Douglas Emmett Inc - Quarter Report: 2010 May (Form 10-Q)
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2010
Commission
file number 001-33106
![](https://www.sec.gov/Archives/edgar/data/0001364250/000136425010000022/deilogo.jpg)
DOUGLAS
EMMETT, INC.
(Exact
name of registrant as specified in its charter)
MARYLAND
|
20-3073047
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
808
Wilshire Boulevard, Suite 200, Santa Monica, California
|
90401
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(310) 255-7700
(Registrant’s
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
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 No o
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 o No o
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 o
|
Non-accelerated
filer o (Do not
check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
Outstanding
at April 30, 2010
|
|
Common
Stock,
|
122,228,698
shares
|
|
$0.01
par value per share
|
FORM
10-Q
TABLE
OF CONTENTS
PAGE
NO.
|
||||
PART
I.
|
||||
Financial
Statements
|
3
|
|||
Consolidated
Balance Sheets as of March 31, 2010 (unaudited) and December 31,
2009
|
3
|
|||
Consolidated
Statements of Operations for the three months ended March 31, 2010 and
2009 (unaudited)
|
4
|
|||
Consolidated
Statements of Cash Flows for the three months ended March 31, 2010 and
2009 (unaudited)
|
5
|
|||
Notes
to Consolidated Financial Statements
|
6
|
|||
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
|||
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
|||
Controls
and Procedures
|
28
|
|||
PART
II.
|
|
|||
Legal
Proceedings
|
29
|
|||
Risk
Factors
|
29
|
|||
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
|||
Defaults
Upon Senior Securities
|
29
|
|||
Reserved
|
29
|
|||
Other
Information
|
29
|
|||
Exhibits
|
29
|
|||
30
|
2
PART
I. FINANCIAL INFORMATION
Consolidated
Balance Sheets
(in
thousands, except shares and per share data)
March
31, 2010
|
December
31, 2009
|
|||||||
(unaudited)
|
||||||||
Assets
|
||||||||
Investment
in real estate:
|
||||||||
Land
|
$ | 835,407 | $ | 835,407 | ||||
Buildings
and improvements
|
5,018,804 | 5,017,569 | ||||||
Tenant
improvements and lease intangibles
|
541,711 | 534,084 | ||||||
Investment
in real estate, gross
|
6,395,922 | 6,387,060 | ||||||
Less:
accumulated depreciation
|
(744,226 | ) | (688,893 | ) | ||||
Investment in real estate,
net
|
5,651,696 | 5,698,167 | ||||||
Cash
and cash equivalents
|
94,300 | 72,740 | ||||||
Tenant
receivables, net
|
969 | 2,357 | ||||||
Deferred
rent receivables, net
|
42,589 | 40,395 | ||||||
Interest
rate contracts
|
91,748 | 108,027 | ||||||
Acquired
lease intangible assets, net
|
10,523 | 11,691 | ||||||
Investment
in unconsolidated real estate funds
|
94,708 | 97,127 | ||||||
Other
assets
|
30,114 | 29,428 | ||||||
Total
assets
|
$ | 6,016,647 | $ | 6,059,932 | ||||
Liabilities
|
||||||||
Secured
notes payable, including loan premium
|
$ | 3,272,157 | $ | 3,273,459 | ||||
Accounts
payable and accrued expenses
|
73,484 | 72,893 | ||||||
Security
deposits
|
32,109 | 32,501 | ||||||
Acquired
lease intangible liabilities, net
|
130,882 | 139,340 | ||||||
Interest
rate contracts
|
206,522 | 237,194 | ||||||
Dividends
payable
|
12,203 | 12,160 | ||||||
Total
liabilities
|
3,727,357 | 3,767,547 | ||||||
Equity
|
||||||||
Douglas
Emmett, Inc. stockholders' equity:
|
||||||||
Common
Stock, $0.01 par value 750,000,000 authorized, 122,029,198 and 121,596,427
outstanding at March 31, 2010 and December 31, 2009,
respectively
|
1,220 | 1,216 | ||||||
Additional
paid-in capital
|
2,299,372 | 2,290,419 | ||||||
Accumulated
other comprehensive income (loss)
|
(171,662 | ) | (186,255 | ) | ||||
Accumulated
deficit
|
(332,507 | ) | (312,017 | ) | ||||
Total
Douglas Emmett, Inc. stockholders' equity
|
1,796,423 | 1,793,363 | ||||||
Noncontrolling
interests
|
492,867 | 499,022 | ||||||
Total
equity
|
2,289,290 | 2,292,385 | ||||||
Total
liabilities and equity
|
$ | 6,016,647 | $ | 6,059,932 |
See
notes to consolidated financial statements.
3
Douglas
Emmett, Inc.
Consolidated
Statements of Operations
(unaudited
and in thousands, except shares and per share data)
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Office
rental
|
||||||||
Rental
revenues
|
$ | 98,747 | $ | 108,546 | ||||
Tenant
recoveries
|
6,478 | 7,966 | ||||||
Parking
and other income
|
15,551 | 17,634 | ||||||
Total
office revenues
|
120,776 | 134,146 | ||||||
Multifamily
rental
|
||||||||
Rental
revenues
|
15,899 | 16,187 | ||||||
Parking
and other income
|
1,112 | 1,084 | ||||||
Total
multifamily revenues
|
17,011 | 17,271 | ||||||
Total
revenues
|
137,787 | 151,417 | ||||||
Operating
Expenses
|
||||||||
Office
expense
|
36,114 | 40,312 | ||||||
Multifamily
expense
|
4,568 | 4,517 | ||||||
General
and administrative
|
5,850 | 6,351 | ||||||
Depreciation
and amortization
|
55,332 | 61,074 | ||||||
Total
operating expenses
|
101,864 | 112,254 | ||||||
Operating
income
|
35,923 | 39,163 | ||||||
Gain
on disposition of interest in unconsolidated real
estate fund
|
- | 5,573 | ||||||
Other
income (loss)
|
246 | (567 | ) | |||||
(Loss)
Gain, including depreciation, from unconsolidated real
estate funds
|
(1,504 | ) | 2,803 | |||||
Interest
expense
|
(45,134 | ) | (49,222 | ) | ||||
Net
loss
|
(10,469 | ) | (2,250 | ) | ||||
Less: Net
loss attributable to noncontrolling interests
|
2,182 | 383 | ||||||
Net
loss attributable to common stockholders
|
$ | (8,287 | ) | $ | (1,867 | ) | ||
Net
loss attributable to common stockholders
|
||||||||
per
share – basic and diluted
|
$ | (0.07 | ) | $ | (0.02 | ) | ||
Dividends
declared per common share
|
$ | 0.10 | $ | 0.10 | ||||
Weighted
average shares of common stock
|
||||||||
outstanding
– basic and diluted
|
121,643,700 | 121,841,789 |
See
notes to consolidated financial statements.
