest expense increased $38.5 million, or 31.5%,
to $160.6 million for 2007 compared to $122.2 million for 2006. The
increase was primarily due to an increase in our average outstanding debt
related to the $545 million borrowed in the fourth quarter of 2006 to fund a
portion of the formation transactions related to our IPO and an additional
$150 million borrowed during the second quarter of 2007 to fund repurchase
of our equity and the purchase of our new property in Century
City. The remaining increase in interest expense was primarily due to
borrowings outstanding under our corporate revolver during 2007 to fund
additional repurchases of our equity and the purchase of our new property in the
Olympic Corridor.
Deficit Distributions to Minority
Partners, Net. Deficit distributions to minority partners, net, was a
$10.6 million net distribution for 2006. The expense was primarily due to cash
distributions to limited partners exceeding the carrying amount of minority
interest in the institutional funds included in our predecessor. This
category was not applicable subsequent to our IPO and therefore no such amount
was recorded in 2007.
Minority
Interests. Minority
interest income totaling $5.7 million was recognized for 2007 compared to
minority expense of $25.9 million expense for 2006. The amount in 2006
represents the limited partners’ ownership interest in our predecessor,
including a preferred minority investor. The amount in 2007
represents the portion of results attributable to minority ownership interests
in our operating partnership.
Comparison
of year ended December 31, 2006 to year ended December 31,
2005
Revenue
Office
Revenue
Total Office
Revenue. Total office revenue consists of rental revenue,
tenant recoveries and parking and other income. Total office
portfolio revenue increased by $28.0 million, or 8.0%, to $376.6 million for
2006 compared to $348.6 million for 2005 for the reasons described
below.
Rental
Revenue. Rental revenue includes rental revenues from our
office properties, percentage rent on the retail space contained within office
properties, and lease termination income. Total office portfolio
rental revenue increased by $17.5 million, or 5.9%, to $315.1 million for 2006
compared to $297.6 million for 2005, primarily due to increases in rents from
our repositioning and acquisition properties including gains in occupancy at our
repositioning properties as part of our repositioning efforts. For
the portion of our office portfolio that was not acquired or repositioned during
the periods presented, rental revenue also increased primarily due to gains in
occupancy and roll-up in average rental rates for new and renewal leases signed
since January 1, 2005.
Tenant
Recoveries. Total office tenant recoveries increased by $6.0
million, or 41.1%, to $20.6 million for 2006 compared to $14.6 million for 2005
primarily due to tenant recoveries at our repositioning and acquisition
properties and gains in occupancy and recoveries related to increases in
operating expenses for the remainder of our office portfolio discussed
below.
Parking and Other
Income. Total office parking and other income increased by
$4.5 million, or 12.4%, to $40.9 million for 2006 compared to $36.4 million for
2005. This increase was primarily due to gains in occupancy in our
repositioning and acquisition properties and parking rate increases implemented
in 2006 across the office portfolio.
Multifamily
Revenue
Total Multifamily
Revenue. Total multifamily revenue consists of rent and
parking and other income. Total multifamily portfolio revenue
increased by $11.8 million, or 26.1%, to $57.0 million for 2006 compared to
$45.2 million for 2005, primarily due to our multifamily acquisitions described
above.
Rent. Total
multifamily rent increased by $11.3 million, or 25.7%, to $55.2 million for 2006
compared to $43.9 million for 2005 primarily due to the acquisition of the five
properties described above. A portion of the multifamily increase was
due to the rollover to market rents of several “Pre-1999 Units” since January 1,
2005. The remainder of the increase was primarily due to increases in
rents charged to other tenants.
Operating
Expenses
Office Rental
Expenses. Total office rental expense increased by $9.1
million, or 7.6%, to $129.0 million for 2006 compared to $119.9 million for
2005, primarily due to the properties acquired at the time of our IPO described
above, gains in occupancy at our repositioning properties, increases in
estimated property taxes as a result of our formation transactions, increases in
contractual expenses including janitorial and security costs, higher insurance
costs in 2006 as a result of industry-wide rate increases and higher utility
costs as a result of warmer than normal weather in 2006.
Multifamily Rental
Expenses. Total multifamily rental expense increased by $2.9
million, or 19.0%, to $18.2 million for 2006 compared to $15.3 million for 2005,
primarily due to our multifamily acquisitions, increases in estimated property
taxes as a result of our formation transactions, as well as higher insurance and
utility costs as described for the office portfolio above.
General and Administrative
Expenses. General and administrative expenses for 2006
increased $41.6 million to $48.1 million for 2006 compared to $6.5 million for
2005 primarily due to one-time non-cash compensation costs at the time of our
IPO totaling approximately $27.7 million and the payment by our predecessor of
$13.2 million in one-time discretionary cash bonuses prior to the consummation
of our IPO.
Depreciation and
Amortization. Depreciation and amortization expense increased
$14.8 million, or 13.1%, to $128.0 million for 2006 compared to $113.2 million
for 2005. The increase was primarily due to depreciation related to
the step up in basis for our predecessor’s properties at the time of our IPO and
depreciation related to the property acquisitions described above.
Non-Operating
Income and Expenses
Gain on Investments in Interest Rate
Contracts, Net. We recognized a net gain of $6.8 million on
investments in interest rate contracts for 2006 compared to a net gain of $81.7
million for 2005. The lower net gain in 2006 compared to the net gain
in 2005 was due to changes in the fair market value of our in-place interest
rate swap contracts during the ten-month period of 2006 prior to the formation
transaction. In conjunction with our IPO, we entered into a series of interest
rate swaps that effectively offset any future changes in the fair value of our
predecessor’s existing interest rate contracts.
Interest
Expense. Interest expense increased $6.5 million, or 5.6%, to
$122.2 million for 2006 compared to $115.7 million for 2005. The
overall increase in interest expense was primarily due to the increase in debt
balances as a result of our formation transactions at the time of our IPO and
additional interest expense related to the purchase of one multifamily property
in March 2006, which was financed with $82.0 million in debt. The
increase in interest expense was partially offset by a $7.6 million accelerated
loan fee amortization on part of an August 2005 refinancing.
Deficit Distributions to Minority
Partners, Net. Deficit distributions to minority partners,
net, decreased $17.5 million, or 62.2%, to $10.6 million for 2006 compared to
$28.1 million for 2005. The decrease was primarily due to a 2005
distribution related to a preferred investor contribution that did not occur in
2006.
Minority
Interests. Minority interest expense decreased $69.7 million
to $25.9 million for 2006 compared to $95.6 million for 2005. The
decrease was primarily due to the allocation of losses incurred in the formation
transactions and the absence of a preferred minority interest holder subsequent
to the formation transactions, as well as lower gains on interest rate contracts
in 2006 in comparison to 2005.
Liquidity
and Capital Resources
Available
Borrowings, Cash Balances and Capital Resources
In June
2007, we borrowed an additional $150 million of long term variable rate
debt. This included an increase of $132 million in our existing loan
facilities with Fannie Mae, plus additional loan facilities with Fannie Mae
totaling $18 million. These loans are secured by our residential
properties with maturity dates ranging from June 1, 2012 to June 1,
2017. Concurrent with the incremental borrowings, we entered into
interest rate contracts to swap the underlying variable rates to fixed
rates. These contracts are designated as hedges and result in a
weighted average fixed interest rate of approximately 5.87%.
We had
total indebtedness of $3.1 billion at December 31, 2007, excluding a loan
premium representing the mark-to-market adjustment on variable rate debt assumed
from our predecessor. Our debt increased $320 million from December
31, 2006 as a result of the $150 million of incremental borrowings discussed
above and $170 million in borrowings under our revolving credit
facility.
We have a
revolving credit facility with a group of banks led by Bank of America, N.A. and
Banc of America Securities LLC. In 2007, we increased the availability of our
revolving credit facility by $120 million, bringing the total available revolver
to $370 million. This revolving credit facility also contains an
accordion feature that allows us to increase availability to $500 million under
specified circumstances. At December 31, 2007, there was
$190 million available to us under this credit facility. This revolving
credit facility expires in 2009 with two one-year extensions and an effective
rate of either LIBOR plus 70 basis points or Federal Funds plus 95 basis points
if the outstanding amount is less than $262.5 million and either LIBOR plus 80
basis points or Federal Funds plus 105 basis points if the amount outstanding is
greater than $262.5 million. We have used our revolving credit facility for
general corporate purposes, including funding acquisitions, redevelopment and
repositioning opportunities, repurchases of our stock and operating partnership
units, tenant improvements and capital expenditures, recapitalizations and
providing working capital.
We have
historically financed our capital needs through short-term lines of credit and
long-term secured mortgages of which have been at floating rates. To
mitigate the impact of fluctuations in short-term interest rates on our cash
flow from operations, we generally enter into interest rate swap or interest
rate cap agreements. At December 31, 2007, the interest rate on all
of our debt, other than amounts drawn under our revolving credit facility, was
effectively fixed at an overall rate of 5.20% by virtue of interest rate swap
and interest rate cap agreements. See Notes 7 and 9 to our
consolidated financial statements included in this Report.
At
December 31, 2007, our total borrowings under secured loans represented 46.5% of
our total market capitalization of $6.6 billion. Total market
capitalization includes our consolidated debt and the value of common stock and
operating partnership units each based on our common stock closing price at
December 31, 2007 on the New York Stock Exchange of $22.61 per
share.
The
nature of our business, and the requirements imposed by REIT rules that we
distribute a substantial majority of our income on an annual basis, will cause
us to have substantial liquidity needs over both the short term and the long
term.
We expect
to meet our short-term liquidity requirements generally through cash provided by
operations and, if necessary, by drawing upon our senior secured revolving
credit facility. We anticipate that cash provided by operations and
borrowings under our senior secured revolving credit facility will be sufficient
to meet our liquidity requirements for at least the next 12 months.
Our
long-term liquidity needs consist primarily of funds necessary to pay for
acquisitions, redevelopment and repositioning of properties, non-recurring
capital expenditures, and repayment of indebtedness at maturity. We
do not expect that we will have sufficient funds on hand to cover all of these
long-term cash requirements. We will seek to satisfy these needs
through cash flow from operations, long-term secured and unsecured indebtedness,
the issuance of debt and equity securities, including units in our operating
partnership, property dispositions and joint venture transactions. We
have historically financed our operations, acquisitions and development, through
the use of our revolving credit facility or other short term acquisition lines
of credit, which we subsequently repay with long-term secured floating rate
mortgage debt. To mitigate the impact of fluctuations in short-term
interest rates on our cash flow from operations, we generally enter into
interest rate swap or interest rate cap agreements at the time we enter into
term borrowings.
We are
also exploring raising capital for acquisitions through an institutional fund,
under which a general partner affiliated with us would receive certain fees as
well as a carried interest in any distributions after the participating
institutional investors receive a return of their invested capital and a
preferred return. If we close such a fund, it is likely that it would
be our exclusive vehicle for most (and perhaps all) cash acquisitions during the
investment period of the fund. The exact terms of any such fund would
be based on negotiations and market conditions. Any securities
offered in such a fund will not be registered under the Securities Act of 1933
and could not be offered or sold in the United States absent registration under
that act or an applicable exemption from those registration
requirements. Nothing in the foregoing disclosure constitutes an
offer to sell any securities in such a fund, nor a solicitation of an offer to
purchase any such securities.
Commitments
The
following table sets forth our principal obligations and commitments, excluding
periodic interest payments, as of December 31, 2007:
Payment due by period (in
thousands)
|
||||||||||||||||||||
Less
than
|
1-3
|
4-5
|
||||||||||||||||||
Contractual Obligations
|
Total
|
1 year
|
years
|
years
|
Thereafter
|
|||||||||||||||
Long-term
debt obligations
|
$ | 3,080,450 | $ | - | $ | 180,450 | $ | 2,688,080 | $ | 211,920 | ||||||||||
Minimum
lease payments
|
8,504 | 1,078 | 1,440 | 1,466 | 4,520 | |||||||||||||||
Purchase
commitments related to capital expenditures associated with tenant
improvements and repositioning and other purchase
obligations
|
4,734 | 4,734 | - | - | - | |||||||||||||||
Total
|
$ | 3,093,688 | $ | 5,812 | $ | 181,890 | $ | 2,689,546 | $ | 216,440 |
The
nature of our business, and the requirements imposed by REIT rules that we
distribute a substantial majority of our income on an annual basis, will cause
us to have substantial liquidity needs over both the short-term and the
long-term.
In 2007,
we declared an annual dividend of $0.70 per share, paid quarterly following the
end of each quarter.
Off-Balance
Sheet Arrangements
At
December 31, 2007, we did not have any off balance sheet financing
arrangements.
Cash
Flows
Cash and
cash equivalents were $5.8 million and $4.5 million, respectively, at December
31, 2007 and 2006.
Net cash
provided by operating activities increased $8.2 million to
$154.8 million for 2007 compared to $146.6 million for 2006. The
increase in 2007 reflects higher net cash flow from existing properties that
generated improved results, as well as incremental cash flow from acquired
properties.
Net cash
used in investing activities decreased $1.9 billion to $172.8 million for
2007 compared to $2.1 billion for 2006. The decrease was primarily
due to a lower level of spending on property acquisitions in 2007 compared to
2006. The amount in 2006 was due to the use of proceeds generated by
our IPO and IPO-related financing transaction to acquire the non-predecessor
properties and to liquidate the owners of our predecessor who elected to receive
cash in the formation transactions.
Net cash
provided by financing activities decreased $1.83 billion to $19.3 million for
2007 compared to $1.85 billion for 2006. During 2007, the net cash inflow
represents borrowings in excess of equity repurchases and payments of dividends
and distributions. The amount in 2006 related to the proceeds from
our formation transactions in October 2006 including $1.5 billion in net
proceeds from our IPO and the $545.0 million additional borrowing under our term
loan, partially offset by debt repayments.
Item
7A. Quantitative and Qualitative Disclosures about
Market Risk
Our
future income, cash flows and fair values relevant to financial instruments are
dependent upon prevalent market interest rates. Market risk refers to
the risk of loss from adverse changes in market prices and interest
rates. We use derivative financial instruments to manage, or hedge,
interest rate risks related to our borrowings. In conjunction with
our IPO, we entered into two new series of interest rate swap and interest rate
cap contracts. The first series effectively offset all future changes
in fair value from our existing interest rate swap and interest rate cap
contracts, and the second series effectively replaced the existing interest rate
contracts and qualified for cash flow hedge accounting under FAS
133. We only enter into contracts with major financial institutions
based on their credit rating and other factors. For a description of
our Interest Rate Contracts, please see Note 9 to our consolidated financial
statements contained in this Report.
As of
December 31, 2007, approximately 94.1% (or $2.90 billion) of our total
outstanding debt of $3.08 billion, excluding loan premiums, was subject to
floating interest rates which were effectively fixed by virtue of interest rate
contracts. The remaining $180.5 million bears interest at a
floating rate and was not mitigated by interest rate contracts. Based
on the level of variable rate debt outstanding at December 31, 2007, by virtue
of the mitigating effect of our interest rate contracts, a 50 basis point change
in LIBOR would result in an annual impact to earnings of approximately
$900.
Item
8. Financial Statements and Supplementary
Data
All
information required by this item is listed in the Index to Financial Statements
in Part IV, Item 15(a)(1).
Item
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item
9A. Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of December 31, 2007, the
end of the period covered by this Report. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that as of
December 31, 2007 our disclosure controls and procedures were effective at
the reasonable assurance level such that the information relating to us and our
consolidated subsidiaries required to be disclosed in our SEC reports
(i) is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
There
have not been any changes in our internal control over financial reporting that
occurred during the fiscal quarter ended December 31, 2007, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting and the Report of
Independent Registered Public Accounting Firm thereon appear at pages F-1 and
F-3, respectively, and are incorporated herein by reference.
