Douglas Emmett Inc - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2008
|
Commission
file number: 1-33106
![](https://www.sec.gov/Archives/edgar/data/0001364250/000136425009000016/logo.jpg)
(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
|
[ x
]
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
Accelerated Filer [ x ]
Accelerated
Filer [ ]
Non-Accelerated
Filer [ ]
(Do
not check if a smaller reporting company)
Smaller
reporting company
[ ]
|
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, 2008, was $2.4
billion.
The
registrant had 121,976,841 shares of its common stock, $0.01 par value,
outstanding as of February 17, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement to be issued in conjunction with
the registrant’s annual meeting of shareholders to be held in 2009 (“Proxy
Statement”) 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,
2008.
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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Business
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4 |
Item
1A
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Risk
Factors
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8
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Item
1B
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Unresolved
Staff Comments
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18
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Item
2
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Properties
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19
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Item
3
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Legal
Proceedings
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26
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Item
4
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Submission
of Matters to a Vote of Security Holders
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26
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PART
II
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Item
5
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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27
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Item
6
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Selected
Financial Data
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29
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Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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30
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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39
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Item
8
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Financial
Statements and Supplementary Data
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39
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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39
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Item
9A
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Controls
and Procedures
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39
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Item
9B
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Other
Information
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39
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PART
III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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40
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Item
11
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Executive
Compensation
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40
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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40
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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40
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Item
14
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Principal
Accountant Fees and Services
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40
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Item
15
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Exhibits
and Financial Statement Schedules
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41
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SIGNATURES
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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 (the Exchange Act), 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 raising capital for our institutional fund;
difficulties in identifying properties to acquire and completing acquisitions;
failure to successfully operate acquired properties and operations; failure to
maintain our status as a Real Estate Investment Trust (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.
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PART
I.
Item
1. Business
Overview
Douglas
Emmett, Inc. is a fully integrated, self-administered and self-managed Real
Estate Investment Trust (REIT) and one of the largest owners and operators of
high-quality office and multifamily properties located in premier submarkets in
California and Hawaii. Our properties, which include approximately
13.3 million square feet of Class A office space and 2,868 apartment units,
are concentrated in ten submarkets – Brentwood, Olympic Corridor, Century City,
Santa Monica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner
Center/Woodland Hills, Burbank and Honolulu. We focus on owning and
acquiring a substantial share of top-tier office properties and premier
multifamily communities in neighborhoods that possess significant supply
constraints, high-end executive housing and key lifestyle amenities. We maintain
a web site at www.douglasemmett.com.
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 own and operate 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 typically 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. Our 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 legal, medical, financial and other
professional 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 property management
group oversees day-to-day property management of both our office and
multifamily portfolios, allowing us to benefit from the operational
efficiencies permitted by our submarket concentration. Our
in-house leasing agents and legal specialists allow 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 to increase our market
share in our existing submarkets of Los Angeles County and Honolulu, and
may selectively enter into other submarkets with similar characteristics
where we believe we can gain significant market
share.
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In
October 2008, we completed the initial closing of our newly formed institutional
fund, Douglas Emmett Fund X, LLC (Fund X). Fund X is the first fund
formed by us since our IPO, when the nine institutional funds previously formed
by our predecessor were consolidated with us. As of the date of its
initial closing, Fund X had obtained equity commitments totaling
$300 million, of which we committed $150 million and certain of our
officers committed $2.25 million on the same terms as the other
investors. Fund X contemplates a fund raising period until July 2009
and an investment period of up to four years from the initial closing, followed
by a ten-year value creation period. With limited exceptions, Fund X
will be our exclusive investment vehicle during its investment period, using the
same underwriting and leverage principles and focusing primarily on the same
markets as we have. For further information, see Note
19
to our consolidated financial statements in Item 8 of this Report.
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.
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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.
Taxation
of Douglas Emmett, Inc.
We believe that we qualify, and intend
to continue to qualify, for taxation as a REIT under the Internal Revenue Code,
although we cannot assure that this has or will happen. See Item 1A. Risk
Factors of this Report. The following 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) of which,
during the last half of each taxable year, not more than 50% in value of the
outstanding stock 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 from 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.
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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 (IRS)
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 items of income. 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), REIT or QRS, as applicable, although no assurance can be given that
the IRS will not successfully challenge the status of any such
organization.
As of
December 31, 2008, we owned interests in Douglas Emmett Builders (DEB) and we
have elected, jointly with DEB, for 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.
Fund X
owns its properties through an entity which is intended to also qualify as a
REIT, and its failure to so qualify could have similar impacts on
us.
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Regulation
Our
properties are subject to various covenants, laws, ordinances and regulations,
including for example regulations relating to common areas, fire and safety
requirements, various environmental laws, the Americans with Disabilities Act of
1990 (ADA) and rent control laws. Various environmental laws impose
liability for release, disposal or exposure to various hazardous materials,
including for example asbestos-containing materials, a substance known to be
present in a number of our buildings. Such laws could impose
liability on us even if we neither knew about nor was responsible for the
contamination. Under the ADA, we must meet federal requirements related to
access and use by disabled persons to the extent that our properties are “public
accommodations”. The costs of our on-going efforts to comply with
these laws are substantial. Moreover, as we have not conducted a
comprehensive audit or investigation of all of our properties to determine our
compliance with applicable laws, we may be liable for investigation and
remediation costs, penalties, and/or damages, which could be substantial and
could adversely affect our ability to sell or rent our property or to borrow
using such property as collateral.
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.
For more
information about the potential impacts of laws and regulations, see Item 1A
Risk Factors of this Report.
Employees
As of
December 31, 2008, we employed more than 500 people. 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 Douglas Emmett Realty Advisors (DERA), our predecessor, and
its nine institutional funds. All of our assets are directly or
indirectly held by 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 2008,
2007 and 2006 is set forth in Note 17 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.
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.
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Item
1A. Risk Factors
The
following section includes the most significant 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 any level of growth
in 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, such as the current global economic
downturn;
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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, such as the pronounced
tightening of credit markets that occurred in the fourth quarter of 2008,
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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- 8
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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
ADA.
|
In
addition, periods of economic slowdown or recession, such as the current global
economic downturn, 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, 2008, our total
consolidated indebtedness was approximately $3.67 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 had approximately
$320.7 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 not meet the criteria that would allow us to exercise one or both of
the one-year extensions on our existing revolving credit facility, which
is scheduled to mature on October 30, 2009, or the availability of
borrowings under the facility may be reduced upon
extension;
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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 current global financial crisis
may adversely affect our business and performance. Our
operations and performance depend on general economic conditions. The
United States economy has recently experienced a financial downturn, with some
financial and economic analysts predicting that the world economy may be
entering into a prolonged economic downturn characterized by high unemployment,
limited availability of credit and decreased consumer and business
spending.
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This downturn
has had, and may continue to have, an unprecedented negative impact on the
global credit markets. Credit has tightened significantly in the last
several months. If this continues or worsens, we might not be able to
obtain mortgage loans to purchase additional properties or successfully
refinance our properties as loans become due. Further, even if we are
able to obtain the financing we need, it may be on terms that are not favorable
to us, with increased financing costs and restrictive covenants, including
restricting our ability to pay dividends and our institutional fund’s ability to
make distributions to its members.
The economic downturn has adversely
affected, and is expected to continue to adversely affect, the businesses of
many of our tenants. As a result, we may see increases in
bankruptcies of our tenants and increased defaults by tenants, and we may
experience higher vacancy rates and delays in re-leasing vacant space, which
could negatively impact our business and results of operations.
Overall, these factors have resulted in
uncertainty in the real estate markets. As a result, the valuation of
real-estate related assets has been volatile and is likely to continue to be
volatile in the future. This volatility in the markets may make
it more difficult for us to obtain adequate financing or realize gains on our
investments, which could have an adverse effect on our business and results of
operations.
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, such as the current global 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 we are subject to the availability of insurance in the
United States and the pricing thereof. 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, 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.
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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. Possible
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, 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, 2008, leases
representing approximately 13.4% of the square footage of the properties in our
office portfolio will expire in 2009, and an additional 6.9% of the square
footage of the properties in our office portfolio was available for
lease. In addition, as of December 31, 2008, approximately 0.9% 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, such as the current economic downturn, 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.
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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 federal, state and local laws and regulatory requirements,
including permitting and licensing requirements. Such laws and
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 laws
and regulations 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 failure
to obtain required permits, licenses and zoning relief or to comply with
applicable laws could have a material adverse effect on our business, financial
condition and results of operations.
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.
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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 financing, equity financing, or private equity
contributions 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.
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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 elect to distribute the minimum amount to remain
compliant with REIT requirements while retaining excess capital for future
operations. 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, or election to not 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 executive officers 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 executive officers will have
significant influence over our affairs. At December 31,
2008, our executive officers owned approximately 8% of our outstanding common
stock, or approximately 27% assuming that they convert all of their
interests in our operating partnership and exercise all of their
options. As a result, our executive officers, 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 executive officers exercises their redemption
rights with respect to their operating partnership units and we issue common
stock in exchange for those units, our executive officers’ influence over our
affairs would increase substantially.
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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:
●
|
redemption
rights of qualifying parties;
|
●
|
transfer
restrictions on our operating partnership
units;
|
- 15
-
●
|
the
ability of the general partner in some cases to amend the partnership
agreement without the consent of the limited partners;
and
|
●
|
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:
●
|
“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
|
●
|
“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 Jordan L. Kaplan, Kenneth M. Panzer and William
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.
- 16
-
The loss of any member of our
executive officers or certain other key senior personnel 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
executive officers, including Dan A. Emmett, Jordan L. Kaplan, Kenneth M. Panzer
and William Kamer. If we lose the services of any member of our
executive officers, our business may be significantly impaired. In
addition, many of our 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.
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 IRS regarding
our qualification as a REIT.
- 17
-
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.
Fund X
owns its properties through an entity which is intended to also qualify as a
REIT, and its failure to so qualify could have similar impacts on
us.
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.
The tax imposed on REITs engaging in
“prohibited transactions” will limit our ability to engage in transactions which
would be treated as sales for federal income tax purposes. A
REIT’s net income from prohibited transactions is subject to a 100%
tax. In general, prohibited transactions are sales or other
dispositions of property, other than foreclosure property but including any
property held in inventory primarily for sale to customers in the ordinary
course of business. Although we do not intend to hold any properties
that would be characterized as inventory held for sale to customers in the
ordinary course of our business, such characterization is a factual
determination and no guarantee can be given that the IRS would agree with our
characterization of our properties.
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 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.
- 18
-
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, 2008:
Office
Portfolio (1)
by Submarket
|
Number
of Properties
|
Rentable
Square Feet (2)
|
Percent
of Total
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
13 | 1,390,768 | 10.4 | % | ||||||||
Olympic
Corridor
|
5 | 1,096,079 | 8.2 | |||||||||
Century City
|
3 | 915,980 | 6.9 | |||||||||
Santa
Monica
|
8 | 969,971 | 7.3 | |||||||||
Beverly
Hills
|
6 | 1,343,094 | 10.1 | |||||||||
Westwood
|
2 | 396,807 | 3.0 | |||||||||
San
Fernando Valley
|
||||||||||||
Sherman
Oaks/Encino
|
11 | 3,180,954 | 23.9 | |||||||||
Warner
Center/Woodland Hills
|
3 | 2,855,864 | 21.4 | |||||||||
Tri-Cities
|
||||||||||||
Burbank
|
1 | 420,949 | 3.1 | |||||||||
Honolulu
|
3 | 757,636 | 5.7 | |||||||||
Total
|
55 | 13,328,102 | 100.0 | % |
(1)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common equity.
|
(2)
|
Based
on Building Owners and Managers Association (BOMA) 1996
remeasurement. Total consists of 12,242,179 leased square feet,
923,081 available square feet, 76,251 building management use square feet,
and 86,591 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, 2008:
Office
Portfolio (1)
by Submarket
|
Percent
Leased (2)
|
Annualized
Rent (3)
|
Annualized Rent Per
Leased
Square Foot (4)
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
95.8 | % | $ | 50,139,136 | $ | 38.06 | ||||||
Olympic
Corridor
|
94.6 | 32,551,780 | 32.14 | |||||||||
Century City
|
98.2 | 32,133,272 | 36.14 | |||||||||
Santa
Monica (5)
|
93.2 | 44,236,506 | 49.86 | |||||||||
Beverly
Hills
|
91.9 | 46,009,751 | 38.36 | |||||||||
Westwood
|
94.9 | 13,611,481 | 36.59 | |||||||||
San
Fernando Valley
|
||||||||||||
Sherman
Oaks/Encino
|
93.6 | 89,929,729 | 31.07 | |||||||||
Warner
Center/Woodland Hills
|
89.0 | 71,516,533 | 28.71 | |||||||||
Tri-Cities
|
||||||||||||
Burbank
|
100.0 | 13,383,871 | 31.79 | |||||||||
Honolulu
|
89.8 | 22,706,974 | 34.05 | |||||||||
Total /
Weighted Average
|
93.1 | % | $ | 416,219,033 | $ | 34.26 |
(1)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common equity.
|
(2)
|
Includes
91,775 square feet with respect to signed leases not yet
commenced.
|
(3)
|
Represents
annualized monthly cash base rent (i.e., excludes tenant reimbursements,
parking and other revenue) under leases commenced as of December 31, 2008
(excluding 91,775 square feet with respect to signed leases not yet
commenced). 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.
|
(4)
|
Represents
annualized rent divided by leased square feet (excluding 91,775 square
feet with respect to signed leases not commenced) as set forth in note (2)
above for the total.
|
(5)
|
Includes
$1,287,232 of annualized rent attributable to our corporate headquarters
at our Lincoln/Wilshire property.
|
- 19
-
The following table presents our
submarket office concentration as of December 31, 2008:
Office
Portfolio (1)
by Submarket
|
Douglas
Emmett
Rentable
Square
Feet
(2)
|
Submarket
Rentable
Square
Feet
(3)
|
Douglas
Emmett
Market
Share
|
|||||||||
West
Los Angeles
|
||||||||||||
Brentwood
|
1,390,768 | 3,356,126 | 41.4 | % | ||||||||
Olympic
Corridor
|
1,096,079 | 3,022,969 | 36.3 | |||||||||
Century City
|
915,980 | 10,064,599 | 9.1 | |||||||||
Santa
Monica
|
969,971 | 8,700,348 | 11.1 | |||||||||
Beverly
Hills
|
1,343,094 | 7,445,875 | 18.0 | |||||||||
Westwood
|
396,807 | 4,408,094 | 9.0 | |||||||||
San
Fernando Valley
|
||||||||||||
Sherman
Oaks/Encino
|
3,180,954 | 5,721,621 | 55.6 | |||||||||
Warner
Center/Woodland Hills
|
2,855,864 | 7,429,172 | 38.4 | |||||||||
Tri-Cities
|
||||||||||||
Burbank
|
420,949 | 5,929,318 | 7.1 | |||||||||
Subtotal/Weighted
Average Los Angeles County
|
12,570,466 | 56,078,122 | 22.4 | |||||||||
Honolulu
|
757,636 | 5,197,904 | 14.6 | |||||||||
Total
|
13,328,102 | 61,276,026 | 21.8 | % |
Source:
CB Richard Ellis (other than Douglas Emmett data).
