Douglas Emmett Inc - Annual Report: 2009 (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,
2009
|
Commission
file number: 1-33106
![](https://www.sec.gov/Archives/edgar/data/0001364250/000136425010000016/logo.jpg)
Douglas
Emmett, Inc.
(Exact
name of registrant as specified in its charter)
MARYLAND
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(20-3073047)
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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808
Wilshire Boulevard, 2nd
Floor
Santa
Monica, California 90401
(310)
255-7700
(Address,
including Zip Code and Telephone Number, including Area Code, of Registrant’s
principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $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.
|
Yes
[ x ] or No [ ]
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Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
|
Yes
[ ] 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):
|
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).
|
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, 2009, was $1.0
billion.
The
registrant had 121,617,198 shares of its common stock, $0.01 par value,
outstanding as of February 17, 2010.
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 2010 (“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,
2009.
FORM
10-K TABLE OF CONTENTS
PAGE
NO.
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PART
I
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Business
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4
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Risk
Factors
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8
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Unresolved
Staff Comments
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18
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Properties
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19
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Legal
Proceedings
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28
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Submission
of Matters to a Vote of Security Holders
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28
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PART
II
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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29
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Selected
Financial Data
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31
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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32
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Quantitative
and Qualitative Disclosures About Market Risk
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40
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Financial
Statements and Supplementary Data
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40
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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40
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Controls
and Procedures
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40
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Other
Information
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40
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PART
III
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Directors,
Executive Officers and Corporate Governance
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41
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Executive
Compensation
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41
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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41
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Certain
Relationships and Related Transactions, and Director
Independence
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41
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Principal
Accountant Fees and Services
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41
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Exhibits
and Financial Statement Schedules
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42
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2
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; a general downturn in
the economy, such as the current global financial crisis; 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.
3
PART
I.
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 consolidated portfolio of properties includes 49
office properties totaling approximately 11.9 million square feet of Class A
office space and nine multifamily properties containing 2,868 apartment
units. We also own an equity interest in an unconsolidated real
estate fund that owns six additional office properties totaling approximately
1.4 million square feet of Class A office space. We manage these six
properties alongside our consolidated portfolio; therefore we present our office
portfolio statistics on a total portfolio basis, with a combined 55 office
properties totaling approximately 13.3 million square feet. All of
these properties 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, acquiring and operating 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.
|
In
October 2008, we completed the initial closing of Douglas Emmett Fund X, LLC
(Fund X), which is the first institutional fund formed by us since our initial
public offering (IPO). Fund X is an unconsolidated real estate fund
with equity commitments totaling in excess of $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 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. While the
financial data in this Report does not include Fund X on a consolidated basis,
much of the property level data in this Report includes the properties owned by
Fund X, as we believe it assists in understanding our business. For
further information, see Note 3 to our consolidated financial statements in Item
8 of this Report.
4
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. Also, our title insurance policies may not insure for
the current aggregate market value of our portfolio, and we do not intend to
increase our title insurance coverage as the market value of our portfolio
increases.
Competition
We
compete with a number of developers, owners and operators of office and
commercial real estate, many of which own properties similar to ours in the same
markets in which our properties are located. If our competitors offer
space at rental rates below current market rates, or below the rental rates we
currently charge our tenants, we may lose potential tenants and we may face
pressure to reduce our rental rates below those we currently charge or to offer
more substantial rent abatements, tenant improvements, early termination rights
or below-market renewal options in order to retain tenants when our tenants’
leases expire. In that case, our financial condition, results of
operations, cash flows, 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 happened 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.
5
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 25% of
the value of our total assets may be represented by securities of one or more
taxable REIT subsidiaries.
We own
interests in various partnerships and limited liability companies. In the case
of a REIT that is a partner in a partnership or a member of a limited liability
company that is treated as a partnership under the Internal Revenue Code,
Treasury Regulations provide that for purposes of the REIT income and asset
tests, the REIT will be deemed to own its proportionate share of the assets of
the partnership or limited liability company (determined in accordance with its
capital interest in the entity), subject to special rules related to the 10%
asset test, and will be deemed to be entitled to the income of the partnership
or limited liability company attributable to such share. The ownership of an
interest in a partnership or limited liability company by a REIT may involve
special tax risks, including the challenge by the Internal Revenue Service (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 an interest in a subsidiary which is intended to be treated as a qualified
REIT subsidiary (QRS). The Internal Revenue Code provides that a QRS will be
ignored for federal income tax purposes and all assets, liabilities and items of
income, deduction and credit of the QRS 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, 2009, 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 non-customary 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.
6
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 were 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
Cities 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 impact of laws and regulations, see Item 1A Risk
Factors of this Report.
Employees
As of
December 31, 2009, we employed approximately 530 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 2009,
2008 and 2007 is set forth in Note 15 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.
7
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 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 (including the
unconsolidated properties owned by Fund X that we operate) 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, wildfires and other events). In
addition, California is also regarded as more litigious and more highly
regulated and taxed than many other 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
the market price of our common stock, our financial condition, our results of
operations and our cash flows, including 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:
·
|
adverse
changes in international, national or local economic and demographic
conditions, such as the current global economic
downturn;
|
·
|
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;
|
·
|
adverse
changes in financial conditions of buyers, sellers and tenants of
properties;
|
·
|
inability
to collect rent from tenants;
|
·
|
competition
from other real estate investors with significant capital, including other
real estate operating companies, publicly-traded REITs and institutional
investment funds;
|
·
|
reductions
in the level of demand for commercial space and residential units, and
changes in the relative popularity of
properties;
|
·
|
increases
in the supply of office space and multifamily
units;
|
·
|
fluctuations
in interest rates and the availability of credit, such as the pronounced
tightening of credit markets that has occurred in the recent liquidity
crisis, which could adversely affect our ability, or the ability of buyers
and tenants of properties, to obtain financing on favorable terms or at
all;
|
·
|
increases
in expenses and the possible inability to recover from our tenants the
increased 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,
as well as costs of compliance with laws, regulations and governmental
policies;
|
·
|
the
effects of rent controls, stabilization laws and other laws or covenants
regulating rental rates; and
|
·
|
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.
|
8
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 and property values and an increased incidence of
defaults under existing leases. If we cannot operate our properties
effectively, or if we do not acquire desirable properties, and when appropriate
dispose of properties, on favorable terms at appropriate times, the market price
of our common stock, our financial condition, our results of operations and our
cash flows, including our 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, 2009, our total
consolidated indebtedness was approximately $3.26 billion, excluding loan
premiums, and we may incur significant additional debt for various purposes,
including, without limitation, to fund future acquisition and development
activities and operational needs. In addition, we have available
proceeds under our credit facility of $350 million, of which there is zero
drawn.
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:
·
|
our
cash flows may be insufficient to meet our required principal and interest
payments;
|
·
|
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;
|
·
|
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;
|
·
|
we
may not meet the criteria that would allow us to exercise the remaining
one-year extension on our existing revolving credit facility, which is
scheduled to mature on October 30, 2010 or the availability of borrowings
under the facility may be reduced upon
extension.
|
·
|
we
may be forced to dispose of one or more of our properties, possibly on
disadvantageous terms;
|
·
|
we
may violate restrictive covenants in our loan documents, which would
entitle the lenders to accelerate our debt
obligations;
|
·
|
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;
|
·
|
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
|
·
|
our
default under any of our indebtedness with cross default provisions could
result in a default on other
indebtedness.
|
If any
one of these events were to occur, the market price of our common stock, our
financial condition, our results of operations and our cash flows, including 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.
9
This downturn has had, and may continue
to have, an unprecedented negative impact on the global credit
markets. Credit has tightened significantly. 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, including
us.
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. Significant rent
reductions could result in a write-down of one or more of our consolidated
properties, or our equity investment in Fund X.
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, 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.
10
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, the market price of our common stock, our
financial condition, our results of operations and our cash flows, including our
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, 2009, leases
representing approximately 13.3% of the square footage of the properties in our
total office portfolio will expire in 2010, and an additional 9.7% of the square
footage of the properties in our total office portfolio was available for
lease. Excluding the properties held by Fund X, which are managed by
us, but are only contained in our consolidated financial statements using equity
accounting, the percentage of leases expiring in 2010 is 13.0% and the available
square footage represents 8.3% of our owned and consolidated office
portfolio. In addition, as of December 31, 2009, approximately 1.0%
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, 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, the market price of our common stock, our financial condition,
our results of operations and our cash flows, including 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 contractual rights, such as rights of first offer.
11
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 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
Cities 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 flows from our properties subject to such
regulations. Furthermore, such regulations may negatively impact our
ability to attract higher-paying tenants to such properties.
12
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 significant risks, including the
following:
·
|
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;
|
·
|
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;
|
·
|
competition
from other potential acquirers may significantly increase the purchase
price of a desired property;
|
·
|
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;
|
·
|
our
cash flows may be insufficient to meet our required principal and interest
payments;
|
·
|
we
may need to spend more than budgeted amounts to make necessary
improvements or renovations to acquired
properties;
|
·
|
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;
|
·
|
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;
|
·
|
we
may be unable to quickly and efficiently integrate new acquisitions,
particularly acquisitions of portfolios of properties, into our existing
operations;
|
·
|
market
conditions may result in higher than expected vacancy rates and lower than
expected rental rates; and
|
·
|
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.
|
If we
cannot complete property acquisitions on favorable terms, or operate acquired
properties to meet our goals or expectations, the market price of our common
stock, our financial condition, our results of operations and our cash flows,
including our 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 the market price of our common stock, our financial
condition, our results of operations and our cash flows, including our ability
to satisfy our debt service obligations and to pay dividends to our
stockholders.
13
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:
·
|
the
availability and pricing of financing on favorable terms or at
all;
|
·
|
the
availability and timely receipt of zoning and other regulatory approvals;
and
|
·
|
the
cost and timely completion of construction (including risks beyond our
control, such as weather or labor conditions, or material
shortages).
|
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 the market price of our
common stock, our financial condition, our results of operations and our cash
flows, including our 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
flows 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,
2009, our executive officers owned approximately 8% of our outstanding common
stock, or approximately 28% 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 exercise 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.
14
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 flows. 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:
·
|
general
market conditions;
|
·
|
the
market’s perception of our growth
potential;
|
·
|
our
current debt levels;
|
·
|
our
current and expected future
earnings;
|
·
|
our
cash flows and cash dividends; and
|
·
|
the
market price per share of our common
stock.
|
Recently,
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;
|
·
|
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.
|
15
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
plan units (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 (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. We have employment agreements with Jordan L. Kaplan,
Kenneth M. Panzer and William Kamer, which 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 outperformance 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 control over financial reporting, we may not be
able to accurately report our financial results. An effective
system of internal control over financial reporting is necessary for us to
provide reliable financial reports, prevent fraud and to operate successfully as
a public company. As part of our ongoing monitoring of internal
controls, we may discover material weaknesses or significant deficiencies in our
internal controls that we believe require remediation. If we discover
such weaknesses, we will make efforts to improve our internal controls in a
timely manner. Any system of internal controls, however well designed
and operated, is based in part on certain assumptions and can only provide
reasonable, not absolute, assurance that the objectives of the system are
met. Any failure to maintain effective internal controls, or
implement any necessary improvements in a timely manner, could have a material
adverse effect on our business and operating results, or cause us to not meet
our reporting obligations, which could affect our ability to remain listed with
the New York Stock Exchange. Ineffective internal 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 the market price of our common stock,
our financial condition, our results of operations and our cash flows, including
our 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 we cannot guarantee 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
Our total
portfolio of properties consists of 49 office properties that we directly own
and operate, six office properties that we operate and indirectly own through
our equity interest in Fund X, and nine wholly-owned multifamily
properties. Our properties are 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.
Office
Portfolio
Presented
below is an overview of certain information regarding our total office portfolio
as of December 31, 2009:
Number
of Properties
|
Rentable
Square
Feet
(2)
|
Square
Feet as a Percent of Total
|
|||||||
West
Los Angeles
|
|||||||||
Brentwood
|
13
|
1,390,773
|
10.4
|
% |
|
||||
Olympic
Corridor
|
5
|
1,096,081
|
8.2
|
||||||
Century
City
|
3
|
915,980
|
6.9
|
||||||
Santa
Monica
|
8
|
969,982
|
7.3
|
||||||
Beverly
Hills
|
6
|
1,343,649
|
10.1
|
||||||
Westwood
|
2
|
396,807
|
3.0
|
||||||
San
Fernando Valley
|
|||||||||
Sherman
Oaks/Encino
|
11
|
3,181,038
|
23.9
|
||||||
Warner
Center/Woodland Hills
|
3
|
2,855,868
|
21.4
|
||||||
Tri-Cities
|
|||||||||
Burbank
|
1
|
420,949
|
3.1
|
||||||
Honolulu
|
3
|
757,904
|
5.7
|
||||||
Total
|
55
|
13,329,031
|
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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate fund.
|
(2)
|
Based
on Building Owners and Managers Association (BOMA) 1996
remeasurement. Total consists of 11,876,619 leased square feet
(includes 164,616 square feet with respect to signed leases not
commenced), 1,297,619 available square feet, 76,441 building management
use square feet, and 78,352 square feet of BOMA 1996 adjustment on leased
space.
|
19
The
following table presents our total office portfolio occupancy and in-place rents
as of December 31, 2009:
Office
Portfolio by Submarket
(1)
|
Percent
Leased(2)
|
Annualized
Rent(3)
|
Annualized
Rent Per Leased Square Foot (4)
|
||||||
West
Los Angeles
|
|||||||||
Brentwood
|
95.4 | % | $ | 51,960,077 | $ | 40.12 | |||
Olympic
Corridor
|
92.2 | 33,142,369 | 33.69 | ||||||
Century
City
|
98.5 | 33,392,390 | 37.80 | ||||||
Santa
Monica (5)
|
93.9 | 46,478,152 | 51.52 | ||||||
Beverly
Hills
|
88.3 | 45,857,663 | 40.43 | ||||||
Westwood
|
88.3 | 13,155,233 | 38.04 | ||||||
San
Fernando Valley
|
|||||||||
Sherman
Oaks/Encino
|
89.4 | 88,352,032 | 32.06 | ||||||
Warner
Center/Woodland Hills
|
83.7 | 68,341,194 | 29.21 | ||||||
Tri-Cities
|
|||||||||
Burbank
|
100.0 | 14,173,451 | 33.67 | ||||||
Honolulu
|
90.5 | 22,603,651 | 34.73 | ||||||
Total
/ Weighted Average
|
90.3 | % | $ | 417,456,212 | $ | 35.64 |
(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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate fund.
|
(2)
|
Includes
164,616 square feet with respect to signed leases not yet
commenced.
|
(3)
|
Represents
annualized monthly cash base rent under leases commenced as of December
31, 2009 (excluding 164,616 square feet with respect to signed leases not
yet commenced). The amount reflects total cash base 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 (based on the BOMA 1996
remeasurement figures set forth in note (2) to the table on the previous
page, but excluding 164,616 square feet with respect to signed leases not
commenced).
|
(5)
|
Includes
$1,287,232 of annualized rent attributable to our corporate headquarters
at our Lincoln/Wilshire property.
|
20
The following table presents the
submarket concentration for our total office portfolio as of December 31,
2009:
Office Portfolio by Submarket
(1)
|
Douglas Emmett Rentable Square
Feet (2)
|
Submarket Rentable Square Feet
(3)
|
Douglas
Emmett Market Share
|
||||
West
Los Angeles
|
|||||||
Brentwood
|
1,390,773
|
3,356,126
|
41.4
|
% | |||
Olympic
Corridor
|
1,096,081
|
3,022,969
|
36.3
|
||||
Century
City
|
915,980
|
10,064,599
|
9.1
|
||||
Santa
Monica
|
969,982
|
8,700,348
|
11.1
|
||||
Beverly
Hills
|
1,343,649
|
7,476,805
|
18.0
|
||||
Westwood
|
396,807
|
4,408,094
|
9.0
|
||||
San
Fernando Valley
|
|||||||
Sherman
Oaks/Encino
|
3,181,038
|
5,721,621
|
55.6
|
||||
Warner
Center/Woodland Hills
|
2,855,868
|
7,429,172
|
38.4
|
||||
Tri-Cities
|
|||||||
Burbank
|
420,949
|
6,759,311
|
6.2
|
||||
Subtotal/Weighted
Average LA County
|
12,571,127
|
56,939,045
|
22.1
|
% | |||
Honolulu
|
757,904
|
5,138,514
|
14.7
|
||||
Total
|
13,329,031
|
62,077,559
|
21.5
|
% |
(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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate fund.
|
(2)
|
Based
on Building Owners and Managers Association (BOMA) 1996
remeasurement. Total consists of 11,876,619 leased square feet
(includes 164,616 square feet with respect to signed leases not
commenced), 1,297,619 available square feet, 76,441 building management
use square feet, and 78,352 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.