Item
9B. Other Information
None
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
Information
regarding our directors, executive officers and corporate governance is
incorporated by reference to the information set forth under the caption “Directors and Executive
Officers” in our Proxy Statement for the Annual Meeting of Stockholders
to be filed with the Commission within 120 days after the end of our year ended
December 31, 2007.
We have
adopted a Code of Business Conduct and Ethics for all of our employees,
including our Chief Executive Officer, Chief Financial Officer and Principal
Accounting Officer, which is a “code of ethics” as defined by applicable rules
of the SEC. The purpose of the code is to ensure that our business is
conducted in a consistently legal and ethical matter. We have posted
the text of the code on our website at www.douglasemmett.com. If we
make any amendments to this code other than technical, administrative or other
non-substantive amendments, or grant any waivers, including implicit waivers,
from a provision of this code to our Chief Executive Officer, Chief Financial
officer or Principal Accounting Officer, we will disclose the nature of any such
amendment or waiver to the code, its effective date and to whom it applies, on
our website or in a report on Form 8-K filed with the SEC. We will
provide a copy of our code or our Annual Report on Form 10-K free of charge to
any person upon request by writing to us at the following
address: Douglas Emmett, Inc., 808 Wilshire Blvd., Santa Monica,
California 90401, Attn: Corporate Secretary.
Item
11. Executive Compensation
Information
regarding executive compensation is incorporated by reference to the information
set forth under the caption “Compensation of Directors and
Executive Officers” in our Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
our year ended December 31, 2007.
Item
12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
Information
regarding security ownership of certain beneficial owners and management is
incorporated by reference to the information set forth under the caption “Voting Securities of Principal
Stockholders and Management” in our Proxy Statement for the Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of our year ended December 31, 2007.
Item
13. Certain Relationships and Related Transactions,
and Director Independence
Information
regarding certain relationships and related transactions is incorporated by
reference to the information set forth under the caption “Certain Transactions” in our
Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our year ended December 31,
2007.
Item
14. Principal Accountant Fees and
Services
Information
regarding accounting fees and disclosures is incorporated by reference to the
information set forth under the caption “Fees Paid to Independent
Auditors” in our Proxy Statement for the Annual Meeting of Stockholders
to be filed with the Commission within 120 days after the end of our year ended
December 31, 2007.
PART
IV.
Item
15. Exhibits and Financial Statement
Schedules
(a)
and (c) Financial Statements and Financial Statement
Schedule
|
|||||
Page
No.
|
|||||
Index to Financial
Statements.
|
|||||
1.
|
The
following financial statements of the Company and the Report of Ernst
& Young LLP, Independent Registered Public Accounting Firm, are
included in Part IV of this Report on the pages indicated:
|
||||
Report
of Management on Internal Control Over Financial Reporting
|
F-1
|
||||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
||||
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
|
F-3
|
||||
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-4
|
||||
Consolidated
Statement of Operations for the year ended December 31, 2007, for the
period from October 31, 2006 through December 31, 2006, for the period
from January 1, 2006 through October 30, 2006, and the year
ended December 31, 2005
|
F-5
|
||||
Consolidated
Statement of Stockholders’ Equity (Defecit) for the year ended December
31, 2007, for the period from October 31, 2006 through December 31, 2006,
for the period from January 1, 2006 through October 30,
2006, and the year ended December 31, 2005
|
F-6
|
||||
Consolidated
Statement of Cash Flows year ended December 31, 2007, for the period from
October 31, 2006 through December 31, 2006, for the period from January 1,
2006 through October 30, 2006, and the year ended December 31,
2005
|
F-7
|
||||
Notes
to Consolidated Financial Statements
|
F-8
|
||||
Schedule
III-Real Estate and Accumulated Depreciation as of December 31,
2007.
|
F-30
|
(b)
|
Exhibits.
|
||
3.1
|
Articles
of Amendment and Restatement of Douglas Emmett, Inc.
(6)
|
||
3.2
|
Amended
and Restated Bylaws of Douglas Emmett, Inc.
(6)
|
||
3.3
|
Certificate
of Correction to Articles of Amendment and Restatement of Douglas Emmett,
Inc.(2)
|
||
4.1
|
Form
of Certificate of Common Stock of Douglas Emmett, Inc.(4)
|
||
10.1
|
Form
of Agreement of Limited Partnership of Douglas Emmett Properties,
LP.
(4)
|
||
10.2
|
Amended
and Restated Discount MBS Multifamily Note for $153,630,000 between Fannie
Mae and Barrington Pacific, LLC, dated June 1, 2007.
(7)
|
||
10.3
|
Amended
and Restated Discount MBS Multifamily Note for $46,400,000 between Fannie
Mae and Barrington Pacific, LLC, dated June 1, 2007.
(7)
|
||
10.4
|
Amended
and Restated Discount MBS Multifamily Note for $43,440,000 between Fannie
Mae and Shores Barrington LLC, dated June 1, 2007.
(7)
|
||
10.5
|
Amended
and Restated Discount MBS Multifamily Note for $144,610,000 between Fannie
Mae and Shores Barrington LLC, dated June 1, 2007.
(7)
|
||
10.6
|
Discount
MBS Multifamily Note for $111,920,000 between Fannie Mae and DEG
Residential, LLC, dated June 1, 2007. (7)
|
||
10.7
|
Form
of Registration Rights Agreement among Douglas Emmett, Inc. and the
persons named therein.
(1)
|
||
10.8
|
Form
of Indemnification Agreement between Douglas Emmett, Inc. and its
directors and officers.
(3)
|
||
10.9
|
Douglas
Emmett, Inc. 2006 Omnibus Stock Incentive Plan.
(8)+
|
||
10.10
|
Form
of Stock Option Agreement.
(3)
|
||
10.11
|
Form
of Employment Agreement between Douglas Emmett, Inc. and
Jordan Kaplan(4)
+
|
||
10.12
|
Form
of Employment Agreement between Douglas Emmett, Inc. and
Kenneth Panzer. (4)
+
|
||
10.13
|
Form
of Employment Agreement between Douglas Emmett, Inc. and
William Kamer. (4)
+
|
||
10.14
|
Representation,
Warranty and Indemnity Agreement among Douglas Emmett, Inc., Douglas
Emmett Properties, LP, Dan A. Emmett, Christopher Anderson, Jordan Kaplan
and Kenneth Panzer, dated as of June 15, 2006.
(1)
|
||
10.15
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF Acquisition, LLC and Douglas Emmett Realty Fund, dated as of June
15, 2006.
(1)
|
||
10.16
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF No. 2 Acquisition, LLC and Douglas Emmett Realty Fund No. 2,
dated as of June 15, 2006.
(1)
|
||
10.17
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF 1995 Acquisition, LLC and Douglas Emmett Realty Fund 1995, dated
as of June 15, 2006.
(1)
|
||
10.18
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF 1996 Acquisition, LLC and Douglas Emmett Realty Fund 1996, dated
as of June 15, 2006.
(1)
|
||
10.19
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF 1997 Acquisition, LLC and Douglas Emmett Realty Fund 1997, dated
as of June 15, 2006.
(1)
|
||
10.20
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF 1998 Acquisition, LLC and Douglas Emmett Realty Fund 1998, dated
as of June 15, 2006.
(1)
|
||
10.21
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF 2000 Acquisition, LLC and Douglas Emmett Realty Fund 2000, dated
as of June 15, 2006.
(1)
|
||
10.22
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, DERF 2002 Acquisition, LLC and Douglas Emmett Realty Fund 2002, dated
as of June 15, 2006.
(1)
|
10.23
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., DERF 2005 Acquisition, LLC,
Douglas Emmett 2005 REIT, Inc. and Douglas Emmett Realty Fund 2005, dated
as of June 15, 2006.
(1)
|
||
10.24
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Opp Fund Acquisition, LLC and The Opportunity Fund, dated as of June
15, 2006.
(1)
|
||
10.25
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Opp Fund 1995 Acquisition, LLC and The Opportunity Fund 1995, dated as
of June 15, 2006.
(1)
|
||
10.26
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Opp Fund 1996 Acquisition, LLC and The Opportunity Fund 1996, dated as
of June 15, 2006.
(1)
|
||
10.27
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Barry Acquisition, LLC and Barry Properties, Ltd., dated as of June
15, 2006.
(1)
|
||
10.28
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Kiowa Acquisition, LLC and Kiowa Properties, Ltd., dated as of June
15, 2006.
(1)
|
||
10.29
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Barrington/Kiowa Acquisition, LLC and Barrington/Kiowa Properties,
dated as of June 15, 2006.
(1)
|
||
10.30
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, BSVM Acquisition, LLC and Brentwood-San Vicente Medical, Ltd., dated
as of June 15, 2006.
(1)
|
||
10.31
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Brentwood Court Acquisition, LLC and Brentwood Court, dated as of June
15, 2006.
(1)
|
||
10.32
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Brentwood Plaza Acquisition, LLC and Brentwood Plaza, dated as of
June 15, 2006.
(1)
|
||
10.33
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, San Vicente Plaza Acquisition, LLC and San Vicente Plaza, dated as of
June 15, 2006.
(1)
|
||
10.34
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., Douglas Emmett Properties,
LP, Owensmouth Acquisition, LLC and Owensmouth/Warner, LLC, dated as of
June 15, 2006.
(1)
|
||
10.35
|
Agreement
and Plan of Merger among Douglas Emmett, Inc., DECO Acquisition, LLC, DERA
Acquisition, LLC, Douglas, Emmett and Company and Douglas Emmett Realty
Advisors, Inc., dated as of June 15, 2006.
(1)
|
||
10.36
|
P.L.E.
OP Contribution Agreement among Douglas Emmett Properties, LP, Douglas
Emmett Realty Advisors, Inc. and the stockholders of P.L.E. Builders,
Inc., dated as of June 15, 2006.
(1)
|
||
10.37
|
REIT
Contribution Agreement among Douglas Emmett, Inc., Douglas Emmett
Properties, LP, Douglas Emmett Realty Advisors, Inc., Aberdeen Properties,
Coral Realty, EA Realty, New September, LLC and the contributors signatory
thereto, dated as of June 15, 2006.
(1)
|
||
10.38
|
HBRCT
OP Contribution Agreement among Douglas Emmett Properties, LP, Douglas
Emmett Realty Advisors and HBRCT LLC, dated as of June 15, 2006.
(1)
|
||
10.39
|
Asset
Contribution Agreement among Douglas Emmett, Inc., DERA Acquisition, LLC,
DECO Acquisition, LLC, DERF 2005 Acquisition, LLC and Douglas Emmett
Properties, LP, dated as of June 15, 2006.
(1)
|
||
10.40
|
Employment
Agreement between Douglas Emmett, Inc. and Andres Gavinet. (4)
+
|
||
10.41
|
Form
of LTIP Unit Award Agreement. (4)
+
|
||
10.42
|
$170,000,000
Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1993, LLC,
the lenders party thereto, Eurohypo AG, New York Branch, and Barclays
Capital Real Estate Inc.
(3)
|
||
10.43
|
$260,000,000
Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1995, LLC,
the lenders party thereto, Eurohypo AG, New York Branch, and Barclays
Capital Real Estate Inc.
(3)
|
||
10.44
|
$215,000,000
Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1996, LLC,
the lenders party thereto, Eurohypo AG, New York Branch, and Barclays
Capital Real Estate Inc.
(3)
|
||
10.45
|
$425,000,000
Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1997, LLC,
Westwood Place Investors, LLC, the lenders party thereto, Eurohypo AG, New
York Branch, and Barclays Capital Real Estate Inc.
(3)
|
||
10.46
|
$150,000,000
Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1998, LLC,
the lenders party thereto, Eurohypo AG, New York Branch, and Barclays
Capital Real Estate Inc.
(3)
|
||
10.47
|
$425,000,000
Loan Agreement dated as of August 25, 2005 among Douglas Emmett 2000, LLC,
the lenders party thereto, Eurohypo AG, New York Branch, and Barclays
Capital Real Estate Inc.
(3)
|
||
10.48
|
$110,000,000
Loan Agreement dated as of August 25, 2005 among Douglas Emmett 2002, LLC,
DEG, LLC, the lenders party thereto, Eurohypo AG, New York Branch, and
Barclays Capital Real Estate Inc.
(3)
|
||
10.49
|
Joinder
and Supplement Agreement dated as of August 25, 2005 among Douglas Emmett
2002, LLC, and DEG, LLC, made with reference to the Loan Agreement dated
as of August 25, 2005 by and among Douglas Emmett 2002, LLC, the lenders
party thereto and Eurohypo AG, New York Branch.
(3)
|
||
10.50
|
Form
of LTIP Unit Designation.
(4)
|
||
10.51
|
Form
of Credit Agreement among Douglas Emmett 2006, LLC, Bank of America, N.A.,
Banc of America Securities, LLC, Bank of Montreal, Bayerische Landesbank,
Wachovia Bank, N.A. and the other lenders party thereto.
(4)
|
||
10.52
|
Form
of Modification Agreement among Douglas Emmett 1993, LLC,
Brentwood Plaza, the lenders party thereto and Eurohypo AG, New York
Branch.
(4)
|
||
10.53
|
Form
of Modification Agreement among Douglas Emmett 1995, LLC, the lenders
party thereto and Eurohypo AG, New York Branch.
(4)
|
||
10.54
|
Form
of Modification Agreement among Douglas Emmett 1996, LLC, the lenders
party thereto and Eurohypo AG, New York Branch.
(4)
|
||
10.55
|
Form
of Modification Agreement among Douglas Emmett 1997, LLC, Westwood
Place Investors, LLC, the lenders party thereto and Eurohypo AG, New York
Branch.
(4)
|
||
10.56
|
Form
of Modification Agreement among Douglas Emmett 1998, LLC, Brentwood
Court, Brentwood-San Vicente Medical, Ltd., the lenders party thereto and
Eurohypo AG, New York Branch.
(4)
|
10.57
|
Form
of Modification Agreement among Douglas Emmett 2000, LLC, the lenders
party thereto and Eurohypo AG, New York Branch.
(4)
|
||
10.58
|
Form
of Modification Agreement among Douglas Emmett 2002, LLC, DEG, LLC, San
Vicente Plaza, Owensmouth/Warner, LLC, the lenders party thereto and
Eurohypo AG, New York Branch.
(4)
|
||
10.59
|
Form
of Joinder and Supplement Agreement among Douglas Emmett 1993, LLC and
Brentwood Plaza made with reference to the Modification Agreement
among Douglas Emmett 1993, LLC, the lenders party thereto and Eurohypo AG,
New York Branch.
(4)
|
||
10.60
|
Form
of Joinder and Supplement Agreement among Douglas Emmett 1998, LLC,
Brentwood Court and Brentwood-San Vicente Medical, Ltd. made with
reference to the Modification Agreement among Douglas Emmett 1998, LLC,
the lenders party thereto and Eurohypo AG, New York Branch.
(4)
|
||
10.61
|
Form
of Joinder and Supplement Agreement among Douglas Emmett 2002, LLC, DEG,
LLC, San Vicente Plaza and Owensmouth/Warner, LLC made with reference to
the Modification Agreement among Douglas Emmett 2002, LLC, DEG, LLC, the
lenders party thereto and Eurohypo AG, New York Branch.