(1)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common equity.
|
(2)
|
Based
on BOMA 1996 remeasurement. Total consists of 12,242,179 leased
square feet (includes 91,775 square feet with respect to signed leases not
commenced), 923,081 available square feet, 76,251 building management use
square feet, and 86,591 square feet of BOMA 1996 adjustment on leased
space.
|
(3)
|
Represents
competitive office space in our nine Los Angeles County submarkets
and Honolulu submarket per CB Richard
Ellis.
|
- 20
-
Tenant
Diversification
|
Our
office portfolio is currently leased to approximately 2,000 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, 2008:
Office
Portfolio(1)
Tenant:
|
Number
of Leases
|
Number
of Properties
|
Lease
Expiration(2)
|
Total
Leased Square Feet
|
Percent
of Rentable Square Feet
|
Annualized
Rent(3)
|
Percent
of Annualized Rent
|
Time
Warner(4)
|
4
|
4
|
2010-2019
|
642,845
|
4.8%
|
$21,256,817
|
5.1%
|
AIG
(Sun America Life Insurance)
|
1
|
1
|
2013
|
182,010
|
1.4
|
5,704,276
|
1.3
|
The
Endeavor Agency, LLC
|
2
|
1
|
2019
|
113,878
|
0.9
|
4,972,648
|
1.2
|
Metrocities
Mortgage, LLC(5)
|
2
|
2
|
2010-2015
|
138,040
|
1.0
|
4,101,901
|
1.0
|
Bank
of America(6)
|
11
|
8
|
2009
- 2013
|
112,925
|
0.8
|
4,039,137
|
1.0
|
Total
(7)
|
20
|
16
|
1,189,698
|
8.9%
|
$40,074,779
|
9.6%
|
(1)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common equity.
|
(2)
|
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.
|
(3)
|
Represents
annualized monthly cash rent under leases commenced as of December 31,
2008. 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.
|
(4)
|
Includes
a 62,000 square foot lease expiring in June 2010, a 10,000 square foot
lease expiring in October 2013, a 150,000 square foot lease expiring in
April 2016, and a 421,000 square foot lease expiring in September
2019.
|
(5)
|
Includes
a 8,000 square foot lease expiring in September 2010 and a 130,000 square
foot lease expiring in February 2015.
|
(6)
|
Includes
a 5,000 square foot lease expiring in September 2009, a 9,000 square foot
lease expiring in September 2010, a 7,000 square foot lease expiring in
December 2010, two leases totaling 19,000 square feet expiring in January
2011, a 2,000 square foot lease expiring in May 2011, a 16,000 square foot
lease expiring in July 2011, a 41,000 square foot lease expiring in
January 2012, a 6,000 square foot lease expiring in May 2012, and a 8,000
square foot lease expiring in July 2013.
|
(7)
|
Excludes
177,000 square feet occupied by Health Net. Out of total square
feet, 126,000 square feet expire in December 2014 and 51,000 square feet
expired at the end of December 31,
2008.
|
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,
2008:
Industry
|
Number
of Leases (1)
|
Annualized
Rent as a Percent of Total
|
Legal
|
353
|
15.9%
|
Financial
Services
|
270
|
14.7
|
Entertainment
|
120
|
11.3
|
Real
Estate
|
165
|
9.1
|
Health
Services
|
297
|
9.0
|
Accounting
& Consulting
|
213
|
8.4
|
Insurance
|
85
|
7.6
|
Retail
|
163
|
7.0
|
Technology
|
70
|
3.9
|
Advertising
|
57
|
3.3
|
Public
Administration
|
29
|
1.8
|
Educational
Services
|
10
|
0.7
|
Other
|
266
|
7.3
|
Total
|
2,098
|
100.0%
|
(1)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common
equity.
|
- 21
-
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,
2008:
Square
Feet Under Lease (1)
|
Number
of Leases
|
Leases
as a Percent of Total
|
Rentable
Square Feet (2)
|
Square
Feet as a Percent of Total
|
Annualized
Rent(3)
(4)
|
Annualized
Rent as a Percent of Total
|
2,500
or less
|
1,033
|
49.2%
|
1,413,098
|
10.6%
|
$51,154,968
|
12.3%
|
2,501-10,000
|
783
|
37.3
|
3,809,780
|
28.6
|
131,241,752
|
31.5
|
10,001-20,000
|
188
|
9.0
|
2,637,920
|
19.8
|
88,723,238
|
21.3
|
20,001-40,000
|
65
|
3.1
|
1,784,910
|
13.4
|
60,924,562
|
14.6
|
40,001-100,000
|
22
|
1.1
|
1,247,281
|
9.4
|
44,736,346
|
10.8
|
Greater
than 100,000
|
7
|
0.3
|
1,257,415
|
9.4
|
39,438,167
|
9.5
|
Subtotal
|
2,098
|
100.0%
|
12,150,404
|
91.2%
|
$416,219,033
|
100.0%
|
Available
|
-
|
-
|
923,081
|
6.9
|
-
|
-
|
BOMA
Adjustment(5)
|
-
|
-
|
86,591
|
0.6
|
-
|
-
|
Building
Management Use
|
-
|
-
|
76,251
|
0.6
|
-
|
-
|
Signed
leases not commenced
|
-
|
-
|
91,775
|
0.7
|
-
|
-
|
Total
|
2,098
|
100.0%
|
13,328,102
|
100.0%
|
$416,219,033
|
100.0%
|
(1)
|
Based
on BOMA 1996 remeasurement. Total consists of 12,242,179 leased square
feet (includes 91,775 square feet with respect to signed leases not
commenced), 923,081 available square feet, 76,251 building management use
square feet, and 86,591 square feet of BOMA 1996 adjustment on leased
space.
|
(2)
|
Average
tenant size is approximately 5,800 square feet. Median is approximately
2,500 square feet.
|
(3)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common equity.
|
(4)
|
Represents
annualized monthly cash base rent (i.e., excludes tenant reimbursements,
parking and other revenue) under leases commenced as of December 31, 2008
(excluding 91,775 square feet with respect to signed leases not yet
commenced). 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.
|
(5)
|
Represents
square footage adjustments for leases that do not reflect BOMA 1996
remeasurement.
|
- 22
-
Lease
Expirations
The
following table sets forth a summary schedule of lease expirations for leases in
place as of December 31, 2008, plus available space, for each of the ten years
beginning January 1, 2009 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(1)
Expiration
|
Number
of Leases Expiring
|
Rentable
Square Feet
|
Expiring
Square Feet as a Percent of Total
|
Annualized
Rent(2)
(3)
|
Annualized
Rent as a Percent of Total
|
Annualized
Rent Per Leased Square Foot(4)
|
Annualized
Rent Per Leased Square Foot at Expiration(5)
|
|||||||||||||||||||||
2009
|
459 | 1,779,677 | 13.4 | % | $ | 57,697,675 | 13.9 | % | $ | 32.42 | $ | 32.76 | ||||||||||||||||
2010
|
424 | 1,764,955 | 13.2 | 59,400,755 | 14.3 | 33.66 | 34.97 | |||||||||||||||||||||
2011
|
391 | 1,767,625 | 13.3 | 61,155,401 | 14.7 | 34.60 | 37.27 | |||||||||||||||||||||
2012
|
292 | 1,546,975 | 11.6 | 52,106,515 | 12.5 | 33.68 | 37.72 | |||||||||||||||||||||
2013
|
257 | 1,658,473 | 12.4 | 60,385,850 | 14.5 | 36.41 | 42.25 | |||||||||||||||||||||
2014
|
121 | 962,824 | 7.2 | 31,550,518 | 7.6 | 32.77 | 41.14 | |||||||||||||||||||||
2015
|
57 | 650,171 | 4.9 | 21,176,002 | 5.1 | 32.57 | 41.19 | |||||||||||||||||||||
2016
|
30 | 615,805 | 4.6 | 20,131,321 | 4.8 | 32.69 | 39.46 | |||||||||||||||||||||
2017
|
28 | 321,680 | 2.4 | 11,020,923 | 2.7 | 34.26 | 47.59 | |||||||||||||||||||||
2018
|
28 | 289,460 | 2.2 | 13,511,401 | 3.2 | 46.68 | 65.37 | |||||||||||||||||||||
2019
|
6 | 622,359 | 4.7 | 21,371,681 | 5.1 | 34.34 | 44.04 | |||||||||||||||||||||
Thereafter
|
5 | 170,400 | 1.3 | 6,710,991 | 1.6 | 39.38 | 55.15 | |||||||||||||||||||||
Available
|
- | 923,081 | 6.9 | - | - | - | - | |||||||||||||||||||||
BOMA
Adjustment(6)
|
- | 86,591 | 0.6 | - | - | - | - | |||||||||||||||||||||
Building
Management Use
|
- | 76,251 | 0.6 | - | - | - | - | |||||||||||||||||||||
Signed
leases not commenced
|
- | 91,775 | 0.7 | - | - | - | - | |||||||||||||||||||||
Total/Weighted
Average
|
2,098 | 13,328,102 | 100.0 | % | $ | 416,219,033 | 100.0 | % | $ | 34.26 | $ | 39.18 |
(1)
|
Based
on BOMA 1996 remeasurement. Total consists of 12,242,179 leased square
feet (includes 91,775 square feet with respect to signed leases not
commenced), 923,081 available square feet, 76,251 building management use
square feet, and 86,591 square feet of BOMA 1996 adjustment on leased
space.
|
(2)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common equity.
|
(3)
|
Represents
annualized monthly cash base rent (i.e., excludes tenant reimbursements,
parking and other revenue) under leases commenced as of December 31, 2008
(excluding 91,775 square feet with respect to signed leases not yet
commenced). 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.
|
(4)
|
Represents
annualized rent divided by leased square feet.
|
(5)
|
Represents
annualized rent at expiration divided by leased square
feet.
|
(6)
|
Represents
the square footage adjustments for leases that do not reflect BOMA 1996
remeasurement.
|
- 23
-
Multifamily
Portfolio
The
following table presents an overview of our multifamily portfolio, including
occupancy and in-place rents, as of December 31, 2008:
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)
|
Monthly
Rent
Per
Leased
Unit
|
West
Los Angeles
|
|||
Brentwood
|
99.5%
|
$24,096,283
|
$2,125
|
Santa
Monica (2)
|
98.7
|
20,501,004
|
2,112
|
Honolulu
|
99.0
|
18,273,968
|
1,401
|
Total
/ Weighted Average
|
99.1%
|
$62,871,255
|
$1,844
|
(1)
|
Represents
December 2008 multifamily rental income
annualized.
|
(2)
|
Excludes
10,013 square feet of ancillary retail space, which generates $293,022 of
annualized rent as of December 31,
2008.
|
- 24
-
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, 2008:
Year
Ended December 31,
|
||||||||||||
2008(1)
|
2007
|
2006
|
||||||||||
Renewals(2)
|
||||||||||||
Number
of leases
|
252 | 247 | 252 | |||||||||
Square
feet
|
1,075,281 | 905,306 | 908,982 | |||||||||
Tenant
improvement costs per square foot(3)
(5)
|
$ | 4.07 | $ | 5.21 | $ | 7.28 | ||||||
Leasing
commission costs per square foot(3)
|
7.60 | 7.39 | 5.86 | |||||||||
Total
tenant improvement and leasing commission costs(3)
|
$ | 11.67 | $ | 12.60 | $ | 13.14 | ||||||
New
leases(4)
|
||||||||||||
Number
of leases
|
172 | 225 | 239 | |||||||||
Square
feet
|
586,574 | 890,962 | 840,994 | |||||||||
Tenant
improvement costs per square foot(3)
(5)
|
$ | 10.96 | $ | 14.38 | $ | 16.29 | ||||||
Leasing
commission costs per square foot(3)
|
8.55 | 9.44 | 7.45 | |||||||||
Total
tenant improvement and leasing commission costs(3)
|
$ | 19.51 | $ | 23.82 | 23.74 | |||||||
Total
|
||||||||||||
Number
of leases
|
424 | 472 | 491 | |||||||||
Square
Feet
|
1,661,855 | 1,796,268 | 1,749,976 | |||||||||
Tenant
improvement costs per square foot(3)
(5)
|
$ | 6.50 | $ | 9.75 | $ | 11.61 | ||||||
Leasing
commission costs per square foot(3)
|
7.94 | 8.41 | 6.63 | |||||||||
Total
tenant improvement and leasing commission costs(3)
|
$ | 14.44 | $ | 18.16 | $ | 18.24 |
(1)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common
equity.
|
(2)
|
Includes
retained tenants that have relocated or expanded into new space within our
portfolio.
|
(3)
|
Assumes
all tenant improvement and leasing commissions are paid in the calendar
year in which the lease is executed, 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.
|
- 25
-
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, 2008:
Office
|
|||
Year
Ended December 31,
|
|||
2008
|
2007
|
2006
|
|
Recurring
capital expenditures
|
$5,457,340
|
$5,331,325
|
$5,812,721
|
Total
square feet(1)
|
11,810,609
|
11,666,107
|
11,554,829
|
Recurring
capital expenditures per square foot
|
$
0.46
|
$
0.46
|
$ 0.50
|
(1)
|
Excludes
square footage attributable to acquired properties with only non-recurring
capital expenditures in the respective
period.
|
The
following table sets forth certain information regarding historical recurring
capital expenditures at the properties in our multifamily portfolio through
December 31, 2008:
Multifamily
|
|||
Year
Ended December 31,
|
|||
2008
|
2007
|
2006
|
|
Recurring
capital expenditures
|
$1,570,154
|
$1,348,063
|
$1,950,713
|
Total
units
|
2,868
|
2,868
|
2,868
|
Recurring
capital expenditures per unit
|
$
547
|
$ 470
|
$ 680
|
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.
- 26
-
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
common stock is traded on the New York Stock Exchange under the symbol
“DEI”. On February 17, 2009, the reported closing sale price per
share of our common stock on the New York Stock Exchange was
$8.53. 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
|
|||||
Fiscal
Year Ended 2008
|
||||||||
Dividend
|
$
|
0.1875
|
$
|
0.1875
|
$
|
0.1875
|
$
|
0.1875
|
Common
Stock Price
|
||||||||
High
|
23.39
|
24.81
|
24.97
|
22.45
|
||||
Low
|
20.28
|
21.64
|
20.06
|
8.26
|
||||
Fiscal
Year Ended 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
|
Holders
of Record
We had 22
holders of record of our common stock on February 17, 2009. Certain
shares of the Company are held in “street” name and accordingly, the number of
beneficial owners of such shares is not known or included in the foregoing
number.
Dividend
Policy
We typically pay dividends to
common stockholders quarterly at the discretion of the Board of
Directors. Dividend amounts depend on our available cash flow, financial
condition and capital requirements, the annual distribution requirements under
the REIT provisions of the Internal Revenue Code and such other factors as the
Board of Directors deems relevant.
Sales
of Unregistered Securities
None.
Repurchases
of Equity Securities
None.
- 27
-
Performance
Graph
The information below shall not be
deemed to be “soliciting material” or to be “filed” with the U.S. Securities and
Exchange Commission or subject to Regulation 14A or 14C, other than as provided
in Item 201 of Regulation S-K , or to the liabilities of Section 18 of the
Exchange Act, except to the extent we specifically request that such information
be treated as soliciting material or specifically incorporate it by reference
into a filing under the Securities Act or the Exchange Act.
The following graph compares the
cumulative total stockholder return on the Common Stock of Douglas Emmett Inc.
from October 24, 2006 to December 31, 2008 with the cumulative total return of
the Standard & Poor’s 500 Index 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 and that all dividends were reinvested into additional
shares of common stock at the frequency with which dividends are paid on the
common stock during the applicable fiscal year). The total return
performance shown in this graph is not necessarily indicative of and is not
intended to suggest future total return performance.