|
21
|
Tenant
Diversification
|
Our total
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 total office
portfolio as of December 31, 2009:
Office
Portfolio by Tenant (1)
|
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
|
2010-2020
|
642,845
|
4.8
|
%
|
$ |
22,268,046
|
5.3
|
%
|
||||||||
AIG
(Sun America Life Insurance)
|
1
|
1
|
2013
|
182,010
|
1.4
|
5,725,351
|
1.4
|
|||||||||||
William
Morris Endeavor
|
2
|
1
|
2019
|
118,612
|
0.9
|
5,602,506
|
1.4
|
|||||||||||
Bank
of America(5)
|
13
|
9
|
2010-2018
|
134,561
|
1.0
|
5,462,536
|
1.3
|
|||||||||||
The
Macerich Partnership, L.P.
|
1
|
1
|
2018
|
90,832
|
0.7
|
4,316,881
|
1.0
|
|||||||||||
Total
|
21
|
16
|
1,168,860
|
8.8
|
%
|
$ |
43,375,320
|
10.4
|
%
|
(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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate fund.
|
(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 base rent under leases commenced as of December
31, 2009. The amount reflects total cash base rent before
abatements. For our Burbank and Honolulu office properties, annualized
base 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, in which 45,000 square
feet was renewed with a new expiration date in December 2020, 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)
|
The
notable leases include 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, an 8,000 square foot lease expiring in
July 2013, an 11,000 square foot lease expiring in November 2014, a 4,000
square foot lease expiring in February 2015, and a 12,000 square foot
lease expiring in March 2018; as well as a small ATM
lease.
|
22
Industry
Diversification
The
following table sets forth information relating to tenant diversification by
industry in our total office portfolio based on annualized rent as of December
31, 2009:
Industry
|
Number
of Leases
(1)
|
Annualized
Rent as a Percent of Total
|
|||
Legal
|
346
|
16.1
|
%
|
||
Financial
Services
|
249
|
14.2
|
|||
Entertainment
|
116
|
12.1
|
|||
Real
Estate
|
156
|
9.6
|
|||
Accounting
& Consulting
|
211
|
8.4
|
|||
Health
Services
|
294
|
8.4
|
|||
Insurance
|
86
|
7.9
|
|||
Retail
|
158
|
6.9
|
|||
Technology
|
66
|
3.8
|
|||
Advertising
|
53
|
3.3
|
|||
Public
Administration
|
31
|
1.8
|
|||
Educational
Services
|
10
|
0.8
|
|||
Other
|
257
|
6.7
|
|||
Total
|
2,033
|
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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate
fund.
|
23
Lease
Distribution
The
following table sets forth information relating to the distribution of leases in
our total office portfolio, based on rentable square feet leased as of December
31, 2009:
Square
Feet Under Lease
|
Number
of Leases
|
Leases
as a Percent of Total
|
Rentable
Square Feet (1)
|
Square
Feet as a Percent of Total
|
Annualized Rent(2)(3) |
Annualized
Rent as a Percent of Total
|
|||||||||
2,500
or less
|
1,025
|
50.4
|
% |
1,398,794
|
10.5
|
% | $ |
52,610,286
|
12.6
|
% | |||||
2,501-10,000
|
732
|
36.0
|
3,594,016
|
27.0
|
129,824,645
|
31.1
|
|||||||||
10,001-20,000
|
185
|
9.1
|
2,583,271
|
19.4
|
91,080,131
|
21.8
|
|||||||||
20,001-40,000
|
62
|
3.1
|
1,698,422
|
12.7
|
59,558,274
|
14.3
|
|||||||||
40,001-100,000
|
23
|
1.1
|
1,324,010
|
9.9
|
47,821,433
|
11.4
|
|||||||||
Greater
than 100,000
|
6
|
0.3
|
1,113,490
|
8.4
|
36,561,443
|
8.8
|
|||||||||
Subtotal
|
2,033
|
100.0
|
% |
11,712,003
|
(4)
|
87.9
|
% | $ |
417,456,212
|
100.0
|
% | ||||
Signed
leases not commenced
|
-
|
-
|
164,616
|
1.2
|
-
|
-
|
|||||||||
Available
|
-
|
-
|
1,297,619
|
9.7
|
-
|
-
|
|||||||||
Building
Management Use
|
-
|
-
|
76,441
|
0.6
|
-
|
-
|
|||||||||
BOMA
Adjustment(5)
|
-
|
-
|
78,352
|
0.6
|
-
|
-
|
|||||||||
Total
|
2,033
|
100.0
|
% |
13,329,031
|
100.0
|
% | $ |
417,456,212
|
100.0
|
% |
(1)
|
Based
on BOMA 1996 remeasurement. Total consists of 11,876,619 leased
square feet (includes 164,616 square feet with respect to signed leases
not commenced), 1,297,619 available square feet, 76,441 building
management use square feet, and 78,352 square feet of BOMA 1996 adjustment
on leased space.
|
(2)
|
Represents
annualized monthly cash base rent (i.e., excludes tenant reimbursements,
parking and other revenue) under leases commenced as of December 31, 2009
(does not include 164,616 square feet with respect to signed leases not
yet commenced). The amount reflects total cash base rent before
abatements. For our Burbank and Honolulu office properties, annualized
base rent is converted from triple net to gross by adding expense
reimbursements to base rent.
|
(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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate fund.
|
(4)
|
Average
tenant size is approximately 5,800 square feet. Median is approximately
2,500 square feet.
|
(5)
|
Represents
square footage adjustments for leases that do not reflect BOMA 1996
remeasurement.
|
24
Lease
Expirations
The
following table sets forth a summary schedule of lease expirations for leases in
place as of December 31, 2009, plus available space, for each of the ten years
beginning January 1, 2010 and thereafter in our total office portfolio (unless
otherwise stated in the footnotes, the information set forth in the table
assumes that tenants exercise no renewal options and no early termination
rights):
Year
of Lease Expiration
|
Number
of Leases Expiring
|
Rentable Square Feet
(1)
|
Expiring
Square Feet as a Percent
of
Total
|
Annualized Rent (2)(3)
|
Annualized
Rent as a Percent of Total
|
Annualized Rent Per Leased
Square Foot (4)
|
Annualized Rent Per Leased
Square Foot at Expiration (5)
|
|||||||||||||
2010
|
483 | 1,774,512 | 13.3 | % | $ | 60,446,979 | 14.5 | % | $ | 34.06 | $ | 34.21 | ||||||||
2011
|
406 | 1,800,868 | 13.5 | 64,456,966 | 15.4 | 35.79 | 37.09 | |||||||||||||
2012
|
358 | 1,640,184 | 12.3 | 56,872,102 | 13.6 | 34.67 | 37.41 | |||||||||||||
2013
|
282 | 1,628,909 | 12.2 | 62,113,532 | 14.9 | 38.13 | 42.43 | |||||||||||||
2014
|
228 | 1,386,478 | 10.4 | 47,674,973 | 11.4 | 34.39 | 39.69 | |||||||||||||
2015
|
116 | 905,925 | 6.8 | 30,822,879 | 7.4 | 34.02 | 40.02 | |||||||||||||
2016
|
50 | 728,902 | 5.5 | 24,405,885 | 5.9 | 33.48 | 39.56 | |||||||||||||
2017
|
34 | 381,771 | 2.9 | 13,522,893 | 3.2 | 35.42 | 46.30 | |||||||||||||
2018
|
31 | 335,968 | 2.5 | 15,759,298 | 3.8 | 46.91 | 62.66 | |||||||||||||
2019
|
30 | 821,232 | 6.2 | 29,737,527 | 7.1 | 36.21 | 45.13 | |||||||||||||
2020
|
10 | 158,347 | 1.2 | 6,299,478 | 1.5 | 39.78 | 48.51 | |||||||||||||
Thereafter
|
5 | 148,907 | 1.1 | 5,343,700 | 1.3 | 35.89 | 51.79 | |||||||||||||
Subtotal
|
2,033 | 11,712,003 | 87.9 | % | $ | 417,456,212 | 100.0 | % | $ | 35.64 | $ | 40.07 | ||||||||
Signed
leases not commenced
|
- | 164,616 | 1.2 | - | - | - | - | |||||||||||||
Available
|
- | 1,297,619 | 9.7 | - | - | - | - | |||||||||||||
Building
management use
|
- | 76,441 | 0.6 | - | - | - | - | |||||||||||||
BOMA
adjustment (6)
|
- | 78,352 | 0.6 | - | - | - | - | |||||||||||||
Total/Weighted
Average
|
2,033 | 13,329,031 | 100.0 | % | $ | 417,456,212 | 100.0 | % | $ | 35.64 | $ | 40.07 |
(1)
|
Based
on BOMA 1996 remeasurement. Total consists of 11,876,619 leased
square feet (includes 164,616 square feet with respect to signed leases
not commenced), 1,297,619 available square feet, 76,441 building
management use square feet, and 78,352 square feet of BOMA 1996 adjustment
on leased space.
|
(2)
|
Represents
annualized monthly cash base rent (i.e., excludes tenant reimbursements,
parking and other revenue) under leases commenced as of December 31, 2009
(does not include 164,616 square feet with respect to signed leases not
yet commenced). The amount reflects total cash base rent before
abatements. For our Burbank and Honolulu office properties, annualized
base rent is converted from triple net to gross by adding expense
reimbursements to base rent.
|
(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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate fund.
|
(4)
|
Represents
annualized base rent divided by leased square feet.
|
(5)
|
Represents
annualized base rent at expiration divided by leased square
feet.
|
(6)
|
Represents
the square footage adjustments for leases that do not reflect BOMA 1996
remeasurement.
|
25
Multifamily
Portfolio
The
following table presents an overview of our wholly-owned multifamily portfolio,
including occupancy and in-place rents, as of December 31, 2009:
Submarket
|
Number
of Properties
|
Number of Units |
Unit
as a 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 Lease Unit | |||||||
West
Los Angeles
|
||||||||||
Brentwood
|
98.5
|
%
|
$
|
22,271,447
|
$ |
1,983
|
||||
Santa
Monica(2)
|
99.6
|
20,434,020
|
2,084
|
|||||||
Honolulu
|
98.8
|
17,817,178
|
1,368
|
|||||||
Total
/ Weighted Average
|
99.0
|
%
|
$
|
60,522,645
|
$ |
1,777
|
(1)
|
Represents
annualized monthly multifamily rental income under leases commenced as of
December 31, 2009.
|
(2)
|
Excludes 10,013 square feet of
ancillary retail space, which generates $300,545 of annualized rent as of
December 31, 2009.
|
26
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
total office portfolio through December 31, 2009:
Year
Ended December 31,
|
|||||||||||
2009 (1)
|
2008 (2)
|
2007
|
|||||||||
Renewals
(3)
|
|||||||||||
Number
of leases
|
324 | 252 | 247 | ||||||||
Square
feet
|
1,516,453 | 1,075,281 | 905,306 | ||||||||
Tenant
improvement costs per square foot (4)(5)
|
$ | 7.14 | $ | 4.07 | $ | 5.21 | |||||
Leasing
commission costs per square foot (4)
|
6.53 | 7.60 | 7.39 | ||||||||
Total tenant improvement and
leasing commission costs (4)
|
$ | 13.67 | $ | 11.67 | $ | 12.60 | |||||
New leases
(6)
|
|||||||||||
Number
of leases
|
223 | 172 | 225 | ||||||||
Square
feet
|
654,558 | 586,574 | 890,962 | ||||||||
Tenant
improvement costs per square foot (4)(5)
|
$ | 15.21 | $ | 10.96 | $ | 14.38 | |||||
Leasing
commission costs per square foot (4)
|
8.65 | 8.55 | 9.44 | ||||||||
Total tenant improvement and
leasing commission costs (4)
|
$ | 23.86 | $ | 19.51 | $ | 23.82 | |||||
Total
|
|||||||||||
Number
of leases
|
547 | 424 | 472 | ||||||||
Square
feet
|
2,171,011 | 1,661,855 | 1,796,268 | ||||||||
Tenant
improvement costs per square foot (4)(5)
|
$ | 9.57 | $ | 6.50 | $ | 9.75 | |||||
Leasing
commission costs per square foot (4)
|
7.17 | 7.94 | 8.41 | ||||||||
Total tenant improvement and
leasing commission costs (4)
|
$ | 16.74 | $ | 14.44 | $ | 18.16 |
(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 totaling 1.4 million square feet owned by Fund X, an
unconsolidated real estate fund.
|
(2)
|
Excludes
a 46,000 square foot fitness center lease at Honolulu Club. The
240-month new lease was executed in April 2008 as part of the sale of the
fitness center by us to a third-party fitness center
operator. This lease replaced a lease entered into between two
subsidiaries of Douglas Emmett, Inc. in February
2008.
|
(3)
|
Includes
retained tenants that have relocated or expanded into new space within our
portfolio.
|
(4)
|
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.
|
(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.
|
(6)
|
Excludes
retained tenants that have relocated or expanded into new space within our
portfolio.
|
27
Historical
Capital Expenditures
The
following table sets forth certain information regarding historical recurring
capital expenditures at the properties in our total office portfolio through
December 31, 2009:
Office
|
|||||||||||
Year
Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||
Recurring
capital expenditures
|
$ | 2,709,654 | $ | 5,457,340 | $ | 5,331,325 | |||||
Total
square feet
(1)
|
11,810,724 | 11,810,609 | 11,666,107 | ||||||||
Recurring
capital expenditures per square foot
|
$ | 0.23 | $ | 0.46 | $ | 0.46 |
(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, 2009:
Multifamily
|
|||||||||||
Year
Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||
Recurring
capital expenditures
|
$ | 1,118,460 | $ | 1,570,154 | $ | 1,348,063 | |||||
Total
units
|
2,868 | 2,868 | 2,868 | ||||||||
Recurring
capital expenditures per unit
|
$ | 390 | $ | 547 | $ | 470 |
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 $40,000 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.
From time
to time, we are party to various lawsuits, claims and other legal proceedings
that arise in the ordinary course of our business. Excluding
ordinary, routine litigation incidental to our business, we are not currently a
party to any legal proceedings that we believe would reasonably be expected to
have a material adverse effect on our business, financial condition or results
of operation.
None.
28
PART
II.
Market
for Common Stock; Dividends
Our
common stock is traded on the New York Stock Exchange under the symbol
“DEI”. On February 17, 2010, the reported closing sale price per
share of our common stock on the New York Stock Exchange was
$13.74. 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 2009
|
||||||||||||||||
Dividend
|
$ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | ||||||||
Common
Stock Price
|
||||||||||||||||
High
|
$ | 13.97 | $ | 10.42 | $ | 13.87 | $ | 14.85 | ||||||||
Low
|
$ | 6.36 | $ | 7.45 | $ | 7.93 | $ | 11.64 | ||||||||
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 |
Holders
of Record
We had 22
holders of record of our common stock on February 17, 2010. 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 flows, 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
29
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, 2009 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/0001364250/000136425010000016/performancegraph.jpg)
Period
Ending
|
|||||
Index
|
10/24/06
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
Douglas
Emmett, Inc.
|
100.00
|
112.95
|
98.85
|
59.45
|
67.44
|
S&P
500
|
100.00
|
103.39
|
109.07
|
68.72
|
86.91
|
NAREIT
Equity
|
100.00
|
109.47
|
92.29
|
57.47
|
73.56
|
Source:
SNL Financial LC
30
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, 2009, 2008, 2007, 2006 and 2005 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
12/31/09
|
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
|
|||||||||||||||||||
Statement
of Operations Data
(in thousands):
|
||||||||||||||||||||||||
Total
office revenues
|
$ | 502,767 | $ | 537,377 | $ | 468,569 | $ | 77,566 | $ | 300,939 | $ | 348,566 | ||||||||||||
Total
multifamily revenues
|
68,293 | 70,717 | 71,059 | 11,374 | 45,729 | 45,222 | ||||||||||||||||||
Total
revenues
|
571,060 | 608,094 | 539,628 | 88,940 | 346,668 | 393,788 | ||||||||||||||||||
Operating
income (loss)
|
148,358 | 154,234 | 141,232 | (3,417 | ) | 113,784 | 138,935 | |||||||||||||||||
Loss
from continuing operations
attributable
to common stockholders
|
(27,064 | ) | (27,993 | ) | (13,008 | ) | (20,591 | ) | (16,362 | ) | (16,520 | ) | ||||||||||||
Per
Share Data:
|
||||||||||||||||||||||||
Loss
per share -
|
$ | (0.22 | ) | $ | (0.23 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (251,723 | ) | $ | (254,154 | ) | ||||||
basic
and diluted
|
||||||||||||||||||||||||
Weighted
average common
|
||||||||||||||||||||||||
shares
outstanding -
|
||||||||||||||||||||||||
basic
and diluted
|
121,552,731 | 120,725,928 | 112,645,587 | 115,005,860 | 65 | 65 | ||||||||||||||||||
Dividends
declared per
|
||||||||||||||||||||||||
common
share
|
$ | 0.40 | $ | 0.75 | $ | 0.70 | $ | 0.12 | $ | - | $ | - |
Douglas
Emmett, Inc.
|
Predecessor
|
|||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||
Balance
Sheet Data (in thousands, as of December 31)
|
||||||||||||||||||||||
Total
assets
|
$ | 6,059,932 | $ | 6,761,034 | $ | 6,189,968 | $ | 6,200,118 | $ | 2,904,647 | ||||||||||||
Secured
notes payable
|
3,273,459 | 3,692,785 | 3,105,677 | 2,789,702 | 2,223,500 | |||||||||||||||||
Other
Data:
|
||||||||||||||||||||||
Number
of consolidated properties (as of December 31)
|
58 |
(1)
|
64 |
(2)
|
57 | 55 | 47 |
(1)
|
All
properties are 100% owned by our operating partnership except the Honolulu
Club (78,000 square feet) in which we held a 66.7%
interest.
|
(2)
|
Includes
(i) 57 properties that are 100% owned by our operating partnership, (ii)
one property owned by a consolidated joint venture in which we held a
66.7% interest, and (iii) six properties owned by Fund X, in which we held
a controlling financial interest at December 31,
2008.
|
31
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, 2009 our consolidated office portfolio
consisted of 49 properties with approximately 11.9 million rentable square feet,
and our multifamily portfolio consisted of nine properties with a total of 2,868
units. Our total office portfolio includes our consolidated office
properties and the six office properties owned by Fund X. Our total
office portfolio consisted of 55 properties with approximately 13.3 million
rentable square feet. As of December 31, 2009, our consolidated
office portfolio was 91.7% leased, our total office portfolio including the Fund
X properties was 90.3% leased and our multifamily properties were 99.0%
leased. Our consolidated office portfolio contributed approximately
86.3% of our annualized rent as of December 31, 2009, while our multifamily
portfolio contributed the remaining 13.7%. As of December 31, 2009,
our Los Angeles County office and multifamily consolidated portfolio contributed
approximately 90.9% of our annualized rent, and our Honolulu, Hawaii office and
multifamily consolidated portfolio contributed the remaining 9.1%. 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.