4
Douglas
Emmett, Inc.
Consolidated
Statements of Cash Flows
(unaudited
and in thousands)
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Operating
Activities
|
||||||||
Net
loss
|
$ | (10,469 | ) | $ | (2,250 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Loss
(Gain), including depreciation, from unconsolidated real estate
funds
|
1,504 | (2,803 | ) | |||||
Depreciation
and amortization
|
55,332 | 61,074 | ||||||
Net
accretion of acquired lease intangibles
|
(7,290 | ) | (10,101 | ) | ||||
Gain
on disposition of interest in unconsolidated real estate
fund
|
- | (5,573 | ) | |||||
Amortization
of deferred loan costs
|
421 | 607 | ||||||
Amortization
of loan premium
|
(1,302 | ) | (1,229 | ) | ||||
Non-cash
market value adjustments on interest rate contracts
|
4,671 | 4,964 | ||||||
Non-cash
amortization of stock-based compensation
|
1,560 | 1,056 | ||||||
Non-cash
profit sharing allocation to consolidated fund
|
- | 660 | ||||||
Change
in working capital components:
|
||||||||
Tenant
receivables
|
1,388 | 62 | ||||||
Deferred
rent receivables
|
(2,194 | ) | (2,003 | ) | ||||
Accounts
payable, accrued expenses and security deposits
|
6,006 | 11,468 | ||||||
Other
|
(909 | ) | (275 | ) | ||||
Net
cash provided by operating activities
|
48,718 | 55,657 | ||||||
Investing
Activities
|
||||||||
Capital
expenditures and property acquisitions
|
(11,176 | ) | (11,846 | ) | ||||
Deconsolidation
of Douglas Emmett Fund X, LLC
|
- | (6,625 | ) | |||||
Net
cash used in investing activities
|
(11,176 | ) | (18,471 | ) | ||||
Financing
Activities
|
||||||||
Proceeds
from long-term borrowings
|
- | 82,640 | ||||||
Deferred
loan costs
|
(2 | ) | (3 | ) | ||||
Repayment
of borrowings
|
- | (106,665 | ) | |||||
Net
change in short-term borrowings
|
- | (25,275 | ) | |||||
Contributions
by Douglas Emmett Fund X, LLC investors
|
- | 66,074 | ||||||
Contributions
by noncontrolling interests
|
- | 450 | ||||||
Distributions
to noncontrolling interests
|
(3,420 | ) | (6,478 | ) | ||||
Distributions
of capital to noncontrolling interests
|
(400 | ) | - | |||||
Repurchase
of common stock
|
- | (3,901 | ) | |||||
Cash
dividends
|
(12,160 | ) | (22,856 | ) | ||||
Net
cash used in financing activities
|
(15,982 | ) | (16,014 | ) | ||||
Increase
in cash and cash equivalents
|
21,560 | 21,172 | ||||||
Cash
and cash equivalents at beginning of period
|
72,740 | 8,655 | ||||||
Cash
and cash equivalents at end of period
|
$ | 94,300 | $ | 29,827 | ||||
Noncash
transactions:
|
||||||||
Investing
activity related to contribution of properties to Douglas Emmett Fund X,
LLC
|
$ | - | $ | 476,852 | ||||
Financing
activity related to contribution of debt and noncontrolling interest to
Douglas Emmett Fund X, LLC
|
$ | - | $ | (483,477 | ) |
See
notes to consolidated financial statements.
5
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements
(in
thousands, except shares and per share data)
1. Overview
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, as well as our investment in
our unconsolidated real estate funds, we own or partially own, manage, lease,
acquire and develop real estate, consisting primarily of office and multifamily
properties. As of March 31, 2010, 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 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
one of the largest owners and operators of high-quality office and multifamily
properties in Los Angeles County, California and in Honolulu,
Hawaii. Our presence in Los Angeles and Honolulu is the result of a
consistent and focused strategy of identifying submarkets that are supply
constrained, have high barriers to entry and typically exhibit strong economic
characteristics such as population and job growth and a diverse economic
base. In our office portfolio, we focus primarily on owning and
acquiring a substantial share of top-tier office properties within submarkets
located near high-end executive housing and key lifestyle amenities. In our
multifamily portfolio, we focus primarily on owning and acquiring select
properties at premier locations within these same submarkets. Our
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.
Basis
of Presentation
The
accompanying consolidated financial statements as of March 31, 2010 and December
31, 2009 and for the three months ended March 31, 2010 and 2009 are the
consolidated financial statements of Douglas Emmett, Inc. and our subsidiaries
including our operating partnership. As described in Note 2 below,
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.
The
accompanying unaudited interim financial statements have been prepared pursuant
to the rules and regulations of the U.S. Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with accounting principles generally
accepted in the United States (GAAP) may have been condensed or omitted pursuant
to SEC rules and regulations, although we believe that the disclosures are
adequate to make their presentation not misleading. The accompanying
unaudited financial statements include, in our opinion, all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial information set forth therein. The results of operations for the
interim periods are not necessarily indicative of the results that may be
expected for the year ended December 31, 2010. The interim
financial statements should be read in conjunction with the consolidated
financial statements in our 2009 Annual Report on Form 10-K and notes
thereto. 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.
The
preparation of financial statements in conformity with GAAP requires us to make
certain estimates and assumptions, for example with respect to the allocation of
the purchase price of acquisitions among land, buildings, improvements,
equipment and any related intangible assets and liabilities. These
estimates and assumptions are subjective and affect the reported amounts in the
consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
6
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
2.