![](https://www.sec.gov/Archives/edgar/data/0001364250/000136425009000016/perfgraph.jpg)
Period
Ending
|
||||||
Index
|
10/24/06
|
12/31/06
|
06/30/07
|
12/31/07
|
06/30/08
|
12/31/08
|
Douglas
Emmett, Inc.
|
100.00
|
112.95
|
106.57
|
98.85
|
97.71
|
59.45
|
S&P
500
|
100.00
|
103.39
|
110.59
|
109.07
|
96.08
|
68.72
|
NAREIT
Equity
|
100.00
|
109.47
|
103.02
|
92.29
|
88.97
|
57.47
|
Source:
SNL Financial LC
- 28
-
Item
6. Selected Financial Data
The
following table sets forth summary financial and operating data on a 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 IPO/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, 2008, 2007, 2006, 2005 and 2004 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
Ending
12/31/08
|
Year
Ending
12/31/07
|
10/31/06
to
12/31/06
|
01/01/06
to
10/30/06
|
Year
Ending
12/31/05
|
Year
Ending
12/31/04
|
|||||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||||||||||
Total
office revenues
|
$ | 537,377 | $ | 468,569 | $ | 77,566 | $ | 300,939 | $ | 348,566 | $ | 286,638 | ||||||||||||
Total
multifamily revenues
|
70,717 | 71,059 | 11,374 | 45,729 | 45,222 | 33,793 | ||||||||||||||||||
Total
revenues
|
608,094 | 539,628 | 88,940 | 346,668 | 393,788 | 320,431 | ||||||||||||||||||
Operating
income (loss)
|
154,234 | 141,232 | (3,417 | ) | 113,784 | 138,935 | 106,853 | |||||||||||||||||
Loss
from continuing operations
|
(27,993 | ) | (13,008 | ) | (20,591 | ) | (16,362 | ) | (16,520 | ) | (56,765 | ) | ||||||||||||
Per
Share Data:
|
||||||||||||||||||||||||
Loss
per share -
|
$ | (0.23 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) | $ | (254,154 | ) | $ | (870,631 | ) | ||||||
basic
and diluted
|
||||||||||||||||||||||||
Weighted
average common
|
||||||||||||||||||||||||
shares
outstanding -
|
||||||||||||||||||||||||
basic
and diluted
|
120,725,928 | 112,645,587 | 115,005,860 | 65 | 65 | 65 | ||||||||||||||||||
Dividends
declared per
|
||||||||||||||||||||||||
common
share
|
$ | 0.75 | $ | 0.70 | $ | 0.12 | $ | - | $ | - | $ | - |
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||||||
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
Balance
Sheet Data (as of December 31)
|
||||||||||||||||||||
Total
assets
|
$ | 6,760,804 | $ | 6,189,968 | $ | 6,200,118 | $ | 2,904,647 | $ | 2,585,697 | ||||||||||
Secured
notes payable
|
3,692,785 | 3,105,677 | 2,789,702 | 2,223,500 | 1,982,655 | |||||||||||||||
|
||||||||||||||||||||
Other
Data: Number of properties (as of December 31) |
64 |
(1)
|
57 | 55 | 47 | 45 |
|
(1)
|
All
properties are 100% owned by our operating partnership except (i) the
Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and
(ii) 6 properties in Fund X totaling 1.4 million square feet in which we
held a 50% interest of the common
equity.
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- 29
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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, 2008 our office portfolio consisted of 55
properties with approximately 13.3 million rentable square feet, and our
multifamily portfolio consisted of nine properties with a total of 2,868
units. As of December 31, 2008, our office portfolio was 93.1%
leased, and our multifamily properties were 99.1% leased. Our office
portfolio contributed approximately 86.9% of our annualized rent as of December
31, 2008, while our multifamily portfolio contributed the remaining
13.1%. As of December 31, 2008, our Los Angeles County office and
multifamily portfolio contributed approximately 91.4% of our annualized rent,
and our Honolulu, Hawaii office and multifamily portfolio contributed the
remaining 8.6%. 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
2008, we completed the following acquisition transactions:
●
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In
March 2008, we acquired a 1.4 million square foot office portfolio
consisting of six Class A buildings, all located in our core Los Angeles
submarkets – Santa Monica, Beverly Hills, Sherman Oaks/Encino and Warner
Center/Woodland Hills – for a contract price of approximately $610
million. As described below, we have contributed these six
properties to Fund X. See Note 19 to our consolidated financial
statements in Item 8 of this
Report.
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●
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In
February 2008, we acquired a two-thirds interest in a 78,298 square-foot
office building located in Honolulu, Hawaii. As part of the
same transaction, we also acquired all of the assets of The Honolulu Club,
a private membership athletic and social club, which is located in the
building. The aggregate contract price was approximately $18
million and the purchase was made through a consolidated joint venture
with our local partner. In May 2008, the operations of the
athletic club were sold to a third party for a nominal
cost. Simultaneously, the acquirer leased from us the space
occupied by the athletic club. The results of operations and
loss on sale of the assets of the athletic club were not
material.
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●
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In
December 2008, we acquired the five-sixths that we did not already own of
the fee title to the land underlying one of our existing office properties
in the Westwood submarket, for a fixed contract price of $7.8
million. With the completion of this acquisition, we now own
100% of the fee interest and 100% of the leasehold
interest.
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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 2008, we had on-going repositioning
efforts on three of our office properties representing 13 buildings and
approximately 3.1 million rentable square feet. Repositioning
properties exclude acquisition properties where the plan for improvement is
implemented as part of the acquisition.
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Financings. During 2008, we
completed the following financing transactions:
●
|
In
October 2008, we completed the initial closing of $300 million of
equity commitments for our newly formed institutional fund, Douglas Emmett
Fund X, LLC, of which we committed $150 million. In
connection with the initial closing, we contributed to Fund X the six
office properties which we acquired in March 2008 as well as the related
$365 million loan. Fund X contemplates a fund raising
period until July 2009 and an investment period of up to four years from
the initial closing, followed by a ten-year value creation
period. With limited exceptions, Fund X will be our exclusive
investment vehicle during its investment period, using the same
underwriting and leverage principles and focusing primarily on the same
markets as we have. See Note 19 to our consolidated financial
statements in Item 8 of this
Report.
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●
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In
August 2008, we obtained a non-recourse $365 million term loan secured by
the six-property portfolio that we acquired in March 2008 as described
above and in Note 3 to our consolidated financial statements in Item 8 of
this Report. This loan bears interest at a floating rate equal
to one-month LIBOR plus 165 basis points, however we have entered into
interest rate swap contracts that effectively fix the interest at 5.515%
(based on an actual/360-day basis) until September 4,
2012. This loan facility matures on August 18,
2013. This long-term loan replaces the $380 million bridge loan
obtained in March 2008 in connection with the property
acquisition.
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●
|
In
March 2008,
we obtained a non-recourse $340 million term loan secured by four of
our previously unencumbered office properties. This loan bears
interest at a floating rate equal to one-month LIBOR plus 150 basis
points, however we have entered into interest rate swap contracts that
effectively fix the interest rate at 4.77% (based on an actual/360-day
basis) until January 2, 2013. This loan facility matures on
April 1, 2015. Proceeds from this loan were utilized to repay
our secured revolving credit facility and for general corporate
purposes.
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●
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In
February 2008, the joint venture in which we have a two-thirds interest
obtained an $18 million loan that financed our February 2008 acquisition
described above and in Note 3 to our consolidated financial statements in
Item 8 of this Report. This loan has an interest rate of
one-month LIBOR plus 125 basis points and a two-year term with a one-year
extension.
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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. 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 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 2006 period reflects significant differences in
the ongoing economic impact resulting from our IPO/formation transactions, the
results are in many cases not directly comparable to 2007 or 2008 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.
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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.
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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, profit-sharing or leasing method. If the
sales criteria have been met, we further analyze whether profit recognition is
appropriate using the full accrual method. If the criteria to
recognize profit using the full accrual method have not been met, we defer the
gain and recognize it when the criteria are met or use the installment or cost
recovery method as appropriate under the circumstances.
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.
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Results
of Operations
The
comparability of our results of operations between 2008, 2007 and 2006 is
affected by our acquisition and repositioning activities in all years
presented. This includes the acquisition of four 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. This also includes
nine office properties, one multifamily property and the remaining fee interest
in one parcel of land that we acquired from unaffiliated entities subsequent to
our IPO. 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 IPO/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. 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. 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. During 2008, we
acquired the Honolulu Club and a portfolio of six properties as described in
Note 3 to the consolidated financial statements in Item 8 of this
Report. As of December 31, 2008, the repositioning and acquisition
properties represented 48.9% of our total office portfolio based on rentable
square feet. In addition, during the three years we acquired four
properties in our multifamily portfolio: Royal Kunia in March 2006 and
Barrington/Kiowa, Barry and Kiowa at the time of our IPO. As of
December 31, 2008, our multifamily acquisitions represented 18.4% 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.
Comparison
of year ended December 31, 2008 to year ended December 31,
2007
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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 $68.8 million, or 14.7%, to $537.4 million for
2008 compared to $468.6 million for 2007 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 $56.6 million, or 15.0%, to $433.5 million for 2008 compared to
$376.9 million for 2007. The increase is due to $45.9 million of
incremental rent from the nine properties we acquired subsequent to the
beginning of 2007, as well as increases in average rental rates for new and
renewal leases across our existing office portfolio.
Parking and Other
Income. Total office parking and other income increased by
$10.1 million, or 16.5%, to $71.5 million for 2008 compared to $61.4 million for
2007. The increase is primarily due to incremental revenues of $6.7
million from the nine properties we acquired subsequent to the beginning of
2007, as well as increases in parking rates implemented across the portfolio and
increases in ground rent income.
Multifamily
Revenue
Total Multifamily
Revenue. Total multifamily revenue consists of rent, parking
income and other income. Total multifamily revenue decreased by $0.3
million, or 0.5%, to $70.7 million for 2008 compared to $71.1 million for
2007. The decrease is primarily due to $3.1 million in amortization
of below-market leases for certain multifamily units initially recorded at the
time of our IPO and formation that were fully amortized during the second
quarter of 2008, thus causing a decline when comparing 2007 to
2008. This decrease was partially offset by an increase of
$2.2 million resulting from increased occupancy and an increase in rents
charged to both new and existing tenants, including increases for select Santa
Monica multifamily units. These 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. Therefore, 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, 2007.
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Operating
Expenses
Office Rental
Expenses. Total office rental expenses increased by $17.5
million, or 11.8%, to $166.1 million for 2008 compared to $148.6 million for
2007. The increase is primarily due to $21.0 million of incremental
operating expenses from the nine properties we acquired subsequent to the
beginning of 2007. The increase was offset by a net reduction in various
operating expenses in our existing portfolio, consisting primarily of lower
property tax accruals offset by higher utility expenses.
Depreciation and
Amortization. Depreciation and amortization expense increased
$38.4 million, or 18.3%, to $248.0 million for 2008 compared to $209.6 million
for 2007. The increase was primarily due to incremental depreciation
and amortization of $28.0 million from the nine properties we acquired
subsequent to the beginning of 2007, as well as the finalization of the purchase
price allocation and related lives of real estate assets combined at the time of
our IPO/formation transactions.
Non-Operating
Income and Expenses
Interest and Other
Income. Interest and other income of $0.7 million in 2007
consisted of interest income earned on the investment of excess
cash. In 2008, interest and other income of $3.6 million consisted
primarily of interest income and the allocation of operating results related to
our institutional fund, Douglas Emmett Fund X, LLC, as well as miscellaneous
income from the temporary operation of the Honolulu Athletic Club during
2008. See Note 3 and Note 19 to our consolidated financial statements
in Item 8 of this Report.
Interest
Expense. Interest expense increased $33.1 million, or 20.6%,
to $193.7 million for 2008 compared to $160.6 million for 2007. The
increase for the comparable periods was primarily due to an increase in
outstanding borrowings during 2008 to fund property acquisitions, including the
six properties acquired in March 2008 that were contributed to Fund X in October
2008, and for general corporate purposes. See Note 19 to our
consolidated financial statements in Item 8 of the Report.
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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 $90.1 million, or 23.8%, to $468.6 million for
2007 compared to $378.5 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 $9.6
million, or 46.6%, to $30.3 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
$18.6 million, or 43.5%, to $61.4 million for 2007 compared to $42.8 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.
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Multifamily
Revenue
Total Multifamily
Revenue. Total multifamily revenue consists of rent, parking
income and other income. Total multifamily revenue increased by $14.0
million, or 24.4%, to $71.1 million for 2007 compared to $57.1 million for 2006,
primarily due to the three multifamily property acquisitions in our
IPO/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 increased $17.7 million,
or 13.5%, to $148.6 million for 2007 compared to $130.9 for
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 Douglas, Emmett and Company
(DECO) in 2006 prior to the acquisition and consolidation of DECO in the
IPO/formation transactions.
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 IPO/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.
- 36
-
Liquidity
and Capital Resources
Available
Borrowings, Cash Balances and Capital Resources
In
October 2008, we completed the initial closing of Fund X. As of the
date of its initial closing, Fund X had obtained equity commitments totaling
$300 million, of which we committed $150 million and certain of our officers
committed $2.25 million on the same terms as the other
investors. Fund X contemplates a fund raising period until July 2009
and an investment period of up to four years from the initial closing, followed
by a ten-year value creation period. With limited exceptions, Fund X
will be our exclusive investment vehicle during its investment period, using the
same underwriting and leverage principles and focusing primarily on the same
markets as we have. See Note 3 to our consolidated financial
statements in Item 8 of this Report for further description of the acquisition
and Note 6 to our consolidated financial statements in Item 8 of this Report for
further description of the debt.
We had
total indebtedness of $3.7 billion at December 31, 2008, excluding a loan
premium representing the mark-to-market adjustment on variable rate debt assumed
from our predecessor. Our debt increased $592 million from December
31, 2007 primarily as a result of acquisitions as discussed in Note 3 to
our consolidated financial statements in Item 8 of this Report. See
Note 6 to our consolidated financial statements in Item 8 of this Report
for further description of the debt.
We have a
revolving credit facility with a group of banks led by Bank of America, N.A. and
Banc of America Securities LLC totaling $370 million. At December 31,
2008, there was approximately $320.7 million available to us under this
credit facility. This revolving credit facility 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. However, if the amount outstanding is greater than $262.5
million, the credit facility bears interest at a rate per annum equal to either
LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis
points The facility is scheduled to mature on October 30, 2009 but
has two one-year extensions available to us. In the current economic
environment and credit market, there is a chance that we may not meet the
criteria necessary to utilize the extensions, or the availability under the
facility may be reduced upon extension. We have used our revolving
credit facility for general corporate purposes, including acquisition funding,
redevelopment and repositioning opportunities, tenant improvements and capital
expenditures, share equivalent repurchases, recapitalizations and 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, 2008, 98% of our debt was
effectively fixed at an overall rate of 5.14% (on an actual / 360-day basis) by
virtue of interest rate swap and interest rate cap agreements in place at the
end of the reporting period. See Notes 6 and 8 to our consolidated
financial statements in Item 8 of this Report.
At
December 31, 2008, our total borrowings under secured loans represented 64.3% of
our total market capitalization of $5.7 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, 2008 on the New York Stock Exchange of $13.06 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. In 2008 we declared an annual dividend of $0.75 per share, paid
quarterly following the end of each quarter.
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 commitments to Fund X, 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.