Current
Year Acquisitions, Dispositions, Repositionings and Financings.
Acquisitions. We
did not acquire any new properties in 2009.
Dispositions. In
connection with the initial closing of Fund X in October 2008, we (i)
contributed to Fund X the portfolio of six Class A office properties that we
acquired in March 2008 and (ii) transferred to Fund X the related $365 million
term loan. In exchange, we received an interest in the common equity
of Fund X. Because the net value of the contributed properties (as
valued under the Fund X operating agreement) exceeded our required capital
contribution, Fund X distributed cash to us for the excess. We received part of
the cash in October 2008 and the remainder at the end of February 2009, at which
point Fund X became an unconsolidated real estate fund in which we retained an
equity investment. We recognized a gain of $5.6 million in the first
quarter of 2009 on the disposition of the interest in Fund X we did not
retain. 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, and in the case of the properties contributed to Fund X, only
until the end of February 2009, when the properties were deconsolidated from our
financial statements. Beginning in February 2009, we have accounted
for our interest in Fund X under the equity method.
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. Although usually associated with
newly-acquired properties, repositioning efforts can also occur at properties we
already own, therefore repositioning properties discussed in the context of this
paragraph exclude acquisition properties where the plan for improvement is
implemented as part of the acquisition. During 2009, we had no
properties that qualify as repositioning properties.
Financings. During 2009, we
exercised a one-year extension option and renewed our revolving credit facility
for $350 million (reduced from $370 million, but on the same pricing and
otherwise on the same terms and conditions as prior to the
extension). A second one-year extension option remains
available. We also exercised a one-year extension option on the $18
million variable-rate loan held by a consolidated joint venture.
Basis
of Presentation
The
accompanying consolidated financial statements as of December 31, 2009 and 2008
and for the three years ended December 31, 2009, 2008 and 2007 are the
consolidated financial statements of Douglas Emmett, Inc. and our subsidiaries
including our operating partnership. As described under
“Dispositions” above, the results of the six properties we acquired in March
2008 were included in our consolidated results until the end of February 2009,
when we completed the transaction to contribute these properties to Fund X in
return for an equity interest. All significant intercompany balances
and transactions have been eliminated in our consolidated financial
statements. Certain prior period amounts have been reclassified to
conform with current period presentation.
32
The
accompanying financial statements have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (SEC). The
accompanying financial statements include, in our opinion, all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial information set forth therein. Any reference to the number
of properties and square footage are unaudited and outside the scope of our
independent registered public accounting firm’s review of our financial
statements in accordance with the standards of the United States Public Company
Accounting Oversight Board.
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. These determinations, even though
inherently subjective and subject to change, affect the reported amounts of our
assets, liabilities, revenues and expenses. While we believe that our
estimates are based on reasonable assumptions and judgments at the time they are
made, some of our assumptions, estimates and judgments will inevitably prove to
be incorrect. As a result, actual outcomes will likely differ from
our accruals, and those differences—positive or negative—could be
material. Some of our accruals are subject to adjustment as we
believe appropriate based on revised estimates and reconciliation to the actual
results when available.
Investment in Real
Estate. Acquisitions of properties and other business
combinations are accounted for utilizing the purchase method and, accordingly,
the results of operations of acquired properties are included in our results of
operations from the respective dates of acquisition. Beginning
January 1, 2009, transaction costs related to acquisitions are expensed, rather
than included with the consideration paid. 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 improvements 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, per building, 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.
33
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 an investment in real
estate or an investment in an unconsolidated real estate fund, an impairment
loss is recorded to the extent that the carrying value exceeds the estimated
fair value of the property or equity investment. 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 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.
Revenue
Recognition. 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. 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.
Estimated
recoveries from tenants for real estate taxes, common are maintenance and
other recoverable operating expenses are recognized as revenues in the period
that the expenses are incurred. Subsequent to year-end, we perform final
reconciliations on a lease-by-lease basis and bill or credit each tenant for any
cumulative annual adjustments. 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.
The
recognition of gains on sales of real estate requires that we measure the timing
of a sale against various criteria related to the terms of the transaction, as
well as 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). 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.
34
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 accounts. The ineffective
portion of a derivative’s change in fair value is immediately recognized in
earnings.
For a
discussion of recently issued accounting literature, see Note 2 to our
consolidated financial statements in Item 8 of this Report.
Results
of Operations
The
comparability of our results of operations between 2009, 2008 and 2007 is
affected by acquisitions in all years presented. This includes the
acquisition of two office properties during 2007 and the acquisition of seven
office properties during 2008. Six of the seven properties acquired
in 2008 were subsequently contributed to a real estate fund and were removed
from our consolidated results at the end of February 2009, as described in Note
3 to the consolidated financial statements in Item 8 of this
Report. For most of the comparisons of 2009 to 2008 below, the
majority of the fluctuation is explained by the inclusion of these six
properties in our 2008 consolidated results for the nine months subsequent to
their acquisition in comparison to only two months of 2009, when they were
removed from our consolidation.
Comparison
of year ended December 31, 2009 to year ended December 31,
2008
|
Revenue
Office
Revenue
Total Office
Revenue. Total office revenue consists of rental revenue,
tenant recoveries and parking and other income. For the reasons
described below, total office revenue decreased by $34.6 million, or 6.4%, to
$502.8 million for 2009 compared to $537.4 million for 2008.
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
decreased by $27.4 million, or 6.3%, to $406.1 million for 2009 compared to
$433.5 million for 2008. The decrease is primarily due to $29.5
million less rent in 2009 compared to 2008 resulting from the six properties we
contributed to Fund X, an unconsolidated real estate fund, partially offset by
increases totaling $2.1 million for the remainder of our
portfolio. The increase of $2.1 million is a result of rate increases
for new and renewal tenants, partially offset by lower occupancy.
Tenant
Recoveries. Total office tenant recoveries decreased by $1.0
million, or 3.0%, to $31.4 million for 2009 compared to $32.4 million for
2008. The decrease is primarily due to $2.4 million less recoveries
in 2009 compared to 2008 resulting from the six properties we contributed to
Fund X, an unconsolidated real estate fund, partially offset by an increase in
recoverable tenant direct expenses.
Parking and Other
Income. Total office parking and other income decreased by
$6.3 million, or 8.7%, to $65.2 million for 2009 compared to $71.5 million for
2008. The decrease is primarily due to $4.4 million less parking
income in 2009 compared to 2008 resulting from the six properties we contributed
to Fund X, an unconsolidated real estate fund, as well as a decrease of $1.9
million for the remainder of our portfolio as a result of lower occupancy and
usage.
Multifamily
Revenue
Total Multifamily
Revenue. Total multifamily revenue consists of rent, parking
income and other income. Total multifamily revenue decreased by $2.4
million, or 3.4%, to $68.3 million for 2009, compared to $70.7 million for
2008. The decrease is primarily due to lower recognition of rental
income during 2009 from the amortization of below-market leases for certain
multifamily units initially recorded at the time of our IPO, thus causing a
decline when comparing the 2009 and 2008 periods, as well as a decline in rental
rates for the comparable periods.
35
Operating
Expenses
Office Rental
Expenses. Total office rental expense decreased by $11.9
million, or 7.1%, to $154.3 million for 2009, compared to $166.1 million for
2008. The decrease is primarily due to $13.0 million less in office
rental expenses in 2009 compared to 2008 resulting from the six properties we
contributed to Fund X, an unconsolidated real estate fund, partially offset by
an increase in office rental expenses in the remainder of our
portfolio. Other office expenses increased by $1.1 million primarily
as a result of lower comparable property tax accruals in the prior year,
partially offset by lower janitorial costs and ground rent payments in the
current year.
General and Administrative
Expenses. General and administrative expenses increased $1.2
million, or 5.5%, to $23.9 million for 2009, compared to $22.6 million for
2008. The increase is primarily due to the timing of accruals related
to compensation, including equity awards that are expensed over the multi-year
vesting period.
Depreciation and
Amortization. Depreciation and amortization expense decreased
$21.4 million, or 8.6%, to $226.6 million for 2009, compared to $248.0 million
for 2008. The decrease is primarily due to $18.5 million less
depreciation and amortization reflected in 2009 compared to 2008 resulting from
the six properties we contributed to Fund X, an unconsolidated real estate
fund.
Non-Operating
Income and Expenses
Gain on Disposition of Interest in
Unconsolidated Real Estate Fund. In February
2009, we recorded a gain of $5.6 million related to the contribution of six
properties to Fund X, an unconsolidated real estate fund, as described in Note 3
to our consolidated financial statements in Item 8 of this Report.
Other Income
(Loss). Other income (loss) reflects a net loss in 2009 which
represents the allocation to outside ownership interest of profit generated by
the six properties owned by Fund X during the two months of 2009 prior to the
deconsolidation of Fund X, net of the profit generated by our management of the
properties during the ten months of 2009 following the deconsolidation of Fund
X. In contrast, the other income (loss) in 2008 reflects a net gain
of $3.6 million, which includes $3.1 million of profit-sharing resulting from
our initial contribution of the six properties in October 2008 to Fund X, which
was deconsolidated in February 2009, as well as $0.5 million of operating profit
related to the temporary operation of the Honolulu Athletic Club during
2008.
Loss, including Depreciation, from
Unconsolidated Real Estate Fund. The loss, including depreciation, from
unconsolidated real estate fund totaled $3.3 million for 2009. The
loss represents our equity interest in the operating results from the six
properties owned by Fund X, including the operating income net of historical
cost-basis depreciation. During 2008, subsequent to acquiring the six
properties, the operating results were contained in our consolidated results, so
there was no comparable amount recorded in this line until the properties were
deconsolidated at the end of February 2009.
Interest
Expense. Interest expense decreased $8.9 million, or 4.6%, to
$184.8 million for 2009, compared to $193.7 million for 2008. The
decrease over comparable periods is primarily due to lower levels of outstanding
debt during 2009 as a result of the deconsolidation of debt associated with the
six properties contributed to Fund X, an unconsolidated real estate fund, and a
decrease in the utilization of our revolving credit facility during the current
year, which had no outstanding borrowings for the majority of
2009. The decrease is partially offset by additional interest expense
as a result of higher non-cash interest expense from the amortization of pre-IPO
interest rate swap contracts.
Comparison
of year ended December 31, 2008 to year ended December 31,
2007
|
Revenue
Office
Revenue
Total Office
Revenue. Total office 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. 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.
36
Multifamily
Revenue
Total Multifamily
Revenue. 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.
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
Other Income
(Loss). Other income (loss) of $0.7 million in 2007 consisted
of interest income earned on the investment of excess cash. In 2008,
other income (loss) of $3.6 million consisted primarily of interest income and
the allocation of operating results related to Fund X, as well as miscellaneous
income from the temporary operation of the Honolulu Athletic Club during
2008. See Note 3 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 3 to our
consolidated financial statements in Item 8 of the Report.
Liquidity
and Capital Resources
Available
Borrowings, Cash Balances and Capital Resources
In
October 2008, we completed the initial closing of Fund X. Fund X has
obtained equity commitments in excess of $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 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, Note 7, and Note 14 to our consolidated
financial statements in Item 8 of this Report.
We had
total indebtedness of $3.3 billion at December 31, 2009, excluding a loan
premium representing the mark-to-market adjustment on variable rate debt assumed
from our predecessor. Our debt decreased $414 million from December
31, 2008 primarily as a result of our contribution of six properties to Fund X,
an unconsolidated real estate fund and the related $365 million of debt which
the properties secure as discussed in Note 3 to our consolidated financial
statements in Item 8 of this Report. The remaining decrease in our
outstanding debt was the result of repaying all outstanding amounts borrowed
under our revolving credit facility. See Note 7 and Note 14 to our
consolidated financial statements in Item 8 of this Report.
37
We have a
secured revolving credit facility with a group of banks led by Bank of America,
N.A. and Banc of America Securities LLC totaling $350 million. At
December 31, 2009, there were no borrowing outstanding 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, 2010 but
has a one-year extension 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 extension, 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
flows from operations, we generally enter into interest rate swap or interest
rate cap agreements. At December 31, 2009, $3.24 billion or 99% of
our debt was effectively fixed at an overall rate of 5.10% (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. However, of the $3.24
billion of variable-rate debt swapped to fixed rates, certain underlying swaps
totaling $1.11 billion are scheduled to mature on August 1, 2010 and certain
other underlying swaps totaling $545 million are scheduled to mature on December
1, 2010. See Item 7A of this Report for a description of the impact
of variable rates on our interest expense. See also Note 7 and Note 9
to our consolidated financial statements in Item 8 of this Report.
At
December 31, 2009, our total borrowings under secured loans represented 61% of
our total market capitalization of $5.6 billion. Total market
capitalization includes our consolidated debt and the value of common stock and
operating partnership units each based on our common stock closing price at
December 31, 2009 on the New York Stock Exchange of $14.25 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 2009, we declared an annual dividend of $0.40 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 flows from operations, long-term secured and unsecured
indebtedness, the issuance of debt and equity securities, including units in our
operating partnership, property dispositions and joint venture
transactions. We have historically financed our operations,
acquisitions and development, through the use of our revolving credit facility
or other short term acquisition lines of credit, which we subsequently repay
with long-term secured floating rate mortgage debt. To mitigate the
impact of fluctuations in short-term interest rates on our cash flows 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, 2009:
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)
|
$ | 3,258,000 | $ | - | $ | 2,706,080 | $ | - | $ | 551,920 | ||||||||||
Minimum
lease payments
|
56,440 | 733 | 1,466 | 1,466 | 52,775 | |||||||||||||||
Remaining
capital commitment to Fund X
|
24,034 | 24,034 | - | - | - | |||||||||||||||
Purchase
commitments related to capital expenditures
|
||||||||||||||||||||
associated
with tenant improvements and
|
||||||||||||||||||||
repositioning
and other purchase obligations
|
2,047 | 2,047 | - | - | - | |||||||||||||||
Total
|
$ | 3,340,521 | $ | 26,814 | $ | 2,707,546 | $ | 1,466 | $ | 604,695 |
(1)
|
Includes
$18 million of debt carried by the Honolulu Club joint venture in which we
held a 66.7% interest.
|
38
Off-Balance
Sheet Arrangements
At
December 31, 2009, we had an equity investment of $97 million in Fund X, an
unconsolidated real estate fund. We formed Fund X to raise
additional capital to allow us to make acquisitions of properties. We
have an interest in Fund X that is pari passu with the other investors in Fund X
based on our capital contributions and we have a remaining capital commitment of
$24 million at December 31, 2009. In addition, during the life of
Fund X, we are entitled to certain additional distributions based on committed
capital and on any profits that exceed certain specified cash returns to the
investors. Certain of our wholly-owned affiliates provide property
management and other services to Fund X, for which we are paid fees and/or
reimbursed our costs.