(4)
|
||
10.62
|
Adjustable
Rate Multifamily Note for $7,750,000 between Fannie Mae and Douglas
Emmett Residential 2006, LLC, dated June 1, 2007. (7)
|
||
10.63
|
Adjustable
Rate Multifamily Note for $7,150,000 between Fannie Mae and Douglas
Emmett Residential 2006, LLC, dated June 1, 2007. (7)
|
||
10.64
|
Adjustable
Rate Multifamily Note for $3,100,000 between Fannie Mae and Douglas
Emmett Residential 2006, LLC, dated June 1, 2007. (7)
|
||
Second
Amendment to Credit Agreement and Reaffirmation of Loan Documents Entered
into as of August 31, 2007, by and among Douglas Emmett 2006, LLC; Bank Of
America, N.A.; BMO Capital Markets Financing, Inc.; Bayerische
Landesbank; ING Real Estate Finance (USA) LLC; and Bank Of
America, N.A.
|
|||
List
of Subsidiaries of the Registrant.
|
|||
Consent
of Independent Registered Public Accounting Firm
|
|||
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|||
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|||
Certificate
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(5)
|
|||
Certificate
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(5)
|
|||
___________________________
|
|||
+
|
Denotes
management contract or compensatory plan, contract or
arrangement
|
||
(1)
|
Previously
filed with the Form S-11 filed by the Registrant on June 16, 2006 and
incorporated herein by this reference.
|
||
(2)
|
Previously
filed with Amendment No. 1 to the Form S-11 filed by the Registrant on
August 4, 2006 and incorporated herein by this
reference.
|
||
(3)
|
Previously
filed with Amendment No. 2 to the Form S-11 filed by the Registrant on
September 20, 2006 and incorporated herein by this
reference.
|
||
(4)
|
Previously
filed with Amendment No. 3 to the Form S-11 filed by the Registrant on
October 3, 2006 and incorporated herein by this
reference.
|
||
(5)
|
In
accordance with SEC Release No. 33-8212, the following exhibit is being
furnished, and is not being filed as part of this Report or as a separate
disclosure document, and is not being incorporated by reference into any
Securities Act of 1933 registration statement.
|
||
(6)
|
Previously
filed with Amendment No. 6 to the Form S-11 filed by the Registrant on
October 19, 2006.
|
||
(7)
|
Previously
filed with the Quarterly Report on Form 10-Q for the quarter ended June
30, 2007 filed by the Registrant on August 10, 2007 and incorporated
herein by this reference.
|
||
(8)
|
Previously
filed with the Quarterly Report on Form 8-K filed by the Registrant on
December 21, 2007 and incorporated herein by this
reference.
|
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DOUGLAS
EMMETT, INC.
|
||
Dated:
February 22, 2008
|
By:
|
/s/JORDAN
L. KAPLAN
|
Jordan
L. Kaplan
|
||
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature
|
Title
|
|
/s/
JORDAN L. KAPLAN
|
||
Jordan
L. Kaplan
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
/s/
WILLIAM KAMER
|
||
William
Kamer
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
/s/
DAN A. EMMETT
|
||
Dan
A. Emmett
|
Chairman
of the Board
|
|
/s/
KENNETH M. PANZER
|
||
Kenneth
M. Panzer
|
Chief
Operating Officer and Director
|
|
/s/
LESLIE E. BIDER
|
||
Leslie
E. Bider
|
Director
|
|
/s/
VICTOR J. COLEMAN
|
||
Victor
J. Coleman
|
Director
|
|
/s/
GHEBRE SELASSIE MEHRETEAB
|
||
Ghebre
Selassie Mehreteab
|
Director
|
|
/s/
THOMAS E. O’HERN
|
||
Thomas
E. O’Hern
|
Director
|
|
/s/
DR. ANDREA L. RICH
|
||
Dr.
Andrea L. Rich
|
Director
|
|
/s/
WILLIAM WILSON III
|
||
William
Wilson III
|
Director
|
Each of
the above signatures is affixed as of February 22, 2008.
Report
of Management on Internal Control over Financial Reporting
The
management of Douglas Emmett, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934.
Our
system of internal control is designed to provide reasonable assurance regarding
the reliability of financial reporting and preparation of our financial
statements for external reporting purposes in accordance with generally accepted
accounting principles. Our management, including the undersigned Chief Executive
Officer and Chief Financial Officer, assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007. In conducting its
assessment, management used the criteria issued by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated
Framework. This framework consists of eight components: internal environment,
objective setting, event identification, risk assessment, risk response, control
activities, information and communication, and monitoring. Based on this
assessment, management concluded that, as of December 31, 2007, our internal
control over financial reporting was effective based on those
criteria.
Management,
including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures, or our internal controls
will prevent all error and fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the benefit
of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected.
The
effectiveness of our internal control over financial reporting as of
December 31, 2007, has been audited by Ernst & Young LLP, the
independent registered public accounting firm that audited the consolidated
financial statements included in this annual report, as stated in their report
appearing on page F-3, which expresses unqualified opinions on the effectiveness
of our internal control over financial reporting as of December 31,
2007.
/s/
JORDAN L. KAPLAN
|
|
Jordan
L. Kaplan
Chief
Executive Officer
|
|
/s/
WILLIAM KAMER
|
|
William
Kamer
Chief
Financial Officer
|
February 22,
2008
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of
Douglas
Emmett, Inc.
We have
audited the accompanying consolidated balance sheets of Douglas Emmett, Inc.
(the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity, and cash flows of
the Company for the year ended December 31, 2007 and for the period from
October 31, 2006 through December 31, 2006, and of Douglas Emmett
Realty Advisors, Inc. and subsidiaries (the “predecessor”), as defined in Note
1, for the period from January 1, 2006 through October 30, 2006 and
for the year ended December 31, 2005. Our audits also include
the financial statement schedule listed in Item 15(a). These
financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Douglas Emmett, Inc.
at December 31, 2007 and 2006, and the consolidated results of their
operations and their cash flows for the year ended December 31, 2007 and
for the period from October 31, 2006 through December 31, 2006, and
the consolidated results of the predecessor’s operations and cash flows for the
period from January 1, 2006 through October 30, 2006 and for the year
ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Douglas Emmett, Inc.’s internal control over
financial reporting as of December 31, 2007, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 20,
2008 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Los
Angeles, California
February
20, 2008
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of
Douglas
Emmett, Inc.
We have
audited Douglas Emmett, Inc.’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Douglas Emmett,
Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Douglas Emmett, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based
on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2007 consolidated financial statements of
Douglas Emmett, Inc. and our report dated February 20, 2008 expressed an
unqualified opinion thereon.
/s/ Ernst
& Young LLP
Los
Angeles, California
February
20, 2008
Douglas
Emmett, Inc.
Consolidated
Balance Sheets
(in
thousands, except share data)
December
31, 2007
|
December
31, 2006
|
|||||||
Assets
|
||||||||
Investment
in real estate
|
||||||||
Land
|
$ | 825,560 | $ | 813,599 | ||||
Buildings
and improvements
|
4,978,124 | 4,863,955 | ||||||
Tenant
improvements and lease intangibles
|
460,486 | 411,063 | ||||||
6,264,170 | 6,088,617 | |||||||
Less:
accumulated depreciation
|
(242,114 | ) | (32,521 | ) | ||||
Net
investment in real estate
|
6,022,056 | 6,056,096 | ||||||
Cash
and cash equivalents
|
5,843 | 4,536 | ||||||
Tenant
receivables, net
|
955 | 4,160 | ||||||
Deferred
rent receivables, net
|
20,805 | 3,587 | ||||||
Interest
rate contracts
|
84,600 | 76,915 | ||||||
Acquired
lease intangible assets, net
|
24,313 | 34,137 | ||||||
Other
assets
|
31,396 | 20,687 | ||||||
Total
assets
|
$ | 6,189,968 | $ | 6,200,118 | ||||
Liabilities
|
||||||||
Secured
notes payable, including loan premium
|
$ | 3,105,677 | $ | 2,789,702 | ||||
Accounts
payable and accrued expenses
|
62,704 | 51,736 | ||||||
Security
deposits
|
31,309 | 28,670 | ||||||
Acquired
lease intangible liabilities, net
|
218,371 | 263,649 | ||||||
Interest
rate contracts
|
129,083 | 6,278 | ||||||
Dividends
payable
|
19,221 | 13,801 | ||||||
Total
liabilities
|
3,566,365 | 3,153,836 | ||||||
Minority
interests
|
793,764 | 934,509 | ||||||
Stockholders’
Equity
|
||||||||
Common
stock, $0.01 par value 750,000,000 authorized, 109,833,903 and
115,005,860 outstanding at December 31, 2007 and 2006,
respectively
|
1,098 | 1,150 | ||||||
Additional
paid-in capital
|
2,019,716 | 2,144,600 | ||||||
Accumulated
other comprehensive income
|
(101,163 | ) | 415 | |||||
Accumulated
deficit
|
(89,812 | ) | (34,392 | ) | ||||
Total
stockholders’ equity
|
1,829,839 | 2,111,773 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 6,189,968 | $ | 6,200,118 | ||||
See
notes to consolidated financial statements.
Douglas
Emmett, Inc.
Consolidated
Statements of Operations
(in
thousands, except shares and per share data)
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ended
December
31,
2007
|
For
the Period
October
31, 2006
through
December
31,
2006
|
For
the Period
January
1, 2006
through
October
30,
2006
|
Year
Ended
December
31,
2005
|
|||||||||||||
Revenues
|
||||||||||||||||
Office
rental
|
||||||||||||||||
Rental
revenues
|
$ | 376,921 | $ | 62,384 | $ | 252,694 | $ | 297,551 | ||||||||
Tenant
recoveries
|
25,177 | 5,436 | 15,206 | 14,632 | ||||||||||||
Parking
and other income
|
46,648 | 7,886 | 33,039 | 36,383 | ||||||||||||
Total
office revenues
|
448,746 | 75,706 | 300,939 | 348,566 | ||||||||||||
Multifamily
rental
|
||||||||||||||||
Rental
revenues
|
67,427 | 10,954 | 44,241 | 43,942 | ||||||||||||
Parking
and other income
|
2,047 | 335 | 1,488 | 1,280 | ||||||||||||
Total
multifamily revenues
|
69,474 | 11,289 | 45,729 | 45,222 | ||||||||||||
Total
revenues
|
518,220 | 86,995 | 346,668 | 393,788 | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Office
expense
|
128,759 | 24,515 | 104,524 | 119,879 | ||||||||||||
Multifamily
expense
|
17,150 | 3,175 | 15,041 | 15,347 | ||||||||||||
General
and administrative
|
21,486 | 30,201 | 17,863 | 6,457 | ||||||||||||
Depreciation
and amortization
|
209,593 | 32,521 | 95,456 | 113,170 | ||||||||||||
Total
operating expenses
|
376,988 | 90,412 | 232,884 | 254,853 | ||||||||||||
Operating income
(loss)
|
141,232 | (3,417 | ) | 113,784 | 138,935 | |||||||||||
Gain
on investments in interest contracts, net
|
- | - | 6,795 | 81,666 | ||||||||||||
Interest
and other income
|
695 | 87 | 4,515 | 2,264 | ||||||||||||
Interest
expense
|
(160,616 | ) | (26,213 | ) | (95,938 | ) | (115,674 | ) | ||||||||
Deficit
distributions to minority partners, net
|
- | - | (10,642 | ) | (28,150 | ) | ||||||||||
(Loss)
income before minority interest
|
(18,689 | ) | (29,543 | ) | 18,514 | 79,041 | ||||||||||
Minority
Interests
|
||||||||||||||||
Minority
interests
|
5,681 | 8,952 | (18,673 | ) | (79,756 | ) | ||||||||||
Preferred
minority investor
|
- | - | (16,203 | ) | (15,805 | ) | ||||||||||
Net
loss
|
$ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) | $ | (16,520 | ) | ||||
Net
loss per common share – basic and diluted
|
$ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) | $ | (254,154 | ) | ||||
Dividends
declared per common share
|
$ | 0.70 | $ | 0.12 | $ | - | $ | - | ||||||||
Weighted
average shares of common stock outstanding -basic and
diluted
|
112,645,587 | 115,005,860 | 65 | 65 |
See
notes to consolidated financial statements.
Douglas
Emmett, Inc.
Consolidated
Statements of Stockholders’ Equity (Deficit)
(in
thousands, except share amounts)
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ended
December
31,
2007
|
For
the Period
October
31,
2006
through
December
31,
2006
|
For
the Period
January
1,
2006
through
October
30,
2006
|
Year
Ended
December
31,
2005
|
|||||||||||||
Shares
of Common Stock
|
||||||||||||||||
Balance
at beginning of period
|
115,005,860 | 65 | 65 | 65 | ||||||||||||
Exchange
of predecessor common stock for common stock of the
company
|
- | (65 | ) | - | - | |||||||||||
Repurchase
of common stock
|
(5,171,957 | ) | - | - | - | |||||||||||
Issuance
of common stock
|
- | 115,005,860 | - | - | ||||||||||||
Balance
at end of period
|
109,833,903 | 115,005,860 | 65 | 65 | ||||||||||||
Common
Stock
|
||||||||||||||||
Balance
at beginning of period
|
$ | 1,150 | $ | - | $ | - | $ | - | ||||||||
Repurchase
of common stock
|
(52 | ) | - | - | - | |||||||||||
Issuance
of common stock
|
- | 1,150 | - | - | ||||||||||||
Balance
at end of period
|
$ | 1,098 | $ | 1,150 | $ | - | $ | - | ||||||||
Additional
Paid-in Capital
|
||||||||||||||||
Balance
at beginning of period
|
$ | 2,144,600 | $ | 60,000 | $ | - | $ | - | ||||||||
Reclassify
predecessor deficit to additional paid-in capital
|
- | (129,086 | ) | - | - | |||||||||||
Contributions
|
- | - | 60,000 | - | ||||||||||||
Repurchase of common stock | (125,133 | ) | - | - | - | |||||||||||
Issuance
of common stock
|
- | 2,202,040 | - | - | ||||||||||||
Stock
compensation
|
249 | 11,646 | - | - | ||||||||||||
Balance
at end of period
|
$ | 2,019,716 | $ | 2,144,600 | $ | 60,000 | $ | - | ||||||||
Notes
Receivable From Stockholders
|
||||||||||||||||
Balance
at beginning of period
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Contributions
|
- | - | (60,000 | ) | - | |||||||||||
Receipt
of amounts due under notes receivable from stockholders
|
- | - | 60,000 | - | ||||||||||||
Balance
at end of period
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Accumulated
Other Comprehensive Income
|
||||||||||||||||
Balance
at beginning of period
|
$ | 415 | $ | - | $ | - | $ | - | ||||||||
Cash
flow hedge adjustment
|
(101,578 | ) | 415 | - | - | |||||||||||
Balance
at end of period
|
$ | (101,163 | ) | $ | 415 | $ | - | $ | - | |||||||
Accumulated
Deficit
|
||||||||||||||||
Balance
at beginning of period
|
$ | (34,392 | ) | $ | (129,086 | ) | $ | (97,791 | ) | $ | (63,614 | ) | ||||
Reclassify
predecessor deficit to additional paid-in capital
|
- | 129,086 | - | - | ||||||||||||
Net
loss
|
(13,008 | ) | (20,591 | ) | (16,362 | ) | (16,520 | ) | ||||||||
Distributions
|
- | - | (14,933 | ) | (17,657 | ) | ||||||||||
Minority
interests redemption adjustment
|
36,138 | - | - | - | ||||||||||||
Dividends
|
(78,550 | ) | (13,801 | ) | - | - | ||||||||||
Balance
at end of period
|
$ | (89,812 | ) | $ | (34,392 | ) | $ | (129,086 | ) | $ | (97,791 | ) | ||||
Total
Stockholders Equity (Deficit)
|
||||||||||||||||
Balance
at beginning of period
|
$ | 2,111,773 | $ | (69,086 | ) | $ | (97,791 | ) | $ | (63,614 | ) | |||||
Net
Loss
|
(13,008 | ) | (20,591 | ) | (16,362 | ) | (16,520 | ) | ||||||||
Cash
flow hedge adjustment
|
(101,578 | ) | 415 | - | - | |||||||||||
Comprehensive
income
|
(114,586 | ) | (20,176 | ) | (16,362 | ) | (16,520 | ) | ||||||||
Issuance
of common stock
|
- | 2,203,190 | - | - | ||||||||||||
Repurchase
of common stock
|
(125,185 | ) | - | - | - | |||||||||||
Contributions
|
- | - | 60,000 | - | ||||||||||||
Distributions
|
- | - | (14,933 | ) | (17,657 | ) | ||||||||||
Dividends
|
(78,550 | ) | (13,801 | ) | - | - | ||||||||||
Minority
interests redemption adjustment
|
36,138 | - | - | - | ||||||||||||
Stock
compensation
|
249 | 11,646 | - | - | ||||||||||||
Balance
at end of period
|
$ | 1,829,839 | $ | 2,111,773 | $ | (69,086 | ) | $ | (97,791 | ) |
See
notes to consolidated financial statements.