Commitments
The
following table sets forth our principal obligations and commitments, excluding
periodic interest payments, as of December 31, 2008:
- 37
-
Payment
due by period (in thousands)
|
||||||||||||||||||||
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1-3
years
|
4-5
years
|
Thereafter
|
|||||||||||||||
Long-term
debt obligations(1)
|
$ | 3,672,300 | $ | 49,300 | $ | 18,000 | $ | 3,053,080 | $ | 551,920 | ||||||||||
Minimum
lease payments
|
7,426 | 707 | 1,466 | 1,466 | 3,787 | |||||||||||||||
Purchase
commitments related to capital expenditures
|
||||||||||||||||||||
associated
with tenant improvements and
|
||||||||||||||||||||
repositioning
and other purchase obligations
|
1,153 | 1,153 | - | - | - | |||||||||||||||
Total
|
$ | 3,680,879 | $ | 51,160 | $ | 19,466 | $ | 3,054,546 | $ | 555,707 |
(1)
|
Includes
$18 million of debt carried by the Honolulu Club joint venture in which we
held a 66.7% interest and $365 million of debt carried by Fund X in which
we held a 50% interest of the common
equity.
|
Off-Balance
Sheet Arrangements
At
December 31, 2008, we did not have any off balance sheet financing
arrangements.
Cash
Flows
Cash and
cash equivalents were $8.7 million and $5.8 million, respectively, at December
31, 2008 and 2007.
Net cash
provided by operating activities increased $28.0 million to $182.8 million
for 2008 compared to $154.8 million for 2007. 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 increased $511.8 million to $684.6 million for
2008 compared to $172.8 million for 2007. The increase was primarily
due to a higher level of spending on property acquisitions in the 2008 period
compared to the 2007 period.
Net cash
provided by financing activities increased $485.3 million to $504.6 million for
2008 compared to $19.3 million for 2007. The comparative difference was
primarily due to the increased level of borrowings associated with property
acquisitions in 2008 as compared to the use of funds primarily for equity
repurchases in 2007.
- 38
-
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 No. 133, Accounting for
Derivative Instruments and Hedging Activities (FAS 133), as amended and
interpreted. 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 8 to our
consolidated financial statements contained in this Report.
As
of December 31, 2008, approximately 98% (or $3.61 billion) of our total
outstanding debt of $3.67 billion, excluding loan premiums, was subject to
floating interest rates which were effectively fixed by virtue of interest rate
contracts. The remaining $67.3 million, including $18 million of
debt held by a consolidated joint venture in which we own a two-thirds interest,
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, 2008, 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 $337.
As
of December 31, 2007, approximately 94% (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.
We
calculate interest sensitivity by computing the amount of floating rate debt not
mitigated by interest rate contracts by the respective change in rate. The
sensitivity analysis does not take into consideration possible changes in the
balances or fair value of our floating rate debt.
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, 2008, 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, 2008 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, 2008, 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
- 39
-
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, 2008.
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, 2008.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Securities
Authorized for Issuance Under Equity Compensation Plan
The
following table provides information as of December 31, 2008 with respect to
shares of our common stock that may be issued under our existing stock incentive
plan (in thousands, except price per option):
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
|
8,057
|
$21.26
|
7,088
|
For a
description of our 2006 Omnibus Stock Incentive Plan, please see Note 13 to our
consolidated financial statements included in this Report. We did not
have any other equity compensation plans as of December 31, 2008.
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, 2008.
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,
2008.
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, 2008.
- 40
-
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 Reports 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, 2008 and 2007
|
F-4
|
|||
Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007, for the period from October 31, 2006 through December 31,
2006, and for the period from January 1, 2006 through October 30, 2006
(Predecessor)
|
F-5
|
|||
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended December
31, 2008 and 2007, for the period from October 31, 2006 through
December 31, 2006, and for the period from January 1, 2006 through October
30, 2006 (Predecessor)
|
F-6
|
|||
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007, for the period from October 31, 2006 through December 31,
2006, and for the period from January 1, 2006 through October 30, 2006
(Predecessor)
|
F-7
|
|||
Notes
to Consolidated Financial Statements
|
F-8
|
|||
Schedule
III-Real Estate and Accumulated Depreciation as of December 31,
2008
|
F-33
|
|||
All
other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or notes thereto.
|
(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 LTIP Unit Award Agreement. (4)
+
|
10.12
|
$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)
|
10.13
|
$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)
|
10.14
|
$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)
|
10.15
|
$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)
|
10.16
|
$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)
|
- 41 -
10.17
|
$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)
|
10.18
|
$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)
|
10.19
|
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)
|
10.20
|
Form
of LTIP Unit Designation.
(4)
|
10.21
|
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)
|
10.22
|
Form
of Modification Agreement among Douglas Emmett 1993, LLC, Brentwood Plaza,
the lenders party thereto and Eurohypo AG, New York Branch.
(4)
|
10.23
|
Form
of Modification Agreement among Douglas Emmett 1995, LLC, the lenders
party thereto and Eurohypo AG, New York Branch.
(4)
|
10.24
|
Form
of Modification Agreement among Douglas Emmett 1996, LLC, the lenders
party thereto and Eurohypo AG, New York Branch.
(4)
|
10.25
|
Form
of Modification Agreement among Douglas Emmett 1997, LLC, Westwood Place
Investors, LLC, the lenders party thereto and Eurohypo AG, New York
Branch.
(4)
|
10.26
|
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)
|
10.27
|
Form
of Modification Agreement among Douglas Emmett 2000, LLC, the lenders
party thereto and Eurohypo AG, New York Branch.
(4)
|
10.28
|
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)
|
10.29
|
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)
|
10.30
|
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)
|
10.31
|
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)
|
10.32
|
Adjustable
Rate Multifamily Note for $7,750,000 between Fannie Mae and Douglas Emmett
Residential 2006, LLC, dated June 1, 2007.
(7)
|
10.33
|
Adjustable
Rate Multifamily Note for $7,150,000 between Fannie Mae and Douglas Emmett
Residential 2006, LLC, dated June 1, 2007.
(7)
|
10.34
|
Adjustable
Rate Multifamily Note for $3,100,000 between Fannie Mae and Douglas Emmett
Residential 2006, LLC, dated June 1, 2007.
(7)
|
10.35
|
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.
(12)
|
10.36
|
$18,000,000
Loan Agreement dated as of February 12, 2008 among DEG III, LLC and Wells
Fargo Bank, National Association.
(9)
|
10.37
|
$340,000,000
Loan Agreement dated as of March 18, 2008 among Douglas Emmett 2007, LLC;
Douglas Emmett Realty Fund 2002; Douglas Emmett 1995, LLC; the lenders
party thereto, EuroHypo AG and ING Real Estate (USA), LLC.
(9)
|
10.38
|
$380,000,000
Loan Agreement dated as of March 26, 2008 among Douglas Emmett 2008, LLC;
the lenders party thereto and General Electric Capital Corporation.
(9)
|
10.39
|
Employment
agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas
Emmett Properties, LP and Jordan L. Kaplan.
(10) +
|
10.40
|
Employment
agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas
Emmett Properties, LP and Kenneth Panzer.
(10) +
|
10.41
|
Employment
agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas
Emmett Properties, LP and William Kamer.
(10) +
|
10.42
|
$365,000,000
Loan Agreement dated as of August 18, 2008 among Douglas Emmett 2008, LLC,
the lenders party thereto and EuroHypo AG.
(11)
|
21.1
|
List
of Subsidiaries of the Registrant.
|
23.1
|
Consent
of Independent Registered Public Accounting
Firm.
|
- 42 -
31.1
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Certificate
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(5)
|
32.2
|
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 Form S-8 filed by the Registrant on December 21,
2007 and incorporated herein by this reference.
|
|
(9)
|
Previously
filed with the Quarterly Report on Form 10-Q for the quarter ended March
31, 2008 filed by the Registrant on May 8, 2008 and incorporated herein by
this reference.
|
|
(10)
|
Copy
originally filed with Amendment No. 3 to the Form S-11 filed by the
Registrant on October 3, 2006; re-filed with the Quarterly Report on Form
10-Q for the quarter ended June 30, 2008 filed on August 7, 2008 to
include conformed signatures.
|
|
(11)
|
Previously
filed with the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 filed by the Registrant on November 6, 2008 and
incorporated herein by this reference.
|
(12)
|
Previously
filed with the Annual Report on Form 10-K for the fiscal year eneded
Deember 31, 2007 filed by Registrant on February 22, 2008 and incorporated
herein by this reference.
|
- 43 -
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 25, 2009
|
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,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
/s/
WILLIAM KAMER
|
|
William
Kamer
|
Chief
Financial Officer
(Principal
Financial Officer)
|
/s/
GREGORY R. HAMBLY
|
|
Gregory
R. Hambly
|
Chief
Accounting Officer
(Principal
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 25, 2009.
- 44 -
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 United States
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, 2008. 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, 2008, 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, 2008, 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 an unqualified opinion on the
effectiveness of our internal control over financial reporting as of
December 31, 2008.
/s/
JORDAN L. KAPLAN
|
|
Jordan
L. Kaplan
Chief
Executive Officer
|
|
/s/
WILLIAM KAMER
|
|
William
Kamer
Chief
Financial Officer
|
February
25, 2009
F-1
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, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for the years ended December 31, 2008 and 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. Our audits also included the financial statement schedule
listed in the Index at 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, 2008 and 2007, and the consolidated results of its
operations and its cash flows for the years ended December 31 2008, and 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, 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, 2008, 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 24,
2009 expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
|
|
Los
Angeles, California
February
24, 2009
|
F-2
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, 2008, 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, 2008, based
on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of
Douglas Emmett, Inc. as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for the years ended December 31, 2008 and 2007, and for the period from
October 31, 2006 to December 31, 2006, and of Douglas Emmett Realty Advisors,
Inc. and subsidiaries for the period from January 1, 2006 to October 30, 2006,
and our report dated February 24, 2009 expressed an unqualified opinion
thereon.
/s/
Ernst & Young LLP
|
|
Los
Angeles, California
February
24, 2009
|
F-3
Douglas
Emmett, Inc.
Consolidated
Balance Sheets
(in
thousands, except share data)
December
31, 2008
|
December
31, 2007
|
|||||||
Assets
|
||||||||
Investment
in real estate
|
||||||||
Land
|
$ | 900,213 | $ | 825,560 | ||||
Buildings
and improvements
|
5,528,567 | 4,978,124 | ||||||
Tenant
improvements and lease intangibles
|
552,536 | 460,486 | ||||||
6,981,316 | 6,264,170 | |||||||
Less:
accumulated depreciation
|
(490,125 | ) | (242,114 | ) | ||||
Net
investment in real estate
|
6,491,191 | 6,022,056 | ||||||
Cash
and cash equivalents
|
8,655 | 5,843 | ||||||
Tenant
receivables, net
|
2,197 | 955 | ||||||
Deferred
rent receivables, net
|
33,039 | 20,805 | ||||||
Interest
rate contracts
|
176,255 | 84,600 | ||||||
Acquired
lease intangible assets, net
|
18,163 | 24,313 | ||||||
Other
assets
|
31,304 | 31,396 | ||||||
Total
assets
|
$ | 6,760,804 | $ | 6,189,968 | ||||
Liabilities
|
||||||||
Secured
notes payables, including loan premium
|
3,692,785 | 3,105,677 | ||||||
Accounts
payable and accrued expenses
|
69,215 | 62,704 | ||||||
Security
deposits
|
35,890 | 31,309 | ||||||
Acquired
lease intangible liabilities, net
|
195,036 | 218,371 | ||||||
Interest
rate contracts
|
407,492 | 129,083 | ||||||
Dividends
payable
|
22,856 | 19,221 | ||||||
Other
liabilities
|
57,316 | - | ||||||
Total
liabilities
|
4,480,590 | 3,566,365 | ||||||
Minority
interests
|
505,025 | 793,764 | ||||||
Stockholders'
Equity
|
||||||||
Common
stock, $0.01 par value 750,000,000 authorized, 121,897,388
and
|
||||||||
109,833,903
outstanding at December 31, 2008 and 2007, respectively
|
1,219 | 1,098 | ||||||
Additional
paid-in capital
|
2,284,429 | 2,019,716 | ||||||
Accumulated
other comprehensive income
|
(274,111 | ) | (101,163 | ) | ||||
Accumulated
deficit
|
(236,348 | ) | (89,812 | ) | ||||
Total
stockholders' equity
|
1,775,189 | 1,829,839 | ||||||
Total
liabilities and stockholders' equity
|
$ | 6,760,804 | $ | 6,189,968 |
See
notes to consolidated financial statements.
F-4
Douglas
Emmett, Inc.
Consolidated
Statements of Operations
(in
thousands, except shares and per share data)
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ending
December
31,
2008
|
Year
Ending
December
31,
2007
|
October
31,
2006
to
December
31,
2006
|
January
1, 2006
to
October
30, 2006
|
|||||||||||||
Revenues
|
||||||||||||||||
Office
rental
|
||||||||||||||||
Rental
revenues
|
$ | 433,487 | $ | 376,921 | $ | 62,384 | $ | 252,694 | ||||||||
Tenant
revenues
|
32,392 | 30,269 | 5,436 | 15,206 | ||||||||||||
Parking
and other income
|
71,498 | 61,379 | 9,746 | 33,039 | ||||||||||||
Total
office revenues
|
537,377 | 468,569 | 77,566 | 300,939 | ||||||||||||
Multifamily
rental
|
||||||||||||||||
Rental
revenues
|
66,510 | 67,427 | 10,954 | 44,241 | ||||||||||||
Parking
and other income
|
4,207 | 3,632 | 420 | 1,488 | ||||||||||||
Total
multifamily revenues
|
70,717 | 71,059 | 11,374 | 45,729 | ||||||||||||
Total
revenues
|
608,094 | 539,628 | 88,940 | 346,668 | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Office
expense
|
166,124 | 148,582 | 26,375 | 104,524 | ||||||||||||
Multifamily
expense
|
17,079 | 18,735 | 3,260 | 15,041 | ||||||||||||
General
and administrative
|
22,646 | 21,486 | 30,201 | 17,863 | ||||||||||||
Depreciation
and amortization
|
248,011 | 209,593 | 32,521 | 95,456 | ||||||||||||
Total
operating expenses
|
453,860 | 398,396 | 92,357 | 232,884 | ||||||||||||
Operating
income (loss)
|
154,234 | 141,232 | (3,417 | ) | 113,784 | |||||||||||
Gain
on investments in interest contracts, net
|
- | - | - | 6,795 | ||||||||||||
Interest
and other income
|
3,580 | 695 | 87 | 4,515 | ||||||||||||
Interest
expense
|
(193,727 | ) | (160,616 | ) | (26,213 | ) | (95,938 | ) | ||||||||
Deficit
distributions to minority partners, net
|
- | - | - | (10,642 | ) | |||||||||||
(Loss)
income before minority interest
|
(35,913 | ) | (18,689 | ) | (29,543 | ) | 18,514 | |||||||||
Minority
Interests
|
||||||||||||||||
Minority
interests
|
7,920 | 5,681 | 8,952 | (18,673 | ) | |||||||||||
Preferred
minority investor
|
- | - | - | (16,203 | ) | |||||||||||
Net
loss
|
$ | (27,993 | ) | $ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) | ||||
Net
loss per common share - basic and diluted
|
$ | (0.23 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) | ||||
Dividends
declared per common share
|
$ | 0.75 | $ | 0.70 | $ | 0.12 | $ | - | ||||||||
Weighted
average shares of common stock outstanding
|
||||||||||||||||
-
basic and diluted
|
120,725,928 | 112,645,587 | 115,005,860 | 65 |
See notes to consolidated financial statements
F-5
Douglas Emmett, Inc.