Acquisitions, Dispositions and Other Transfers
We did not make any property
acquisitions or dispositions during the three months ended March 31,
2010.
During
the fourth quarter of 2008, we contributed a portfolio of six Class A office
properties and the related $365 million term loan secured by the six properties
to Douglas Emmett Fund X, LLC (Fund X). See also Note 12. 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 $5,573 on the disposition
of the interest in Fund X we did not retain.
The
results of operations for the properties contributed to Fund X are included in
our consolidated statement of operations 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.
7
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
3.
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:
Three
Months Ended March 31,
|
||||||||
Office Segment
|
2010
|
2009
|
||||||
Rental
revenue
|
$ | 120,776 | $ | 134,146 | ||||
Rental
expense
|
(36,114 | ) | (40,312 | ) | ||||
Segment
profit
|
84,662 | 93,834 | ||||||
Multifamily Segment
|
||||||||
Rental
revenue
|
17,011 | 17,271 | ||||||
Rental
expense
|
(4,568 | ) | (4,517 | ) | ||||
Segment
profit
|
12,443 | 12,754 | ||||||
Total
segments' profit
|
$ | 97,105 | $ | 106,588 |
The
following table is a reconciliation of segment profit to net loss attributable
to common stockholders:
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Total
segments' profit
|
$ | 97,105 | $ | 106,588 | ||||
General
and administrative expense
|
(5,850 | ) | (6,351 | ) | ||||
Depreciation
and amortization
|
(55,332 | ) | (61,074 | ) | ||||
Gain
on disposition of interest in unconsolidated real estate
fund
|
- | 5,573 | ||||||
Other
income (loss)
|
246 | (567 | ) | |||||
(Loss)
Gain, including depreciation, from unconsolidated real estate
funds
|
(1,504 | ) | 2,803 | |||||
Interest
expense
|
(45,134 | ) | (49,222 | ) | ||||
Net
loss
|
(10,469 | ) | (2,250 | ) | ||||
Less:
Net loss attributable to noncontrolling interests
|
2,182 | 383 | ||||||
Net
loss attributable to common stockholders
|
$ | (8,287 | ) | $ | (1,867 | ) |
8
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
4.
Other Assets
Other
assets consist of the following as of:
March
31, 2010
|
December
31, 2009
|
||||||
Deferred
loan costs, net of accumulated amortization of $5,410 and
$4,989
at March 31, 2010 and December 31, 2009, respectively
|
$ | 4,398 | $ | 4,817 | |||
Restricted
cash
|
2,899 | 2,897 | |||||
Prepaid
interest
|
193 | 263 | |||||
Prepaid
expenses
|
2,570 | 3,662 | |||||
Interest
receivable
|
10,357 | 10,376 | |||||
Other
indefinite-lived intangible
|
1,988 | 1,988 | |||||
Other
|
7,709 | 5,425 | |||||
Total
other assets
|
$ | 30,114 | $ | 29,428 |
We
incurred deferred loan cost amortization expense of $421 and $607 for the three
months ended March 31, 2010 and 2009, respectively. Deferred loan
cost amortization is included as a component of interest expense in the
consolidated statements of operations.
5.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of:
March
31, 2010
|
December
31, 2009
|
||||||
Accounts
payable
|
$ | 31,878 | $ | 31,940 | |||
Accrued
interest payable
|
26,191 | 26,263 | |||||
Deferred
revenue
|
15,415 | 14,690 | |||||
Total
accounts payable and accrued expenses
|
$ | 73,484 | $ | 72,893 |
6.
Acquired Lease Intangibles
The
following summarizes our acquired lease intangibles related to
above/below-market leases as of:
March
31, 2010
|
December
31, 2009
|
|||||||
Above-market
tenant leases
|
$ | 32,770 | $ | 32,770 | ||||
Accumulated
amortization
|
(25,181 | ) | (24,033 | ) | ||||
Below-market
ground leases
|
3,198 | 3,198 | ||||||
Accumulated
amortization
|
(264 | ) | (244 | ) | ||||
Acquired
lease intangible assets, net
|
$ | 10,523 | $ | 11,691 | ||||
Below-market
tenant leases
|
$ | 261,523 | $ | 261,523 | ||||
Accumulated
accretion
|
(143,942 | ) | (135,534 | ) | ||||
Above-market
ground leases
|
16,200 | 16,200 | ||||||
Accumulated
accretion
|
(2,899 | ) | (2,849 | ) | ||||
Acquired
lease intangible liabilities, net
|
$ | 130,882 | $ | 139,340 |
9
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
7.
Secured Notes Payable
The
following summarizes our secured notes payable at:
Type
of Debt
|
Maturity Date
(1)
|
March
31, 2010
|
December
31, 2009
|
Variable
Rate
|
Effective Annual
Fixed Rate
(2)
|
Swap Maturity Date
(1)
|
||||||||
Variable
Rate Swapped to Fixed Rate:
|
||||||||||||||
Fannie Mae Loan I
(3)
|
06/01/2012
|
$
|
293,000
|
$
|
293,000
|
DMBS
+ 0.60%
|
4.70%
|
08/01/11
|
||||||
Fannie Mae Loan II
(3)
|
06/01/2012
|
95,080
|
95,080
|
DMBS
+ 0.60%
|
5.78
|
08/01/11
|
||||||||
Modified Term
Loan
(4)(5)
|
08/31/2012
|
2,300,000
|
2,300,000
|
LIBOR
+ 0.85%
|
5.13
|
08/01/10-08/01/12
|
||||||||
Fannie Mae Loan III
(3)
|
02/01/2015
|
36,920
|
36,920
|
DMBS
+ 0.60%
|
5.78
|
08/01/11
|
||||||||
Fannie Mae Loan IV
(3)
|
02/01/2015
|
75,000
|
75,000
|
DMBS
+ 0.76%
|
4.86
|
08/01/11
|
||||||||
Term Loan (6)
|
04/01/2015
|
340,000
|
340,000
|
LIBOR
+ 1.50%
|
4.77
|
01/02/13
|
||||||||
Fannie Mae Loan V
(3)
|
02/01/2016
|
82,000
|
82,000
|
LIBOR
+ 0.62%
|
5.62
|
03/01/12
|
||||||||
Fannie Mae Loan VI
(3)
|
06/01/2017
|
18,000
|
18,000
|
LIBOR
+ 0.62%
|
5.82
|
06/01/12
|
||||||||
Subtotal
|
3,240,000
|
3,240,000
|
5.10%
|
|||||||||||
Variable
Rate:
|
||||||||||||||
Wells Fargo
Loan
(7)
|
03/01/2011
|
18,000
|
18,000
|
LIBOR
+ 1.25%
|
--
|
--
|
||||||||
Secured Revolving
Credit Facility (8)
|
10/30/2010
|
-
|
-
|
LIBOR / Fed
Funds+(9)
|
--
|
--
|
||||||||
Subtotal
|
3,258,000
|
3,258,000
|
||||||||||||
Unamortized Loan
Premium (10)
|
14,157
|
15,459
|
||||||||||||
Total | $ | 3,272,157 | $ | 3,273,459 |
(1)
|
As
of March 31, 2010, the weighted average remaining life of our total
outstanding debt was 2.8 years, and the weighted average remaining life of
the interest rate swaps was 1.1 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 was
5.17% at March 31, 2010.