Douglas
Emmett, Inc.
Consolidated
Statements of Cash Flows
(in
thousands)
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ended
December
31,
2007
|
For
the Period
October
31,
2006
through
December
31,
2006
|
For
the Period
January
1, 2006
through
October
30,
2006
|
Year
Ended
December
31,
2005
|
|||||||||||||
Operating
Activities
|
||||||||||||||||
Net
loss
|
$ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) | $ | (16,520 | ) | ||||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||||||||||
Minority
interests in consolidated real estate partnerships
|
(5,681 | ) | (8,952 | ) | 34,876 | 95,561 | ||||||||||
Deficit
distributions to minority partners
|
- | - | 10,642 | 28,150 | ||||||||||||
Depreciation
and amortization
|
209,593 | 32,521 | 95,456 | 113,170 | ||||||||||||
Net
accretion of acquired lease intangibles
|
(40,563 | ) | (6,871 | ) | (1,561 | ) | (1,690 | ) | ||||||||
Amortization
of deferred loan costs
|
1,136 | 168 | 2,318 | 10,482 | ||||||||||||
Amortization
of loan premium
|
(4,475 | ) | (721 | ) | - | - | ||||||||||
Non-cash
market value adjustments on interest rate contracts
|
14,266 | 2,561 | (6,795 | ) | (81,666 | ) | ||||||||||
Non-cash
amortization of stock-based compensation
|
2,178 | 26,600 | - | - | ||||||||||||
Change
in working capital components
|
||||||||||||||||
Tenant
receivables
|
3,229 | - | 1,065 | (1,278 | ) | |||||||||||
Deferred
rent receivables
|
(17,218 | ) | (3,587 | ) | (6,489 | ) | (15,897 | ) | ||||||||
Accounts
payable, accrued expenses and security
deposits
|
15,211 | 19,509 | 22,227 | 434 | ||||||||||||
Other
assets
|
(9,863 | ) | (19,642 | ) | (9,752 | ) | (2,935 | ) | ||||||||
Net
cash provided by operating activities
|
154,805 | 20,995 | 125,625 | 127,811 | ||||||||||||
Investing
Activities
|
||||||||||||||||
Capital
expenditures, property acquisitions and purchases of predecessor owners’
interests in real estate
|
(172,804 | ) | (1,935,476 | ) | (165,970 | ) | (231,157 | ) | ||||||||
Net
cash used in investing activities
|
(172,804 | ) | (1,935,476 | ) | (165,970 | ) | (231,157 | ) | ||||||||
Financing
Activities
|
||||||||||||||||
Proceeds
from borrowings
|
404,850 | 596,000 | 82,000 | 1,865,000 | ||||||||||||
Deferred
loan costs
|
(1,767 | ) | (4,524 | ) | (1,253 | ) | (14,476 | ) | ||||||||
Repayment
of borrowings
|
(124,700 | ) | (141,500 | ) | - | (1,724,655 | ) | |||||||||
Net
change in short-term borrowings
|
40,300 | - | - | - | ||||||||||||
Proceeds
from affiliated borrowing
|
- | - | - | 23,500 | ||||||||||||
Repayments
of affiliated borrowing
|
- | - | - | (23,500 | ) | |||||||||||
Proceeds
from interest rate swap termination
|
- | - | - | 10,982 | ||||||||||||
Payment
on interest rate swap termination
|
- | - | - | (1,281 | ) | |||||||||||
Contributions
by minority interests
|
- | - | 33,264 | 142,518 | ||||||||||||
Distributions
to minority interests
|
(31,851 | ) | - | (67,292 | ) | (156,663 | ) | |||||||||
Redemption
of minority interests
|
(69,211 | ) | (188,128 | ) | - | - | ||||||||||
Contributions
by stockholders
|
- | - | 60,000 | - | ||||||||||||
Distributions
to stockholders
|
- | - | (14,933 | ) | (17,657 | ) | ||||||||||
Issuance
of common stock, net
|
- | 1,497,446 | - | - | ||||||||||||
Repurchase
of common stock
|
(125,185 | ) | - | - | - | |||||||||||
Cash
dividends
|
(73,130 | ) | - | - | - | |||||||||||
Net
cash provided by financing activities
|
19,306 | 1,759,294 | 91,786 | 103,768 | ||||||||||||
Increase
(decerease) in cash and cash equivalents
|
1,307 | (155,187 | ) | 51,441 | 422 | |||||||||||
Cash
and cash equivalents at beginning of period
|
4,536 | 159,723 | 108,282 | 107,860 | ||||||||||||
Cash
and cash equivalents at end of period
|
$ | 5,843 | $ | 4,536 | $ | 159,723 | $ | 108,282 | ||||||||
Supplemental
disclosure of cash flow information
|
||||||||||||||||
Cash
paid during the year for interest, net of amounts
capitalized
|
$ | 152,746 | $ | 23,849 | $ | 97,928 | $ | 110,651 |
See
notes to consolidated financial statements for additional non-cash
items.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements
(in
thousands, except shares and per share data)
1.
Organization and Description of Business
Douglas
Emmett, Inc. is a Maryland corporation formed on June 28, 2005, which
did not have any meaningful operating activity until the consummation of our
initial public offering (IPO) and the related acquisition of our predecessor and
certain other entities in October 2006. Accordingly, we believe that
a discussion of the results of Douglas Emmett, Inc. would not be meaningful
for the periods covered by these financial statements prior to that
acquisition.
We
acquired our predecessor and certain other entities simultaneously with the
closing of our IPO on October 30, 2006.
Because
the formation transactions did not occur until October 30, 2006, the historical
financial results in these financial statements for periods prior to and
including that date relate to our accounting predecessor. Our
predecessor includes Douglas Emmett Realty Advisors, Inc. (DERA or the
predecessor) as the accounting acquirer, and nine consolidated real estate
limited partnerships that owned, directly or indirectly, office and multifamily
properties and fee interests in land subject to ground leases, which we refer to
collectively as the “institutional funds.” For the periods presented
prior to our IPO, DERA was the general partner, and had responsibility for the
asset management of the institutional funds.
Our
predecessor does not include certain other entities we acquired at the time of
our IPO, including Douglas, Emmett and Company (DECO), P.L.E.
Builders, Inc., subsequently renamed Douglas Emmett Builders (DEB), and
seven California limited partnerships and one California limited liability
company, which we refer to collectively as the “single-asset
entities.” DECO provided property management and leasing services to
all of the properties acquired in the formation transactions, and DEB provided
construction services in connection with improvements to tenant suites and
common areas in the properties. Each single-asset entity owned,
directly or indirectly, one multifamily or office property (or, in one case, a
fee interest in land subject to a ground lease).
After the completion of our IPO and the
related formation transactions, we are a fully integrated, self-administered and
self-managed Real Estate Investment Trust (REIT). Through our interest in
Douglas Emmett Properties, LP (our operating partnership) and its subsidiaries,
we own, manage, lease, acquire and develop real estate, consisting primarily of
office and multifamily properties. As of December 31, 2007, we own a
portfolio of 48 office properties (including ancillary retail space) and nine
multifamily properties, as well as the fee interests in two parcels of land
subject to ground leases. All of these properties are located in Los
Angeles County, California and Honolulu, Hawaii.
The terms
“us”, “we” and “our” as used in these financial statements refer to Douglas
Emmett, Inc. and its subsidiaries (including our operating partnership)
subsequent to our IPO on October 30, 2006 and our predecessor prior to that
date.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
2.
Summary of Significant Accounting Policies
Basis
of Presentation
For the
periods subsequent to October 31, 2006, the financial statements presented are
the consolidated financial statements of Douglas Emmett, Inc. and its
subsidiaries, including our operating partnership. The financial statements
presented for periods prior to October 31, 2006 are the consolidated financial
statements of our predecessor, which include the accounts of DERA and the
institutional funds. All significant intercompany balances and
transactions have been eliminated in the consolidated financial
statements.
Use
of Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Segment
Information
FAS
No. 131, Disclosures
about Segments of an Enterprise and Related Information, established
standards for disclosure about operating segments and related disclosures about
products and services, geographic areas and major customers. Segment information
is prepared on the same basis that our management reviews information for
operational decision-making purposes. We operate two business segments: the
acquisition, redevelopment, ownership and management of office real estate and
the acquisition, redevelopment, ownership and management of multifamily real
estate.
The
products for our office segment include primarily rental of office space and
other tenant services including parking and storage space rental. The products
for our multifamily segment include rental of apartments and other tenant
services including parking and storage space rental.
Investments
in Real Estate
Acquisitions of properties are
accounted for utilizing the purchase method and accordingly, the results of
operations of acquired properties are included in our results of operations from
the respective dates of acquisition. Estimates of future cash flows and other
valuation techniques are used to allocate the purchase price of acquired
property between land, buildings and improvements, equipment and identifiable
intangible assets and liabilities such as amounts related to in-place at-market
leases, acquired above- and below-market ground leases, acquired above- and
below-market tenant leases and tenant relationships. Initial valuations are
subject to change until such information is finalized, but no later than
12 months from the acquisition date.
The fair
values of tangible assets are determined on an ‘‘as-if-vacant’’
basis. The ‘‘as-if-vacant’’ fair value is allocated to land, where
applicable, buildings, tenant improvements and equipment based on comparable
sales and other relevant information obtained in connection with the acquisition
of the property.
The
estimated fair value of acquired in-place at-market tenant leases are the costs
we would have incurred to lease the property to the occupancy level of the
property at the date of acquisition. Such estimates includes the fair
value of leasing commissions and legal costs that would be incurred to lease the
property to this occupancy level. Additionally, we evaluate the time
period over which such occupancy level would be achieved and include an estimate
of the net operating costs (primarily real estate taxes, insurance and
utilities) incurred during the lease-up period, which is generally six
months.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Above-market
and below-market in-place lease intangibles are recorded as an asset or
liability based on the present value (using a discount rate which reflects the
risks associated with the leases acquired) of the difference between the
contractual amounts to be received or paid pursuant to the in-place tenant or
ground leases, respectively, and our estimate of fair market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining
noncancelable term of the lease.
Expenditures
for repairs and maintenance are charged to operations as
incurred. Significant betterments and costs incurred in the execution
of leases are capitalized. When assets are sold or retired, their costs and
related accumulated depreciation are removed from the accounts with the
resulting gains or losses reflected in operations for the period.
The
values allocated to land, buildings, site improvements, tenant improvements,
leasing costs and in-place leases are depreciated on a straight-line basis using
an estimated life of 40 years for buildings, 15 years for site improvements, a
portfolio average term of existing leases for in-place lease values and the
respective lease term for tenant improvements and leasing costs. The values of
above- and below-market tenant leases are amortized over the life of the related
lease and recorded as either an increase (for below-market leases) or a decrease
(for above-market leases) to rental income. The values of acquired above- and
below-market ground leases are amortized over the life of the lease and recorded
either as an increase (for below-market leases) or a decrease (for above-market
leases) to office rental operating expense. The amortization of acquired
in-place leases is recorded as an adjustment to depreciation and amortization in
the consolidated statements of operations. If a lease were to be terminated
prior to its stated expiration, all unamortized amounts relating to that lease
would be written off.
Impairment
of Long-Lived Assets
We
account for properties held for disposition or properties that are sold during
the period in accordance with FAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144). An asset is classified as an
asset held for disposition when it meets the requirements of FAS 144, which
include, among other criteria, the approval of the sale of the asset, the asset
has been marketed for sale and we expect that the sale will likely occur within
the next 12 months. Upon classification of an asset as held for disposition, the
net book value of the asset, excluding long-term debt, is included on the
balance sheet as properties held for disposition, depreciation of the asset is
ceased and the operating results of the asset are included in discontinued
operations for all periods presented.
We assess
whether there has been impairment in the value of our long-lived assets whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount to the undiscounted future cash flows
expected to be generated by the asset. If the current carrying value exceeds the
estimated undiscounted cash flows, an impairment loss is recorded equal to the
difference between the asset’s current carrying value and its value based on the
discounted estimated future cash flows. Assets to be disposed of are reported at
the lower of the carrying amount or fair value, less costs to sell. Based upon
such periodic assessments, no indications of impairment were identified for the
years ended December 31, 2007 and 2006.
Cash
and Cash Equivalents
For
purposes of the consolidated statements of cash flows, we consider short-term
investments with maturities of three months or less when purchased to be cash
equivalents.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Revenue
and Gain Recognition
Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104 of the
Securities and Exchange Commission, Revenue Recognition (SAB
104), as amended. SAB 104 requires that four basic criteria must be met before
revenue can be recognized: persuasive evidence of an arrangement exists; the
delivery has occurred or services rendered; the fee is fixed and determinable;
and collectibility is reasonably assured. All leases are classified as operating
leases. For all lease terms exceeding one year, rental income is recognized on a
straight-line basis over the terms of the leases. Deferred rent receivables
represent rental revenue recognized on a straight-line basis in excess of billed
rents. Reimbursements from tenants for real estate taxes and other recoverable
operating expenses are recognized as revenues in the period the applicable costs
are incurred. In addition, we record a capital asset for leasehold improvements
constructed by us that are reimbursed by tenants, with the offsetting side of
this accounting entry recorded to deferred revenue which is included in accounts
payable and accrued expenses. The deferred revenue is amortized as additional
rental revenue over the life of the related lease.
Rental
revenue from month-to-month leases or leases with no scheduled rent increases or
other adjustments is recognized on a monthly basis when earned.
Lease
termination fees, which are included in rental revenues in the accompanying
consolidated statements of operations, are recognized when the related leases
are canceled and we have no continuing obligation to provide services to such
former tenants. Total lease termination revenue was recorded in the amount of
$332 for the year ended December 31, 2007; $38 for the period of
October 31, 2006 to December 31, 2006; $365 for the period of
January 1, 2006 to October 30, 2006; and $1,291 for the year ended
December 31, 2005.
We recognize
gains on sales of real estate pursuant to the provisions of FAS No. 66, Accounting for Sales of Real
Estate (FAS 66). The specific timing of a sale is measured against
various criteria in FAS 66 related to the terms of the transaction and any
continuing involvement in the form of management or financial assistance
associated with the property. If the sales criteria are not met, we defer gain
recognition and account for the continued operations of the property by applying
the finance, installment or cost recovery methods, as appropriate, until the
sales criteria are met.
Monitoring of Rents and Other
Receivables
We
maintain an allowance for estimated losses that may result from the inability of
tenants to make required payments. If a tenant fails to make contractual
payments beyond any allowance, we may recognize bad debt expense in future
periods equal to the amount of unpaid rent and deferred rent. As of December 31,
2007 and 2006, we had an allowance for doubtful accounts of $4,136 and $934,
respectively.