Consolidated
Statements of Stockholders’ Equity (Deficit)
(in
thousands, except share amounts)
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ending
December
31,
2008
|
Year
Ending
December
31,
2007
|
October
31, 2006
to
December
31, 2006
|
January
1, 2006
to
October
30, 2006
|
|||||||||||||
Shares
of Common Stock
|
||||||||||||||||
Balance
at beginning of period
|
109,833,903 | 115,005,860 | 65 | 65 | ||||||||||||
Exchange
of predecessor common stock for common stock of the
company
|
- | - | (65 | ) | - | |||||||||||
Repurchase
of common stock
|
- | (5,171,957 | ) | - | - | |||||||||||
Conversion
of operating partnership units to common stock
|
12,032,532 | - | - | - | ||||||||||||
Issuance
of common stock
|
30,953 | - | 115,005,860 | - | ||||||||||||
Balance
at end of period
|
121,897,388 | 109,833,903 | 115,005,860 | 65 | ||||||||||||
Common
Stock
|
||||||||||||||||
Balance
at beginning of period
|
$ | 1,098 | $ | 1,150 | $ | - | $ | - | ||||||||
Repurchase
of common stock
|
- | (52 | ) | - | - | |||||||||||
Conversion
of operating partnership units to common stock
|
120 | - | - | - | ||||||||||||
Issuance
of common stock
|
1 | - | 1,150 | - | ||||||||||||
Balance
at end of period
|
$ | 1,219 | $ | 1,098 | $ | 1,150 | $ | - | ||||||||
Additional
Paid-in Capital
|
||||||||||||||||
Balance
at beginning of period
|
$ | 2,019,716 | $ | 2,144,600 | $ | 60,000 | $ | - | ||||||||
Reclassify
predecessor deficit to additional paid-in capital
|
- | - | (129,086 | ) | - | |||||||||||
Contributions
|
- | - | - | 60,000 | ||||||||||||
Repurchase
of common stock
|
- | (125,133 | ) | - | - | |||||||||||
Conversion
of operating partnership units to common stock
|
261,572 | - | - | - | ||||||||||||
Issuance
of common stock
|
667 | - | 2,202,040 | - | ||||||||||||
Stock
compensation
|
2,474 | 249 | 11,646 | - | ||||||||||||
Balance
at end of period
|
$ | 2,284,429 | $ | 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
|
$ | (101,163 | ) | $ | 415 | $ | - | $ | - | |||||||
Cash
flow hedge adjustment
|
(172,948 | ) | (101,578 | ) | 415 | - | ||||||||||
Balance
at end of period
|
$ | (274,111 | ) | $ | (101,163 | ) | $ | 415 | $ | - | ||||||
Accumulated
Deficit
|
||||||||||||||||
Balance
at beginning of period
|
$ | (89,812 | ) | $ | (34,392 | ) | $ | (129,086 | ) | $ | (97,791 | ) | ||||
Reclassify
predecessor deficit to additional paid-in capital
|
- | - | 129,086 | - | ||||||||||||
Net
loss
|
(27,993 | ) | (13,008 | ) | (20,591 | ) | (16,362 | ) | ||||||||
Distributions
|
- | - | - | (14,933 | ) | |||||||||||
Minority
interests redemption adjustment
|
(27,377 | ) | 36,138 | - | - | |||||||||||
Dividends
|
(91,166 | ) | (78,550 | ) | (13,801 | ) | - | |||||||||
Balance
at end of period
|
$ | (236,348 | ) | $ | (89,812 | ) | $ | (34,392 | ) | $ | (129,086 | ) | ||||
Total
Stockholders' Equity (Deficit)
|
||||||||||||||||
Balance
at beginning of period
|
$ | 1,829,839 | $ | 2,111,773 | $ | (69,086 | ) | $ | (97,791 | ) | ||||||
Net
loss
|
(27,993 | ) | (13,008 | ) | (20,591 | ) | (16,362 | ) | ||||||||
Cash
flow hedge adjustment
|
(172,948 | ) | (101,578 | ) | 415 | - | ||||||||||
Comprehensive
income
|
(200,941 | ) | (114,586 | ) | (20,176 | ) | (16,362 | ) | ||||||||
Issuance
of common stock
|
668 | - | 2,203,190 | - | ||||||||||||
Repurchase
of common stock
|
- | (125,185 | ) | - | - | |||||||||||
Contributions
|
- | - | - | 60,000 | ||||||||||||
Distributions
|
- | - | - | (14,933 | ) | |||||||||||
Dividends
|
(91,166 | ) | (78,550 | ) | (13,801 | ) | - | |||||||||
Conversion
of operating partnership units to common stock
|
261,692 | - | - | - | ||||||||||||
Minority
interests redemption adjustment
|
(27,377 | ) | 36,138 | - | - | |||||||||||
Stock
compensation
|
2,474 | 249 | 11,646 | - | ||||||||||||
Balance
at end of period
|
$ | 1,775,189 | $ | 1,829,839 | $ | 2,111,773 | $ | (69,086 | ) |
See notes to consolidated financial statements.
F-6
Douglas
Emmett, Inc.
Consolidated
Statements of Cash Flows
(in
thousands)
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ending
December
31,
2008
|
Year
Ending
December
31,
2007
|
October
31, 2006
to
December
31, 2006
|
January
1, 2006
to
October
30, 2006
|
|||||||||||||
Operating
Activities
|
||||||||||||||||
Net
loss
|
$ | (27,993 | ) | $ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) | ||||
Adjustments
to reconcile net loss to net cash provided by
|
||||||||||||||||
operating
activities:
|
||||||||||||||||
Minority
interests
|
(7,920 | ) | (5,681 | ) | (8,952 | ) | 34,876 | |||||||||
Deficit
distributions to minority partners
|
- | - | - | 10,642 | ||||||||||||
Non-cash
profit allocation to consolidated fund
|
(431 | ) | - | - | - | |||||||||||
Depreciation
and amortization
|
248,011 | 209,593 | 32,521 | 95,456 | ||||||||||||
Net
accretion of acquired lease intangibles
|
(42,905 | ) | (40,563 | ) | (6,871 | ) | (1,561 | ) | ||||||||
Amortization
of deferred loan costs
|
2,083 | 1,136 | 168 | 2,318 | ||||||||||||
Amortization
of loan premium
|
(4,742 | ) | (4,475 | ) | (721 | ) | - | |||||||||
Non-cash
market value adjustments on interest rate
|
||||||||||||||||
contracts
|
13,805 | 14,266 | 2,561 | (6,795 | ) | |||||||||||
Non-cash
amortization of stock-based compensation
|
4,400 | 2,178 | 26,600 | - | ||||||||||||
Change
in working capital components
|
||||||||||||||||
Tenant
receivables
|
(1,242 | ) | 3,229 | - | 1,065 | |||||||||||
Deferred
rent receivables
|
(12,234 | ) | (17,218 | ) | (3,587 | ) | (6,489 | ) | ||||||||
Accounts
payable, accrued expenses and security
|
||||||||||||||||
deposits
|
4,586 | 15,211 | 19,509 | 22,227 | ||||||||||||
Other
|
7,413 | (9,863 | ) | (19,642 | ) | (9,752 | ) | |||||||||
Net
cash provided by operating activities
|
182,831 | 154,805 | 20,995 | 125,625 | ||||||||||||
Investing
Activities
|
||||||||||||||||
Capital
expenditures, property acquisitions and purchases
|
||||||||||||||||
of
predecessor owners' interests in real estate
|
(684,623 | ) | (172,804 | ) | (1,935,476 | ) | (165,970 | ) | ||||||||
Net
cash used in investing activities
|
(684,623 | ) | (172,804 | ) | (1,935,476 | ) | (165,970 | ) | ||||||||
Financing
Activities
|
||||||||||||||||
Proceeds
from borrowings
|
1,563,275 | 404,850 | 596,000 | 82,000 | ||||||||||||
Deferred
loan costs
|
(6,810 | ) | (1,767 | ) | (4,524 | ) | (1,253 | ) | ||||||||
Repayment
of borrowings
|
(946,400 | ) | (124,700 | ) | (141,500 | ) | - | |||||||||
Net
change in short-term borrowings
|
(25,025 | ) | 40,300 | - | - | |||||||||||
Contributions
by minority interests
|
58,065 | - | - | 33,264 | ||||||||||||
Distributions
to minority interests
|
(27,880 | ) | (31,851 | ) | - | (67,292 | ) | |||||||||
Redemption
of minority interests
|
(23,758 | ) | (69,211 | ) | (188,128 | ) | - | |||||||||
Contributions
to stockholders
|
- | - | - | 60,000 | ||||||||||||
Distributions
to stockholders
|
- | - | - | (14,933 | ) | |||||||||||
Issuance
of common stock, net
|
668 | - | 1,497,446 | - | ||||||||||||
Repurchase
of common stock
|
- | (125,185 | ) | - | - | |||||||||||
Cash
dividends
|
(87,531 | ) | (73,130 | ) | - | - | ||||||||||
Net
cash provided by financing activities
|
504,604 | 19,306 | 1,759,294 | 91,786 | ||||||||||||
Increase
(decrease) in cash and cash equivalents
|
2,812 | 1,307 | (155,187 | ) | 51,441 | |||||||||||
Cash
and cash equivalents at beginning of period
|
5,843 | 4,536 | 159,723 | 108,282 | ||||||||||||
Cash
and cash equivalents at end of period
|
$ | 8,655 | $ | 5,843 | $ | 4,536 | $ | 159,723 | ||||||||
Supplemental
disclosure of cash flow information
|
||||||||||||||||
|
||||||||||||||||
Cash
paid during the period for interest, net of amounts
capitalized
|
$ | 172,686 | $ | 152,746 | $ | 23,849 | $ | 97,928 |
See
notes to consolidated financial statements for additional non-cash
items.
F-7
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 IPO/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, 2008, we own a portfolio of 55 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.
F-8
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 30, 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. Substantially all of our business is
conducted through our consolidated operating partnership, in which other
investors own a minority interest. See Note 11. Our
business also includes a consolidated joint venture in which our operating
partnership owns a two-thirds interest. The balances and results of
the property owned by this consolidated joint venture are included in our
financial statements, with a deduction representing the outside ownership
included in minority interests. Our business also includes the
consolidated results of six properties owned by Fund X, with the outside
ownership reflected in other liabilities and an adjustment for the allocation of
operating results to outside ownership interests in interest and other
income. See Note 19. All significant intercompany balances
and transactions have been eliminated in the consolidated financial
statements.
Approximately
$15.2 million and $1.9 million, for the year ended December 31, 2007 and for the
period from October 31, 2006 to December 31, 2006, respectively, of office and
multifamily parking revenue has been reclassified to office and multifamily
expense to conform to current period presentation in accordance with EITF
Issue No. 99-19: Reporting Revenue Gross as a Principal Versus
Net as an Agent and EITF Issue No. 01-14: Income Statement
characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred. Revenues in the unaudited financial information in Note
18 have also reflected the impact of this reclassification. The
change reflects our parking operations on a gross basis based on the terms of
our management contract with an outside vendor for parking
services. The change has no impact on previously reported operating
income or net income.
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
Statement
of Financial Accounting Standards (FAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information (FAS 131), 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.
F-9
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
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.
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 improvements 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
tenant-portfolio average term, per building, 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 impairments occurred for the years ended December
31, 2008, 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.
F-10
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
$423 for the year ended December 31, 2008; $332 for the year ended December 31,
2007; $38 for the period of October 31, 2006 to December 31, 2006; and
$365 for the period of January 1, 2006 to October 30,
2006.
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, profit-sharing or leasing
method. If the sales criteria have been met, we further analyze
whether profit recognition is appropriate using the full accrual
method. If the criteria to recognize profit using the full accrual
method have not been met, we defer the gain and recognize it when the criteria
are met or use the installment or cost recovery method as appropriate under the
circumstances.
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 take into
consideration many factors to evaluate the level of reserves necessary,
including historical termination/default activity and current economic
conditions. As of December 31, 2008 and 2007, we had an allowance for
doubtful accounts of $9,740 and $4,136, 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, 2008 and 2007,
we had a total of approximately $20,660 and $21,794, respectively, of lease
security available on existing letters of credit, as well as $35,890 and
$31,309, 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,
2008 and 2007. 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.
F-11
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. The interest rate swap
agreements we utilize effectively modify our exposure to interest rate risk by
converting our floating-rate debt to a fixed-rate basis, thus reducing the
impact of interest-rate changes on future interest expense. These
agreements involve the receipt of floating-rate amounts in exchange for
fixed-rate interest payments over the life of the agreements without an exchange
of the underlying principal amount. We do not use any other derivative
instruments.
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. The fair value of these hedges is obtained through
independent third-party valuation sources that use conventional valuation
algorithms. See Note 8 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 plan units, 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 2008 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.
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 12.
F-12
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Recently
Issued Accounting Literature
In
February 2007, the Financial Accounting Standards Board (FASB) issued FAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 (FAS 159). 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 meant January 1, 2008. The adoption of FAS 159 did
not have a material impact on the Company’s consolidated financial statements
since the Company has not elected to apply the fair value option for any of its
eligible financial instruments or other items.
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
means January 1, 2009. We believe that the adoption of this standard
will not have a material effect on our financial position and results of
operations, other than presentation differences.
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
will require that transaction costs such as legal, accounting and advisory fees
be expensed. 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 means January 1, 2009. We believe that the
adoption of this standard will not have a material effect on our financial
position and results of operations.
On
January 1, 2008, we adopted FAS No. 157, Fair Value Measurements (FAS
157). FAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. FAS 157 applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances. FAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability.
In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (FAS 161), an amendment of
FAS 133, to expand disclosure requirements for an entity's derivative and
hedging activities. Under FAS 161, entities are required to
provide enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FAS 133 and its related interpretations, and how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. In order to meet these
requirements, entities shall include quantitative disclosures about derivative
fair values and gains/losses on derivative instruments, qualitative disclosures
about objectives and strategies for using derivatives, and disclosures about
credit-risk-related contingent features in derivative agreements. FAS 161
is effective for fiscal years and interim periods beginning after
November 15, 2008. We adopted FAS 161 on January 1,
2009 and do not expect this standard to have a significant impact as this
statement only addresses disclosures.
F-13
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
3.
Investment in Real Estate
In March 2008, we acquired a 1.4
million square foot office portfolio consisting of six Class A buildings all
located in our core Los Angeles submarkets – Santa Monica, Beverly Hills,
Sherman Oaks/Encino and Warner Center/Woodland Hills – for a contract price of
approximately $610 million. Subsequent to acquiring the properties,
we entered into a non-recourse $365 million term loan secured by the
six-property portfolio. In October 2008, we completed the initial
closing of equity commitments for our newly formed institutional fund, Douglas
Emmett Fund X, LLC (Fund X). We then contributed these six properties
to Fund X in return for a 50% interest in the common equity of Fund X and other
consideration. See Note 6 for a description of the debt and Note 19
for further information on Fund X.
In
February 2008, we acquired a two-thirds interest in a 78,298 square-foot office
building located in Honolulu, Hawaii. As part of the same
transaction, we also acquired all of the assets of The Honolulu Club, a private
membership athletic and social club, which is located in the
building. The aggregate contract price was approximately $18 million
and the purchase was made through a consolidated joint venture with our local
partner. The joint venture financed the acquisition with an $18
million loan. See Note 6 for a description of the debt. In
May 2008, the operations of the athletic club were sold to a third party for a
nominal cost. Simultaneously, the acquirer leased from us the space
occupied by the athletic club. The results of operations and loss on
sale of the assets of the athletic club were not material.
In
December 2008, we acquired the five-sixths that we did not already own of the
fee title to the land underlying one of our existing office properties in the
Westwood submarket, for a fixed contract price of $7.8 million. With
the completion of this acquisition, we now own 100% of the fee interest and 100%
of the leasehold interest.
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 one of our core Los Angeles submarkets, Century City, 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 in
conjunction with the acquisition. We exercised the option and acquired fee title
to the land at the end of 2007.