|
(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)
|
Secured
by four properties in a collateralized pool. Requires monthly
payments of interest only, with outstanding principal due upon
maturity.
|
(7)
|
This
loan is held by a consolidated entity in which our operating partnership
holds a two-thirds interest.
|
(8)
|
This
credit facility is secured by nine properties and has no borrowings
outstanding. A one-year extension option remains
available.
|
(9)
|
This
revolver bears interest at either LIBOR +0.70% or Fed Funds +0.95% at our
election. If the amount outstanding exceeds
$262.5 million, the credit facility bears interest at either LIBOR
+0.80% or Fed Funds +1.05% at our election.
|
(10)
|
Represents
non-cash mark-to-market adjustment on variable rate debt associated with
office properties.
|
10
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
The
minimum future principal payments due on our secured notes payable at March 31,
2010, excluding the non-cash loan premium amortization, were as
follows:
Twelve
months ending March 31,
|
|||
2011
|
$ | 18,000 | |
2012
|
- | ||
2013
|
2,688,080 | ||
2014
|
- | ||
2015
|
111,920 | ||
Thereafter
|
440,000 | ||
Total
future principal payments
|
$ | 3,258,000 |
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 March 31, 2010,
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.
11
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
8.
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
March 31, 2010, 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
(Actual)
|
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 March 31, 2010,
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
(Actual)
|
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
March 31, 2010, the fair value of derivatives, aggregated by counterparty, in a
net liability position was $129.0 million, which includes accrued interest but
excludes any adjustment for nonperformance risk related to these
agreements.
12
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 as interest expense.
Amounts
accumulated in other comprehensive income (loss) related to derivatives will be
reclassified to interest expense as interest payments are made on our
variable-rate debt. For derivatives designated as cash flow hedges, we estimate
an additional $100.5 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
following table represents the effect of derivative instruments on our
consolidated statements of operations:
Three
months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Derivatives
in Designated Cash Flow Hedging Relationships:
|
||||||||
Amount
of gain (loss) recognized in OCI on derivatives (effective
portion)
|
$ | (18,627 | ) | $ | (18,445 | ) | ||
Amount
of gain (loss) reclassified from accumulated OCI into earnings (effective
portion)
|
$ | (36,925 | ) | $ | (35,298 | ) | ||
Location
of gain (loss) reclassification from accumulated OCI into earnings
(effective portion)
|
Interest
expense
|
Interest
expense
|
||||||
Amount
of gain (loss) recognized in earnings on derivatives (ineffective portion
and amount excluded from effectiveness testing)
|
$ | 82 | $ | (551 | ) | |||
Location
of gain (loss) recognized in earnings on derivatives (ineffective portion
and amount excluded from effectiveness testing)
|
Interest
expense
|
Interest
expense
|
||||||
Derivatives
Not Designated as Cash Flow Hedges:
|
||||||||
Amount
of realized and unrealized gain (loss) recognized in earnings on
derivatives
|
$ | (33 | ) | $ | 307 | |||
Location
of gain (loss) recognized in earnings on derivatives
|
Interest
expense
|
Interest
expense
|
13
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 Financial Accounting Standards Board
(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 March
31, 2010:
March
31, 2010
|
December
31, 2009
|
||||||
Derivative
assets, disclosed as "Interest Rate Contracts":
|
|||||||
Derivatives
designated as accounting hedges
|
$ | - | $ | - | |||
Derivatives
not designated as accounting hedges
|
91,748 | 108,027 | |||||
Total
derivative assets
|
$ | 91,748 | $ | 108,027 | |||
Derivative
liabilities, disclosed as "Interest Rate Contracts":
|
|||||||
Derivatives
designated as accounting hedges
|
$ | 133,352 | $ | 152,498 | |||
Derivatives
not designated as accounting hedges
|
73,170 | 84,696 | |||||
Total
derivative liabilities
|
$ | 206,522 | $ | 237,194 |
The FASB
has established a framework for measuring fair value which uses a market-based
measurement, not an entity-specific measurement. The FASB established
a fair value hierarchy that distinguishes between assumptions based on market
data obtained from sources independent of the reporting entity and the reporting
entity’s own assumptions about market-based inputs. Level 1 inputs
utilize unadjusted quoted prices in active markets for identical assets or
liabilities. Level 2 inputs are inputs that are observable either
directly or indirectly for similar assets and liabilities in active
markets. Level 3 inputs are unobservable assumptions generated by the
reporting entity.
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 did not have any fair value measurements
using significant unobservable inputs (Level 3) as of March 31,
2010.
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 were measured at
fair value as of March 31, 2010 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
March
31, 2010
|
||||||||
Assets
|
|||||||||||
Interest
Rate Contracts
|
$ |
-
|
$ |
91,748
|
$ |
-
|
$ |
91,748
|
|||
Liabilities
|
|||||||||||
Interest
Rate Contracts
|
$ |
-
|
$ |
206,522
|
$ |
-
|
$ |
206,522
|
14
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
9.
Stockholders’ Equity
Noncontrolling
Interests
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 March 31, 2010. 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 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 March 31, 2010.