In
connection with the initial closing of Fund X in October 2008, we (i)
contributed to Fund X the portfolio of six Class A office properties that we
acquired in March 2008 and (ii) transferred to Fund X the related $365 million
term loan. In exchange, we received an interest in the common equity
of Fund X. Because the net value of the contributed properties (as
valued under the Fund X operating agreement) exceeded our required capital
contribution, Fund X distributed cash to us for the excess. We received part of
the cash in October 2008 and the remainder at the end of February
2009. We recognized a gain of $5.6 million in the first quarter of
2009 on the disposition of the interest in Fund X we did not
retain. We do not expect to receive additional significant liquidity
from our investment in Fund X until the disposition of the properties held by
Fund X, which may not be for many years. We do not have any debt
outstanding in connection with our interest in Fund X.
Fund X
has debt outstanding, which is secured by the six properties we contributed,
totaling $365 million at December 31, 2009 as summarized in the following
table:
Type
of Debt
|
Maturity
Date
|
Variable
Rate
|
Effective
Annual Fixed Rate(1)
|
Swap
Maturity Date
|
||||
Variable
rate term loan (swapped
to fixed rate)
(2)
|
08/18/13
|
LIBOR
+ 1.65%
|
5.52%
|
09/04/12
|
(1)
|
Includes
the effect of interest rate contracts. Based on actual/360-day
basis and excludes amortization of loan fees. The total
effective rate on an actual/365-day basis is 5.59% at December 31,
2009.
|
(2)
|
The
loan is secured by six properties in a collateralized
pool. Requires monthly payments of interest only, with
outstanding principal due upon
maturity.
|
We remain
responsible under certain environmental and other limited indemnities and
guarantees covering customary non-recourse carve outs under these loans which we
entered into prior to our contribution of this debt and the related properties
to Fund X, although we have an indemnity from Fund X for any amounts we would be
required to pay under these agreements. If Fund X fails to perform
any obligations under a swap agreement related to this loan, we remain liable to
the swap counterparties. The maximum future payments under the swap
agreements was approximately $38.3 million as of December 31, 2009. To date, all
obligations under the swap agreements have been performed by Fund X in
accordance with the terms of the agreements.
Cash
Flows
Cash and
cash equivalents were $72.7 million and $8.7 million at December 31, 2009 and
2008, respectively.
Our cash
flows from operating activities is primarily dependent upon the occupancy level
of our portfolio, the rental rates achieved on our leases, the collectability of
rent and recoveries from our tenants and the level of operating expenses and
other general and administrative costs. Net cash provided by
operating activities decreased by $2.5 million to $180.3 million for 2009
compared to $182.8 million for 2008. The decrease is primarily due to
the cash flows from properties contributed to Fund X were included in our
consolidated results for nine months of 2008 compared to only two months of
2009. See Note 3 to our consolidated financial statements in
Item 8 of this Report.
Our net
cash used in investing activities is generally used to fund property
acquisitions, development and redevelopment projects and recurring and
non-recurring capital expenditures. Net cash used in investing
activities decreased $635.8 million to $48.8 million for 2009 compared to $684.6
million for 2008. The decrease was primarily due to the absence of
property acquisitions in 2009 compared to 2008. See Note 3 to our
consolidated financial statements in Item 8 of this Report.
Our net
cash related to financing activities is generally impacted by our borrowings,
capital activities net of dividends and distributions paid to common
stockholders and noncontrolling interests. Net cash flows from
financing activities amounted to a net use of cash for 2009 totaling $67.5
million compared to a net provision of cash for 2008 totaling $504.6
million. The primary differences are the repayment of debt in 2009
compared to increased borrowings in 2008 for property acquisitions, partially
offset by lower dividends and distributions in 2009 and a lower level of
operating partnership unit redemptions in 2009 compared to 2008. See
Note 3 to our consolidated financial statements in Item 8 of this
Report.
39
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. We only enter
into contracts with major financial institutions based on their credit rating
and other factors. For a description of our interest rate contracts,
please see Note 9 to our consolidated financial statements contained Item 8
of in this Report.
As of
December 31, 2009, approximately 99% (or $3.24 billion) of our total outstanding
debt of $3.26 billion, excluding loan premiums, was subject to floating interest
rates which were effectively fixed by virtue of interest rate
contracts. The remaining $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, 2009, 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 $90
thousand. However, of the $3.24 billion of variable-rate debt swapped
to fixed rates, certain underlying swaps totaling $1.11 billion are scheduled to
mature on August 1, 2010 and certain other underlying swaps totaling $545
million are scheduled to mature on December 1, 2010. If we chose to
not enter into new swaps covering the remaining term of the hedged debt, the
potential impact to earnings of a 50 basis point change in LIBOR would be an
additional $2.6 million.
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 thousand.
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.
By using
derivative instruments to hedge exposure to changes in interest rates, we expose
ourselves to credit risk and the potential inability of our counterparties to
perform under the terms of the agreements. We attempt to minimize
this credit risk by contracting with high-quality bank financial
counterparties.
All
information required by this item is listed in the Index to Financial Statements
in Part IV, Item 15(a)(1).
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, 2009, 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, 2009 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, 2009, 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
40
PART
III
Information
required by this item is incorporated by reference to the information set forth
under the captions “Election
of Directors (Proposal 1) – Information Concerning Nominees,” “Executive Officers,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” “Corporate Governance” and
“Board Meetings and
Committees” in our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of our year
ended December 31, 2009.
Item
11. Executive Compensation
Information
required by this item is incorporated by reference to the information set forth
under the captions “Executive
Compensation,” “Director Compensation,”
“Compensation Committee
Interlocks and Insider Participation” and “Compensation Committee
Report” in our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of our year
ended December 31, 2009.
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, 2009 with respect to
shares of our common stock that may be issued under our existing stock incentive
plan (in thousands, except exercise price):
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)
|
(b)
|
(c)
|
||
Equity
compensation plans approved by stockholders
|
11,293
|
$18.44
|
27,600
|
For a
description of our 2006 Omnibus Stock Incentive Plan, please see Note 12 to
our consolidated financial statements included in this Report. We did
not have any other equity compensation plans as of December 31,
2009.
The
remaining information required by this item is incorporated by reference to the
information set forth under the caption “Voting Securities and Principal
Stockholders—Security Ownership of Certain Beneficial Owners and
Management” in our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
our year ended December 31, 2009.
Information
required by this item is incorporated by reference to the information set forth
under the captions “Transactions With Related
Persons,” “Election of
Directors (Proposal 1) – Information Concerning Nominees” and “Corporate Governance” in our
Proxy Statement for the 2010 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our year ended December 31,
2009.
Information
required by this item is incorporated by reference to the information set forth
under the caption “Independent
Registered Public Accounting Firm” in our Proxy Statement for the 2010
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of our year ended December 31, 2009.
41
PART
IV.
(a)
and (c) Financial Statements and Financial Statement
Schedule
|
||
Index to Financial
Statements.
|
Page No. | |
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, 2009 and 2008
|
F-4 | |
Consolidated
Statements of Operations for the years ended December 31, 2009, 2008 and
2007.
|
F-5 | |
Consolidated
Statements of Equity (Deficit) for the years ended December 31, 2009, 2008
and 2007.
|
F-6 | |
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007.
|
F-7 | |
Notes
to Consolidated Financial Statements
|
F-8 | |
Schedule
III-Real Estate and Accumulated Depreciation as of December 31,
2009
|
F-31 | |
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.
(5
|
|
3.2 |
Bylaws
of Douglas Emmett, Inc.
(5)
|
|
3.3 |
Certificate
of Correction to Articles of Amendment and Restatement of Douglas Emmett,
Inc.(6)
|
|
4.1 |
Form
of Certificate of Common Stock of Douglas Emmett, Inc.(3)
|
|
10.1 |
Form
of Agreement of Limited Partnership of Douglas Emmett Properties, LP.
(3)
|
|
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
Initial Holders named therein.(1)+
|
|
10.8 |
Form
of Indemnification Agreement between Douglas Emmett, Inc. and its
directors and officers.
(2) +
|
|
10.9 |
Douglas
Emmett, Inc. 2006 Omnibus Stock Incentive Plan.
(8)+
|
|
10.10 |
Form
of Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan Non-Qualified
Stock Option Agreement.(2)+
|
|
10.11 |
Form
of Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan LTIP Unit Award
Agreement.(3)+
|
42
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.
(2)
|
|
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.
(2)
|
|
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.
(2)
|
|
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.
(2)
|
|
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.
(2)
|
|
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.
(2)
|
|
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.
(2)
|
|
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.
(2)
|
|
10.20 |
Form
of Douglas Emmett Properties, LP Partnership Unit Designation – LTIP
Units.
(3) +
|
|
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(3)
|
|
10.22 |
Form
of Modification Agreement among Douglas Emmett 1993, LLC, Brentwood Plaza,
the Lenders party thereto and Eurohypo AG, New York Branch.
(3)
|
|
10.23 |
Form
of Modification Agreement among Douglas Emmett 1995, LLC, the Lenders
party thereto and Eurohypo AG, New York Branch.
(3)
|
|
10.24 |
Form
of Modification Agreement among Douglas Emmett 1996, LLC, the Lenders
party thereto and Eurohypo AG, New York Branch.
(3)
|
|
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.
(3)
|
|
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.
(3)
|
|
10.27 |
Form
of Modification Agreement among Douglas Emmett 2000, LLC, the Lenders
party thereto and Eurohypo AG, New York Branch.
(3)
|
|
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.
(3)
|
|
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.
(3)
|
|
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.
(3)
|
43
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.
(3)
|
|
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 |
Employment
agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas
Emmett Properties, LP and Jordan L. Kaplan.
(10) +
|
|
10.39 |
Employment
agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas
Emmett Properties, LP and Kenneth Panzer.
(10) +
|
|
10.40 |
Employment
agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas
Emmett Properties, LP and William Kamer.
(10) +
|
|
10.41 |
$365,000,000
Loan Agreement dated as of August 18, 2008 among Douglas Emmett 2008, LLC,
the lenders party thereto and Eurohypo AG.
(11)
|
|
10.42 |
Extension
Agreement and Reaffirmation of Loan Documents entered into as of October
30, 2009, 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; Landesbank Baden-Württemberg; and Wachovia Bank,
National Association.
|
|
10.43 |
Douglas
Emmett, Inc. 2006 Omnibus Stock Incentive Plan Amendment No. 1. (13)
+
|
|
10.44 |
Form
of Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan LTIP Unit Award
Agreement (for independent directors). +
|
|
21.1 |
List
of Subsidiaries of the Registrant.
|
|
23.1 |
Consent
of Independent Registered Public Accounting Firm.
|
|
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.
(4)
|
|
32.2 |
Certificate
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(4)
|
|
44
+ |
Denotes
management contract or compensatory plan, contract or
arrangement
|
|
(1)
|
Filed
with Registrant’s Registration Statement on Form S-11 (Registration No.
333-135082) filed June 16, 2006 and incorporated herein by this
reference.
|
|
(2)
|
Filed
with Registrant’s Amendment No. 2 to Form S-11 filed September 20, 2006
and incorporated herein by this reference.
|
|
(3)
|
Filed
with Registrant’s Amendment No. 3 to Form S-11 filed October 3, 2006 and
incorporated herein by this reference.
|
|
(4)
|
In
accordance with SEC Release No. 33-8212, this 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.
|
|
(5)
|
Filed
with Registrant’s Amendment No. 6 to Form S-11 filed October 19, 2006 and
incorporated herein by this reference.
|
|
(6)
|
Filed
with Registrant's Current Report on Form 8-K filed October 30, 2006 and
incorporated herein by this reference.
|
|
(7)
|
Filed
August 10, 2007 with Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007 and incorporated herein by this
reference.
|
|
(8)
|
Filed
with Registrant’s Registration Statement on Form S-8 (File No. 333-148268)
filed December 21, 2007 and incorporated herein by this
reference.
|
|
(9)
|
Filed
May 8, 2008 with Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008 and incorporated herein by this
reference.
|
|
(10)
|
Filed
with Registrant’s Amendment No. 3 to Form S-11 filed October 3, 2006 and
on August 7, 2008 with Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008 and incorporated herein by this
reference.
|
|
(11)
|
Filed
November 6, 2008 with Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008 and incorporated herein by this
reference.
|
|
(12)
|
Filed
February 22, 2008 with Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 and incorporated herein by this
reference.
|
|
(13)
|
Filed
August 6, 2009 with Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009 and incorporated herein by this
reference.
|
45
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, 2010
|
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
|
|
|
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, 2010.
46
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, 2009. 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, 2009, 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, 2009, 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, 2009.
/s/
JORDAN L. KAPLAN
|
|
Jordan
L. Kaplan
Chief
Executive Officer
|
|
/s/
WILLIAM KAMER
|
|
William
Kamer
Chief
Financial Officer
|
February
25, 2010
F-1
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of
Douglas
Emmett, Inc.
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, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, 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.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for noncontrolling interests (formerly minority
interests) with the adoption of the guidance originally issued in FASB Statement
No. 160 “Noncontrolling Interests in Consolidated Financial Statements”
(codified in FASB ASC Topic 810, Consolidation) effective January 1, 2009, and
retroactively applied.
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, 2009,
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 25, 2010 expressed an unqualified opinion
thereon.
/s/ Ernst & Young
LLP
|
|
Los
Angeles, California
February
25, 2010
|
F-2
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, 2009, 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, 2009, 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, 2009 and 2008, and the related
consolidated statements of operations, equity (deficit), and cash flows for each
of the three years in the period ended December 31, 2009, and our report dated
February 25, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young
LLP
|
|
Los
Angeles, California
February
25, 2010
|
F-3
Douglas
Emmett, Inc.
Consolidated
Balance Sheets
(in
thousands, except share data)
December
31, 2009
|
December
31, 2008
|
|||||||
Assets
|
||||||||
Investment
in real estate:
|
||||||||
Land
|
$ | 835,407 | $ | 900,213 | ||||
Buildings
and improvements
|
5,017,569 | 5,528,567 | ||||||
Tenant
improvements and lease intangibles
|
534,084 | 552,536 | ||||||
Investment
in real estate, gross
|
6,387,060 | 6,981,316 | ||||||
Less:
accumulated depreciation
|
(688,893 | ) | (490,125 | ) | ||||
Investment
in real estate, net
|
5,698,167 | 6,491,191 | ||||||
Cash
and cash equivalents
|
72,740 | 8,655 | ||||||
Tenant
receivables, net
|
1,841 | 2,427 | ||||||
Deferred
rent receivables, net
|
40,395 | 33,039 | ||||||
Interest
rate contracts
|
108,027 | 176,255 | ||||||
Acquired
lease intangible assets, net
|
11,691 | 18,163 | ||||||
Investment
in unconsolidated real estate fund
|
97,127 | - | ||||||
Other
assets
|
29,944 | 31,304 | ||||||
Total
assets
|
$ | 6,059,932 | $ | 6,761,034 | ||||
Liabilities
|
||||||||
Secured
notes payable, including loan premium
|
$ | 3,273,459 | $ | 3,692,785 | ||||
Accounts
payable and accrued expenses
|
72,893 | 69,445 | ||||||
Security
deposits
|
32,501 | 35,890 | ||||||
Acquired
lease intangible liabilities, net
|
139,340 | 195,036 | ||||||
Interest
rate contracts
|
237,194 | 407,492 | ||||||
Dividends
payable
|
12,160 | 22,856 | ||||||
Other
liabilities
|
- | 57,316 | ||||||
Total
liabilities
|
3,767,547 | 4,480,820 | ||||||
Equity
|
||||||||
Douglas
Emmett, Inc. stockholders' equity:
|
||||||||
Common
stock, $0.01 par value 750,000,000 authorized,
121,596,427
and 121,897,388 outstanding at
December
31, 2009 and 2008, respectively
|
1,216 | 1,219 | ||||||
Additional
paid-in capital
|
2,290,419 | 2,284,429 | ||||||
Accumulated
other comprehensive income (loss)
|
(186,255 | ) | (274,111 | ) | ||||
Accumulated
deficit
|
(312,017 | ) | (236,348 | ) | ||||
Total
Douglas Emmett, Inc. stockholders' equity
|
1,793,363 | 1,775,189 | ||||||
Noncontrolling
interests
|
499,022 | 505,025 | ||||||
Total
equity
|
2,292,385 | 2,280,214 | ||||||
Total
liabilities and equity
|
$ | 6,059,932 | $ | 6,761,034 |
See
notes to consolidated financial statements.
F-4
Douglas
Emmett, Inc.