We
generally do not require collateral or other security from our tenants, other
than security deposits or letters of credit. As of December 31, 2007 and 2006,
we had a total of approximately $21,794 and $17,074, respectively, of lease
security available on existing letters of credit, as well as $31,309 and
$28,670, respectively, of lease security available in security
deposits.
Deferred
Loan Costs
Costs
incurred in issuing secured notes payable are capitalized. Deferred loan costs
are included in other assets in the consolidated balance sheets at December 31,
2007 and 2006. The deferred loan costs are amortized to interest expense over
the life of the respective loans. Any unamortized amounts upon early repayment
of secured notes payable are written-off in the period of
repayment.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Interest
Rate Agreements
We manage our interest rate risk
associated with borrowings by obtaining interest rate swap and interest rate cap
contracts. No other derivative instruments were used.
FAS No.
133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133), as
amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. As required by FAS 133,
we record all derivatives on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended
use of the derivative and the resulting designation. Derivatives used to hedge
the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, are considered fair value hedges.
Derivatives used to hedge the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered cash flow
hedges.
Our
objective in using derivatives is to add stability to interest expense and to
manage our exposure to interest rate movements or other identified risks.
To accomplish this objective, we primarily use interest rate swaps as part of
our cash flow hedging strategy. Interest rate swaps designated as
cash flow hedges involve the receipt of variable-rate amounts in exchange for
fixed-rate payments over the life of the agreements without exchange of the
underlying principal amount. For derivatives designated as cash flow
hedges, the effective portion of changes in the fair value of the derivative is
initially reported in other comprehensive income (outside of earnings) and
subsequently reclassified to earnings when the hedged transaction affects
earnings. The ineffective portion of changes in the fair value of the
derivative is recognized directly in earnings. We assess the
effectiveness of each hedging relationship by comparing the changes in fair
value or cash flows of the derivative hedging instrument with the changes in
fair value or cash flows of the designated hedged item or transaction. For
derivatives not designated as hedges, changes in fair value are recognized in
earnings. See Note 9 for the accounting of our and our predecessor’s
interest rate hedges.
Offering
Costs
Underwriting
discount and commissions and other offering costs are reflected as a reduction
in additional paid–in capital.
Stock-Based
Compensation
We
account for stock-based compensation, including stock options and long-term
incentive units granted in connection with our IPO, using the fair value method
of accounting under FAS No. 123R (revised 2004), Share-Based Payment. The
estimated fair value of the stock options and the long-term incentive units is
being amortized over their respective vesting periods.
Income
Taxes
As a REIT, we are permitted to deduct
distributions paid to our stockholders, eliminating the federal taxation of
income represented by such distributions at the corporate level. REITs are
subject to a number of organizational and operational
requirements. If we fail to qualify as a REIT in any taxable year, we
will be subject to federal income tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate tax rates. We
believe we have met these tests during 2007 and accordingly, no provision for
income taxes has been made in the accompanying consolidated financial
statements.
DERA was
an S-Corporation and the institutional funds were limited partnerships. Under
applicable federal and state income tax rules, the allocated share of net income
or loss from the limited partnerships and S-Corporation is reportable in the
income tax returns of the respective partners and stockholders. Accordingly, no
income tax provision was included in the accompanying consolidated financial
statements of our predecessor other than the 1.5% tax due on taxable income of
S-Corporations in the State of California.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Earnings
Per Share
Basic
earnings per share is calculated by dividing the net income applicable to common
stockholders for the period by the weighted average of common shares outstanding
during the period. Diluted earnings per share is calculated by
dividing the net income applicable to common stockholders for the period by the
weighted average number of common and dilutive instruments outstanding during
the period using the treasury stock method. See Note 13.
Recently
Issued Accounting Literature
In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), to create a single model to address accounting for
uncertainty in tax positions. FIN 48 clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax position is required
to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We adopted FIN 48 on January 1,
2007. Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition in our financial
statements at December 31, 2007.
In
September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS
157). FAS 157 provides guidance for using fair value to measure assets and
liabilities. This statement clarifies the principle that fair value
should be based on the assumptions that market participants would use when
pricing the asset or liability. FAS 157 establishes a fair value
hierarchy, giving the highest priority to quoted prices in active markets and
the lowest priority to unobservable data. FAS 157 applies
whenever other standards require assets or liabilities to be measured at fair
value. This statement is effective in fiscal years beginning after
November 15, 2007. We believe that the adoption of this standard
will not have a material effect on our financial position and results of
operations.
In
February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115. This standard permits entities to choose to measure many
financial instruments and certain other items at fair value and is effective for
the first fiscal year beginning after November 15, 2007, which for us begins
with our 2008 fiscal year. We do not expect to elect the fair value
measurement option for any financial assets or liabilities at the present
time.
In
December 2007, the FASB issued FAS No. 160, Non-controlling Interests in
Consolidated Financial Statements-an Amendment of Accounting Research Bulletin
No. 51 (FAS 160). FAS 160 establishes new accounting and reporting
standards for a non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement
requires the recognition of a non-controlling interest (minority interest) as
equity in the consolidated financial statements separate from the parent’s
equity. The amount of net income attributable to the non-controlling
interest will be included in consolidated net income on the face of the income
statement. FAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial
interest. In addition, this statement requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair
value of the non-controlling equity investment on the deconsolidation
date. FAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. FAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, which for us begins with our 2009
fiscal year. We are currently evaluating the impact that FAS No. 160
will have on our financial statements.
In
December 2007, the FASB issued FAS No. 141 (Revised 2007), Business Combinations
(FAS 141R). FAS 141R will significantly change the accounting for
business combinations. Under FAS 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited
exceptions. FAS 141R also includes a substantial number of new
disclosure requirements. FAS 141R applies prospectively to business
combinations occurring in any reporting period beginning on or after December
15, 2008, which for us begins with our 2009 fiscal year. We are
currently evaluating the impact that FAS 141R will have on our financial
statements.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
3.
Initial Public Offering
As described in Note 1, we acquired our
predecessor and certain other entities simultaneously with the closing of our
IPO on October 30, 2006. In the fourth quarter of 2007, we recorded
the final allocation of the purchase price to the assets acquired and
liabilities assumed, which was immaterial.
4.
Investment in Real Estate
In October 2007, we acquired an
8-story, Class A office building comprised of approximately 174,000 square feet,
located within the Olympic Corridor submarket, for a contract price of $84
million. In May 2007, we acquired an approximate 50,000 rentable
square foot Class A office building located in our Century City submarket for a
contract price of $32 million. We obtained the ground leasehold in
the property and the option to acquire fee title to the land for a fixed price
of $800,000 in conjunction with the acquisition. We exercised the
option and acquired fee title to the land at the end
of 2007. The building is currently 100% leased through
December 2019.
In
March 2006, our predecessor acquired a multifamily property in Honolulu,
Hawaii. The aggregate acquisition costs of this property approximated
$114 million.
The
following table summarizes the allocations of estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition:
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||
2007
Acquisitions
|
2006
Acquisition
|
|||||||
Investment
in real estate:
|
||||||||
Land
|
$ | 11,962 | $ | 42,887 | ||||
Buildings
and improvements
|
102,449 | 68,394 | ||||||
Tenant
improvements and other in-place lease assets
|
7,283 | 2,982 | ||||||
Tenant
receivables and other assets
|
24 | 579 | ||||||
Accounts
payable, accrued expenses and tenant security deposits
|
(700 | ) | (849 | ) | ||||
Acquired
lease intangible liabilities
|
(5,109 | ) | (263 | ) | ||||
Net
acquisition cost
|
$ | 115,909 | $ | 113,730 |
Our
acquired lease intangibles related to above/below-market leases is summarized as
of:
December
31,
|
||||||||
2007
|
2006
|
|||||||
Above-market
tenant leases
|
$ | 32,770 | $ | 32,770 | ||||
Accumulated
amortization
|
(11,564 | ) | (1,817 | ) | ||||
Below-market
ground leases
|
3,198 | 3,198 | ||||||
Accumulated
amortization
|
(91 | ) | (14 | ) | ||||
Acquired
lease intangible assets, net
|
$ | 24,313 | $ | 34,137 | ||||
Below-market
tenant leases
|
$ | 261,260 | $ | 256,151 | ||||
Accumulated
accretion
|
(57,112 | ) | (8,353 | ) | ||||
Above-market
ground leases
|
16,200 | 16,200 | ||||||
Accumulated
accretion
|
(1,977 | ) | (349 | ) | ||||
Acquired
lease intangible liabilities, net
|
$ | 218,371 | $ | 263,649 |
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Net
accretion of above- and below-market in-place tenant lease value was recorded as
an increase to rental income in the amount of $39,011 for the year ended
December 31, 2007; $6,536 for the period of October 31, 2006 to
December 31, 2006; $1,009 for the period of January 1, 2006 to
October 30, 2006; and $1,690 for the year ended December 31, 2005. The
weighted-average amortization period for our above and below market tenant
leases was approximately 4 years as of December 31, 2007.
The net
accretion of above- and below-market ground lease value has been recorded as a
decrease of office rental operating expense in the amount of $1,552 for the year
ended December 31, 2007; $335 for the period of October 31, 2006 to
December 31, 2006; $552 for the period of January 1, 2006 to
October 30, 2006; and $1,146 for the year ended December 31,
2005.
Following
is the estimated net accretion at December 31, 2007 for the next five
years:
Year
|
||||
2008
|
$ | 35,522 | ||
2009
|
29,536 | |||
2010
|
25,433 | |||
2011
|
21,362 | |||
2012
|
18,335 | |||
Thereafter
|
63,870 | |||
Total
|
$ | 194,058 |
5.
Other Assets
Other
assets consist of the following at:
December
31,
|
||||||||
2007
|
2006
|
|||||||
Deferred
loan costs, net of accumulated amortization of $1,304 and $168 at December
31, 2007 and 2006, respectively
|
$ | 4,987 | $ | 4,356 | ||||
Deposits
in escrow
|
4,000 | - | ||||||
Restricted
cash
|
2,848 | 2,827 | ||||||
Prepaid
interest
|
7,944 | 4,953 | ||||||
Prepaid
expenses
|
3,095 | 3,291 | ||||||
Interest
receivable
|
3,229 | 3,015 | ||||||
Other
indefinite-lived intangible
|
1,988 | 1,988 | ||||||
Other
|
3,305 | 257 | ||||||
$ | 31,396 | $ | 20,687 |
We and
our predecessor incurred deferred loan cost amortization expense of $1,136 for
the year ended December 31, 2007, $168 for the period of October 31, 2006 to
December 31, 2006; $2,318 for the period of January 1, 2006 to October 30, 2006;
and $10,482 for the year ended December 31, 2005. The amortization
expense was inclusive of loan cost write-offs totaling $9,823 for the year ended
December 31, 2005. There were no loan costs written-off to expense in
2007 and 2006. The deferred loan cost amortization is included as a component of
interest expense in the consolidated statements of operations.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
6.
Minimum Future Lease Rentals
We
and our predecessor have leased space to tenants primarily under noncancelable
operating leases which generally contain provisions for a base rent plus
reimbursement for certain operating expenses. Operating expense reimbursements
are reflected in our consolidated statements of operations as tenant
recoveries.
We and
our predecessor have leased space to certain tenants under noncancelable leases,
which provide for percentage rents based upon tenant revenues. Percentage rental
income totaled $1,138 for the year ended December 31, 2007; $133 for the period
of October 31, 2006 to December 31, 2006; $913 for the period of January 1, 2006
to October 30, 2006; and $933 for the year ended December 31, 2005.
Future
minimum base rentals on noncancelable office and ground operating leases at
December 31, 2007 are as follows:
2008
|
$ | 340,252 | ||
2009
|
310,260 | |||
2010
|
269,144 | |||
2011
|
220,143 | |||
2012
|
177,047 | |||
Thereafter
|
486,225 | |||
Total
future minimum base rentals
|
$ | 1,803,071 |
The above
future minimum lease payments exclude residential leases, which typically have a
term of one year or less, as well as tenant reimbursements, amortization of
deferred rent receivables and above/below-market lease intangibles. Some leases
are subject to termination options. In general, these leases provide for
termination payments should the termination options be exercised. The preceding
table is prepared assuming such options are not exercised.
7.
Secured Notes Payable
In June
2007, we borrowed an additional $150 million of long term variable rate
debt. This included an increase of $132 million in our existing
loan facilities with Fannie Mae, plus additional loan facilities with Fannie Mae
totaling $18 million. These loans are secured by our residential
properties with maturity dates ranging from June 1, 2012 to June 1,
2017. Concurrent with the incremental borrowings, we entered into
interest rate contracts to swap the underlying variable rates to fixed
rates. These contracts are designated as hedges and result in a
weighted average fixed interest rate of approximately 5.87%.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
A summary
of our secured notes payable is as follows:
Effective
|
||||||||||||||||||
Annual
|
Swap
|
|||||||||||||||||
December
31,
|
Fixed/Floating
|
Interest
|
Maturity
|
Maturity
|
||||||||||||||
Type of Debt
|
2007
|
2006
|
Rate
|
Rate(1)
|
Date
|
Date
|
||||||||||||
Variable
Rate Swapped to Fixed Rate:
|
||||||||||||||||||
Modified
Term Loan(2)(3)
|
$ | 2,300,000 | (3) | $ | 2,300,000 |
LIBOR
+ 0.85%
|
5.20 | % |
08/31/12
|
08/01/10-08/01/12
|
||||||||
|
|
|
||||||||||||||||
Fannie Mae Loan
I (4)
|
293,000 | 293,000 |
DMBS
+ 0.60%
|
4.76 |
06/01/12(5)
|
08/01/11
|
||||||||||||
Fannie Mae Loan II(4)
|
75,000 | 75,000 |
DMBS
+ 0.76%
|
4.93 |
02/01/15
|
08/01/11
|
||||||||||||
Fannie Mae Loan III(4)
|
82,000 | 82,000 |
LIBOR
+ 0.62%
|
5.70 |
02/01/16
|
03/01/12
|
||||||||||||
Fannie Mae Loan IV(4)
|
95,080 | (6) | - |
DMBS
+ 0.60%
|
5.86 |
06/01/12
|
08/01/11
|
|||||||||||
Fannie Mae Loan V(4)
|
36,920 | (6) | - |
DMBS
+ 0.60%
|
5.86 |
02/01/15
|
08/01/11
|
|||||||||||
Fannie
Mae Loan VI(4)
|
18,000 | (6) | - |
LIBOR
+ 0.62%
|
5.90 |
06/01/17
|
06/01/12
|
|||||||||||
Subtotal
|
2,900,000 | (7) | 2,750,000 | 5.20 | % | |||||||||||||
Variable
Rate:
|
||||||||||||||||||
Senior
Secured Revolving Credit Facility(8)
|
180,450 | 10,000 |
LIBOR/Fed
Funds+
|
(9) | --- |
10/30/09
|
--- | |||||||||||
Subtotal
|
3,080,450 | 2,760,000 | ||||||||||||||||
Unamortized
Loan Premium(10)
|
25,227 | 29,702 | ||||||||||||||||
Total
|
$ | 3,105,677 | $ | 2,789,702 |
(1)
|
Includes
the effect of interest rate contracts. Based on actual/365-day
basis and excludes amortization of loan fees and unused fees on credit
line.
|
(2)
|
Secured
by seven separate cross collateralized pools. Requires monthly
payments of interest only, with outstanding principal due upon
maturity.