The
tables below represent our condensed consolidated statements of stockholders’
equity:
Douglas
Emmett, Inc. Stockholders' Equity
|
Noncontrolling
Interests
|
Total
Equity
|
||||||||||
Balance
as of January 1, 2010, as reported
|
$ | 1,793,363 | $ | 499,022 | $ | 2,292,385 | ||||||
Comprehensive
income (loss):
|
||||||||||||
Net
loss
|
(8,287 | ) | (2,182 | ) | (10,469 | ) | ||||||
Other
comprehensive income (loss)
|
14,593 | 3,704 | 18,297 | |||||||||
Comprehensive
income (loss)
|
6,306 | 1,522 | 7,828 | |||||||||
Dividends
and distributions
|
(12,203 | ) | (3,772 | ) | (15,975 | ) | ||||||
Redemption
of operating partnership units
|
6,386 | (6,386 | ) | - | ||||||||
Stock
compensation
|
2,571 | 2,481 | 5,052 | |||||||||
Balance
as of March 31, 2010
|
$ | 1,796,423 | $ | 492,867 | $ | 2,289,290 |
Douglas
Emmett, Inc. Stockholders' Equity
|
Noncontrolling
Interests
|
Total
Equity
|
||||||||||
Balance
as of January 1, 2009, as reported
|
$ | 1,775,189 | $ | 505,025 | $ | 2,280,214 | ||||||
Comprehensive
income (loss):
|
||||||||||||
Net
loss
|
(1,867 | ) | (383 | ) | (2,250 | ) | ||||||
Other
comprehensive income (loss)
|
10,556 | 6,297 | 16,853 | |||||||||
Comprehensive
income (loss)
|
8,689 | 5,914 | 14,603 | |||||||||
Contributions
|
- | 450 | 450 | |||||||||
Dividends
and distributions
|
(12,150 | ) | (6,412 | ) | (18,562 | ) | ||||||
Redemption
of operating partnership units
|
(634 | ) | (3,267 | ) | (3,901 | ) | ||||||
Stock
compensation
|
1,200 | 1,475 | 2,675 | |||||||||
Deconsolidation
of Douglas Emmett Fund X, LLC
|
11,890 | 10 | 11,900 | |||||||||
Balance
as of March 31, 2009
|
$ | 1,784,184 | $ | 503,195 | $ | 2,287,379 |
15
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
The table
below represents our consolidated statements of comprehensive income
(loss):
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss
|
$ | (10,469 | ) | $ | (2,250 | ) | ||
Cash
flow hedge adjustment
|
19,064 | 18,920 | ||||||
Equity
interest in other comprehensive income (loss) of unconsolidated real
estate funds
|
(767 | ) | (2,067 | ) | ||||
Comprehensive
income (loss)
|
7,828 | 14,603 | ||||||
Less:
Comprehensive income (loss) attributable to noncontrolling
interests
|
(1,522 | ) | (5,914 | ) | ||||
Comprehensive
income (loss) attributable to common stockholders
|
$ | 6,306 | $ | 8,689 |
Dividends
During
the first three months of 2010 and 2009, we declared quarterly dividends of
$0.10 per share in each quarter, which equals an annualized rate of $0.40 per
share for both periods.
Taxability
of Dividends
Earnings
and profits, which determine the taxability of distributions to stockholders,
may 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.
16
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Equity
Conversions and Repurchases
During
the three months ended March 31, 2010, approximately 433,000 operating
partnership units were converted to shares of common stock. We did not make any
repurchases of share equivalents during this period.
The table
below represents the net income attributable to common stockholders and
transfers (to) from the noncontrolling interests:
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss attributable to common stockholders
|
$ | (8,287 | ) | $ | (1,867 | ) | ||
Transfers
from the noncontrolling interests:
|
||||||||
Increase
in common stockholders paid-in capital for
redemption of operating partnership units
|
6,382 | 3,264 | ||||||
Change
from net income attributable to common stockholders
and transfers from noncontrolling interests
|
$ | (1,905 | ) | $ | 1,397 |
Stock-Based
Compensation
The
Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan is administered by
the compensation committee of our board of directors. 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. For more information on our stock incentive plan,
please refer to the notes to the consolidated financial statements in our 2009
Annual Report on Form 10-K, which was filed with the SEC on February 26, 2010,
and our proxy statement, which was filed with the SEC on April 22,
2010.
During
the first quarter of 2010, we granted approximately 1.6 million long-term
incentive units and stock options that are subject to vesting with a total fair
market value of $9.2 million. In addition, we granted
$3.6 million of immediately-vested equity awards during the first quarter
of 2010 to satisfy a portion of the bonuses accrued during 2009 and
$1.4 million of immediately-vested equity awards during the first quarter
of 2009 to satisfy a portion of the bonuses accrued during 2008. We
recognize non-cash compensation expense upon vesting of equity awards, and
accordingly recognized non-cash compensation expense of $1.4 million and $1.0
million for the three months ended March 31, 2010 and 2009,
respectively.
17
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
10.
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 for the three months
ended March 31, 2010 and 2009 totaled $131 and $197, respectively.
Future
minimum base rentals on our non-cancelable office and ground operating leases at
March 31, 2010 were as follows:
Twelve
months ending March 31:
2011
|
$ | 351,409 | |
2012
|
309,418 | ||
2013
|
264,953 | ||
2014
|
209,598 | ||
2015
|
158,211 | ||
Thereafter
|
420,062 | ||
Total
future minimum base rentals
|
$ | 1,713,651 |
The above
future minimum lease receipts 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. We
have an ordinary purchase option on one of these two 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 in the amount of $539 and $513 for the three months ended
March 31, 2010 and 2009, respectively.
The
following is a schedule of our minimum ground lease payments as of March 31,
2010:
Twelve
months ending March 31:
|
|||
2011
|
$ | 733 | |
2012
|
733 | ||
2013
|
733 | ||
2014
|
733 | ||
2015
|
733 | ||
Thereafter
|
52,592 | ||
Total
future minimum lease payments
|
$ | 56,257 |
18
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
11.