Consolidated
Statements of Operations
(in
thousands, except shares and per share data)
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenues:
|
||||||||||||
Office
rental
|
||||||||||||
Rental
revenues
|
$ | 406,117 | $ | 433,487 | $ | 376,921 | ||||||
Tenant
recoveries
|
31,407 | 32,392 | 30,269 | |||||||||
Parking
and other income
|
65,243 | 71,498 | 61,379 | |||||||||
Total
office revenues
|
502,767 | 537,377 | 468,569 | |||||||||
Multifamily
rental
|
||||||||||||
Rental
revenues
|
64,127 | 66,510 | 67,427 | |||||||||
Parking
and other income
|
4,166 | 4,207 | 3,632 | |||||||||
Total
multifamily revenues
|
68,293 | 70,717 | 71,059 | |||||||||
Total
revenues
|
571,060 | 608,094 | 539,628 | |||||||||
Operating
Expenses
|
||||||||||||
Office
expense
|
154,270 | 166,124 | 148,582 | |||||||||
Multifamily
expense
|
17,925 | 17,079 | 18,735 | |||||||||
General
and administrative
|
23,887 | 22,646 | 21,486 | |||||||||
Depreciation
and amortization
|
226,620 | 248,011 | 209,593 | |||||||||
Total
operating expenses
|
422,702 | 453,860 | 398,396 | |||||||||
Operating
income
|
148,358 | 154,234 | 141,232 | |||||||||
Gain
on disposition of interest in unconsolidated real
estate fund
|
5,573 | - | - | |||||||||
Other
income (loss)
|
(12 | ) | 3,580 | 695 | ||||||||
Loss,
including depreciation, from unconsolidated real
estate fund
|
(3,279 | ) | - | - | ||||||||
Interest
expense
|
(184,797 | ) | (193,727 | ) | (160,616 | ) | ||||||
Net
loss
|
(34,157 | ) | (35,913 | ) | (18,689 | ) | ||||||
Less:
net loss attributable to noncontrolling interests
|
7,093 | 7,920 | 5,681 | |||||||||
Net
loss attributable to common stockholders
|
$ | (27,064 | ) | $ | (27,993 | ) | $ | (13,008 | ) | |||
Net
loss attributable to common stockholders
|
||||||||||||
per
share – basic and diluted
|
$ | (0.22 | ) | $ | (0.23 | ) | $ | (0.12 | ) | |||
Dividends
declared per common share
|
$ | 0.40 | $ | 0.75 | $ | 0.70 | ||||||
Weighted
average shares of common stock
|
||||||||||||
outstanding
– basic and diluted
|
121,552,731 | 120,725,928 | 112,645,587 |
See
notes to consolidated financial statements
F-5
Douglas
Emmett, Inc.
Consolidated
Statements of Equity (Deficit)
(in
thousands, except share amounts)
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Shares
of Common Stock
|
||||||||||||
Balance
at beginning of period
|
121,897,388 | 109,833,903 | 115,005,860 | |||||||||
Repurchase
of equity units
|
(819,500 | ) | - | (5,171,957 | ) | |||||||
Conversion
of operating partnership units
|
518,539 | 12,032,532 | - | |||||||||
Issuance
of common stock
|
- | 30,953 | - | |||||||||
Balance
at end of period
|
121,596,427 | 121,897,388 | 109,833,903 | |||||||||
Common
Stock
|
||||||||||||
Balance
at beginning of period
|
$ | 1,219 | $ | 1,098 | $ | 1,150 | ||||||
Repurchase
of equity units
|
(8 | ) | - | (52 | ) | |||||||
Conversion
of operating partnership units
|
5 | 120 | - | |||||||||
Issuance
of common stock
|
- | 1 | - | |||||||||
Balance
at end of period
|
$ | 1,216 | $ | 1,219 | $ | 1,098 | ||||||
Additional
Paid-in Capital
|
||||||||||||
Balance
at beginning of period
|
$ | 2,284,429 | $ | 2,019,716 | $ | 2,144,600 | ||||||
Repurchase
of equity units
|
(4,606 | ) | - | (125,133 | ) | |||||||
Conversion
of operating partnership units
|
7,665 | 261,572 | - | |||||||||
Issuance
of common stock
|
- | 667 | - | |||||||||
Stock
compensation
|
2,931 | 2,474 | 249 | |||||||||
Balance
at end of period
|
$ | 2,290,419 | $ | 2,284,429 | $ | 2,019,716 | ||||||
Accumulated
Other Comprehensive Income (Loss)
|
||||||||||||
Balance
at beginning of period
|
$ | (274,111 | ) | $ | (101,163 | ) | $ | 415 | ||||
Cash
flow hedge adjustment
|
87,856 | (172,948 | ) | (101,578 | ) | |||||||
Balance
at end of period
|
$ | (186,255 | ) | $ | (274,111 | ) | $ | (101,163 | ) | |||
Accumulated
Deficit
|
||||||||||||
Balance
at beginning of period
|
$ | (236,348 | ) | $ | (89,812 | ) | $ | (34,392 | ) | |||
Net
loss
|
(27,064 | ) | (27,993 | ) | (13,008 | ) | ||||||
Noncontrolling
interests redemption adjustment
|
- | (27,377 | ) | 36,138 | ||||||||
Dividends
|
(48,605 | ) | (91,166 | ) | (78,550 | ) | ||||||
Balance
at end of period
|
$ | (312,017 | ) | $ | (236,348 | ) | $ | (89,812 | ) | |||
Douglas
Emmett, Inc. Stockholders' Equity
|
||||||||||||
Balance
at beginning of period
|
$ | 1,775,189 | $ | 1,829,839 | $ | 2,111,773 | ||||||
Net
loss
|
(27,064 | ) | (27,993 | ) | (13,008 | ) | ||||||
Cash
flow hedge adjustment
|
87,856 | (172,948 | ) | (101,578 | ) | |||||||
Comprehensive
income
|
60,792 | (200,941 | ) | (114,586 | ) | |||||||
Issuance
of common stock
|
- | 668 | - | |||||||||
Repurchase
of equity units
|
(4,614 | ) | - | (125,185 | ) | |||||||
Dividends
|
(48,605 | ) | (91,166 | ) | (78,550 | ) | ||||||
Conversion
of operating partnership units
|
7,670 | 261,692 | - | |||||||||
Noncontrolling
interests redemption adjustment
|
- | (27,377 | ) | 36,138 | ||||||||
Stock
compensation
|
2,931 | 2,474 | 249 | |||||||||
Balance
at end of period
|
$ | 1,793,363 | $ | 1,775,189 | $ | 1,829,839 | ||||||
Noncontrolling
Interests
|
||||||||||||
Balance
at beginning of period
|
$ | 505,025 | $ | 793,764 | $ | 934,509 | ||||||
Net
loss
|
(7,093 | ) | (7,920 | ) | (5,681 | ) | ||||||
Cash
flow hedge adjustment
|
24,361 | - | - | |||||||||
Comprehensive
income
|
17,268 | (7,920 | ) | (5,681 | ) | |||||||
Repurchase
of equity units
|
(3,603 | ) | (23,759 | ) | (69,210 | ) | ||||||
Deconsolidation
of Douglas Emmett Fund X, LLC
|
10 | - | - | |||||||||
Contributions
|
450 | 319 | - | |||||||||
Distributions
|
(16,571 | ) | (27,672 | ) | (31,851 | ) | ||||||
Conversion
of operating partnership units
|
(7,670 | ) | (261,692 | ) | - | |||||||
Noncontrolling
interests redemption adjustment
|
- | 27,377 | (36,138 | ) | ||||||||
Stock
compensation
|
4,113 | 4,608 | 2,135 | |||||||||
Balance
at end of period
|
$ | 499,022 | $ | 505,025 | $ | 793,764 | ||||||
Total
Equity
|
||||||||||||
Balance
at beginning of period
|
$ | 2,280,214 | $ | 2,623,603 | $ | 3,046,282 | ||||||
Net
loss
|
(34,157 | ) | (35,913 | ) | (18,689 | ) | ||||||
Cash
flow hedge adjustment
|
112,217 | (172,948 | ) | (101,578 | ) | |||||||
Comprehensive
income
|
78,060 | (208,861 | ) | (120,267 | ) | |||||||
Issuance
of common stock
|
- | 668 | - | |||||||||
Repurchase
of equity units
|
(8,217 | ) | (23,759 | ) | (194,395 | ) | ||||||
Dividends
|
(48,605 | ) | (91,166 | ) | (78,550 | ) | ||||||
Deconsolidation
of Douglas Emmett Fund X, LLC
|
10 | - | - | |||||||||
Contributions
|
450 | 319 | - | |||||||||
Distributions
|
(16,571 | ) | (27,672 | ) | (31,851 | ) | ||||||
Stock
compensation
|
7,044 | 7,082 | 2,384 | |||||||||
Balance
at end of period
|
$ | 2,292,385 | $ | 2,280,214 | $ | 2,623,603 |
See
notes to consolidated financial statements.
F-6
Douglas
Emmett, Inc.
Consolidated
Statements of Cash Flows
(in
thousands)
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
Activities
|
||||||||||||
Net
loss
|
$ | (34,157 | ) | $ | (35,913 | ) | $ | (18,689 | ) | |||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||||||
Non-cash
profit sharing allocation to consolidated real estate fund
|
660 | (431 | ) | - | ||||||||
Loss,
including depreciation, from unconsolidated real estate
fund
|
3,279 | - | - | |||||||||
Depreciation
and amortization
|
226,620 | 248,011 | 209,593 | |||||||||
Net
accretion of acquired lease intangibles
|
(32,468 | ) | (42,905 | ) | (40,563 | ) | ||||||
Gain
on disposition of interest in unconsolidated real estate
fund
|
(5,573 | ) | - | - | ||||||||
Amortization
of deferred loan costs
|
2,018 | 2,083 | 1,136 | |||||||||
Amortization
of loan premium
|
(5,026 | ) | (4,742 | ) | (4,475 | ) | ||||||
Non-cash
market value adjustments on interest rate contracts
|
20,062 | 13,805 | 14,266 | |||||||||
Non-cash
amortization of stock-based compensation
|
5,101 | 4,400 | 2,178 | |||||||||
Change
in working capital components:
|
||||||||||||
Tenant
receivables
|
442 | (1,242 | ) | 3,229 | ||||||||
Deferred
rent receivables
|
(8,961 | ) | (12,234 | ) | (17,218 | ) | ||||||
Accounts
payable, accrued expenses and security deposits
|
9,664 | 4,586 | 15,211 | |||||||||
Other
|
(1,318 | ) | 7,413 | (9,863 | ) | |||||||
Net
cash provided by operating activities
|
180,343 | 182,831 | 154,805 | |||||||||
Investing
Activities
|
||||||||||||
Capital
expenditures and property acquisitions
|
(42,151 | ) | (684,623 | ) | (172,804 | ) | ||||||
Deconsolidation
of Douglas Emmett Fund X, LLC
|
(6,625 | ) | - | - | ||||||||
Net
cash used in investing activities
|
(48,776 | ) | (684,623 | ) | (172,804 | ) | ||||||
Financing
Activities
|
||||||||||||
Proceeds
from long-term borrowings
|
82,640 | 1,563,275 | 404,850 | |||||||||
Deferred
loan costs
|
(446 | ) | (6,810 | ) | (1,767 | ) | ||||||
Repayment
of borrowings
|
(106,665 | ) | (946,400 | ) | (124,700 | ) | ||||||
Net
change in short-term borrowings
|
(25,275 | ) | (25,025 | ) | 40,300 | |||||||
Contributions
by Douglas Emmett Fund X, LLC investors
|
66,074 | - | - | |||||||||
Contributions
by noncontrolling interests
|
450 | 58,065 | - | |||||||||
Distributions
to noncontrolling interests
|
(16,742 | ) | (27,880 | ) | (31,851 | ) | ||||||
Redemption
of noncontrolling interests
|
(2,880 | ) | (23,758 | ) | (69,211 | ) | ||||||
Issuance
of common stock, net
|
- | 668 | - | |||||||||
Repurchase
of common stock
|
(5,337 | ) | - | (125,185 | ) | |||||||
Cash
dividends
|
(59,301 | ) | (87,531 | ) | (73,130 | ) | ||||||
Net
cash (used in) provided by financing activities
|
(67,482 | ) | 504,604 | 19,306 | ||||||||
Increase
in cash and cash equivalents
|
64,085 | 2,812 | 1,307 | |||||||||
Cash
and cash equivalents at beginning of period
|
8,655 | 5,843 | 4,536 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 72,740 | $ | 8,655 | $ | 5,843 | ||||||
Noncash
transactions:
|
||||||||||||
Investing
activity related to contribution of properties to
unconsolidated
|
||||||||||||
real
estate fund
|
$ | 476,852 | $ |
─
|
|
$ |
─
|
|||||
Financing
activity related to contribution of debt and noncontrolling
interest
|
||||||||||||
to
unconsolidated real estate fund
|
$ | (483,477 | ) | $ |
─
|
|
$ |
─
|
||||
Supplemental
disclosure of cash flow information
|
||||||||||||
Cash
paid during the year for interest, net of amounts
capitalized
|
$ | 163,244 | $ | 172,686 | $ | 152,746 |
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 fully integrated, self-administered and self-managed Real
Estate Investment Trust (REIT). The terms “us,” “we” and “our” as
used in these financial statements refer to Douglas Emmett, Inc. and its
subsidiaries. Through our interest in Douglas Emmett Properties, LP
(our operating partnership) and its subsidiaries, including our investment in
Fund X, an unconsolidated real estate fund, we own or partially own, manage,
lease, acquire and develop real estate, consisting primarily of office and
multifamily properties. As of December 31, 2009, we own a
consolidated portfolio of 49 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. We also manage six properties
owned by Fund X and manage the properties as part of our total portfolio, with a
combined 55 office properties. All of these properties are located in
Los Angeles County, California and Honolulu, Hawaii.
We are a
Maryland corporation formed on June 28, 2005 that 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, at which time we acquired our predecessor and certain
other entities.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
financial statements presented are the consolidated financial statements of
Douglas Emmett, Inc. and its subsidiaries, including our operating
partnership. Substantially all of our business is conducted through
our consolidated operating partnership, in which other investors own a
noncontrolling interest. See Note 10. 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.
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
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.
F-8
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
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. Beginning
January 1, 2009, transaction costs related to acquisitions are expensed, rather
than included with the consideration paid. Estimates of future cash flows and
other valuation techniques are used to allocate the purchase price of acquired
property between land, buildings and improvements, equipment and identifiable
intangible assets and liabilities such as amounts related to in-place at-market
leases, acquired above- and below-market ground leases, acquired above- and
below-market tenant leases and tenant relationships. Initial valuations are
subject to change until such information is finalized, but no later than
12 months from the acquisition date.
The fair
values of tangible assets are determined on an ‘‘as-if-vacant’’
basis. The ‘‘as-if-vacant’’ fair value is allocated to land, where
applicable, buildings, tenant improvements and equipment based on comparable
sales and other relevant information obtained in connection with the acquisition
of the property.
The
estimated fair value of acquired in-place at-market tenant leases are the costs
we would have incurred to lease the property to the occupancy level of the
property at the date of acquisition. Such estimates 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 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
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 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, 2009, 2008 and
2007.
We assess
whether there has been impairment in the value of our investment in
unconsolidated real estate fund periodically. An impairment charge is
recorded when events or change in circumstances indicate that a decline in the
fair value below the carrying value has occurred and such decline is
other-than-temporary. The ultimate realization of the investment in
unconsolidated real estate fund is dependent on a number of factors, including
the performance of the investment and market conditions. The Company will record
an impairment charge if it determines that a decline in the value of an
investment in an unconsolidated real estate fund is
other-than-temporary. Based upon such periodic assessments, no
impairment occurred for the year ended December 31, 2009.
F-9
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
An asset
is classified as an asset held for disposition when it meets certain
requirements, including the approval of the sale of the asset, the marketing of
the asset for sale and our expectation 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.
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.
Revenue
and Gain Recognition
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. 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 totaling $1,008 for
2009, $423 for 2008, and $332 for 2007.
Estimated
recoveries from tenants for real estate taxes, common area maintenance and
other recoverable operating expenses are recognized as revenues in the period
that the expenses are incurred. Subsequent to year-end, we perform
final reconciliations on a lease-by-lease basis and bill or credit each tenant
for any cumulative annual adjustments. 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.
The
recognition of gains on sales of real estate requires that we measure the timing
of a sale against various criteria related to the terms of the transaction, as
well as 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, 2009 and 2008, we had an allowance for
doubtful accounts of $15,934 and $9,740, 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, 2009 and 2008,
we had a total of approximately $19,995 and $20,660, respectively, of lease
security available on existing letters of credit, as well as $32,501 and
$35,890, 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,
2009 and 2008. 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-10
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.
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 9.
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. 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 2009.
We have
elected to treat DEB as a taxable REIT subsidiary (TRS). A TRS
generally may engage in any business, including the provision of customary or
non-customary services for our tenants. A TRS is treated as a regular
corporation and is subject to federal income tax and applicable state income and
franchise taxes at regular corporate rates. DEB did not have
significant tax provisions or deferred income tax items for the years ended
December 31, 2009, 2008 and 2007.
Earnings
(Loss) Per Share
Basic
earnings (loss) per share is calculated by dividing the net income (loss)
applicable to common stockholders for the period by the weighted average of
common shares outstanding during the period. Diluted earnings (loss)
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 11.