|
(3)
|
Includes
$1.11 billion swapped to 4.89% until August 1, 2010; $545.0 million
swapped to 5.75% until December 1, 2010; $322.5 million swapped to 4.98%
until August 1, 2011; and $322.5 million swapped to 5.02% until August 1,
2012.
|
(4)
|
Secured
by four separate collateralized pools. Fannie Mae Discount
Mortgage-Backed Security (DMBS) generally tracks 90-day
LIBOR.
|
(5)
|
The
maturity date was extended by five months in conjunction with the $150
million of incremental loans entered into during the second quarter of
2007.
|
(6)
|
Represents
part of $150 million in incremental borrowings made during the second
quarter of 2007.
|
(7)
|
The
weighted average remaining life of our outstanding debt is 4.9
years. The weighted average remaining life of the interest rate
swaps associated with this balance is 3.2
years.
|
(8)
|
Loan
is secured by nine properties and has two one-year extension options
available.
|
(9)
|
This
revolver bears interest at either LIBOR +0.70% or Fed Funds + 0.95% at our
election. If the amount outstanding exceeds
$262.5 million, the credit facility bears interest at either LIBOR
+0.80% or Fed Funds + 1.05% at our
election
|
(10)
|
Represents
non-cash mark-to-market adjustment on variable rate debt associated with
office properties.
|
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
The
minimum future principal payments due on our secured notes payable, excluding
the non-cash loan premium amortization, at December 31, 2007 are as
follows:
2008
|
$ | - | ||
2009
|
180,450 | |||
2010
|
- | |||
2011
|
- | |||
2012
|
2,688,080 | |||
Thereafter
|
211,920 | |||
Total
future principal
|
$ | 3,080,450 |
Senior
Secured Revolving Credit Facility
During
2007, we increased the availability under our secured revolving credit facility
by $120 million, to an aggregate of $370 million. Our secured
revolving credit facility is with a group of banks led by Bank of America, NA
and Banc of America Securities, LLC, and bears interest at a rate per annum
equal to either LIBOR plus 70 basis points or Federal Funds Rate plus 95 basis
points if the amount outstanding is $262.5 million or less and at either LIBOR
plus 80 basis points or Federal Funds Rate plus 105 basis points if the amount
outstanding is greater than $262.5 million. Our secured revolving credit
facility contains an accordion feature that allows us to increase the
availability by an additional $130 million, to $500 million, under specified
circumstances. The facility bears interest at 15 basis points on the
undrawn balance. The facility expires in 2009 with two one-year
extensions at our option.
8.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of:
December
31,
|
||||||||
2007
|
2006
|
|||||||
Accounts
payable
|
$ | 43,449 | $ | 32,978 | ||||
Accrued
interest payable
|
13,963 | 12,701 | ||||||
Deferred
revenue
|
5,292 | 6,057 | ||||||
$ | 62,704 | $ | 51,736 |
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
9.
Interest Rate Contracts
We have
executed interest rate swaps with a notional amount of $2.9 billion to
protect against interest rate fluctuations on our existing variable-rate term
loan facilities. These derivatives were designated and qualify as
highly effective cash flow hedges under FAS 133 and remove the variability from
the hedged cash flows. An unrealized loss of $101.6 million was
recorded in accumulated other comprehensive income in our consolidated balance
sheet for the year ended December 31, 2007 and an unrealized gain of $415
was recorded in accumulated other comprehensive income in our consolidated
balance sheet for the period October 31, 2006 through December 31,
2006, representing the change in fair value of the cash flow
hedges. An immaterial amount of hedge ineffectiveness has also been
recorded in interest expense.
Amounts
reported in accumulated other comprehensive income related to derivatives
designated as hedges under FAS 133 will be reclassified to interest expense as
interest payments are made on our hedged variable-rate debt. The
change in net unrealized gains and losses on cash flow hedges reflects a
reclassification of $8.8 million and $1.6 million from accumulated
other comprehensive income to interest expense, as a reduction in interest
expense for the year ended December 31, 2007 and for the period from
October 31, 2006 through December 31, 2006,
respectively. For derivatives designated as cash flow hedges, we
estimate an additional $28.3 million will be reclassified during 2008 from
accumulated other comprehensive income to interest expense as a reduction in
interest expense.
We also
have additional interest rate swaps that we acquired from our predecessor at the
time of our IPO. Our predecessor had $2.21 billion notional of
pay-fixed interest rate swaps at swap rates ranging between 4.09% and
5.00%. Concurrent with the completion of our IPO, we executed
receive-fixed swaps for the same notional amount at swap rates ranging between
4.96% and 5.00%, which were intended to largely off-set the future cash flows
and future change in fair value of our predecessor’s pay-fixed
swaps. The acquired pay-fixed swaps and the new receive-fixed swaps
were not designated as hedges under FAS 133 and as such, the changes in fair
value of these interest rate swaps have been recognized in earnings for all
periods. The fair value of these swaps decreased $13.2 million
and $2.6 million for the year ended December 31, 2007 and for the
period of October 31, 2006 through December 31, 2006, respectively,
representing the realization of the pre-IPO fair value of the swaps over their
remaining term. These amounts were recorded in interest
expense. We also recorded $19.1 million and $3.3 million of
interest receipts related to swaps not designated as hedges under FAS 133 in
interest expense for the year ended December 31, 2007 and for the period
October 31, 2006 through December 31, 2006,
respectively. Prior to our IPO, our predecessor’s existing interest
rate swaps were marked to their market value through gain on investments in
interest contracts, net, amounting to a net gain of $6.8 million and
$81.7 million for the period January 1, 2006 through October 30,
2006 and the year ended December 31, 2005, respectively.
Our
predecessor had $450 million of interest caps and $450 million of sold
caps. These derivatives were not designated as hedges under FAS
133. The changes in fair value of these caps have been recognized in
earnings for all periods presented.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
10.
Preferred Minority Interests in Consolidated Real Estate
Partnerships
A preferred minority investor invested
$99 million and $85 million, in 2005 and 2004, respectively, in two of our
predecessor’s consolidated subsidiaries. In return, the preferred minority
investor received a profit participation of 8.75% per annum on its unreturned
capital contribution. The profit participation is reflected in our predecessor’s
statement of operations as a component of minority interests for the period of
January 1, 2006 to October 30, 2006 and for the year ended December 31,
2005. The preferred minority investor’s interest was redeemed in
conjunction with our IPO and formation transactions.
11.
Minority Interests in Consolidated Real Estate Partnerships
Our predecessor reflected unaffiliated
partners’ interests in the institutional funds as minority interest in
consolidated real estate partnerships. Minority interest in consolidated real
estate partnerships represented the minority partners’ share of the underlying
net assets of our predecessor’s consolidated real estate partnerships. When
these consolidated real estate partnerships made cash distributions to partners
in excess of the carrying amount of the minority interest, our predecessor
generally recorded a charge equal to the amount of such excess distributions,
even though there was no economic effect or cost.
If the
excess distributions previously absorbed by our predecessor were recovered
through the future earnings of the consolidated real estate partnership, our
predecessor would record income in the period of recovery. Our predecessor
reported this charge and any subsequent recovery in the consolidated statements
of operations as deficit distributions to minority partners, net.
12.
Stockholders’ Equity and Minority Interests in Operating
Partnership
Minority interests in our operating
partnership relate to interests in our operating partnership that are not owned
by us, which amounted to approximately 30% at December 31,
2007. After the completion of our IPO and the formation transactions,
these interests are comprised of the continuing investors (including our
predecessor principals and our executive officers) who elected to own units in
our operating partnership. In our formation transactions, we acquired
certain assets of our predecessor and other entities in exchange for the
assumption or discharge of $2.54 billion in indebtedness and preferred equity,
the payment of $1.92 billion in cash, and the issuance of 49.1 million common
units of our operating partnership and 39.1 million shares of our common
stock. Neither we nor our operating partnership retained any proceeds
from the issuance of common stock.
Continuing
investors, including our predecessor principals, holding shares of our common
stock or units in our operating partnership, as a result of the formation
transactions, have the right to cause our operating partnership to redeem any or
all of their units in our operating partnership for cash equal to the
then-current market value of one share of common stock, or, at our election,
shares of our common stock on a one-for-one basis.
Shares
and Units
A unit in
our operating partnership and a share of our common stock have essentially the
same economic characteristics as they share equally in the total net income or
loss and distributions of our operating partnership. A unit may be redeemed for
cash, or exchanged at our election for shares of common stock on a one-for-one
basis. We had 109,833,903 shares of common stock and 47,149,489 units
outstanding as of December 31, 2007.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Dividends
During
2007, we declared four quarterly dividends of $0.175 per share, which equals an
annual rate of $0.70 per share. In addition, on January 15, 2007 we
paid a dividend of $0.12 per share, which represented a pro rated quarterly
dividend for the period from October 31, 2006 to December 31, 2006.
Equity
Repurchases
During
the year ended December 31, 2007, we repurchased approximately 8.1 million
share equivalents in private transactions for a total consideration of
approximately $194.4 million. We may make additional purchases of our
share equivalents from time to time in private transactions or in the public
markets, but do not have any commitments to do so.
Taxability
of Dividends
Earnings
and profits, which determine the taxability of distributions to stockholders,
will differ from income reported for financial reporting purposes due to the
differences for federal income tax purposes in the treatment of loss on
extinguishment of debt, revenue recognition, compensation expense and in the
basis of depreciable assets and estimated useful lives used to compute
depreciation.
13.
Loss per Share
The
following is a summary of the elements used in calculating basic and diluted
earnings per share (in thousands except share and per share
amounts):
|
For
the Period
October
31, 2006
|
For
the Period
January
1, 2006
|
||||||||||||||
Year
ended
|
through
|
through
|
Year
ended
|
|||||||||||||
December
31,
|
December 31,
|
October
30,
|
December
31,
|
|||||||||||||
2007
|
2006
|
2006
|
2005
|
|||||||||||||
Net
loss attributable to common shares
|
$ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) | $ | (16,520 | ) | ||||
Weighted
average common shares outstanding — basic
|
112,645,587 | 115,005,860 | 65 | 65 | ||||||||||||
Potentially
dilutive common shares(1):
|
||||||||||||||||
Stock
options
|
- | - | - | - | ||||||||||||
Adjusted
weighted average common shares outstanding — diluted
|
112,645,587 | 115,005,860 | 65 | 65 | ||||||||||||
Net
loss per share from continuing operations — basic and
diluted
|
$ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) | $ | (254,154 | ) | ||||
Net
loss per share from discontinued operations — basic and
diluted
|
- | - | - | - | ||||||||||||
Net
loss per share — basic and diluted
|
$ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) | $ | (254,154 | ) |
(1)
|
For
the year ended December 31, 2007 and for the period October 31,
2006 through December 31, 2006 the potentially dilutive shares were
not included in the earnings per share calculation as their effect is
antidilutive. No such potentiality dilutive shares existed prior to our
IPO.
|
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
14.
Stock-Based Compensation
2006
Omnibus Stock Incentive Plan
The
Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan, our stock incentive
plan, was adopted by our board of directors and approved by our stockholders
prior to the consummation of our IPO. The stock incentive plan permits us to
make grants of “incentive stock options, non-qualified stock options, stock
appreciation rights, deferred stock awards, restricted stock awards, dividend
equivalent rights and other stock-based awards” within the meaning of
Section 422 of the Code, or any combination of the foregoing. We have
initially reserved 16,500,000 shares of our common stock for the issuance of
awards under our stock incentive plan. The number of shares reserved under our
stock incentive plan is also subject to adjustment in the event of a stock
split, stock dividend or other change in our capitalization. Generally, shares
that are forfeited or canceled from awards under our stock incentive plan also
will be available for future awards.
Our stock
incentive plan is administered by the compensation committee of our board of
directors. The compensation committee may interpret the stock incentive plan and
may make all determinations necessary or desirable for the administration of the
stock incentive plan and has full power and authority to select the participants
to whom awards will be granted, to make any combination of awards to
participants, to accelerate the exercisability or vesting of any award and to
determine the specific terms and conditions of each award, subject to the
provisions of our stock incentive plan. All full-time and part-time officers,
employees, directors and other key persons (including consultants and
prospective employees) are eligible to participate in our stock incentive
plan.
Other
stock-based awards under our stock incentive plan include awards that are valued
in whole or in part by reference to shares of our common stock, including
convertible preferred stock, convertible debentures and other convertible or
exchangeable securities, partnership interests in a subsidiary or our operating
partnership, awards valued by reference to book value, fair value or performance
of a subsidiary, and any class of profits interest or limited liability company
membership interest. We have made certain awards in the form of a
separate series of units of limited partnership interests in our operating
partnership called long-term incentive units, or “LTIP units.” LTIP units, which
can be granted either as free-standing awards or in tandem with other awards
under our stock incentive plan, were valued by reference to the value of our
common stock at the time of grant, and are subject to such conditions and
restrictions as the compensation committee may determine, including continued
employment or service, computation of financial metrics and/or achievement of
pre-established performance goals and objectives.
At the
time of our IPO, our operating partnership issued an aggregate of
1,044,000 LTIP units to several of our key employees. 870,000 of the LTIP
units were fully vested upon grant, while the remaining LTIP units vest one
quarter on each of December 31, 2007, 2008, 2009 and 2010. At
the time of our IPO, we also issued options to purchase an aggregate of
5,742,221 shares of our common stock to our key employees. 5,155,556 of the
options granted were fully vested upon grant, while the remaining options
granted vest as to one quarter on each of December 31, 2007, 2008, 2009 and
2010. We recognized $2.1 million and $26.6 million of non-cash
compensation expense for the year ended December 31, 2007 and the period of
October 31, 2006 to December 31, 2006 (the period following the award grant)
related to these options and LTIP units, respectively. Compensation
expense for options was recognized on a straight-line
basis. Compensation expense for LTIP units was recognized using the
accelerated recognition method.
Upon
initial election to our board, each of our non-employee directors received an
initial one-time grant of 7,500 LTIP units that will vest ratably over a
three-year period. We also granted each of our non-employee directors
1,880 and 325 LTIP units as compensation for their services in 2007 and 2006,
respectively, for which compensation expense was recognized in full during the
period of service.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
On
December 16, 2004, the FASB issued FAS No. 123 (revised 2004), Share-Based Payment (FAS
123R), which is a revision of FAS 123, Accounting for Stock-Based
Compensation. Generally, the approach in FAS 123R is similar
to the approach described in FAS 123. However, FAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values.
The
estimated fair value of the stock options granted at the time of our IPO was
determined to be $2.25 per share. We calculated the fair value of the option
grant on the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants made at our IPO: a dividend yield of 3.3%;
expected volatility of 12.0%; expected life of 52 months; and risk-free interest
rate of 4.5%.
The
weighted average fair value of the LTIP units granted in 2007 and at our IPO
were $26.59 and $17.55 per unit, respectively. We calculated the fair value of
the LTIP units granted using the market value of our common stock on the date of
grant and a discount for post-vesting restrictions estimated by a third-party
consultant. The total fair value of LTIP units vested in 2007 and
2006 was $1,335 and $14,668, respectively. Total unrecognized
compensation cost related to nonvested option and LTIP awards was $4,060 at
December 31, 2007. This expense will be recognized over a
weighted-average term of 25 months.