The
results of operations for each of the acquired properties are included in our
consolidated statements of operations only from the date of each
acquisition. The following table summarizes the allocations of
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition. The amounts shown for 2008 acquisitions represent our
preliminary purchase price allocations. These amounts are likely to
change based on a more thorough calculation to be performed during the one-year
purchase accounting period provided under the relevant accounting
standards.
The
following table summarizes the allocations of estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition:
2008
Acquisitions
|
2007
Acquisitions
|
|||||||
Investment
in real estate:
|
||||||||
Land
|
$ | 74,685 | $ | 11,962 | ||||
Buildings
and improvements
|
528,179 | 102,449 | ||||||
Tenant
improvements and other in-place lease assets
|
50,978 | 7,283 | ||||||
Tenant
receivables and other assets
|
2,486 | 24 | ||||||
Accounts
payable, accrued expenses and tenant security deposits
|
(6,193 | ) | (700 | ) | ||||
Acquired
lease intangibles
|
(25,720 | ) | (5,109 | ) | ||||
Net
acquisition costs
|
$ | 624,415 | $ | 115,909 |
F-14
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Our
acquired lease intangibles related to above/below-market leases is summarized as
of December 31:
2008
|
2007
|
|||||||
Above-market
tenant leases
|
$ | 34,227 | $ | 32,770 | ||||
Accumulated
amortization
|
(19,094 | ) | (11,564 | ) | ||||
Below-market
ground leases
|
3,198 | 3,198 | ||||||
Accumulated
amortization
|
(168 | ) | (91 | ) | ||||
Acquired
lease intangible assets, net
|
$ | 18,163 | $ | 24,313 | ||||
Below-market
tenant leases
|
288,437 | 261,260 | ||||||
Accumulated
accretion
|
(106,950 | ) | (57,112 | ) | ||||
Above-market
ground leases
|
16,200 | 16,200 | ||||||
Accumulated
accretion
|
(2,651 | ) | (1,977 | ) | ||||
Acquired
lease intangible liabilities, net
|
$ | 195,036 | $ | 218,371 |
Net
accretion of above- and below-market in-place tenant lease value was recorded as
an increase to rental income in the amount of $42,308 for the year ended
December 31, 2008; $39,011 for the year ended December 31, 2007; $6,536 for the
period of October 31, 2006 to December 31, 2006; and $1,009 for the
period of January 1, 2006 to October 30, 2006. The weighted-average
amortization period for our above and below market tenant leases was
approximately 4 years as of December 31, 2008.
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 $597 for the year
ended December 31, 2008; $1,552 for the year ended December 31, 2007; $335 for
the period of October 31, 2006 to December 31, 2006; and $552 for the
period of January 1, 2006 to October 30, 2006.
Following
is the estimated net accretion at December 31, 2008 for the next five
years:
Year
|
||||
2009
|
$
|
36,361
|
||
2010
|
29,148
|
|||
2011
|
24,117
|
|||
2012
|
19,833
|
|||
2013
|
16,635
|
|||
Thereafter
|
50,779
|
|||
Total
|
$
|
176,873
|
F-15
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
4.
Other Assets
Other
assets consist of the following at December 31:
2008
|
2007
|
||||||||
Deferred
loan costs, net of accumulated amortization of $3,336 and
$1,304
at
December 31, 2008 and 2007, respectively
|
$ | 9,714 | $ | 4,987 | |||||
Deposits
in escrow
|
- | 4,000 | |||||||
Restricted
cash
|
2,934 | 2,848 | |||||||
Prepaid
interest
|
4,360 | 7,944 | |||||||
Prepaid
expenses
|
3,845 | 3,095 | |||||||
Interest
receivable
|
5,938 | 3,229 | |||||||
Other
indefinite-lived intangible
|
1,988 | 1,988 | |||||||
Other
|
2,525 | 3,305 | |||||||
$ | 31,304 | $ | 31,396 |
We and
our predecessor incurred deferred loan cost amortization expense of $2,083 for
the year ended December 31, 2008; $1,136 for the year ended December 31, 2007,
$168 for the period of October 31, 2006 to December 31, 2006; and $2,318 for the
period of January 1, 2006 to October 30, 2006. The deferred loan cost
amortization is included as a component of interest expense in the consolidated
statements of operations.
F-16
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
5.
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 $871 for the year ended December 31, 2008; $1,138 for the year
ended December 31, 2007; $133 for the period of October 31, 2006 to December 31,
2006; and $913 for the period of January 1, 2006 to October 30,
2006.
Future
minimum base rentals on noncancelable office and ground operating leases at
December 31, 2008 are as follows:
2009
|
$ | 386,361 | ||
2010
|
338,985 | |||
2011
|
287,757 | |||
2012
|
235,887 | |||
2013
|
179,704 | |||
Thereafter
|
459,603 | |||
Total
future minimum base rentals
|
$ | 1,888,297 |
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.
6.
Secured Notes Payable
In August
2008, we obtained a non-recourse $365 million term loan secured by the
six-property portfolio that we acquired in March 2008 as described in Note
3. This loan bears interest at a floating rate equal to one-month
LIBOR plus 165 basis points, however we have entered into interest rate swap
contracts that effectively fix the interest at 5.515% (based on an
actual/360-day basis) until September 4, 2012. This loan facility
matures on August 18, 2013. This long-term loan replaces the $380
million bridge loan obtained in March 2008 in connection with the property
acquisition. In October 2008, this loan and the related properties
that serve as collateral were contributed to a newly formed institutional fund
as described in Note 19.
In March
2008, we obtained a non-recourse $340 million term loan secured by four of
our previously unencumbered office properties. This loan bears
interest at a floating rate equal to one-month LIBOR plus 150 basis points,
however we have entered into interest rate swap contracts that effectively fix
the interest rate at 4.77% (based on an actual/360-day basis) until January 2,
2013. This loan facility matures on April 1,
2015. Proceeds from this loan were utilized to repay our secured
revolving credit facility and for general corporate purposes.
In
February 2008, the joint venture which owns the Honolulu Club, in which we have
a two-thirds interest, obtained an $18 million loan that financed the February
2008 acquisition described in Note 3. This loan has an interest rate
of one-month LIBOR plus 125 basis points and a two-year term with a one-year
extension.
F-17
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:
Type
of Debt
|
Maturity
Date
|
December
31,
2008
|
December
31, 2007
|
Variable
Rate
|
Effective
Annual
Interest
Rate
(1)
|
Swap
Maturity Date
|
||||||||
Variable
Rate Swapped to Fixed Rate:
|
||||||||||||||
Fannie
Mae loan I (2)
|
6/1/2012
|
$
|
293,000
|
$
|
293,000
|
DMBS
+ 0.60%
|
4.70%
|
|
08/01/11
|
|||||
Fannie
Mae loan II (2)
|
6/1/2012
|
95,080
|
95,080
|
DMBS
+ 0.60%
|
5.78
|
08/01/11
|
||||||||
Modified
Term Loan I (3)(4)
|
8/31/2012
|
2,300,000
|
2,300,000
|
LIBOR
+ 0.85%
|
5.13
|
08/01/10-08/01/12
|
||||||||
Term
Loan II (5)(6)
|
8/18/2013
|
365,000
|
-
|
LIBOR
+1.65%
|
5.52
|
09/04/12
|
||||||||
Fannie
Mae loan III (2)
|
2/1/2015
|
36,920
|
36,920
|
DMBS
+ 0.60%
|
5.78
|
08/01/11
|
||||||||
Fannie
Mae loan IV (2)
|
2/1/2015
|
75,000
|
75,000
|
DMBS
+ 0.76%
|
4.86
|
08/01/11
|
||||||||
Term
Loan III (7)
|
4/1/2015
|
340,000
|
-
|
LIBOR
+1.50%
|
4.77
|
01/02/13
|
||||||||
Fannie
Mae loan V (2)
|
2/1/2016
|
82,000
|
82,000
|
LIBOR
+ 0.62%
|
5.62
|
03/01/12
|
||||||||
Fannie
Mae loan VI (2)
|
6/1/2017
|
18,000
|
18,000
|
LIBOR
+ 0.62%
|
5.82
|
06/01/12
|
||||||||
Subtotal
|
|
3,605,000
|
(8)
|
2,900,000
|
5.14%
|
|
||||||||
Variable
Rate:
|
||||||||||||||
Wells
Fargo Loan (9)
|
3/1/2010
|
(10)
|
18,000
|
-
|
LIBOR
+ 1.25%
|
--
|
--
|
|||||||
$370
Million Senior Secured
|
||||||||||||||
Revolving
Credit Facility (11)
|
10/30/2009
|
(12)
|
49,300
|
180,450
|
LIBOR/Feds
Funds+
|
(13)
|
--
|
--
|
||||||
Subtotal
|
3,672,300
|
3,080,450
|
||||||||||||
Unamortized
Loan Premium (14)
|
20,485
|
25,227
|
||||||||||||
Total
|
$
|
3,692,785
|
$
|
3,105,677
|
(1)
|
Includes
the effect of interest rate contracts. Based on actual/360-day
basis and excludes amortization of loan fees and unused fees on credit
line. The total effective rate on an actual/365-day basis is
5.21% at December 31, 2008.
|
(2)
|
Secured
by four separate collateralized pools. Fannie Mae Discount
Mortgage-Backed Security (DMBS) generally tracks 90-day
LIBOR.
|
(3)
|
Secured
by seven separate collateralized pools. Requires monthly
payments of interest only, with outstanding principal due upon
maturity.
|
(4)
|
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. Each of these rates is based on actual/360-day
basis.
|
(5)
|
Secured
by six properties in a collateralized pool. Requires monthly
payments of interest only, with outstanding principal due upon
maturity.
|
(6)
|
This
loan is held by our Fund X, a consolidated entity in which our operating
partnership held one-half of the common equity.
|
(7)
|
Secured
by four properties in a collateralized pool. Requires monthly
payments of interest only, with outstanding principal due upon
maturity.
|
(8)
|
As
of December 31, 2008, the weighted average remaining life of our total
outstanding debt is 4.1 years, and the weighted average remaining life of
the interest rate swaps is 2.4 years.
|
(9)
|
This
loan is held by a consolidated entity in which our operating partnership
held a two-thirds interest. The loan has a one-year extension
option.
|
(10)
|
Represents
maturity date of March 1, 2010 which we may extend to March 1,
2011.
|
(11)
|
This
credit facility is secured by nine properties and has two one-year
extension options available.
|
(12)
|
Represents
maturity date of October 30, 2009 which we may extend to October 30,
2011.
|
(13)
|
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.
|
(14)
|
Represents
non-cash mark-to-market adjustment on variable rate debt associated with
office properties.
|
F-18
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, 2008 are as
follows:
Year
ending December 31:
|
|||
2009
|
$
|
49,300
|
|
2010
|
18,000
|
||
2011
|
-
|
||
2012
|
2,688,080
|
||
2013
|
365,000
|
||
Thereafter
|
551,920
|
||
Total
future principal
|
$
|
3,672,300
|
Senior
Secured Revolving Credit Facility
We have a
$370 million revolving credit facility with a group of banks led by Bank of
America, N.A. and Banc of America Securities, LLC. It 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. However, if the amount outstanding is greater than $262.5
million, the credit facility bears interest at a rate per annum equal to either
LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis
points. 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 during the fourth quarter of 2009, with two one-year extensions
at our option.
7.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of December
31:
2008
|
2007
|
||||
Accounts
payable
|
$
|
30,199
|
$
|
43,449
|
|
Accrued
interest payable
|
22,982
|
13,963
|
|||
Deferred
revenue
|
16,034
|
5,292
|
|||
$
|
69,215
|
$
|
62,704
|
F-19
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
8.
Interest Rate Contracts
As of
December 31, 2008, approximately 98% or $3.61 billion of our $3.67 billion
of outstanding debt had interest payments designated as hedged transactions to
receive-floating/pay-fixed interest rate swap agreements. 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 $172.9 million was recorded in
accumulated other comprehensive income in our consolidated balance sheet for the
year ended December 31, 2008. 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 from accumulated other comprehensive income to interest
expense, as an increase of $62.2 million to interest expense for the year
ended December 31, 2008 and a reduction of $8.8 million to interest expense
for the year ended December 31, 2007, respectively. For derivatives
designated as cash flow hedges, we estimate an additional $131.9 million
will be reclassified during 2009 from accumulated other comprehensive income to
interest expense as an increase to 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 4.04% 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 $14.2 million
and $13.2 million for the years ended December 31, 2008 and 2007,
respectively, and $2.6 million for the period of October 31, 2006 through
December 31, 2006, 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 $19.2 million and
$19.1 million of interest receipts related to swaps not designated as
hedges under FAS 133 as a reduction to interest expense for the years ended
December 31, 2008 and 2007, respectively, and $3.3 million for period of
October 31, 2006 through December 31, 2006. 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 for the period January 1, 2006 through
October 30, 2006.
Our
predecessor had $450 million of interest caps and $450 million of sold
caps. These derivatives were not designated as hedges under FAS
133. An immaterial amount related to the changes in fair value of
these caps has been recognized in earnings for all periods
presented.
9. Deficit Distributions to Minority
Partners, Net
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.
10.
Preferred Minority Investor
Prior to 2006, a minority investor
invested $184 million in two of our predecessor’s consolidated subsidiaries. In
return, the minority investor received a preferred profit participation of 8.75%
per annum on its unreturned capital contribution. The preferred 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. The minority investor’s interest was redeemed in conjunction
with our IPO and formation transactions
F-20
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
11.
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 22% at December 31,
2008. 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 IPO/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 121,897,388 shares of common stock and 34,197,712 operating
partnership units outstanding as of December 31, 2008.
Dividends
During
2008, we declared four quarterly dividends of $0.1875 per share, which equals an
annual rate of $0.75 per share. During 2007, we declared four
quarterly dividends of $0.175 per share, which equals an annual rate of $0.70
per share.
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. Our common stock dividends are classified for United
States federal income tax purposes as follows (unaudited):
Record
Date
|
Paid
Date
|
Dividend
Per Share
|
Dividend
Allocable to 2008
|
2008
Dividend Ordinary Income %
|
2008
Dividend Capital Gain %
|
2008
Return of Capital %
|
12/31/07
|
1/15/08
|
$0.1750
|
$0.1750
|
0.0%
|
0.0%
|
100.0%
|
3/31/08
|
4/15/08
|
$0.1875
|
$0.1875
|
0.0%
|
0.0%
|
100.0%
|
6/30/08
|
7/15/08
|
$0.1875
|
$0.1875
|
0.0%
|
0.0%
|
100.0%
|
9/30/08
|
10/15/08
|
$0.1875
|
$0.1875
|
0.0%
|
0.0%
|
100.0%
|
12/31/08
|
1/15/09
|
$0.1875
|
$
-
|
0.0%
|
0.0%
|
0.0%
|
Total:
|
$0.9250
|
$0.7375
|
0.0%
|
0.0%
|
100.0%
|
The
common stock dividend of $0.1750 paid on January 15, 2008, with a record date of
December 31, 2007, is allocated to 2008. The common stock dividend of
$0.1875 paid on January 15, 2009, with a record date of December 31, 2008,
is allocated to 2009.
Equity
Repurchases
During
the year ended December 31, 2008, we repurchased approximately 1.1 million
share equivalents in private transactions for a total consideration of
approximately $23.8 million. 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. Also
during 2007, we repurchased approximately 640,000 share equivalents from an
executive officer who is a member of our board of directors for $15 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.
F-21
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
12.