F-11
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Recently
Issued Accounting Literature
On July
1, 2009, the Financial Accounting Standards Board (FASB) released the
authoritative version of the FASB Accounting Standards Codification as the
single source of authoritative nongovernmental U.S. Generally Accepted
Accounting Principles (GAAP). Codification Topic 105, Generally Accepted Accounting
Principles, established that the Codification is effective for interim
and annual periods ending after September 15, 2009. All existing
accounting standard documents are superseded. All other accounting
literature not included in the Codification will be considered
nonauthoritative. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants, therefore the Codification includes all relevant SEC guidance
organized using the same topical structure in separate sections within the
Codification. All previous references to FASB Accounting Standards
(FASs), FASB Staff Positions (FSPs) or Emerging Issues Task Force Abstracts
(EITFs) are now replaced by the Accounting Standards Codification Topics (ASCs)
that contain the relevant and current accounting
pronouncements. Modifications to the Codification will come in the
form of Accounting Standards Updates (ASUs) which will serve to update the
Codification, provide background information about the guidance and provide the
basis for conclusions on the changes to the Codification. The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification was effective beginning
with our financial statements for the fiscal quarter ending September 30, 2009
and the principal impact is limited to disclosures as all future references to
authoritative accounting literature will be referenced in accordance with the
Codification.
On
January 1, 2009, we adopted new FASB guidance contained in ASC 805, which
changes the method of accounting for business combinations. Under
ASC 805, an acquiring entity is required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. ASC 805 requires that transaction
costs such as legal, accounting and advisory fees be
expensed. ASC 805 also includes a substantial number of new
disclosure requirements. The adoption of ASC 805 did not have a
material effect on our financial position or results of operations.
On
January 1, 2009, we adopted new FASB guidance contained in ASC 810, which
establishes new accounting and reporting standards for noncontrolling interests
in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of
a noncontrolling interest (minority interest) as equity in the consolidated
financial statements separate from the parent’s equity. The amount of
net income attributable to the noncontrolling interest is included in
consolidated net income on the face of the income
statement. ASC 810 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 noncontrolling equity investment on the deconsolidation
date. ASC 810 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interests. The adoption of ASC 810 did not have a material
effect on our financial position or results of operations, other than
presentation differences.
On
January 1, 2009, we adopted new FASB guidance contained in ASC 815, which
expands disclosure requirements for an entity's derivative and hedging
activities. Under ASC 815, 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, 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 must 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. The adoption of ASC 815 did not have a material
effect on our financial position or results of operations as this statement only
addresses disclosures.
On
January 1, 2009, we adopted new FASB guidance contained in ASC 260, which
clarifies that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities, and as participating securities, they must be included
in the computation of earnings per share pursuant to the two-class
method. The adoption of ASC 260 did not have a material effect
on our financial position or results of operations.
F-12
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
On April
1, 2009, we adopted new FASB guidance contained in ASC 825, which requires
disclosures about the fair value of financial instruments for interim reporting
periods of publicly-traded companies as well as in annual financial
statements. The adoption of ASC 825 did not have a material
effect on our financial position or results of operations as this statement only
addresses disclosures.
On April
1, 2009, we adopted new FASB guidance contained in ASC 855, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The adoption of ASC 855 did not have
a material effect on our financial position or results of operations as this
statement only addresses disclosures. See Note 17 for subsequent
events disclosure.
In
December 2009, the FASB issued ASU No. 2009-16, “Transfers and
Servicing (Topic 860): Accounting for Transfers of Financial Assets.” ASU
No. 2009-16 is a revision to ASC 860, “Transfers and Servicing,” and amends
the guidance on accounting for transfers of financial assets, including
securitization transactions, where entities have continued exposure to risks
related to transferred financial assets. ASU No. 2009-16 also expands the
disclosure requirements for such transactions. This ASU will become effective
for us on January 1, 2010. We are currently evaluating the impact that this ASU
will have on our financial statements.
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. This ASU amends the FASB Accounting Standards Codification
for Statement 167. This standard requires an enterprise to perform an
analysis to determine whether an enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest
entity. Additionally, an enterprise is required to assess whether it
has an implicit financial responsibility to ensure that a variable interest
entity operates as designed when determining whether it has the power to direct
the activities of the variable interest entity that most significantly impact
the entity’s economic performance. This ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
November 15, 2009, which for us means January 1, 2010. We are
currently evaluating the impact that this ASU will have on our financial
statements
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.”
ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements.
This ASU became effective for us on January 1, 2010. We do not currently
anticipate that this ASU will have a material impact on our consolidated
financial statements upon adoption.
F-13
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
3.
Investment in Real Estate
The
results of operations for 2009, 2008 and 2007 are affected by the acquisition of
new properties, as well as the contribution of certain properties to Douglas
Emmett Fund X, LLC (Fund X), an unconsolidated real estate fund. The
operating results of acquired properties are included in our consolidated
statements of operations only from the date each property was acquired, and in
the case of the properties contributed to Fund X, only until the end of February
2009, when Fund X was deconsolidated from our financial
statements. 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 |
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.
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
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 7. 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 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. See Note 7 and Note 14. In
connection with the initial closing of Fund X in October 2008, (i) we
contributed to Fund X these six office properties and (ii) we transferred to
Fund X the related $365 million term loan. In exchange, we received
an interest in the common equity of Fund X. Because the net value of
the contributed properties (as valued under the Fund X operating agreement)
exceeded our required capital contribution, Fund X distributed cash to us for
the excess. We received part of the cash in October 2008 and the
remainder at the end of February 2009, at which point Fund X became an
unconsolidated real estate fund in which we retained an equity investment
representing an ownership of approximately 49%. We recognized a gain
of $5.6 million on the disposition of the interest in Fund X we did not
retain. Beginning in February 2009, we have accounted for our
interest in Fund X under the equity method.
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.
We did
not make any acquisitions during the year ended December 31,
2009.
F-14
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
4.
Acquired Lease Intangibles
The
following summarizes our acquired lease intangibles related to
above/below-market leases as of December 31:
2009
|
2008
|
||||||
Above-market
tenant leases
|
$ | 32,770 | $ | 34,227 | |||
Accumulated
amortization
|
(24,033 | ) | (19,094 | ) | |||
Below-market
ground leases
|
3,198 | 3,198 | |||||
Accumulated
amortization
|
(244 | ) | (168 | ) | |||
Acquired
lease intangible assets, net
|
$ | 11,691 | $ | 18,163 | |||
Below-market
tenant leases
|
$ | 261,523 | $ | 288,437 | |||
Accumulated
accretion
|
(135,534 | ) | (106,950 | ) | |||
Above-market
ground leases
|
16,200 | 16,200 | |||||
Accumulated
accretion
|
(2,849 | ) | (2,651 | ) | |||
Acquired
lease intangible liabilities, net
|
$ | 139,340 | $ | 195,036 |
Net
accretion of above- and below-market in-place tenant lease value was recorded as
an increase to rental income totaling $32,346 for 2009, $42,308 for 2008 and
$39,011 for 2007. The net accretion of above- and below-market ground lease
value has been recorded as a decrease of office rental operating expense
totaling $122 for 2009, $597 for 2008 and $1,552 for 2007.
Following
is the estimated net accretion at December 31, 2009 for the next five
years:
Year
|
||||
2010
|
$ | 24,930 | ||
2011
|
21,108 | |||
2012
|
18,184 | |||
2013
|
15,563 | |||
2014
|
12,753 | |||
Thereafter
|
35,111 | |||
Total
|
$ | 127,649 |
5.
Other Assets
Other
assets consist of the following at December 31:
2009
|
2008
|
|||||||
Deferred
loan costs, net of accumulated amortization of $4,989 and $3,336
at
December 31, 2009 and 2008, respectively
|
$ | 4,817 | $ | 9,714 | ||||
Restricted
cash
|
2,897 | 2,934 | ||||||
Prepaid
interest
|
263 | 4,360 | ||||||
Prepaid
expenses
|
3,662 | 3,845 | ||||||
Interest
receivable
|
10,376 | 5,938 | ||||||
Other
indefinite-lived intangible
|
1,988 | 1,988 | ||||||
Other
|
5,941 | 2,525 | ||||||
$ | 29,944 | $ | 31,304 |
We
incurred deferred loan cost amortization expense of $2,018 for 2009, $2,083 for
2008 and $1,136 for 2007. Deferred loan cost amortization is included
as a component of interest expense in the consolidated statements of
operations.
F-15
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
6.
Future Minimum Lease Receipts and Payments
Future
Minimum Lease Receipts
We lease space to tenants primarily
under noncancelable operating leases that 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 lease
space to certain tenants under noncancelable leases that provide for percentage
rents based upon tenant revenues. Percentage rental income totaled $654 for
2009, $871 for 2008 and $1,138 for 2007.
Future
minimum base rentals on our non-cancelable office and ground operating leases at
December 31, 2009 were as follows:
Twelve
months ending December 31:
2010
|
$ | 352,140 | |
2011
|
310,466 | ||
2012
|
265,078 | ||
2013
|
215,302 | ||
2014
|
160,754 | ||
Thereafter
|
421,621 | ||
Total
future minimum base rentals
|
$ | 1,725,361 |
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, generally upon payment of a termination fee.
The preceding table assumes that these options are not exercised.
Future
Minimum Lease Payments
We
currently lease portions of the land underlying two of our office
properties. Prior to the end of the fourth quarter of 2008, we had a
third ground lease, for which we owned a one-sixth interest in the fee title to
the land. In December 2008, we acquired the remaining five-sixths
interest in the fee title to the land, and 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 have an ordinary
purchase option on one of the two remaining leases, which we may exercise at any
time prior to May 31, 2014 for a purchase price of $27.5 million. We
have the ability and intent to exercise this option, therefore the future
minimum rent payments are excluded from the table below. We expensed
ground lease payments totaling $2,149 for 2009, $3,206 for 2008, and $3,204 for
2007.
The
following is a schedule of our minimum ground lease payments as of December 31,
2009:
Twelve
months ending December 31:
|
|||
2010
|
$ | 733 | |
2011
|
733 | ||
2012
|
733 | ||
2013
|
733 | ||
2014
|
733 | ||
Thereafter
|
52,775 | ||
Total
future minimum lease payments
|
$ | 56,440 |
F-16
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
7.
Secured Notes Payable
A summary
of our secured notes payable is as follows:
Type
of Debt
|
Maturity
Date
(1)
|
December
31, 2009
|
December
31, 2008
|
Variable
Rate
|
Effective
Annual
Interest
Rate (2)
|
Swap Maturity Date (1)
|
|||||||||||
Variable
Rate Swapped to
|
|||||||||||||||||
Fixed
Rate:
|
|||||||||||||||||
Fannie
Mae loan I (3)
|
6/1/2012
|
$
|
293,000
|
$
|
293,000
|
DMBS
+ 0.60%
|
4.70
|
%
|
08/01/11
|
||||||||
Fannie
Mae loan II (3)
|
6/1/2012
|
95,080
|
95,080
|
DMBS
+ 0.60%
|
5.78
|
08/01/11
|
|||||||||||
Modified
Term Loan (4)(5)
|
8/31/2012
|
2,300,000
|
2,300,000
|
LIBOR
+ 0.85%
|
5.13
|
08/01/10-08/01/12
|
|||||||||||
Term
Loan (6)(7)
|
8/18/2013
|
-
|
365,000
|
--
|
--
|
--
|
|||||||||||
Fannie
Mae loan III (3)
|
2/1/2015
|
36,920
|
36,920
|
DMBS
+ 0.60%
|
5.78
|
08/01/11
|
|||||||||||
Fannie
Mae loan IV (3)
|
2/1/2015
|
75,000
|
75,000
|
DMBS
+ 0.76%
|
4.86
|
08/01/11
|
|||||||||||
Term
Loan (8)
|
4/1/2015
|
340,000
|
340,000
|
LIBOR
+1.50%
|
4.77
|
01/02/13
|
|||||||||||
Fannie
Mae loan V (3)
|
2/1/2016
|
82,000
|
82,000
|
LIBOR
+ 0.62%
|
5.62
|
03/01/12
|
|||||||||||
Fannie
Mae loan VI (3)
|
6/1/2017
|
18,000
|
18,000
|
LIBOR
+ 0.62%
|
5.82
|
06/01/12
|
|||||||||||
Subtotal
|
$
|
3,240,000
|
$
|
3,605,000
|
5.10
|
% | |||||||||||
Variable
Rate:
|
|||||||||||||||||
Wells
Fargo Loan (9)
|
3/1/2011
|
18,000
|
18,000
|
LIBOR
+ 1.25%
|
--
|
--
|
|||||||||||
Secured
Revolving Credit Facility (10)
|
10/30/2010
|
-
|
49,300
|
LIBOR/Feds
Funds+
|
(11)
|
--
|
--
|
||||||||||
Subtotal
|
3,258,000
|
3,672,300
|
|||||||||||||||
Unamortized
Loan Premium (12)
|
15,459
|
20,485
|
|||||||||||||||
Total
|
$
|
3,273,459
|
$
|
3,692,785
|
(1)
|
As
of December 31, 2009, the weighted average remaining life of our total
outstanding debt is 3.1 years, and the weighted average remaining life of
the interest rate swaps is 1.4 years.
|
(2)
|
Includes
the effect of interest rate contracts. Based on actual/360-day
basis and excludes amortization of loan fees and unused fees on the credit
line. The total effective rate on an actual/365-day basis is
5.17% at December 31, 2009.
|
(3)
|
Secured
by four separate collateralized pools. Fannie Mae Discount
Mortgage-Backed Security (DMBS) generally tracks 90-day LIBOR, although
volatility may exist between the two rates, resulting in an immaterial
amount of swap ineffectiveness.
|
(4)
|
Secured
by seven separate collateralized pools. Requires monthly
payments of interest only, with outstanding principal due upon
maturity.
|
(5)
|
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.
|
(6)
|
This
loan was transferred to Fund X, an unconsolidated real estate fund in
which our operating partnership holds an equity
interest.
|
(7)
|
Secured
by six properties in a collateralized pool. These properties
were also transferred to Fund X. Requires monthly payments of interest
only, with outstanding principal due upon maturity.
|
(8)
|
Secured
by four properties in a collateralized pool. Requires monthly
payments of interest only, with outstanding principal due upon
maturity.
|
(9)
|
This
loan is held by a consolidated entity in which our operating partnership
held a two-thirds interest.
|
(10)
|
This
credit facility is secured by nine properties and has no borrowings
outstanding. We exercised a one-year extension option and renewed the
credit facility for $350 million (reduced from $370 million, but on the
same pricing and otherwise on the same terms and conditions as prior to
the extension). A second one-year extension option remains
available.
|
(11)
|
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.
|
(12)
|
Represents
non-cash mark-to-market adjustment on variable rate debt associated with
office properties.
|
F-17
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Senior
Secured Revolving Credit Facility
We have a
$350 million revolving credit facility with a group of banks led by Bank of
America, N.A. and Banc of America Securities, LLC. At December 31,
2009, there were no amounts outstanding under the facility. This
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 bears interest at 15 basis
points on the undrawn balance. The facility expires during the fourth
quarter of 2010, with a one-year extension at our option.
During
2009, there were no new borrowings and no debt matured. The
significant change to our debt structure in 2009 consisted of contributing six
properties to Fund X, an unconsolidated real estate fund, along with the $365
million of debt which is secured by the properties, as described in Note 3 and
Note 14. Other changes consisted of exercising two separate options
to extend the maturity dates of an $18 million loan held by a consolidated joint
venture and the $350 million revolving credit facility described
above.
The
minimum future principal payments due on our secured notes payable, excluding
the non-cash loan premium amortization, at December 31, 2009 are as
follows:
Year
ending December 31:
|
|||
2010
|
$ | - | |
2011
|
18,000 | ||
2012
|
2,688,080 | ||
2013
|
- | ||
2014
|
- | ||
Thereafter
|
551,920 | ||
Total
future principal
|
$ | 3,258,000 |
8.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of December
31:
2009
|
2008
|
||||||
Accounts
payable
|
$ | 31,940 | $ | 30,429 | |||
Accrued
interest payable
|
26,263 | 22,982 | |||||
Deferred
revenue
|
14,690 | 16,034 | |||||
$ | 72,893 | $ | 69,445 |
F-18
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
9.
Interest Rate Contracts
Cash
Flow Hedges of Interest Rate Risk
We manage
our interest rate risk associated with borrowings by obtaining interest rate
swap and interest rate cap contracts. 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 to convert our floating-rate debt to a fixed-rate basis, thus
reducing the impact of interest-rate changes on future interest expense and cash
flows. 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 may enter
into derivative contracts that are intended to hedge certain economic risks,
even though hedge accounting does not apply, or for which we elect to not apply
hedge accounting. We do not use any other derivative
instruments.