The
following is a summary of certain information with respect to outstanding stock
options and LTIP units granted under our stock incentive plan:
Weighted
|
||||||||||||||||
Average
|
||||||||||||||||
Weighted
|
Remaining
|
Total
|
||||||||||||||
Number
of
|
Average
|
Contract
Life
|
Intrinsic
|
|||||||||||||
Stock
Options:
|
Stock
Options
|
Exercise
Price
|
(months)
|
Value
|
||||||||||||
Outstanding
at January 1, 2006
|
-
|
$
|
-
|
|||||||||||||
Granted
|
5,742
|
21
|
||||||||||||||
Outstanding
at December 31, 2006
|
5,742
|
21
|
118
|
$
|
32,099
|
|||||||||||
Forfeited
|
(44)
|
21
|
||||||||||||||
Outstanding
at December 31, 2007
|
5,698
|
21
|
106
|
$
|
9,173
|
|||||||||||
Exercisable
at December 31, 2007
|
5,156
|
21
|
106
|
$
|
8,300
|
Weighted
|
||||||||
Average
|
||||||||
Number
|
Grant
Date
|
|||||||
LTIP
Units:
|
Of
Units
|
Fair
Value
|
||||||
Outstanding
at January1, 2006
|
-
|
$
|
-
|
|||||
Granted
|
1,091
|
17.55
|
||||||
Vested
|
(872)
|
16.82
|
||||||
Outstanding
at December 31, 2006
|
219
|
20.44
|
||||||
Granted
|
11
|
26.59
|
||||||
Vested
|
(66)
|
20.21
|
||||||
Forfeited
|
(15)
|
20.48
|
||||||
Outstanding
at December 31, 2007
|
149
|
21.00
|
||||||
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
15.
Fair Value of Financial Instruments
FAS
No. 107, Disclosures
about Fair Value of Financial Instruments, requires us to disclose fair
value information about all financial instruments, whether or not recognized in
the balance sheets, for which it is practicable to estimate fair
value.
Our
estimates of the fair value of financial instruments at December 31, 2007
and 2006, respectively, were determined using available market information and
appropriate valuation methods. Considerable judgment is necessary to interpret
market data and develop estimated fair value. The use of different market
assumptions or estimation methods may have a material effect on the estimated
fair value amounts.
The
carrying amounts for cash and cash equivalents, restricted cash, rents and other
receivables, due from affiliates, accounts payable and other liabilities
approximate fair value because of the short-term nature of these instruments. As
described in Note 9, the interest rate cap and interest rate swap financial
instruments are recorded on the consolidated balance sheets at their fair
values.
We
calculate the fair value of our mortgage and other secured loans based on a
currently available market rate; assuming the loans are outstanding through
maturity and considering the collateral. In determining the current market rate
for fixed rate debt, a market spread is added to the quoted yields on federal
government treasury securities with similar maturity dates to debt.
At
December 31, 2007, the aggregate fair value of our secured notes payable
and secured revolving credit facility is estimated to be approximately equal to
the carrying value of $3,106 million. As of December 31, 2006, the
estimated fair value of the secured loans was approximately $2,790
million.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
16.
Related-Party Transactions
During
the year ended December 31, 2007, our core operations did not involve any
material related-party transactions. However, as part of the equity
repurchases described in Note 12, we repurchased approximately 640,000 share
equivalents from a member of executive management and our board of directors for
$15 million. Prior to DECO being acquired by us in the formation transactions,
our predecessor had a number of transactions with DECO, which was then owned by
the stockholders of DERA:
Ÿ
|
Our
predecessor paid $6.4 million and $5.6 million in real estate commissions
to DECO for the period from January 1, 2006 to October 30, 2006 and for
the year ended December 31, 2005, respectively. The commissions paid to
DECO were accounted for as leasing costs and were included in our
predecessor’s investment in real estate in the consolidated balance sheets
for the period prior to our IPO.
|
Ÿ
|
Our
predecessor expensed $8.2 million and $9.0 million in property
management fees related to management services by DECO for the period from
January 1, 2006 to October 30, 2006 and for the year ended December 31,
2005, respectively. These management fees were based upon
percentages, ranging from 1.75% to 4.00%, of the rental cash receipts
collected by the properties.
|
Ÿ
|
Our
predecessor contributed its share of discretionary profit-sharing
contributions (subject to statutory limitations), totaling $192 for the
period from January 1, 2006 to October 30, 2006 and $192 for the year
ended December 31, 2005, for services rendered by employees of
DECO.
|
Our
predecessor also contracted with DEB, an operating company owned by the
stockholders of DERA and acquired by us in the formation transactions, to
provide building and tenant improvement work. For such contracting
work performed, our predecessor paid DEB $12.1 million and $16.3 million for the
period from January 1, 2006 to October 30, 2006 and for the year ended December
31, 2005, respectively. These amounts were included in the cost basis
of buildings and tenant improvements in the consolidated balance sheet of our
predecessor.
Our
predecessor leased approximately 26,785 square feet of office space to DECO and
DEB. The rents from these leases totaled $655 and $814 for the period
from January 1, 2006 to October 30, 2006 and for the year ended December 31,
2005, respectively.
On
March 15, 2006, DERA’s stockholders contributed $60 million to DERA in
the form of promissory notes. As part of our formation transactions,
these notes were paid in full.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
17.
Commitments and Contingencies
We are
subject to various legal proceedings and claims that arise in the ordinary
course of business. These matters are generally covered by insurance. We believe
that the ultimate settlement of these actions will not have a material adverse
effect to our financial position and results of operations or cash
flows.
Concentration
of Credit Risk
Our
properties are located in Los Angeles County, California and Honolulu,
Hawaii. The ability of the tenants to honor the terms of their respective leases
is dependent upon the economic, regulatory and social factors affecting the
markets in which the tenants operate. We perform ongoing credit
evaluations of our tenants for potential credit losses. Financial
instruments that subject us to credit risk consist primarily of cash, accounts
receivable, deferred rents receivable and interest rate contracts. We maintain
our cash and cash equivalents with high quality financial institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up
to $100, and to date, we have not experienced any losses on our deposited
cash.
Asset
Retirement Obligations
In March 2005, the FASB issued
Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations—an interpretation of FASB Statement No. 143
(FIN 47). FIN 47 clarifies that the term “conditional asset
retirement obligation” as used in FAS No. 143, Accounting for Asset
Retirement Obligations, represents a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement is
conditional on a future event that may or may not be within a company’s
control. Under this standard, a liability for a conditional asset
retirement obligation must be recorded if the fair value of the obligation can
be reasonably estimated. Environmental site assessments and investigations have
identified 18 properties in our portfolio containing asbestos, which would have
to be removed in compliance with applicable environmental regulations if these
properties undergo major renovations or are demolished. As of December 31, 2007,
the obligations to remove the asbestos from these properties have indeterminable
settlement dates, and therefore, we are unable to reasonably estimate the fair
value of the associated conditional asset retirement obligation.
Future
Minimum Lease Payments
We lease
(and during 2006 and 2005, our predecessor leased) portions of the land
underlying three of our office properties. During the second quarter
of 2007, we obtained a fourth ground leasehold in conjunction with our
acquisition of the Century City building described in Note 4. We
acquired fee title to the land subject to this fourth ground lease at the end of
2007. We and our predecessor expensed ground lease payments in the
amount of $3,204 for the year ended December 31, 2007; $281 for the period of
October 31, 2006 to December 31, 2006; $3,082 for the period of
January 1, 2006 to October 30, 2006; and $3,261 for the year ended
December 31, 2005.
The
following is a schedule of minimum ground lease payments as of December 31,
2007:
2008
|
$ | 1,078 | ||
2009
|
707 | |||
2010
|
733 | |||
2011
|
733 | |||
2012
|
733 | |||
Thereafter
|
4,520 | |||
$ | 8,504 |
Tenant
Concentrations
For the years ended December 31, 2007,
2006 and 2005, no tenant exceeded 10% of our total rental revenue and tenant
reimbursements.
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
18.
Segment Reporting
FAS
No. 131, Disclosures
about Segments of an Enterprise and Related Information, established
standards for disclosure about operating segments and related disclosures about
products and services, geographic areas and major customers. Segment information
is prepared on the same basis that our management reviews information for
operational decision making purposes. We and our predecessor have operated in
two business segments: (i) the acquisition, redevelopment, ownership and
management of office real estate and (ii) the acquisition, redevelopment,
ownership and management of multifamily real estate. The products for
our office segment include primarily rental of office space and other tenant
services including parking and storage space rental. The products for our
multifamily segment include rental of apartments and other tenant services
including parking and storage space rental.
Asset
information by segment is not reported because we do not use this measure to
assess performance and make decisions to allocate resources. Therefore,
depreciation and amortization expense is not allocated among
segments. Interest and other income, management services, general and
administrative expenses, interest expense, depreciation and amortization expense
and net derivative gains and losses are not included in rental revenues less
rental expenses as the internal reporting addresses these items on a corporate
level.
Rental
revenues less rental expenses is not a measure of operating results or cash
flows from operating activities as measured by GAAP, and it is not indicative of
cash available to fund cash needs and should not be considered an alternative to
cash flows as a measure of liquidity. All companies may not calculate rental
revenues less rental expenses in the same manner. We and our predecessor
considered rental revenues less rental expenses to be an appropriate
supplemental measure to net income because it assisted both investors and
management to understand the core operations of our and our predecessor’s
properties.
Douglas Emmett, Inc.
|
||||||||||||
Year ended December 31,
2007
|
||||||||||||
Office
|
Multifamily
|
Total
|
||||||||||
Rental
revenues
|
$ | 448,746 | $ | 69,474 | $ | 518,220 | ||||||
Percentage
of total
|
87 | % | 13 | % | 100 | % | ||||||
Rental
expenses
|
$ | 128,759 | $ | 17,150 | $ | 145,909 | ||||||
Percentage
of total
|
88 | % | 12 | % | 100 | % | ||||||
Rental
revenues less rental expenses
|
$ | 319,987 | $ | 52,324 | $ | 372,311 | ||||||
Percentage
of total
|
86 | % | 14 | % | 100 | % |
Douglas Emmett, Inc.
|
||||||||||||
October 31, 2006 to December 31,
2006
|
||||||||||||
Office
|
Multifamily
|
Total
|
||||||||||
Rental
revenues
|
75,706 | 11,289 | 86,995 | |||||||||
Percentage
of total
|
87 | % | 13 | % | 100 | % | ||||||
Rental
expenses
|
24,515 | 3,175 | 27,690 | |||||||||
Percentage
of total
|
89 | % | 11 | % | 100 | % | ||||||
Rental
revenues less rental expenses
|
51,191 | 8,114 | 59,305 | |||||||||
Percentage
of total
|
86 | % | 14 | % | 100 | % |
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
The Predecessor
|
||||||||||||
January 1, 2006 to October 30,
2006
|
||||||||||||
Office
|
Multifamily
|
Total
|
||||||||||
Rental
revenues
|
$ | 300,939 | $ | 45,729 | $ | 346,668 | ||||||
Percentage
of total
|
87 | % | 13 | % | 100 | % | ||||||
Rental
expenses
|
$ | 104,524 | $ | 15,041 | $ | 119,565 | ||||||
Percentage
of total
|
87 | % | 13 | % | 100 | % | ||||||
Rental
revenues less rental expenses
|
$ | 196,415 | $ | 30,688 | $ | 227,103 | ||||||
Percentage
of total
|
86 | % | 14 | % | 100 | % |
The Predecessor
|
||||||||||||
Year ended December 31,
2005
|
||||||||||||
Office
|
Multifamily
|
Total
|
||||||||||
Rental
revenues
|
$ | 348,566 | $ | 45,222 | $ | 393,788 | ||||||
Percentage
of total
|
89 | % | 11 | % | 100 | % | ||||||
Rental
expenses
|
$ | 119,879 | $ | 15,347 | $ | 135,226 | ||||||
Percentage
of total
|
89 | % | 11 | % | 100 | % | ||||||
Rental
revenues less rental expenses
|
$ | 228,687 | $ | 29,875 | $ | 258,562 | ||||||
Percentage
of total
|
88 | % | 12 | % | 100 | % |
The
following is a reconciliation of rental revenues less rental expenses to net
loss:
Douglas
Emmett Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ending
December
31,
2007
|
October
31,
2006
to
December
31,
2006
|
January
1,
2006
To
October
30,
2006
|
Year
Ending
December
31,
2005
|
|||||||||||||
Rental
revenues less rental expenses
|
$ | 372,311 | $ | 59,305 | $ | 227,103 | $ | 258,562 | ||||||||
Interest
and other income
|
695 | 87 | 4,515 | 2,264 | ||||||||||||
Gain
on investments in interest rate contracts, net
|
- | - | 6,795 | 81,666 | ||||||||||||
General
and administrative expenses
|
(21,486 | ) | (30,201 | ) | (17,863 | ) | (6,457 | ) | ||||||||
Interest
expense
|
(160,616 | ) | (26,213 | ) | (95,938 | ) | (115,674 | ) | ||||||||
Depreciation
and amortization
|
(209,593 | ) | (32,521 | ) | (95,456 | ) | (113,170 | ) | ||||||||
Deficit
distributions to minority partners
|
(10,642 | ) | (28,150 | ) | ||||||||||||
Minority
interests
|
5,681 | 8,952 | (34,876 | ) | (95,561 | ) | ||||||||||
Net
loss
|
$ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) | $ | (16,520 | ) |
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
19.
Quarterly Financial Information (unaudited)
The tables below reflects the selected
quarterly information for the years ended December 31, 2007 and 2006
:
Douglas Emmett, Inc.
|
||||||||||||||||
Three Months Ended
|
||||||||||||||||
December
31,
|
September
30,
|
June
30,
|
March
31,
|
|||||||||||||
2007
|
2007
|
2007
|
2007
|
|||||||||||||
Total
revenue
|
$ | 132,964 | $ | 130,932 | $ | 126,749 | $ | 127,575 | ||||||||
Loss
before minority interest
|
(8,183 | ) | (4,007 | ) | (1,802 | ) | (4,697 | ) | ||||||||
Net
loss
|
(5,690 | ) | (2,785 | ) | (1,260 | ) | (3,273 | ) | ||||||||
Net
loss per common share - basic and diluted
|
$ | (0.05 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.03 | ) | ||||
Weighted
average shares of common stock outstanding - basic and
diluted
|
109,833,903 | 110,956,113 | 114,861,872 | 115,005,860 |
Douglas
Emmett, Inc.
|
The Predecessor
|
|||||||||||||||||||
October
31,
|
October
1,
|
|||||||||||||||||||
2006
to
|
2006
to
|
Three Months Ended
|
||||||||||||||||||
December
31,
|
October
30,
|
September
30,
|
June
30,
|
March
31,
|
||||||||||||||||
2006
|
2006
|
2006
|
2006
|
2006
|
||||||||||||||||
Total
revenue
|
$ | 86,995 | $ | 35,627 | $ | 104,864 | $ | 103,567 | $ | 102,610 | ||||||||||
(Loss)
income before minority interests
|
(29,543 | ) | (2,772 | ) | (69,019 | ) | 32,967 | 57,338 | ||||||||||||
Net
(loss) income
|
(20,591 | ) | (8,477 | ) | (25,706 | ) | 5,329 | 12,492 | ||||||||||||
Net
(loss) income per common share – basic and diluted
|
$ | (0.18 | ) | $ | (130,415 | ) | $ | (395,477 | ) | $ | 81,985 | $ | 192,185 | |||||||
Weighted
average shares of common stock outstanding - basic and
diluted
|
115,005,860 | 65 | 65 | 65 | 65 |
20.
Subsequent Events
During
January 2008, we repurchased approximately one million share equivalents for
approximately $21.5 million. Subsequent to December 31,
2007, approximately 10 million share equivalents were converted to shares
of our common stock. In February 2008, we acquired a 78,000 square
feet office building in Honolulu, Hawaii. The contract price of
approximately $18 million includes both the building and the assets of a
private membership athletic and social club, which is located in the
building. The purchase was made in a joint venture with Richard
Gushman, who has served as Douglas Emmett's local partner on most of its prior
Hawaii acquisitions. The joint venture financed the acquisition with
an $18 million loan obtained from Wells Fargo at a floating interest rate of
LIBOR plus 125 basis points. The loan has a term of two years with a one-year
extension.