Loss per Share
The
following is a summary of the elements used in calculating basic and diluted
loss per share (in thousands except share and per share amounts):
Year
ended
December
31,
2008
|
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
|
|||||||||||||
Net
loss attributable to common shares
|
$ | (27,993 | ) | $ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) | ||||
Weighted
average common shares
|
||||||||||||||||
outstanding
- basic
|
120,725,928 | 112,645,587 | 115,005,860 | 65 | ||||||||||||
Potentially
dilutive common shares (1)
|
||||||||||||||||
Stock
options
|
- | - | - | - | ||||||||||||
Adjusted
weighted average common shares
|
||||||||||||||||
outstanding
- diluted
|
120,725,928 | 112,645,587 | 115,005,860 | 65 | ||||||||||||
Net
loss per share - basic and diluted
|
$ | (0.23 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) |
(1)
|
For
the years ended December 31, 2008, December 31, 2007 and for the period
October 31, 2006 through December 31, 2006, the potentially dilutive
shares were not included in the loss per share calculation as their effect
is anti-dilutive. No such potentiality dilutive shares existed prior to
our IPO.
|
F-22
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
13.
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 plan (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, we issued 1,044,000 LTIP units and 5,742,221 options
to purchase shares of our common stock to key employees. 870,000 of
the LTIP units and 5,155,556 of these options were fully vested upon grant,
while the remaining LTIP units and options vest one quarter on each of
December 31, 2007, 2008, 2009 and 2010.
During
2008, we issued 234,000 LTIP units and 2,483,000 options to purchase
shares of our common stock to key employees. One quarter of the LTIP
units and options were fully vested upon grant, while the remaining LTIP units
and options vest one third on each of December 31, 2008, 2009 and
2010.
F-23
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
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
3,430, 1,880 and 325 LTIP units as compensation for their services in 2008, 2007
and 2006, respectively, for which compensation expense was recognized in full
during the period of service.
Compensation
expense for options was recognized on a straight-line basis over the requisite
service period for the entire award, which is equal to the vesting
period. Compensation expense for LTIP units was recognized using the
accelerated recognition method. Accordingly, we recognized $4.4
million and $2.1 million of non-cash compensation expense for the years ended
December 31, 2008 and 2007, respectively, and $26.6 million of non-cash
compensation for the period of October 31, 2006 to December 31, 2006 related to
these options and LTIP units. An additional $2.2 million of
immediately-vested equity awards were granted during the first quarter of 2008
to satisfy a portion of the bonuses accrued during 2007.
We
calculated the fair value of the stock options using the Black-Scholes
option-pricing model using the following assumptions:
January
2008 Grant
|
October
2006 Grant
|
||||
Dividend
yield
|
5.7%
|
3.3%
|
|||
Expected
volatility
|
19.2%
|
12.0%
|
|||
Expected
life
|
60
months
|
52
months
|
|||
Risk
–free interest rate
|
2.8%
|
4.5%
|
|||
Fair
value of option on grant date
|
$1.89
|
$2.25
|
The
weighted average fair value of the LTIP units granted in 2008, 2007 and at our
IPO were $20.36, $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
2008, 2007 and 2006 was $3,658, $1,335 and $14,668,
respectively. Total unrecognized compensation cost related to
nonvested option and LTIP awards was $5,217 at December 31,
2008. This expense will be recognized over a weighted-average term of
22 months.
F-24
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
The
following is a summary of certain information with respect to outstanding stock
options and LTIP units granted under our stock incentive plan:
Stock
Options:
|
Number
of Stock Options (thousands)
|
Weighted
Average Exercise Price
|
Weighted
Average
Remaining
Contract
Life
(months)
|
Total
Intrinsic
Value
|
||||||||||||
Outstanding
at January 1, 2006
|
- | $ | - | |||||||||||||
Granted
|
5,742 | 21.00 | ||||||||||||||
Outstanding
at December 31, 2006
|
5,742 | 21.00 | 118 | $ | 32,099 | |||||||||||
Forfeited
|
(44 | ) | 21.00 | |||||||||||||
Outstanding
at December 31, 2007
|
5,698 | 21.00 | 106 |
$
|
9,173 | |||||||||||
Granted
|
2,483 | 21.87 | ||||||||||||||
Exercised
|
(31 | ) | 21.56 | |||||||||||||
Forfeited
|
(93 | ) | 21.56 | |||||||||||||
Outstanding
at December 31, 2008
|
8,057 | 21.26 | 98 |
$
|
- | |||||||||||
Exercisable
at December 31, 2008
|
6,606 | 21.16 | 97 | $ | - | |||||||||||
LTIP
Units:
|
Number
of
Units (thousands)
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||||||||
Outstanding
at January 1, 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 | ||||||||||||||
Granted
|
254 | 20.36 | ||||||||||||||
Vested
|
(186 | ) | 19.60 | |||||||||||||
Forfeited
|
(17 | ) | 21.02 | |||||||||||||
Outstanding
at December 31, 2008
|
200 | 21.49 |
F-25
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
14.
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, 2008
and 2007, 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. We calculate the fair value of our secured notes payable
based on a currently available market rate; assuming the loans are outstanding
through maturity and considering the collateral. At December 31,
2008, the aggregate fair value of our secured notes payable and secured
revolving credit facility is estimated to be approximately $3,578 million,
based on a credit-adjusted present value of the principal and interest payments
which are at floating rates. As of December 31, 2007, the
estimated fair value of the secured loans was approximately $3,106
million.
Currently,
we use interest rate swaps and caps to manage interest rate
risk resulting from variable interest payments on our floating rate
debt. These financial instruments are carried on our balance sheet at
fair value as determined under FAS157, based on the assumptions that market
participants would use in pricing the asset or liability. The
valuation of these instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of
each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based
inputs, including interest rate curves and implied volatilities.
As a
basis for considering market participant assumptions in fair value measurements,
FAS 157 establishes a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent
of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entity’s own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the
hierarchy). Level 1 inputs utilize quoted prices (unadjusted) in
active markets for identical assets or liabilities that we have the ability to
access. Level 2 inputs are inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for similar
assets and liabilities in active markets, as well as inputs that are observable
for the asset or liability (other than quoted prices), such as interest rates,
foreign exchange rates, and yield curves that are observable at commonly quoted
intervals.
To comply
with the provisions of FAS 157, we incorporate credit valuation adjustments to
appropriately reflect both our own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In
adjusting the fair value of our derivative contracts for the effect of
nonperformance risk, we considered the impact of netting and any applicable
credit enhancements, such as collateral postings, thresholds, mutual puts and
guarantees. We have determined that our derivative valuations in
their entirety are classified in Level 2 of the fair value
hierarchy. We do not have any fair value measurements using
significant unobservable inputs (Level 3) as of December 31, 2008.
The table
below presents the assets and liabilities measured at fair value on a recurring
basis as of December 31, 2008, aggregated by the level in the fair value
hierarchy within which those measurements fall.
Quoted Prices in
Active
Markets
for
Identical
Assets
and Liabilities (Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Balance
at
December
31,
2008
|
|||||
Assets
|
||||||||
Interest Rate
Contracts
|
$─
|
$176,255
|
$─
|
$176,255
|
||||
Liabilities
|
||||||||
Floating Rate Debt
|
─
|
3,578
|
─
|
3,578
|
||||
Interest Rate
Contracts
|
─
|
407,492
|
─
|
407,492
|
F-26
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
15.
Predecessor Related-Party Transactions
Prior to
DECO being acquired by us in the IPO/formation transactions, our predecessor had
a number of transactions during 2006 with DECO, which was then owned by the
stockholders of DERA:
·
|
Our
predecessor paid $6.4 million in real estate commissions to DECO for the
period from January 1, 2006 to October 30, 2006. 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.
|
·
|
Our
predecessor expensed $8.2 million in property management fees related
to management services by DECO for the period from January 1, 2006 to
October 30, 2006. These management fees were based upon
percentages, ranging from 1.75% to 4.00%, of the rental cash receipts
collected by the properties.
|
·
|
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, 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 IPO/formation transactions, to
provide building and tenant improvement work. For such contracting
work performed, our predecessor paid DEB $12.1 million for the period from
January 1, 2006 to October 30, 2006. 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 for the period from
January 1, 2006 to October 30, 2006.
On
March 15, 2006, DERA’s stockholders contributed $60 million to DERA in
the form of promissory notes. As part of the formation transactions
related to our IPO, these notes were paid in full.
F-27
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
16.
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 $250 under the recently increased limit that the U.S. Congress has
temporarily granted until December 31, 2009, 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 23 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, 2008,
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, our predecessor leased) portions of the land underlying three
of our office properties. For one of the three ground leases, we (and
our predecessor) owned a one-sixth interest in the fee title to the
land. At the end of the fourth quarter of 2008, we acquired the
remaining five-sixths interest in the fee title to the land. With the
completion of this acquisition, we now own 100% of the fee interest and 100% of
the leasehold interest. 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 3. 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 $3,206 for
the year ended December 31, 2008, $3,204 for the year ended December 31, 2007;
$281 for the period of October 31, 2006 to December 31, 2006; and
$3,082 for the period of January 1, 2006 to October 30,
2006.
The
following is a schedule of minimum lease payments on the remaining two ground
leases as of December 31, 2008:
2009
|
$
|
707
|
||
2010
|
733
|
|||
2011
|
733
|
|||
2012
|
733
|
|||
2013
|
733
|
|||
Thereafter
|
3,787
|
|||
$
|
7,426
|
Tenant
Concentrations
For the years ended December 31, 2008,
2007 and 2006, no tenant exceeded 10% of our total rental revenue and tenant
reimbursements.
F-28
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
17.
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, 2008
|
||||||||||||
Office
|
Multifamily
|
Total
|
||||||||||
Rental
revenues
|
$ | 537,377 | $ | 70,717 | $ | 608,094 | ||||||
Percentage
of total
|
88 | % | 12 | % | 100 | % | ||||||
Rental
expenses
|
$ | 166,124 | $ | 17,079 | $ | 183,203 | ||||||
Percentage
of total
|
91 | % | 9 | % | 100 | % | ||||||
Rental
revenues less rental expenses
|
$ | 371,253 | $ | 53,638 | $ | 424,891 | ||||||
Percentage
of total
|
87 | % | 13 | % | 100 | % | ||||||
Douglas
Emmett, Inc.
|
||||||||||||
Year
ended December 31, 2007
|
||||||||||||
Office
|
Multifamily
|
Total
|
||||||||||
Rental
revenues
|
$ | 468,569 | $ | 71,059 | $ | 539,628 | ||||||
Percentage
of total
|
87 | % | 13 | % | 100 | % | ||||||
Rental
expenses
|
$ | 148,582 | $ | 18,735 | $ | 167,317 | ||||||
Percentage
of total
|
89 | % | 11 | % | 100 | % | ||||||
Rental
revenues less rental expenses
|
$ | 319,987 | $ | 52,324 | $ | 372,311 | ||||||
Percentage
of total
|
86 | % | 14 | % | 100 | % |
F-29
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Douglas
Emmett, Inc.
|
||||||||||||
October
31, 2006 to December 31, 2006
|
||||||||||||
Office
|
Multifamily
|
Total
|
||||||||||
Rental
revenues
|
$ | 77,566 | $ | 11,374 | $ | 88,940 | ||||||
Percentage
of total
|
87 | % | 13 | % | 100 | % | ||||||
Rental
expenses
|
$ | 26,375 | $ | 3,260 | $ | 29,635 | ||||||
Percentage
of total
|
89 | % | 11 | % | 100 | % | ||||||
Rental
revenues less rental expenses
|
$ | 51,191 | $ | 8,114 | $ | 59,305 | ||||||
Percentage
of total
|
86 | % | 14 | % | 100 | % | ||||||
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
following is a reconciliation of rental revenues less rental expenses to net
loss:
Douglas
Emmett, Inc.
|
The
Predecessor
|
|||||||||||||||
Year
Ending
December
31,
2008
|
Year
Ending
December
31,
2007
|
October
31,
2006
to
December
31,
2006
|
January
1, 2006
to
October
30, 2006
|
|||||||||||||
Rental
revenues less rental expenses
|
$ | 424,891 | $ | 372,311 | $ | 59,305 | $ | 227,103 | ||||||||
Interest
and other income
|
3,580 | 695 | 87 | 4,515 | ||||||||||||
Gain
on investments in interest rate
|
||||||||||||||||
contracts,
net
|
- | - | - | 6,795 | ||||||||||||
General
and administrative expenses
|
(22,646 | ) | (21,486 | ) | (30,201 | ) | (17,863 | ) | ||||||||
Interest
expense
|
(193,727 | ) | (160,616 | ) | (26,213 | ) | (95,938 | ) | ||||||||
Depreciation
and amortization
|
(248,011 | ) | (209,593 | ) | (32,521 | ) | (95,456 | ) | ||||||||
Deficit
distributions to minority
|
||||||||||||||||
partners
|
- | - | - | (10,642 | ) | |||||||||||
Minority
interests
|
7,920 | 5,681 | 8,952 | (34,876 | ) | |||||||||||
Net
loss
|
$ | (27,993 | ) | $ | (13,008 | ) | $ | (20,591 | ) | $ | (16,362 | ) |
F-30
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
18.
Quarterly Financial Information (unaudited)
The tables below reflect selected
quarterly information for the years ended December 31, 2008 and
2007:
Three
Months Ended
|
||||||||||||||||
December
31,
2008
|
September
30,
2008
|
June
30,
2008
|
March
31,
2008
|
|||||||||||||
Total
revenue
|
$ | 155,570 | $ | 157,653 | $ | 155,063 | $ | 139,808 | ||||||||
Loss
before minority interest
|
(8,059 | ) | (12,400 | ) | (12,213 | ) | (3,241 | ) | ||||||||
Net
loss
|
(6,369 | ) | (9,696 | ) | (9,428 | ) | (2,500 | ) | ||||||||
Net
loss per common share - basic and diluted
|
$ | (0.05 | ) | $ | (0.08 | ) | $ | (0.08 | ) | $ | (0.02 | ) | ||||
Weighted
average shares of common stock outstanding - basic and
diluted
|
121,777,360 | 121,509,098 | 121,313,515 | 118,283,579 | ||||||||||||
Three
Months Ended
|
||||||||||||||||
December
31,
2007
|
September
30,
2007
|
June
30,
2007
|
March
31,
2007
|
|||||||||||||
Total
revenue
|
$ | 139,058 | $ | 136,135 | $ | 131,682 | $ | 132,753 | ||||||||
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 |
F-31
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
19.
Douglas Emmett Fund X, LLC
In
October 2008, we completed the initial closing of our new institutional fund,
Douglas Emmett Fund X, LLC (Fund X). Fund X is the first fund formed
by us since our IPO, when the nine institutional funds previously formed by our
predecessor were consolidated with us. As of the date of its initial
closing, Fund X had obtained equity commitments totaling $300 million, of which
we committed $150 million and certain of our officers committed $2.25 million on
the same terms as the other investors.
Fund X
contemplates a fund raising period until July 2009 and an investment period of
up to four years from the initial closing, followed by a ten-year value creation
period. With limited exceptions, Fund X will be our exclusive
investment vehicle during its investment period, using the same underwriting and
leverage principles and focusing primarily on the same markets as we
have.
In
connection with the initial closing of Fund X, (i) we contributed to Fund X the
portfolio of six Class A office properties totaling approximately 1.4 million
square feet located in four of our core Los Angeles submarkets (Santa Monica,
Beverly Hills, Sherman Oaks/Encino and Warner Center/Woodland Hills) which we
acquired in March 2008 and (ii) we transferred to Fund X the related 5-year,
$365 million term loan. In exchange, we received an interest in the
common equity of Fund X, which represented 50% as of the initial closing based
on our pro rata share of our $150 million equity commitment relative to the $300
million total in equity commitments. Since the net value of the
contributed properties (as valued under the Fund X operating agreement) exceeded
our required capital contribution, we received additional cash from Fund X
shortly after the initial closing and expect to receive a second cash
distribution in late February or early March 2009 that would complete the
adjustment of our contribution in Fund X to our required pro rata capital
contribution level.