Fair Value of Financial Instruments
Our
estimates of the fair value of financial instruments at March 31, 2010 were
determined using available market information and appropriate valuation methods.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. The use of different market assumptions or estimation
methods may have a material effect on the estimated fair value
amounts.
The
carrying amounts for cash and cash equivalents, restricted cash, rents and other
receivables, due from affiliates, accounts payable and other liabilities
approximate fair value because of the short-term nature of these
instruments. We calculate the fair value of our secured notes payable
based on a currently available market rate; assuming the loans are outstanding
through maturity and considering the collateral. At March 31, 2010,
the aggregate fair value of our secured notes payable and secured revolving
credit facility was 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.
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 8.
12.
Related Party Transactions
During
the fourth quarter of 2008, we contributed a portfolio of six properties, the
related $365 million term loan, and the benefits and burdens of the related
interest-rate 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 2 for further information. 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 the swap agreement, as a guarantor we remain
liable to the swap counterparties. The maximum future payments under
the swap agreements was approximately $34.8 million as of March 31,
2010. To date, all obligations under the swap agreements have been
performed by Fund X in accordance with the terms of the
agreements.
19
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
13.
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 outcome of these actions will
not have a material adverse effect on our financial position, 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, including primarily
U.S. banking institutions as well as a U.S. branch of a foreign bank. Accounts
at each U.S. banking institution are insured by the Federal Deposit Insurance
Corporation up to $250 thousand under the increased limit that the U.S. Congress
has temporarily granted until December 31, 2013. We have not
experienced any losses to date on our deposited cash. All of our
deposits are maintained at banks with investment grade ratings as evaluated by
the predominant rating agencies.
Asset
Retirement Obligations
Conditional
asset retirement obligations represent 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 our
control. 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 March 31, 2010, 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.
Tenant
Concentrations
For the three months ended March 31,
2010 and 2009, no tenant accounted for more than 10% of our total rental revenue
and tenant recoveries.
20
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
14.
Summary of Significant Accounting Policies
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.
Income
Taxes
We have
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (IRC) commencing with our initial taxable year ending December 31,
2006. To qualify as a REIT, we are required to distribute at least
90% of our REIT taxable income to our stockholders and meet the various other
requirements imposed by the IRC relating to such matters as operating results,
asset holdings, distribution levels and diversity of stock ownership. Provided
we qualify for taxation as a REIT, we are generally not subject to
corporate-level income tax on the earnings distributed currently to our
stockholders that we derive from our REIT qualifying activities. We are subject
to corporate-level tax on the earnings we derive through our taxable REIT
subsidiary (TRS). If we fail to qualify as a REIT in any taxable year, and are
unable to avail ourselves of certain savings provisions set forth in the IRC,
all of our taxable income would be subject to federal income tax at regular
corporate rates, including any applicable alternative minimum tax.
In
addition, we are subject to taxation by various state and local (and potentially
foreign) jurisdictions, including those in which we transact business or
reside. Our non-TRS subsidiaries, including our operating
partnership, are either partnerships or disregarded entities for federal income
tax purposes. Under applicable federal and state income tax rules,
the allocated share of net income or loss from disregarded entities (including
limited partnerships and S-Corporations) is reportable in the income tax returns
of the respective partners and stockholders. Accordingly, no income
tax provision is included in the accompanying consolidated financial
statements.
Earnings
Per Share (EPS)
Basic EPS
is calculated by dividing the net income applicable to common stockholders for
the period by the weighted average of common shares outstanding during the
period. Diluted EPS 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. Since we were in a net loss position during
the three months ended March 31, 2010 and 2009, all potentially dilutive
instruments are anti-dilutive and have been excluded from our computation of
weighted average dilutive shares outstanding.
21
Douglas
Emmett, Inc.
Notes
to Consolidated Financial Statements (continued)
(in
thousands, except shares and per share data)
Recently
Issued Accounting Literature
Changes
to U.S. GAAP are established by the FASB in the form of accounting standards
updates (ASUs) to the FASB’s Accounting Standards Codification. We
consider the applicability and impact of all ASUs. Newly issued ASUs
not listed below are expected to have no impact on our consolidated financial
position and results of operations, because either the ASU is not applicable or
the impact is expected to be immaterial.
In
January 2010, we adopted FASB guidance contained in ASU No. 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. 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. The adoption of ASU 2009-17 did
not have a material effect on our consolidated financial position or results of
operations.
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. This guidance provides for new disclosures
requiring us to (i) disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the reasons
for the transfers and (ii) present separately information about purchases,
sales, issuances and settlements in the reconciliation of Level 3 fair value
measurements. This guidance also provides clarification of existing
disclosures requiring us to (i) determine each class of assets and liabilities
based on the nature and risks of the investments rather than by major security
type and (ii) for each class of assets and liabilities, disclose the valuation
techniques and inputs used to measure fair value for both Level 2 and Level 3
fair value measurements. This ASU is effective for annual and interim
reporting periods beginning after December 15, 2009 for most of the new
disclosures and for periods beginning after December 15, 2010 for the new Level
3 disclosures. The adoption of this FASB guidance did not have a
material effect on our financial position and results of operations as it only
addresses disclosures.
In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure
Requirements. This standard amends the authoritative guidance
for subsequent events that was previously issued and, among other things,
exempts SEC registrants from the requirement to disclose the date through which
it has evaluated subsequent events for either original or restated financial
statements. This standard does not apply to subsequent events or
transactions that are within the scope of other applicable GAAP that provides
different guidance on the accounting treatment for subsequent events or
transactions. The adoption of this standard did not have a material effect on
our financial position and results of operations as it only addresses
disclosures.
22
Forward
Looking Statements.
This
Quarterly Report on Form 10-Q (Report) contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the Exchange Act). 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 that we may make orally or in writing from
time to time, are based on our beliefs and assumptions. 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 previously reported forward-looking
statements, which are based on 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 funds;
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; 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 possible future terrorist attacks. For further discussion of these and other
factors, see “Item 1A. Risk Factors” in our 2009 Annual Report on
Form 10-K.
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.
Critical
Accounting Policies
Our
discussion and analysis of our historical financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of our financial
statements in conformity with GAAP requires us to make estimates of certain
items and judgments as to certain future events, for example with respect to the
allocation of the purchase price of acquired property among land, buildings,
improvements, equipment, and any related intangible assets and liabilities, or
the effect of a property tax reassessment of our properties. These
determinations, even though inherently subjective and prone 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.