As of
December 31, 2009, approximately 99% of our outstanding debt had interest
payments designated as hedged transactions to receive-floating/pay-fixed
interest rate swap agreements, which qualify as highly effective cash flow
hedges, as summarized below:
Interest Rate Derivative
|
Number of Instruments
|
Notional
|
Interest
Rate Swaps
|
36
|
$3,240,000
|
Non-designated
Hedges
Derivatives
not designated as hedges are not speculative. Prior to the initial
public offering (IPO) of Douglas Emmett, Inc., we entered into $2.2 billion
notional of pay-fixed swaps at swap rates ranging between 4.04% and 5.00%, as
well as $600 million of purchased caps to manage our exposure to interest rate
movements and other identified risks. At the time of our IPO, we
entered into offsetting $2.2 billion notional of receive-fixed swaps at swap
rates ranging between 4.96% and 5.00%, as well as $600 million of sold caps,
which were intended to largely offset the future cash flows and future change in
fair value of our pre-IPO pay-fixed swaps and purchased caps to reduce the
effect on our reported earnings. Accordingly, as of December 31,
2009, we had the following outstanding interest rate derivatives that were not
designated for accounting purposes as hedging instruments, but were used to
hedge our economic exposure to interest rate risk:
Interest Rate Derivative
|
Number of Instruments
|
Notional
|
Pay-Fixed
Swaps
|
25
|
$2,205,000
|
Receive-Fixed
Swaps
|
25
|
$2,205,000
|
Purchased
Caps
|
19
|
$600,000
|
Sold
Caps
|
15
|
$600,000
|
Credit-risk-related
Contingent Features
We have
agreements with each of our derivative counterparties that contain a provision
under which we could also be declared in default on our derivative obligations
if we default on any of our indebtedness, including any default where
repayment of the indebtedness has not been accelerated by the
lender. We have agreements with certain of our derivative
counterparties that contain a provision under which, if we fail to maintain a
minimum cash and cash equivalents balance of $1 million, then the derivative
counterparty would have the right to terminate the derivative. There
have been no events of default on any of our derivatives.
As of
December 31, 2009, the fair value of derivatives, aggregated by counterparty, in
a net liability position was $144.0 million, which includes accrued interest but
excludes any adjustment for nonperformance risk related to these
agreements.
F-19
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Accounting
for Interest Rate Contracts
Hedge
accounting generally provides for the timing of gain or loss recognition on the
hedging instrument to match the earnings effect of the hedged forecasted
transactions in a cash flow hedge. All other changes in fair value,
with the exception of hedge ineffectiveness, are recorded in accumulated other
comprehensive income (loss), which is a component of equity outside of
earnings. Amounts reported in accumulated other comprehensive income
(loss) related to derivatives designated as accounting hedges will be
reclassified to interest expense as interest payments are made on our hedged
variable-rate debt. 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
change in net unrealized gains and losses on cash flow hedges reflects a
reclassification from accumulated other comprehensive income (loss) to interest
expense, which increased interest expense by $144.7 million for 2009, increased
interest expense by $62.2 million for 2008 and reduced interest expense by $8.8
million for 2007. For these derivatives, we estimate an additional
$116.7 million will be reclassified within the next 12 months from accumulated
other comprehensive income (loss) to interest expense as an increase to interest
expense. The ineffectiveness attributable to a mismatch in the
underlying rate indices of certain interest rate contracts and the corresponding
item it was designated to hedge resulted in our recording a loss of $518 for
2009, a gain of $346 for 2008 and a loss of $347 for 2007.
For
derivatives not designated as hedges, the changes in fair value of these
interest rate swaps have been recognized in earnings for all
periods. The aggregate net asset fair value of these swaps decreased
$19.5 million for 2009, $14.2 million for 2008 and $13.2 million for
2007. The decrease in net asset fair value was recorded as additional
interest expense. Included in the net $14.2 million decrease is a $1.2 million
increase related to the credit value adjustment resulting from our initial
application of a new accounting pronouncement related to fair value measurements
in the first quarter of 2008.
The
following table represents the effect of derivative instruments on our
consolidated statements of operations for 2009:
Interest
Rate Contracts
|
||
Derivatives
in Designated Cash Flow Hedging Relationships:
|
||
Amount
of gain (loss) recognized in OCI on derivatives (effective
portion)
|
$
|
(44,365)
|
Amount
of gain (loss) reclassified from accumulated OCI into earnings (effective
portion)
|
$
|
(144,693)
|
Location
of gain (loss) reclassification from accumulated OCI into earnings
(effective portion)
|
Interest
expense
|
|
Amount
of gain (loss) recognized in earnings on derivatives (ineffective portion
and amount excluded from effectiveness testing)
|
$
|
(518)
|
Location
of gain (loss) recognized in earnings on derivatives (ineffective portion
and amount excluded from effectiveness testing)
|
Interest
expense
|
|
Interest
Rate Contracts
|
||
Derivatives
Not Designated as Cash Flow Hedges:
|
||
Amount
of realized and unrealized gain (loss) recognized in earnings on
derivatives
|
$
|
(401)
|
Location
of gain (loss) recognized in earnings on derivatives
|
Interest
expense
|
F-20
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Fair
Value Measurement
We record
all derivatives on the balance sheet at fair value, using the framework for
measuring fair value established by the FASB. The fair value of these
hedges is obtained through independent third-party valuation sources that use
conventional valuation algorithms. The following table represents the
fair values of derivative instruments as of December 31, 2009:
Derivative
fair values, disclosed as “Interest Rate Contracts”:
|
Assets
|
Liabilities
|
||
Derivatives
designated as accounting hedges
|
$
|
─
|
$
|
152,498
|
Derivatives
not designated as accounting hedges
|
108,027
|
84,696
|
||
Total
derivatives
|
$
|
108,027
|
$
|
237,194
|
The FASB
has established a framework for measuring fair value and expanded disclosures
about fair value measurements. It 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. As a basis for considering market participant
assumptions in fair value measurements, the FASB established 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.
Currently,
we use interest rate swaps and caps to manage interest rate
risk resulting from variable interest payments on our floating rate
debt. 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.
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,
2009.
The table
below presents the derivative assets and liabilities, presented in our financial
statements on a gross basis without reflecting any net settlement positions with
the same counterparty. The derivatives shown below are measured at
fair value as of December 31, 2009 and 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,
2009
|
|||||
Assets
|
||||||||
Interest Rate
Contracts
|
$
|
─
|
$
|
108,027
|
$
|
─
|
$
|
108,027
|
Liabilities
|
||||||||
Interest Rate
Contracts
|
$
|
─
|
$
|
237,194
|
$
|
─
|
$
|
237,194
|
F-21
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
10.
Equity
We had
121,596,427 shares of common stock and 33,717,169 operating partnership units
outstanding as of December 31, 2009. Noncontrolling interests in
our operating partnership relate to interests in the partnership that are not
owned by us. Noncontrolling interests represented approximately 22%
of our operating partnership at December 31, 2009. 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
distributions of our operating partnership. Investors who own units
in our operating partnership 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.
Noncontrolling
interests also includes the interest of a minority partner in a joint venture
formed during the first quarter of 2008 to purchase an office building in
Honolulu, Hawaii. The joint venture is two-thirds owned by our
operating partnership and is consolidated in our financial statements as of
December 31, 2009.
Prior to
January 1, 2009 (the effective date for a new accounting pronouncement on
consolidation), we calculated the book value of net assets allocable to
noncontrolling interests (formerly referred to as minority interests), and
adjusted the balance to reflect the calculated amount with a reclass to or from
the retained earnings (accumulated deficit) balance. Subsequent to
the adoption of the new accounting guidance, any adjustment to the book value of
net assets allocable between noncontrolling interests and common stockholders is
recorded with an adjustment to additional paid-in-capital.
During
2009, approximately 519,000 operating partnership units were converted to shares
of common stock. Also during 2009, we repurchased 819,500 share
equivalents in open market transactions and 250,000 share equivalents in a
private transaction for a total combined consideration of approximately
$8.2 million. We may make additional purchases of our share
equivalents from time to time in private transactions or in the public markets,
but have no commitments to do so. During 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.
The table
below represents the net income attributable to common stockholders and
transfers from noncontrolling interests:
For
the Year Ended December 31,
|
|||||||||||||
2009
|
2008
|
2007
|
|||||||||||
Net
loss attributable to common stockholders
|
$ | (27,064 | ) | $ | (27,993 | ) | $ | (13,008 | ) | ||||
Transfers
from the noncontrolling interests:
|
|||||||||||||
Increase
in common stockholders paid-in capital for repurchase
|
|||||||||||||
of
operating partnership units
|
723 | - | - | ||||||||||
Increase
in common stockholders paid-in capital for conversion
|
|||||||||||||
of
operating partnership units
|
7,665 | 261,572 | - | ||||||||||
Net
transfers from noncontrolling interests
|
8,388 | 261,572 | - | ||||||||||
Change
from net income attributable to common stockholders
|
|||||||||||||
and
transfers from noncontrolling interests
|
$ | (18,676 | ) | $ | 233,579 | $ | (13,008 | ) |
F-22
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
During
2009, we declared four quarterly dividends of $0.10 per share, which equals an
annual rate of $0.40 per share. During 2008, we declared four
quarterly dividends of $0.1875 per share, which equals an annual rate of $0.75
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):
Paid
Date
|
Dividend
Per Share
|
Dividend
Allocable to 2009
|
2009
Dividend Ordinary Income %
|
2009
Dividend Capital Gain %
|
2009
Return of Capital %
|
|||||||||||
12/31/08
|
1/15/09
|
$ | 0.1875 | $ | 0.1875 | 0.0 | % | 0.0 | % | 100.0 | % | |||||
3/31/09
|
4/15/09
|
$ | 0.1000 | $ | 0.1000 | 0.0 | % | 0.0 | % | 100.0 | % | |||||
6/30/09
|
7/15/09
|
$ | 0.1000 | $ | 0.1000 | 0.0 | % | 0.0 | % | 100.0 | % | |||||
9/30/09
|
10/15/09
|
$ | 0.1000 | $ | 0.1000 | 0.0 | % | 0.0 | % | 100.0 | % | |||||
12/31/09
|
1/15/10
|
$ | 0.1000 | $ | - | 0.0 | % | 0.0 | % | 0.0 | % | |||||
Total:
|
$ | 0.4875 | 0.0 | % | 0.0 | % | 100.0 | % |
The
common stock dividend of $0.10 paid on January 15, 2010 is allocated to
2010.
F-23
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
11.
Earnings (Loss) Per Share
The
following is a summary of the elements used in calculating basic and diluted
earning (loss) per share:
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
loss attributable to common shares (in thousands)
|
$ | (27,064 | ) | $ | (27,993 | ) | $ | (13,008 | ) | |||
Weighted
average common shares outstanding - basic
|
121,552,731 | 120,725,928 | 112,645,587 | |||||||||
Potentially
dilutive common shares: stock options (1)
|
- | - | - | |||||||||
Adjusted
weighted average common shares
|
||||||||||||
outstanding
- diluted
|
121,552,731 | 120,725,928 | 112,645,587 | |||||||||
Net
loss per share - basic and diluted
|
$ | (0.22 | ) | $ | (0.23 | ) | $ | (0.12 | ) |
(1)
|
For
all years presented, the potentially dilutive shares were not included in
the earnings (loss) per share calculation as their effect is
anti-dilutive.
|
12.
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 Internal Revenue Code of 1986, as amended, or any
combination of the foregoing. Our stock incentive plan was amended in 2009 to
increase the number of shares reserved for issuance by 24,080,163 shares, which
brought the total number of shares available for future grant as of April 13,
2009 to 27,600,000. However, “full value” awards issued
after April 13, 2009 (such as Deferred Stock Awards, Restricted Stock Awards and
LTIP Unit awards) are counted against our stock incentive plan overall limits as
two shares (rather than one), while options and Stock Appreciation Rights are
counted as one share (0.9 shares for options or Stock Appreciation Rights with
terms of five years or less). 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 our stock
incentive plan and may make all determinations necessary or desirable for the
administration of our plan. They have 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.
F-24
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
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. During
2009, we issued 302,000 LTIP units and 3,236,000 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, 2009, 2010 and 2011.
Upon
initial election to our board, each of our non-employee directors received a
one-time grant of 7,500 LTIP units that vested ratably over a three-year
period. We also granted LTIP units totaling approximately 30,000 in
2009, 21,000 in 2008 and 11,000 in 2007 as compensation for the non-employee
directors’ services in the respective years, 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 non-cash
compensation expense totaling $4.9 million in 2009, $4.4 million in 2008 and
$2.1 million in 2007. An additional $1.4 million of
immediately-vested equity awards were granted during the first quarter of 2009
to satisfy a portion of the bonuses accrued during 2008 and 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 granted in 2009 and 2008 using
the Black-Scholes option-pricing model using the following
assumptions:
2009
|
2008
|
|||
Dividend
yield
|
7.7%
|
5.7%
|
||
Expected
volatility
|
24.5%
|
19.2%
|
||
Expected
life
|
60
months
|
60
months
|
||
Risk
–free interest rate
|
1.5%
|
2.8%
|
||
Fair
value of option on grant date
|
$0.92
|
$1.89
|
The
weighted average fair values of the LTIP units granted in 2009, 2008 and 2007
were $10.64, $20.36, and $26.59 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 2009, 2008, and 2007 was $4,110, $3,658, and $1,335,
respectively. Total unrecognized compensation cost related to
nonvested option and LTIP awards was $4,676 at December 31,
2009. This expense will be recognized over a weighted-average term of
18 months.
F-25
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 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 | $ | - | |||||||||||
Granted
|
3,236 | 11.42 | ||||||||||||||
Outstanding
at December 31, 2009
|
11,293 | 18.44 | 93 | $ | 9,159 | |||||||||||
Exercisable
at December 31, 2009
|
8,950 | 19.44 | 90 | $ | 2,290 | |||||||||||
LTIP
Units:
|
Number
of
Units (thousands)
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||||||||
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 | ||||||||||||||
Granted
|
331 | 10.64 | ||||||||||||||
Vested
|
(288 | ) | 14.27 | |||||||||||||
Outstanding
at December 31, 2009
|
243 | 14.76 |
F-26
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
13.
Fair Value of Financial Instruments
Our
estimates of the fair value of financial instruments at December 31, 2009
and 2008, 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; and 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, 2009, the aggregate fair value
of our secured notes payable and secured revolving credit facility is estimated
to be approximately $3.2 billion, based on a credit-adjusted present value of
the principal and interest payments that are at floating rates. As of
December 31, 2008, the estimated fair value of our secured loans was
approximately $3.6 billion.
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 based on the assumptions that market participants would use in
pricing the asset or liability. See Note 9.
F-27
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
14.
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, 2013. To date, we have not
experienced any losses on our deposited cash.
Asset
Retirement Obligations
A
conditional asset retirement obligation 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 19 properties in our consolidated 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, 2009, 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.
Investment
in Unconsolidated Real Estate Fund
Related to our investment in Fund X, we
have a commitment for future capital contributions totaling $24.0 million at
December 31, 2009.
Guarantees
On March
26, 2008, we acquired a 1.4 million square foot office portfolio consisting
of six Class A buildings. Subsequent to acquiring the properties, we
entered into a 5-year non-recourse $365 million interest-only floating rate term
loan secured by the six-property portfolio. At the time we entered into the
loan, we entered into an interest rate swap agreement to mitigate interest rate
risk by converting the floating-rate debt to a fixed-rate basis, thus reducing
the impact of interest-rate changes on future interest expense and cash
flows. The swap agreement involves 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.
In
October 2008, we contributed these six properties, the related $365 million term
loan, and the benefits and burdens of the related swap agreement to Fund X in
exchange for an interest in the common equity of Fund X, which became an
unconsolidated equity investment in February 2009. See Note 3
and Note 7 for further information. If Fund X fails to perform any
obligations under the swap agreement, we remain liable to the swap
counterparties. The maximum future payments under the swap agreements
was approximately $38.3 million as of December 31, 2009. As of December 31,
2009, all obligations under the swap agreements have been performed by Fund X in
accordance with the terms of the agreements.
Tenant
Concentrations
For 2009, 2008 and 2007, 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)
15.
Segment Reporting
Segment
information is prepared on the same basis that our management reviews
information for operational decision-making purposes. We operate 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
primarily include 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
segment profit as our internal reporting addresses these items on a corporate
level.
Segment
profit is not a measure of operating income 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. Not all companies may calculate segment profit
in the same manner. We consider segment profit to be an appropriate
supplemental measure to net income because it assists both investors and
management in understanding the core operations of our properties.