During
the life of Fund X, we are entitled to certain additional cash based on
committed capital and on any profits which exceed certain specified cash returns
to the investors. Certain of our affiliates (which are wholly-owned
by us) are expected to provide property management and other services to Fund X,
for which we will be paid fees and/or reimbursed our costs.
Our
business includes the results of Fund X, which is currently accounted for on a
consolidated basis. The ownership interest in Fund X that we do not
own is reflected in Other Liabilities on our consolidated balance
sheet. An adjustment to our consolidated results of operations
relating to that ownership in Fund X is reflected in Interest and Other
Income.
F-32
Douglas
Emmett, Inc.
Schedule
III
Consolidated
Real Estate and Accumulated Depreciation
(dollars
in thousands)
Initial
Cost
|
Cost
Capitalized Subsequent to Acquisition
|
Gross
Carrying Amount
at
December 31, 2008
|
Accumulated
Depreciation at December 31, 2008
|
||||||||||||||||||
Property
Name
|
Encumbrances
at December 31, 2008
|
Land
|
Building
& Improvements
|
Improvements
|
Carrying
Costs
|
Land
|
Building
& Improvements
|
Total
|
Year
Built / Renovated
|
Year
Aquired
|
|||||||||||
Office
Properties
|
|||||||||||||||||||||
Bundy
Olympic
|
$24,979
|
$4,201
|
$11,860
|
$28,311
|
$ -
|
$6,030
|
$38,342
|
$44,372
|
$4,107
|
1991/1998
|
1994
|
||||||||||
The
Gateway Building
|
34,434
|
2,376
|
15,302
|
44,254
|
-
|
5,119
|
56,813
|
61,932
|
5,051
|
1987
|
1994
|
||||||||||
Village
on Canon
|
5,785
|
5,933
|
11,389
|
47,785
|
-
|
13,303
|
51,804
|
65,107
|
4,253
|
1989/1995
|
1994
|
||||||||||
Brentwood
Executive Plaza
|
25,235
|
3,255
|
9,654
|
32,745
|
-
|
5,921
|
39,733
|
45,654
|
4,160
|
1983/1996
|
1995
|
||||||||||
Camden
Medical Arts
|
3,965
|
3,102
|
12,221
|
27,397
|
-
|
|
5,298
|
37,422
|
42,720
|
3,095
|
1972/1992
|
1995
|
|||||||||
Executive
Tower
|
77,100
|
6,660
|
32,045
|
59,074
|
-
|
9,471
|
88,308
|
97,779
|
9,296
|
1989
|
1995
|
||||||||||
Palisades
Promenade
|
36,970
|
5,253
|
15,547
|
49,779
|
-
|
9,664
|
60,915
|
70,579
|
4,606
|
1990
|
1995
|
||||||||||
Studio
Plaza
|
124,895
|
9,347
|
73,358
|
128,949
|
-
|
15,015
|
196,639
|
211,654
|
16,315
|
1988/2004
|
1995
|
||||||||||
First
Federal
|
79,741
|
9,989
|
29,187
|
112,356
|
-
|
21,787
|
129,745
|
151,532
|
9,829
|
1981/2000
|
1996
|
||||||||||
Wilshire
Brentwood Plaza
|
61,702
|
5,013
|
34,283
|
71,735
|
-
|
8,828
|
102,203
|
111,031
|
8,387
|
1985
|
1996
|
||||||||||
Landmark
II
|
115,372
|
19,156
|
109,259
|
69,049
|
-
|
26,139
|
171,325
|
197,464
|
14,601
|
1989
|
1997
|
||||||||||
Olympic
Center
|
27,926
|
5,473
|
22,850
|
29,946
|
-
|
8,247
|
50,022
|
58,269
|
4,629
|
1985/1996
|
1997
|
||||||||||
Saltair
San Vicente
|
1,888
|
5,075
|
6,946
|
16,413
|
-
|
7,557
|
20,877
|
28,434
|
2,003
|
1964/1992
|
1997
|
||||||||||
Second
Street
|
26,720
|
4,377
|
15,277
|
34,843
|
-
|
7,421
|
47,076
|
54,497
|
4,263
|
1991
|
1997
|
||||||||||
Sherman
Oaks Galleria
|
244,080
|
33,213
|
17,820
|
402,201
|
-
|
48,328
|
404,906
|
453,234
|
35,980
|
1981/2002
|
1997
|
||||||||||
Tower
at Sherman Oaks
|
4,474
|
4,712
|
15,747
|
34,820
|
-
|
8,685
|
46,594
|
55,279
|
4,935
|
1967/1991
|
1997
|
||||||||||
The
Verona
|
2,457
|
2,574
|
7,111
|
13,795
|
-
|
5,111
|
18,369
|
23,480
|
1,793
|
1991
|
1997
|
||||||||||
Coral
Plaza
|
20,066
|
4,028
|
15,019
|
18,187
|
-
|
5,366
|
31,868
|
37,234
|
2,891
|
1981
|
1998
|
||||||||||
MB
Plaza
|
31,185
|
4,533
|
22,024
|
28,069
|
-
|
7,503
|
47,123
|
54,626
|
4,822
|
1971/1996
|
1998
|
||||||||||
Valley
Executive Tower
|
91,892
|
8,446
|
67,672
|
95,645
|
-
|
11,737
|
160,026
|
171,763
|
13,188
|
1984
|
1998
|
||||||||||
Valley
Office Plaza
|
40,642
|
5,731
|
24,329
|
43,332
|
-
|
8,957
|
64,435
|
73,392
|
5,847
|
1966/2002
|
1998
|
||||||||||
Westside
Towers
|
74,383
|
8,506
|
79,532
|
72,758
|
-
|
14,568
|
146,228
|
160,796
|
13,077
|
1985
|
1998
|
||||||||||
100
Wilshire
|
136,713
|
12,769
|
78,447
|
134,953
|
-
|
27,108
|
199,061
|
226,169
|
15,731
|
1968/2002
|
1999
|
||||||||||
11777
San Vicente
|
25,815
|
5,032
|
15,768
|
28,011
|
-
|
6,714
|
42,097
|
48,811
|
3,421
|
1974/1998
|
1999
|
||||||||||
Century
Park Plaza
|
93,107
|
10,275
|
70,761
|
102,365
|
-
|
16,153
|
167,248
|
183,401
|
14,104
|
1972/1987
|
1999
|
||||||||||
Encino
Terrace
|
76,683
|
12,535
|
59,554
|
88,748
|
-
|
15,533
|
145,304
|
160,837
|
13,321
|
1986
|
1999
|
||||||||||
One
Westwood
|
10,084
|
10,350
|
29,784
|
58,013
|
-
|
9,154
|
88,993
|
98,147
|
7,239
|
1987/2004
|
1999
|
||||||||||
Westwood
Place
|
54,190
|
8,542
|
44,419
|
50,476
|
-
|
11,448
|
91,989
|
103,437
|
7,806
|
1987
|
1999
|
||||||||||
Brentwood
Saltair
|
2,017
|
4,468
|
11,615
|
10,468
|
-
|
4,775
|
21,776
|
26,551
|
2,229
|
1986
|
2000
|
||||||||||
Encino
Gateway
|
54,889
|
8,475
|
48,525
|
49,917
|
-
|
15,653
|
91,264
|
106,917
|
8,486
|
1974/1998
|
2000
|
||||||||||
Encino
Plaza
|
33,621
|
5,293
|
23,125
|
42,264
|
-
|
6,165
|
64,517
|
70,682
|
6,233
|
1971/1992
|
2000
|
||||||||||
Lincoln
Wilshire
|
21,727
|
3,833
|
12,484
|
20,942
|
-
|
7,475
|
29,784
|
37,259
|
2,174
|
1996
|
2000
|
||||||||||
1901
Avenue of the Stars
|
148,766
|
18,514
|
131,752
|
102,023
|
-
|
26,163
|
226,126
|
252,289
|
18,185
|
1968/2001
|
2001
|
||||||||||
Camden/9601
Wilshire
|
15,066
|
16,597
|
54,774
|
99,142
|
-
|
17,658
|
152,855
|
170,513
|
12,745
|
1962/2004
|
2001
|
||||||||||
Columbus
Center
|
11,404
|
2,096
|
10,396
|
8,697
|
-
|
2,333
|
18,856
|
21,189
|
2,052
|
1987
|
2001
|
||||||||||
Santa
Monica Square
|
3,564
|
5,366
|
18,025
|
18,878
|
-
|
6,863
|
35,406
|
42,269
|
2,916
|
1983/2004
|
2001
|
||||||||||
Warner
Center Towers
|
374,330
|
43,110
|
292,147
|
375,785
|
-
|
59,418
|
651,624
|
711,042
|
57,747
|
1982-1993/2004
|
2002
|
||||||||||
Beverly
Hills Medical Center
|
28,361
|
4,955
|
27,766
|
26,640
|
-
|
6,435
|
52,926
|
59,361
|
4,436
|
1964/2004
|
2004
|
||||||||||
Bishop
Place
|
86,922
|
8,317
|
105,651
|
52,048
|
-
|
8,833
|
157,183
|
166,016
|
13,999
|
1992
|
2004
|
||||||||||
Harbor
Court
|
23,475
|
51
|
41,001
|
20,972
|
-
|
-
|
62,024
|
62,024
|
6,827
|
1994
|
2004
|
||||||||||
The
Trillium
|
184,500
|
20,688
|
143,263
|
77,530
|
-
|
21,989
|
219,492
|
241,481
|
20,290
|
1988
|
2005
|
||||||||||
Brentwood
Court
|
6,686
|
2,564
|
8,872
|
325
|
-
|
2,563
|
9,198
|
11,761
|
897
|
1984
|
2006
|
||||||||||
Brentwood
Medical Plaza
|
23,957
|
5,934
|
27,836
|
965
|
-
|
5,933
|
28,802
|
34,735
|
2,861
|
1975
|
2006
|
||||||||||
Brentwood
San Vicente Medical
|
13,690
|
5,557
|
16,457
|
181
|
-
|
5,557
|
16,638
|
22,195
|
1,499
|
1957/1985
|
2006
|
||||||||||
San
Vicente Plaza
|
10,722
|
7,055
|
12,035
|
216
|
-
|
7,055
|
12,251
|
19,306
|
1,362
|
1985
|
2006
|
||||||||||
Century
Park West
|
22,600
|
3,717
|
29,099
|
392
|
-
|
3,669
|
29,539
|
33,208
|
1,613
|
1971
|
2007
|
||||||||||
Cornerstone
Plaza
|
55,800
|
8,245
|
80,633
|
3,170
|
-
|
8,263
|
83,785
|
92,048
|
3,580
|
1986
|
2007
|
||||||||||
Honolulu
Club
|
18,000
|
1,863
|
16,766
|
1,631
|
-
|
1,863
|
18,397
|
20,260
|
523
|
1980
|
2008
|
||||||||||
15250
Ventura
|
23,000
|
5,039
|
30,194
|
815
|
-
|
5,039
|
31,009
|
36,048
|
1,397
|
1970
|
2008
|
||||||||||
16000
Ventura
|
39,300
|
5,539
|
59,977
|
1,865
|
-
|
5,539
|
61,842
|
67,381
|
2,900
|
1980
|
2008
|
||||||||||
2001
Wilshire
|
33,500
|
6,033
|
43,740
|
896
|
-
|
6,033
|
44,636
|
50,669
|
2,188
|
1980
|
2008
|
||||||||||
8383
Wilshire
|
117,600
|
20,987
|
209,660
|
4,125
|
-
|
20,987
|
213,785
|
234,772
|
8,959
|
1971
|
2008
|
||||||||||
9100
Wilshire
|
108,000
|
18,992
|
152,143
|
930
|
-
|
18,992
|
153,073
|
172,065
|
5,453
|
1971
|
2008
|
||||||||||
Warner
Corporate Center
|
43,600
|
8,258
|
66,677
|
721
|
-
|
8,257
|
67,399
|
75,656
|
2,541
|
1988
|
2008
|
||||||||||
Multifamily
Properties
|
|||||||||||||||||||||
Barrington
Plaza
|
153,630
|
28,568
|
81,485
|
142,159
|
-
|
58,208
|
194,004
|
252,212
|
14,899
|
1963/1998
|
1998
|
||||||||||
Barrington
555
|
43,440
|
6,461
|
27,639
|
40,029
|
-
|
14,903
|
59,226
|
74,129
|
4,459
|
1989
|
1999
|
||||||||||
Pacific
Plaza
|
46,400
|
10,091
|
16,159
|
72,275
|
-
|
27,816
|
70,709
|
98,525
|
4,859
|
1963/1998
|
1999
|
||||||||||
The
Shores
|
144,610
|
20,809
|
74,191
|
195,272
|
-
|
60,555
|
229,717
|
290,272
|
15,496
|
1965-67/2002
|
1999
|
||||||||||
Moanalua
Hillside
|
111,920
|
24,720
|
85,895
|
37,355
|
-
|
35,294
|
112,676
|
147,970
|
8,020
|
1968/2004
|
2005
|
||||||||||
The
Villas at Royal Kunia
|
82,000
|
42,887
|
71,376
|
13,781
|
-
|
35,163
|
92,881
|
128,044
|
7,813
|
1990/1995
|
2006
|
||||||||||
Barrington/Kiowa
Apartments
|
7,750
|
5,720
|
10,052
|
285
|
-
|
5,720
|
10,337
|
16,057
|
762
|
1974
|
2006
|
||||||||||
Barry
Apartments
|
7,150
|
6,426
|
8,179
|
269
|
-
|
6,426
|
8,448
|
14,874
|
696
|
1973
|
2006
|
||||||||||
Kiowa
Apartments
|
3,100
|
2,605
|
3,263
|
190
|
-
|
2,605
|
3,453
|
6,058
|
279
|
1972
|
2006
|
||||||||||
Ground
Lease
|
|||||||||||||||||||||
Owensmouth/Warner
|
14,720
|
23,848
|
-
|
|
-
|
-
|
23,848
|
-
|
23,848
|
-
|
N/A
|
2006
|
|||||||||
TOTAL
|
$3,672,300
|
$634,137
|
$3,000,017
|
$3,347,162
|
$ -
|
$900,213
|
$6,081,103
|
$6,981,316
|
$490,125
|
F-33
Douglas
Emmett, Inc.
Schedule
III (continued)
Consolidated
Real Estate and Accumulated Depreciation
(dollars
in thousands)
Year
ended December 31,
|
|||||||||||||
2008
|
2007
|
2006
|
|||||||||||
Real
Estate Assets
|
|||||||||||||
Balance,
beginning of period
|
6,264,170 | 6,088,617 | 3,128,742 | ||||||||||
Additions
|
-
property acquisitions
|
653,842 | 121,694 | 260,666 | |||||||||
-
improvements
|
63,304 | 57,300 | 52,577 | ||||||||||
Purchase accounting
|
- | (3,441 | ) | 2,646,632 | |||||||||
Balance,
end of period
|
6,981,316 | 6,264,170 | 6,088,617 | ||||||||||
Accumulated
Depreciation
|
|||||||||||||
Balance,
beginning of period
|
(242,114 | ) | (32,521 | ) | (506,258 | ) | |||||||
Additions
|
-
depreciation
|
(248,011 | ) | (209,593 | ) | (121,620 | ) | ||||||
Purchase
accounting
|
- | - | 595,357 | ||||||||||
Balance,
end of period
|
(490,125 | ) | (242,114 | ) | (32,521 | ) |
F-34