In
addition, we identified certain critical accounting policies that affect certain
of our more significant estimates and assumptions used in preparing our
consolidated financial statements in our 2009 Annual Report on Form
10-K. We have not made any material changes to these policies during
the periods covered by this Report.
23
Historical Results of
Operations
Overview
Our
results of operations for the three months ended March 31, 2010 and 2009
consists of the rental operations for 49 office properties and nine multifamily
properties that we owned during both comparable periods as well as six office
properties that were contributed during the first quarter of 2009 to Fund X, an
institutional real estate fund that we manage and in which we own an equity
interest. The results of these six contributed properties are included only
through the end of February 2009, when Fund X was deconsolidated, and thereafter
only to the extent of equity income or loss from our investment in Fund
X.
|
Comparison
of three months ended March 31, 2010 to three months ended March 31,
2009
|
Revenues
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 $13.4 million, or 10.0%, to
$120.8 million for the three months ended March 31, 2010, compared to $134.1
million for the three months ended March 31, 2009.
Office 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 $9.8 million, or 9.0%, to $98.7 million for the three months ended
March 31, 2010, compared to $108.5 million for the three months ended March 31,
2009. The decrease was primarily due to $7.6 million of rent
reflected in our 2009 consolidated results from the six properties we
contributed to Fund X at the end of February 2009, as well as a decrease of $2.2
million for the remainder of our portfolio. The remaining decrease of
$2.2 million is primarily due to lower accretion of net below-market
rents. Each of the leases in place at the time of our IPO was
adjusted to then-market rates. As we progress further from the IPO
date, the maturity and expiration of these leases will result in lower
comparable rent adjustments.
Tenant
Recoveries. Total office tenant recoveries decreased by $1.5
million, or 18.7%, to $6.5 million for the three months ended March 31, 2010,
compared to $8.0 million for the three months ended March 31,
2009. The decrease was primarily due to $0.7 million of recoveries
reflected in our 2009 consolidated results from the six properties we
contributed to Fund X at the end of February 2009, as well as a decrease in
recoverable utilities and scheduled services expense for the remainder of our
portfolio.
Parking and Other
Income. Total office parking and other income decreased by
$2.1 million, or 11.8%, to $15.6 million for the three months ended March 31,
2010, compared to $17.6 million for the three months ended March 31,
2009. The decrease was primarily due to $1.2 million of parking
income reflected in our 2009 consolidated results from the six properties we
contributed to Fund X at the end of February 2009, as well as decreases in
parking income for the remainder of our portfolio as a result of lower
occupancy.
Operating
Expenses
Office Rental
Expenses. Total office rental expense decreased by $4.2
million, or 10.4%, to $36.1 million for the three months ended March 31, 2010,
compared to $40.3 million for the three months ended March 31,
2009. The decrease was primarily due to $3.2 million of property
operating expenses reflected in our 2009 consolidated results from the six
properties we contributed to Fund X at the end of February 2009, as well as
lower utilities and scheduled services expense for the remainder of our
portfolio.
Depreciation and
Amortization. Depreciation and amortization expense decreased
$5.7 million, or 9.4%, to $55.3 million for the three months ended March 31,
2010, compared to $61.1 million for the three months ended March 31,
2009. The decrease was primarily due to $4.9 million of depreciation
and amortization reflected in our 2009 consolidated results from the six
properties we contributed to Fund X at the end of February 2009.
24
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 as described in Note 2 to our consolidated financial
statements in Item 1 of this Report.
(Loss) Gain, including Depreciation,
from Unconsolidated Real Estate Funds. The (loss) gain,
including depreciation, from unconsolidated real estate funds totaled a net loss
of $1.5 million for the three months ended March 31, 2010. This
amount 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, for the full three-month
period. Comparatively, the prior year’s quarterly amount includes
only one month of equity income (loss) following the deconsolidation of Fund X
in February 2009 as described in Note 2 to our consolidated financial statements
in Item 1 of this Report. The (loss) gain, including depreciation,
from unconsolidated real estate funds totaled a net gain of $2.8 million for the
three months ended March 31, 2009. This amount represents $3.5
million of income relating to the contribution of properties to Fund X at the
end of February 2009, partially offset by a loss of $0.7 million for our equity
interest in the net operating results of Fund X subsequent to the
deconsolidation in February 2009.
Interest
Expense. Interest expense decreased $4.1 million, or 8.3%, to
$45.1 million for the three months ended March 31, 2010, compared to $49.2
million for the three months ended March 31, 2009. This decrease was
primarily due to lower average levels of outstanding debt during the first
quarter of 2010 as a result of the deconsolidation of debt associated with the
six properties contributed to Fund X as described in Note 2 to our consolidated
financial statements in Item 1 of this Report.
Liquidity
and Capital Resources
Available
Borrowings, Cash Balances and Capital Resources
We had
total indebtedness of $3.3 billion at March 31, 2010, excluding a loan
premium representing the mark-to-market adjustment on variable rate debt
resulting from our IPO. See Note 7 to our consolidated financial
statements in Item 1 of this Report.
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
March 31, 2010, there were no borrowings 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
typically financed our capital needs through short-term lines of credit and
long-term secured mortgages at floating rates. To mitigate the impact
of fluctuations in short-term interest rates on our cash flow from operations,
we generally enter into interest rate swap or interest rate cap agreements with
respect to our long-term secured mortgages. At March 31, 2010, 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 3 of this Report for a description of the impact of
variable rates on our interest expense. See also Notes 7 and 8 to our
consolidated financial statements in Item 1 of this Report.
25
None of
our term loans with swapped-to-fixed interest rates mature until
2012. Our other loan obligations, which remain at variable rates, are
our revolving credit facility described above, whose maturity can be extended,
under certain conditions, to October 30, 2011, and an $18 million secured loan,
whose maturity is March 31, 2011.
At March
31, 2010, our total borrowings under secured loans represented 58.9% of our
total market capitalization of $5.8 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
March 31, 2010 on the New York Stock Exchange of $15.37 per share.