The
following table represents operating activity within our reportable
segments:
Year
Ended December 31,
|
||||||||||||
Office Segment
|
2009
|
2008
|
2007
|
|||||||||
Rental
revenue
|
$ | 502,767 | $ | 537,377 | $ | 468,569 | ||||||
Rental
expense
|
(154,270 | ) | (166,124 | ) | (148,582 | ) | ||||||
Segment
profit
|
348,497 | 371,253 | 319,987 | |||||||||
Multifamily Segment
|
||||||||||||
Rental
revenue
|
68,293 | 70,717 | 71,059 | |||||||||
Rental
expense
|
(17,925 | ) | (17,079 | ) | (18,735 | ) | ||||||
Segment
profit
|
50,368 | 53,638 | 52,324 | |||||||||
Total
segments' profit
|
$ | 398,865 | $ | 424,891 | $ | 372,311 |
The
following table is a reconciliation of segment profit to net loss attributable
to common stockholders:
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Total
segments' profit
|
$ | 398,865 | $ | 424,891 | $ | 372,311 | ||||||
General
and administrative expenses
|
(23,887 | ) | (22,646 | ) | (21,486 | ) | ||||||
Depreciation
and amortization
|
(226,620 | ) | (248,011 | ) | (209,593 | ) | ||||||
Gain
on disposition of interest in
|
||||||||||||
unconsolidated
real estate fund
|
5,573 | - | - | |||||||||
Other
income (loss)
|
(12 | ) | 3,580 | 695 | ||||||||
Loss,
including depreciation,
|
||||||||||||
from
unconsolidated real estate fund
|
(3,279 | ) | - | - | ||||||||
Interest
expense
|
(184,797 | ) | (193,727 | ) | (160,616 | ) | ||||||
Net
loss
|
(34,157 | ) | (35,913 | ) | (18,689 | ) | ||||||
Less:
Net loss attributable to
|
||||||||||||
noncontrolling
interests
|
7,093 | 7,920 | 5,681 | |||||||||
Net
loss attributable to common stockholders
|
$ | (27,064 | ) | $ | (27,993 | ) | $ | (13,008 | ) |
F-29
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
16.
Quarterly Financial Information (unaudited)
The tables below reflect selected
quarterly information for 2009 and 2008:
Three
Months Ended
|
||||||||||||||||
December
31,
2009
|
September
30,
2009
|
June
30,
2009
|
March
31,
2009
|
|||||||||||||
Total
revenue
|
$ | 139,421 | $ | 140,427 | $ | 139,795 | $ | 151,417 | ||||||||
Net
loss before noncontrolling interests
|
(11,277 | ) | (11,112 | ) | (9,518 | ) | (2,250 | ) | ||||||||
Net
loss attributable to common stockholders
|
(8,909 | ) | (8,806 | ) | (7,482 | ) | (1,867 | ) | ||||||||
Net
loss per common share - basic and diluted
|
$ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.02 | ) | ||||
Weighted
average shares of common stock
|
||||||||||||||||
outstanding
- basic and diluted
|
121,568,046 | 121,485,711 | 121,319,121 | 121,841,789 | ||||||||||||
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 | ||||||||
Net
loss before noncontrolling interests
|
(8,059 | ) | (12,400 | ) | (12,213 | ) | (3,241 | ) | ||||||||
Net
loss attributable to common stockholders
|
(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 |
17.
Subsequent Events
We
evaluated subsequent events through February 25, 2010, the date on which these
financial statements were issued, and were not aware of any subsequent events
that were material.
F-30
Douglas
Emmett, Inc.
Schedule
III
Consolidated
Real Estate and Accumulated Depreciation
(dollars
in thousands)
Property Name | Encumbrances at December 31, 2009 |
Initial
Cost
|
Improvements Capitalized Subsequent to Acquisition |
Gross
Carrying Amount
at
December 31, 2009
|
Accumulated Depreciation at December 31, 2009 | Year Built / Renovated | Year Aquired | |||||||||||||||||||||||||||
Land
|
Building
& Improvements
|
Land
|
Building
& Improvements
|
Total
|
||||||||||||||||||||||||||||||
Office
Properties
|
||||||||||||||||||||||||||||||||||
Bundy
Olympic
|
$ | 24,979 | $ | 4,201 | $ | 11,860 | $ | 28,586 | $ | 6,030 | $ | 38,617 | $ | 44,647 | $ | 5,623 | 1991/1998 | 1994 | ||||||||||||||||
The
Gateway Building
|
34,434 | 2,376 | 15,302 | 44,904 | 5,119 | 57,463 | 62,582 | 7,299 | 1987 | 1994 | ||||||||||||||||||||||||
Village
on Canon
|
- | 5,933 | 11,389 | 48,240 | 13,303 | 52,259 | 65,562 | 6,194 | 1989/1995 | 1994 | ||||||||||||||||||||||||
Brentwood
Executive Plaza
|
25,235 | 3,255 | 9,654 | 33,483 | 5,921 | 40,471 | 46,392 | 5,878 | 1983/1996 | 1995 | ||||||||||||||||||||||||
Camden
Medical Arts
|
- | 3,102 | 12,221 | 27,774 | 5,298 | 37,799 | 43,097 | 4,510 | 1972/1992 | 1995 | ||||||||||||||||||||||||
Executive
Tower
|
77,100 | 6,660 | 32,045 | 60,328 | 9,471 | 89,562 | 99,033 | 13,539 | 1989 | 1995 | ||||||||||||||||||||||||
Palisades
Promenade
|
36,970 | 5,253 | 15,547 | 50,217 | 9,664 | 61,353 | 71,017 | 6,812 | 1990 | 1995 | ||||||||||||||||||||||||
Studio
Plaza
|
124,895 | 9,347 | 73,358 | 128,949 | 15,015 | 196,639 | 211,654 | 24,105 | 1988/2004 | 1995 | ||||||||||||||||||||||||
First
Federal
|
79,741 | 9,989 | 29,187 | 113,803 | 21,787 | 131,192 | 152,979 | 14,608 | 1981/2000 | 1996 | ||||||||||||||||||||||||
Wilshire
Brentwood Plaza
|
61,702 | 5,013 | 34,283 | 72,505 | 8,828 | 102,973 | 111,801 | 12,450 | 1985 | 1996 | ||||||||||||||||||||||||
Landmark
II
|
115,372 | 19,156 | 109,259 | 70,543 | 26,139 | 172,819 | 198,958 | 21,540 | 1989 | 1997 | ||||||||||||||||||||||||
Olympic
Center
|
27,926 | 5,473 | 22,850 | 30,496 | 8,247 | 50,572 | 58,819 | 6,751 | 1985/1996 | 1997 | ||||||||||||||||||||||||
Saltair
San Vicente
|
- | 5,075 | 6,946 | 16,478 | 7,557 | 20,942 | 28,499 | 2,923 | 1964/1992 | 1997 | ||||||||||||||||||||||||
Second
Street
|
26,720 | 4,377 | 15,277 | 34,937 | 7,421 | 47,170 | 54,591 | 6,450 | 1991 | 1997 | ||||||||||||||||||||||||
Sherman
Oaks Galleria
|
244,080 | 33,213 | 17,820 | 405,210 | 48,328 | 407,915 | 456,243 | 53,054 | 1981/2002 | 1997 | ||||||||||||||||||||||||
Tower
at Sherman Oaks
|
- | 4,712 | 15,747 | 35,431 | 8,685 | 47,205 | 55,890 | 7,022 | 1967/1991 | 1997 | ||||||||||||||||||||||||
The
Verona
|
- | 2,574 | 7,111 | 13,889 | 5,111 | 18,463 | 23,574 | 2,659 | 1991 | 1997 | ||||||||||||||||||||||||
Coral
Plaza
|
20,066 | 4,028 | 15,019 | 18,452 | 5,366 | 32,133 | 37,499 | 4,231 | 1981 | 1998 | ||||||||||||||||||||||||
MB
Plaza
|
31,185 | 4,533 | 22,024 | 28,628 | 7,503 | 47,682 | 55,185 | 7,091 | 1971/1996 | 1998 | ||||||||||||||||||||||||
Valley
Executive Tower
|
91,892 | 8,446 | 67,672 | 96,667 | 11,737 | 161,048 | 172,785 | 19,601 | 1984 | 1998 | ||||||||||||||||||||||||
Valley
Office Plaza
|
40,642 | 5,731 | 24,329 | 44,899 | 8,957 | 66,002 | 74,959 | 8,598 | 1966/2002 | 1998 | ||||||||||||||||||||||||
Westside
Towers
|
74,383 | 8,506 | 79,532 | 73,432 | 14,568 | 146,902 | 161,470 | 19,098 | 1985 | 1998 | ||||||||||||||||||||||||
100
Wilshire
|
136,713 | 12,769 | 78,447 | 136,132 | 27,108 | 200,240 | 227,348 | 23,402 | 1968/2002 | 1999 | ||||||||||||||||||||||||
11777
San Vicente
|
25,815 | 5,032 | 15,768 | 28,146 | 6,714 | 42,232 | 48,946 | 5,067 | 1974/1998 | 1999 | ||||||||||||||||||||||||
Century
Park Plaza
|
93,107 | 10,275 | 70,761 | 103,051 | 16,153 | 167,934 | 184,087 | 20,802 | 1972/1987 | 1999 | ||||||||||||||||||||||||
Encino
Terrace
|
76,683 | 12,535 | 59,554 | 89,456 | 15,533 | 146,012 | 161,545 | 19,416 | 1986 | 1999 | ||||||||||||||||||||||||
One
Westwood
|
- | 10,350 | 29,784 | 58,283 | 9,195 | 89,222 | 98,417 | 10,646 | 1987/2004 | 1999 | ||||||||||||||||||||||||
Westwood
Place
|
54,190 | 8,542 | 44,419 | 50,716 | 11,448 | 92,229 | 103,677 | 11,519 | 1987 | 1999 | ||||||||||||||||||||||||
Brentwood
Saltair
|
- | 4,468 | 11,615 | 10,683 | 4,775 | 21,991 | 26,766 | 3,259 | 1986 | 2000 | ||||||||||||||||||||||||
Encino
Gateway
|
54,889 | 8,475 | 48,525 | 51,053 | 15,653 | 92,400 | 108,053 | 12,477 | 1974/1998 | 2000 | ||||||||||||||||||||||||
Encino
Plaza
|
33,621 | 5,293 | 23,125 | 43,807 | 6,165 | 66,060 | 72,225 | 8,909 | 1971/1992 | 2000 | ||||||||||||||||||||||||
Lincoln
Wilshire
|
21,727 | 3,833 | 12,484 | 20,961 | 7,475 | 29,803 | 37,278 | 3,212 | 1996 | 2000 | ||||||||||||||||||||||||
1901
Avenue of the Stars
|
148,766 | 18,514 | 131,752 | 104,559 | 26,163 | 228,662 | 254,825 | 26,953 | 1968/2001 | 2001 | ||||||||||||||||||||||||
Camden/9601
Wilshire
|
- | 16,597 | 54,774 | 99,438 | 17,658 | 153,151 | 170,809 | 18,735 | 1962/2004 | 2001 | ||||||||||||||||||||||||
Columbus
Center
|
11,404 | 2,096 | 10,396 | 8,982 | 2,333 | 19,141 | 21,474 | 2,835 | 1987 | 2001 | ||||||||||||||||||||||||
Santa
Monica Square
|
- | 5,366 | 18,025 | 19,061 | 6,863 | 35,589 | 42,452 | 4,316 | 1983/2004 | 2001 | ||||||||||||||||||||||||
Warner
Center Towers
|
374,330 | 43,110 | 292,147 | 380,468 | 59,418 | 656,307 | 715,725 | 84,315 | 1982-1993/2004 | 2002 | ||||||||||||||||||||||||
Beverly
Hills Medical Center
|
28,361 | 4,955 | 27,766 | 27,030 | 6,435 | 53,316 | 59,751 | 6,506 | 1964/2004 | 2004 | ||||||||||||||||||||||||
Bishop
Place
|
86,922 | 8,317 | 105,651 | 53,902 | 8,833 | 159,037 | 167,870 | 20,896 | 1992 | 2004 | ||||||||||||||||||||||||
Harbor
Court
|
23,475 | 51 | 41,001 | 21,308 | - | 62,360 | 62,360 | 9,902 | 1994 | 2004 | ||||||||||||||||||||||||
The
Trillium
|
184,500 | 20,688 | 143,263 | 80,137 | 21,989 | 222,099 | 244,088 | 29,699 | 1988 | 2005 | ||||||||||||||||||||||||
Brentwood
Court
|
6,686 | 2,564 | 8,872 | 346 | 2,563 | 9,219 | 11,782 | 1,303 | 1984 | 2006 | ||||||||||||||||||||||||
Brentwood
Medical Plaza
|
23,957 | 5,934 | 27,836 | 1,265 | 5,933 | 29,102 | 35,035 | 4,303 | 1975 | 2006 | ||||||||||||||||||||||||
Brentwood
San Vicente Medical
|
13,690 | 5,557 | 16,457 | 472 | 5,557 | 16,929 | 22,486 | 2,154 | 1957/1985 | 2006 | ||||||||||||||||||||||||
San
Vicente Plaza
|
10,722 | 7,055 | 12,035 | 253 | 7,055 | 12,288 | 19,343 | 1,961 | 1985 | 2006 | ||||||||||||||||||||||||
Century
Park West
|
22,600 | 3,717 | 29,099 | 396 | 3,669 | 29,543 | 33,212 | 2,634 | 1971 | 2007 | ||||||||||||||||||||||||
Cornerstone
Plaza
|
55,800 | 8,245 | 80,633 | 4,176 | 8,263 | 84,791 | 93,054 | 6,839 | 1986 | 2007 | ||||||||||||||||||||||||
Honolulu
Club
|
18,000 | 1,863 | 16,766 | 3,292 | 1,863 | 20,058 | 21,921 | 1,331 | 1980 | 2008 | ||||||||||||||||||||||||
Multifamily
Properties
|
||||||||||||||||||||||||||||||||||
Barrington
Plaza
|
153,630 | 28,568 | 81,485 | 142,878 | 58,208 | 194,723 | 252,931 | 22,103 | 1963/1998 | 1998 | ||||||||||||||||||||||||
Barrington
555
|
43,440 | 6,461 | 27,639 | 40,169 | 14,903 | 59,366 | 74,269 | 6,625 | 1989 | 1999 | ||||||||||||||||||||||||
Pacific
Plaza
|
46,400 | 10,091 | 16,159 | 72,771 | 27,816 | 71,205 | 99,021 | 7,344 | 1963/1998 | 1999 | ||||||||||||||||||||||||
The
Shores
|
144,610 | 20,809 | 74,191 | 196,082 | 60,555 | 230,527 | 291,082 | 23,153 | 1965-67/2002 | 1999 | ||||||||||||||||||||||||
Moanalua
Hillside
|
111,920 | 24,720 | 85,895 | 37,626 | 35,294 | 112,947 | 148,241 | 11,932 | 1968/2004 | 2005 | ||||||||||||||||||||||||
The
Villas at Royal Kunia
|
82,000 | 42,887 | 71,376 | 14,361 | 35,163 | 93,461 | 128,624 | 11,665 | 1990/1995 | 2006 | ||||||||||||||||||||||||
Barrington/Kiowa
Apartments
|
7,750 | 5,720 | 10,052 | 438 | 5,720 | 10,490 | 16,210 | 1,147 | 1974 | 2006 | ||||||||||||||||||||||||
Barry
Apartments
|
7,150 | 6,426 | 8,179 | 354 | 6,426 | 8,533 | 14,959 | 1,065 | 1973 | 2006 | ||||||||||||||||||||||||
Kiowa
Apartments
|
3,100 | 2,605 | 3,263 | 242 | 2,605 | 3,505 | 6,110 | 432 | 1972 | 2006 | ||||||||||||||||||||||||
Ground
Lease
|
||||||||||||||||||||||||||||||||||
Owensmouth/Warner
|
14,720 | 23,848 | - | - | 23,848 | - | 23,848 | - | N/A | 2006 | ||||||||||||||||||||||||
TOTAL
|
$ | 3,258,000 | $ | 569,289 | $ | 2,437,626 | $ | 3,380,145 | $ | 835,407 | $ | 5,551,653 | $ | 6,387,060 | $ | 688,893 | ||||||||||||||||||
F-31
Year
ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||
Real
Estate Assets
|
|||||||||||
Balance,
beginning of period
|
$
|
6,981,316
|
$
|
6,264,170
|
$
|
6,088,617
|
|||||
Additions
|
-
property acquisitions
|
-
|
653,842
|
121,694
|
|||||||
-
improvements
|
44,952
|
63,304
|
57,300
|
||||||||
Purchase
accounting
|
-
|
-
|
(3,441)
|
||||||||
Deductions
|
-
deconsolidation
|
(639,208)
|
-
|
-
|
|||||||
Balance,
end of period
|
$
|
6,387,060
|
$
|
6,981,316
|
$
|
6,264,170
|
|||||
Accumulated
Depreciation
|
|||||||||||
Balance,
beginning of period
|
$
|
(490,125)
|
$
|
(242,114)
|
$
|
(32,521)
|
|||||
Additions
|
-
depreciation
|
(226,620)
|
(248,011)
|
(209,593)
|
|||||||
Deductions
|
-
deconsolidation
|
27,852
|
-
|
-
|
|||||||
Balance,
end of period
|
$
|
(688,893)
|
$
|
(490,125)
|
$
|
(242,114)
|
|||||
F-32