Douglas
Emmett, Inc.
Schedule
III
Consolidated
Real Estate and Accumulated Depreciation
(dollars
in thousands)
Initial
Cost
|
Cost
Capitalized
Subsequent
to Acquistion
|
Gross
Carrying Amount
at
December 31, 2007
|
||||||||||||||||||||||||||||||||||||||||
Asset ID
|
Property
Name
|
Encumbrances
at
December
31,
2007
|
Land
|
Building
&
Improvements
|
Improvements
|
Carrying
Costs
|
Land
|
Building
&
Improvements
|
Total
|
Accumulated
Depreciation
at
December
31,
2007
|
Year
Built
/
Renovated
|
Year
Aquired
|
||||||||||||||||||||||||||||||
Office
Properties
|
||||||||||||||||||||||||||||||||||||||||||
2015
|
Bundy
Olympic
|
$ | 24,979 | $ | 4,201 | $ | 11,860 | $ | 28,019 | $ | - | $ | 6,030 | $ | 38,050 | $ | 44,080 | $ | 2,277 |
1991/1998
|
1994
|
|||||||||||||||||||||
2010
|
The
Gateway Building
|
34,434 | 2,376 | 15,302 | 43,760 | - | 5,119 | 56,319 | 61,438 | 2,691 |
1987
|
1994
|
||||||||||||||||||||||||||||||
2005
|
Village
on Canon
|
23,747 | 5,933 | 11,389 | 47,466 | - | 13,303 | 51,485 | 64,788 | 2,246 |
1989/1995
|
1994
|
||||||||||||||||||||||||||||||
2020
|
Brentwood
Executive Plaza
|
25,235 | 3,255 | 9,654 | 32,094 | - | 5,921 | 39,082 | 45,003 | 2,193 |
1983/1996
|
1995
|
||||||||||||||||||||||||||||||
2035
|
Camden
Medical Arts
|
15,248 | 3,102 | 12,221 | 27,112 | - | 5,298 | 37,137 | 42,435 | 1,630 |
1972/1992
|
1995
|
||||||||||||||||||||||||||||||
2030
|
Executive
Tower
|
- | 6,660 | 32,045 | 58,177 | - | 9,471 | 87,411 | 96,882 | 4,971 |
1989
|
1995
|
||||||||||||||||||||||||||||||
2040
|
Palisades
Promenade
|
36,970 | 5,253 | 15,547 | 49,775 | - | 9,664 | 60,911 | 70,575 | 2,407 |
1990
|
1995
|
||||||||||||||||||||||||||||||
2025
|
Studio
Plaza
|
124,895 | 9,347 | 73,358 | 128,949 | - | 15,015 | 196,639 | 211,654 | 8,525 |
1988/2004
|
1995
|
||||||||||||||||||||||||||||||
2050
|
First
Federal
|
79,741 | 9,989 | 29,187 | 110,383 | - | 21,787 | 127,772 | 149,559 | 5,049 |
1981/2000
|
1996
|
||||||||||||||||||||||||||||||
2045
|
Wilshire
Brentwood Plaza
|
61,702 | 5,013 | 34,283 | 70,956 | - | 8,828 | 101,424 | 110,252 | 4,372 |
1985
|
1996
|
||||||||||||||||||||||||||||||
2055
|
Landmark
II
|
115,372 | 19,156 | 109,259 | 68,406 | - | 26,139 | 170,682 | 196,821 | 7,615 |
1989
|
1997
|
||||||||||||||||||||||||||||||
2090
|
Olympic
Center
|
27,926 | 5,473 | 22,850 | 29,041 | - | 8,247 | 49,117 | 57,364 | 2,545 |
1985/1996
|
1997
|
||||||||||||||||||||||||||||||
2070
|
Saltair
San Vicente
|
8,138 | 5,075 | 6,946 | 16,128 | - | 7,557 | 20,592 | 28,149 | 1,068 |
1964/1992
|
1997
|
||||||||||||||||||||||||||||||
2065
|
Second
Street
|
26,720 | 4,377 | 15,277 | 34,328 | - | 7,421 | 46,561 | 53,982 | 2,114 |
1991
|
1997
|
||||||||||||||||||||||||||||||
2080
|
Sherman
Oaks Galleria
|
244,080 | 33,213 | 17,820 | 399,742 | - | 48,327 | 402,448 | 450,775 | 18,692 |
1981/2002
|
1997
|
||||||||||||||||||||||||||||||
2075
|
Tower
at Sherman Oaks
|
16,421 | 4,712 | 15,747 | 33,868 | - | 8,685 | 45,642 | 54,327 | 2,711 |
1967/1991
|
1997
|
||||||||||||||||||||||||||||||
2060
|
The
Verona
|
9,474 | 2,574 | 7,111 | 13,584 | - | 5,111 | 18,158 | 23,269 | 962 |
1991
|
1997
|
||||||||||||||||||||||||||||||
2120
|
Coral
Plaza
|
20,066 | 4,028 | 15,019 | 17,836 | - | 5,366 | 31,517 | 36,883 | 1,505 |
1981
|
1998
|
||||||||||||||||||||||||||||||
2115
|
MB
Plaza
|
31,185 | 4,533 | 22,024 | 27,799 | - | 7,503 | 46,853 | 54,356 | 2,560 |
1971/1996
|
1998
|
||||||||||||||||||||||||||||||
2105
|
Valley
Executive Tower
|
91,892 | 8,446 | 67,672 | 93,369 | - | 11,737 | 157,750 | 169,487 | 6,879 |
1984
|
1998
|
||||||||||||||||||||||||||||||
2110
|
Valley
Office Plaza
|
40,642 | 5,731 | 24,329 | 42,063 | - | 8,957 | 63,166 | 72,123 | 3,159 |
19662002
|
1998
|
||||||||||||||||||||||||||||||
2095
|
Westside
Towers
|
74,383 | 8,506 | 79,532 | 71,400 | - | 14,568 | 144,870 | 159,438 | 6,939 |
1985
|
1998
|
||||||||||||||||||||||||||||||
2150
|
100
Wilshire
|
136,713 | 12,769 | 78,447 | 132,823 | - | 27,108 | 196,931 | 224,039 | 8,153 |
1968/2002
|
1999
|
||||||||||||||||||||||||||||||
2130
|
11777
San Vicente
|
25,815 | 5,032 | 15,768 | 27,044 | - | 6,714 | 41,130 | 47,844 | 1,804 |
1974/1998
|
1999
|
||||||||||||||||||||||||||||||
2140
|
Century
Park Plaza
|
93,107 | 10,275 | 70,761 | 101,691 | - | 16,153 | 166,574 | 182,727 | 7,316 |
1972/1987
|
1999
|
||||||||||||||||||||||||||||||
2135
|
Encino
Terrace
|
76,683 | 12,535 | 59,554 | 87,622 | - | 15,533 | 144,178 | 159,711 | 7,055 |
1986
|
1999
|
||||||||||||||||||||||||||||||
2145
|
One
Westwood
|
26,201 | 2,376 | 29,784 | 57,922 | - | 1,179 | 88,903 | 90,082 | 3,779 |
1987/2004
|
1999
|
||||||||||||||||||||||||||||||
2165
|
Westwood
Place
|
54,190 | 8,542 | 44,419 | 49,580 | - | 11,448 | 91,093 | 102,541 | 4,102 |
1987
|
1999
|
||||||||||||||||||||||||||||||
2185
|
Brentwood
Saltair
|
8,265 | 4,468 | 11,615 | 10,295 | - | 4,775 | 21,603 | 26,378 | 1,156 |
1986
|
2000
|
||||||||||||||||||||||||||||||
2175
|
Encino
Gateway
|
54,889 | 8,475 | 48,525 | 48,336 | - | 15,653 | 89,683 | 105,336 | 4,525 |
1974/1998
|
2000
|
||||||||||||||||||||||||||||||
2180
|
Encino
Plaza
|
33,621 | 5,293 | 23,125 | 40,682 | - | 6,165 | 62,935 | 69,100 | 3,355 |
1971/1992
|
2000
|
||||||||||||||||||||||||||||||
2170
|
Lincoln
Wilshire
|
21,727 | 3,833 | 12,484 | 20,889 | - | 7,475 | 29,731 | 37,206 | 1,127 |
1996
|
2000
|
||||||||||||||||||||||||||||||
2200
|
1901
Avenue of the Stars
|
148,766 | 18,514 | 131,752 | 99,985 | - | 26,163 | 224,088 | 250,251 | 9,404 |
1968/2001
|
2001
|
||||||||||||||||||||||||||||||
2205
|
Camden/9601
Wilshire
|
58,213 | 16,597 | 54,774 | 98,606 | - | 17,658 | 152,319 | 169,977 | 6,689 |
1962/2004
|
2001
|
||||||||||||||||||||||||||||||
2195
|
Columbus
Center
|
11,404 | 2,096 | 10,396 | 8,440 | - | 2,333 | 18,599 | 20,932 | 1,159 |
1987
|
2001
|
||||||||||||||||||||||||||||||
2190
|
Santa
Monica Square
|
14,743 | 5,366 | 18,025 | 18,741 | - | 6,863 | 35,269 | 42,132 | 1,520 |
1983/2004
|
2001
|
||||||||||||||||||||||||||||||
2210
|
Warner
Center Towers
|
374,330 | 43,110 | 292,147 | 367,839 | - | 59,421 | 643,675 | 703,096 | 30,248 |
1982-1993/2004
|
2002
|
||||||||||||||||||||||||||||||
2230
|
Beverly
Hills Medical Center
|
28,361 | 4,955 | 27,766 | 26,190 | - | 6,435 | 52,476 | 58,911 | 2,318 |
1964/2004
|
2004
|
||||||||||||||||||||||||||||||
2250
|
Bishop
Place
|
86,922 | 8,317 | 105,651 | 47,768 | - | 8,833 | 152,903 | 161,736 | 7,349 |
1992
|
2004
|
||||||||||||||||||||||||||||||
2240
|
Harbor
Court
|
23,475 | 51 | 41,001 | 20,735 | - | - | 61,787 | 61,787 | 3,382 |
1994
|
2004
|
||||||||||||||||||||||||||||||
2260
|
The
Trillium
|
- | 20,688 | 143,263 | 75,403 | - | 21,989 | 217,365 | 239,354 | 10,546 |
1988
|
2005
|
||||||||||||||||||||||||||||||
2285
|
Brentwood
Court
|
6,686 | 2,564 | 8,872 | 172 | - | 2,563 | 9,045 | 11,608 | 424 |
1984
|
2006
|
||||||||||||||||||||||||||||||
2290
|
Brentwood
Medical Plaza
|
23,957 | 5,934 | 27,836 | 615 | - | 5,933 | 28,452 | 34,385 | 1,464 |
1975
|
2006
|
||||||||||||||||||||||||||||||
2300
|
Brentwood
San Vicente Medical
|
13,690 | 5,557 | 16,457 | 43 | - | 5,557 | 16,500 | 22,057 | 797 |
1957/1985
|
2006
|
||||||||||||||||||||||||||||||
2320
|
San
Vicente Plaza
|
10,722 | 7,055 | 12,035 | 137 | - | 7,055 | 12,172 | 19,227 | 708 |
1985
|
2006
|
||||||||||||||||||||||||||||||
2325
|
Century
Park West
|
- | 3,717 | 29,099 | 161 | - | 3,717 | 29,260 | 32,977 | 604 |
1971
|
2007
|
||||||||||||||||||||||||||||||
2330
|
Cornerstone
Plaza
|
- | 8,245 | 80,633 | 86 | - | 8,245 | 80,719 | 88,964 | 488 |
1986
|
2007
|
||||||||||||||||||||||||||||||
Multifamily
Properties
|
||||||||||||||||||||||||||||||||||||||||||
2100
|
Barrington
Plaza
|
153,630 | 28,568 | 81,485 | 141,322 | - | 58,208 | 193,167 | 251,375 | 7,740 |
1963/1998
|
1998
|
||||||||||||||||||||||||||||||
2155
|
Barrington
555
|
43,440 | 6,461 | 27,639 | 39,871 | - | 14,903 | 59,068 | 73,971 | 2,298 |
1989
|
1999
|
||||||||||||||||||||||||||||||
2125
|
Pacific
Plaza
|
46,400 | 10,091 | 16,159 | 71,580 | - | 27,816 | 70,014 | 97,830 | 2,453 |
1963/1998
|
1999
|
||||||||||||||||||||||||||||||
2160
|
The
Shores
|
144,610 | 20,809 | 74,191 | 194,533 | - | 60,555 | 228,978 | 289,533 | 8,009 |
1965-67/2002
|
1999
|
||||||||||||||||||||||||||||||
2270
|
Moanalua
Hillside
|
111,920 | 24,720 | 85,895 | 36,950 | - | 35,294 | 112,271 | 147,565 | 4,124 |
1968/2004
|
2005
|
||||||||||||||||||||||||||||||
2305
|
The
Villas at Royal Kunia
|
82,000 | 42,887 | 71,376 | 13,425 | - | 35,163 | 92,525 | 127,688 | 4,016 |
1990/1991/1995
|
2006
|
||||||||||||||||||||||||||||||
2275
|
Barrington/Kiowa
Apartments
|
7,750 | 5,720 | 10,052 | 34 | - | 5,720 | 10,086 | 15,806 | 393 |
1974
|
2006
|
||||||||||||||||||||||||||||||
2280
|
Barry
Apartments
|
7,150 | 6,426 | 8,179 | 20 | - | 6,426 | 8,199 | 14,625 | 358 |
1973
|
2006
|
||||||||||||||||||||||||||||||
2310
|
Kiowa
Apartments
|
3,100 | 2,605 | 3,263 | 63 | - | 2,605 | 3,326 | 5,931 | 141 |
1972
|
2006
|
||||||||||||||||||||||||||||||
Ground
Lease
|
||||||||||||||||||||||||||||||||||||||||||
2315
|
Owensmouth/Warner
|
14,720 | 23,848 | - | - | - | 23,848 | $ | - | 23,848 | - |
N/A
|
2006
|
|||||||||||||||||||||||||||||
TOTAL
|
$ | 3,080,450 | $ | 559,452 | $ | 2,420,860 | $ | 3,283,858 | $ | - | $ | 825,560 | $ | 5,438,610 | $ | 6,264,170 | $ | 242,114 |
F-30
Year
ended December 31,
|
||||||||||||
2007
|
2006
|
2005
|
||||||||||
Real
Estate Assets
|
||||||||||||
Balance,
beginning of period
|
6,088,617 | 3,128,742 | 2,804,208 | |||||||||
Additions -property
acquisitions
|
121,694 | 260,666 | 274,205 | |||||||||
-improvements
|
57,300 | 52,577 | 50,329 | |||||||||
Purchase
accounting
|
(3,441 | ) | 2,646,632 | - | ||||||||
Deductions-property
dispositions
|
- | - | - | |||||||||
Balance,
end of period
|
6,264,170 | 6,088,617 | 3,128,742 | |||||||||
Accumulated
Depreciation
|
||||||||||||
Balance,
beginning of period
|
(32,521 | ) | (506,258 | ) | (405,228 | ) | ||||||
Additions -depreciation
|
(209,593 | ) | (121,620 | ) | (106,282 | ) | ||||||
Purchase
accounting
|
- | 595,357 | - | |||||||||
Deductions -disposals
|
- | - | 5,252 | |||||||||
Balance,
end of period
|
(242,114 | ) | (32,521 | ) | (506,258 | ) |
F-31