The
nature of our business will cause us to have substantial liquidity needs over
both the short term and the long term. We expect to meet our
short-term liquidity requirements generally through cash provided by operations
and, if necessary, by drawing on our secured revolving credit
facility. We anticipate that cash provided by operations and
borrowings under our 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.
Cash
Flows
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 $6.9 million to $48.7 million for the three
months ended March 31, 2010, compared to $55.7 million for the three months
ended March 31, 2009. The decrease is primarily due to the cash flows
from the six properties contributed to Fund X which were included in our
consolidated results until the end of February 2009.
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 by $7.3 million to $11.2 million for the three months ended March 31,
2010 compared to $18.5 million for the three months ended March 31,
2009. The decrease was attributable to the deconsolidation of Fund X
in 2009. See Note 2 to our consolidated financial statements in Item
1 of this Report.
Our net
cash related to financing activities is generally impacted by our borrowings,
and capital activities net of dividends and distributions paid to common
stockholders and noncontrolling interests. Cash used in financing
activities for the three months ended March 31, 2010 was essentially flat in
comparison to the three months ended March 31, 2009. However, there
were noteworthy increases and decreases in the components of financing cash
flows which offset one another to produce the flat comparison. The
use of cash for financing activity decreased this year in comparison to prior
year from a $13.8 million decrease in cash dividends and distributions paid to
common stockholders and noncontrolling interests, which is almost completely
offset by the net increase in cash flows from other financing activities during
the three months ended March 31, 2009 that did not recur in the comparable
quarter of 2010. These activities include the receipt of $66.1
million in cash contributions from Fund X investors as part of the formation
transactions that preceded our deconsolidation of Fund X, partially offset by
payments to reduce the $49.3 million outstanding balance of our revolving credit
facility to zero and to repurchase $3.9 million of our common stock in the open
market.
26
Contractual
Obligations
During
the first three months of 2010, there were no material changes outside the
ordinary course of business in the information regarding specified contractual
obligations contained in our 2009 Annual Report on Form 10-K.
Off-Balance
Sheet Arrangements
We have
established and manage unconsolidated real estate funds through which
institutional investors provide capital commitments for acquisition of
properties. These include Fund X, which we formed in the fourth
quarter of 2008, and Douglas Emmett Partnership X, LP, which we formed in the
first quarter of 2010 to allow additional investments along side Fund X by
institutional investors who cannot invest through a limited liability
company. The capital we invest in our institutional funds is invested
on a pari passu basis with the other investors. In addition, we also
receive certain additional distributions based on committed capital and on any
profits that exceed certain specified cash returns to the
investors. We do not expect to receive additional significant
liquidity from our investments in our institutional funds until the disposition
of the properties held by the relevant fund, which may not be for many
years. Certain of our wholly-owned affiliates provide property
management and other services with respect to the real estate owned by our
institutional funds for which we are paid fees and/or reimbursed our
costs.
At March
31, 2010, our institutional funds had capital commitments of $441.5 million, of
which $183.5 million remained undrawn. This amount included
commitments from us of $153.0 million, of which $27.0 million remained
undrawn.
We do not
have any debt outstanding in connection with our interest in our institutional
funds, although our institutional funds have their own debt, which is secured by
the properties they own. The following table summarizes the debt of
our institutional funds at March 31, 2010:
Type
of Debt
|
Amount
(in
millions)
|
Maturity
Date
|
Variable
Rate
|
Effective
Annual Fixed
Rate(1)
|
Swap
Maturity Date
|
|||||
Variable
rate term loan (swapped to fixed rate)
(2)(3)
|
$
365
|
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 March 31,
2010.
|
(2)
|
The
loan is secured by six properties in a collateralized
pool. Requires monthly payments of interest only, with
outstanding principal due upon maturity.
|
(3)
|
Fund
X assumed this loan during the fourth quarter of 2008 when we contributed
the properties securing it to Fund X. 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 $34.8
million as of March 31, 2010. To date, all obligations under
the swap agreements have been performed by Fund X in accordance with the
terms of the agreements.
|
27
At March
31, 2010, approximately $3.2 billion, or 99%, of our debt was hedged with
derivative instruments. Based on the level of variable rate debt
outstanding at March 31, 2010, 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 not to 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.
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 of 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.
We
maintain disclosure controls and procedures (as such term is defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to
ensure that information required to be disclosed in our reports under the
Exchange Act is processed, recorded, summarized and reported within the time
periods specified in the SEC’s rules and regulations and that such information
is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As of
March 31, 2010, the end of the period covered by this Report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, regarding the
effectiveness of our disclosure controls and procedures at the end of the period
covered by this Report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded, as of that time, that our
disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us in reports filed or submitted under the Exchange
Act (i) is processed, recorded, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow for timely decisions regarding
required disclosure.
No
changes to our internal control over financial reporting were identified in
connection with the evaluation referenced above that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
28
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
From time to time, we are party to
various lawsuits, claims and other legal proceedings that arise in the ordinary
course of our business. 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.
Item
1A. Risk Factors
There
have been no material changes to the risk factors included in Item 1A. “Risk
Factors” in our 2009 Annual Report on Form 10-K.
Sales. We did not
make any unregistered sales of our securities during the quarter ended March 31,
2010.
Purchases. We did
not make any purchases of our share equivalents during the three months ended
March 31, 2010.
None.
Item
4. Reserved
Item
5. Other Information
None.
Item 6. Exhibits
Exhibit
Number
|
Description
|
|
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.(1)
|
|
32.2
|
Certificate
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1)
|
|
(1)
|
In
accordance with SEC Release No. 33-8212, the following exhibit is being
furnished, and is not being filed as part of this Report on Form 10-Q or
as a separate disclosure document, and is not being incorporated by
reference into any Securities Act of 1933 registration
statement.
|
29
Pursuant
to the requirements of the Securities and 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.
|
||||
Date: May
5, 2010
|
By:
|
/s/
JORDAN L. KAPLAN
|
||
Jordan
L. Kaplan
|
||||
President
and Chief Executive Officer
|
||||
Date: May
5, 2010
|
By:
|
/s/
WILLIAM KAMER
|
||
William
Kamer
|
||||
Chief
Financial Officer
|