Douglas Emmett, Inc.
2 0 0 8
A N N U A L
R E P O R T
Concentration in Attractive LA Submarkets
(cid:62)(cid:72)(cid:89)(cid:85)(cid:76)(cid:89)
(cid:42)(cid:76)(cid:85)(cid:91)(cid:76)(cid:89)
1
(cid:51)(cid:40)(cid:3)(cid:55)(cid:80)(cid:76)(cid:89)(cid:74)(cid:76)
(cid:42)(cid:86)(cid:83)(cid:83)(cid:76)(cid:78)(cid:76)
2
3
101
(cid:62)(cid:86)(cid:86)(cid:75)(cid:83)(cid:72)(cid:85)(cid:75)(cid:3)
(cid:47)(cid:80)(cid:83)(cid:83)(cid:90)
(cid:59)(cid:72)(cid:89)(cid:97)(cid:72)(cid:85)(cid:72)
SANTA MONICA MOUNTAINS
(cid:52)(cid:72)(cid:83)(cid:80)(cid:73)(cid:92)
(cid:55)(cid:72)(cid:74)(cid:80)(cid:77)(cid:80)(cid:74)
(cid:55)(cid:72)(cid:83)(cid:80)(cid:90)(cid:72)(cid:75)(cid:76)(cid:90)
405
(cid:61)(cid:72)(cid:83)(cid:83)(cid:76)(cid:96)
(cid:46)(cid:83)(cid:76)(cid:85)
(cid:53)(cid:86)(cid:89)(cid:91)(cid:79)
(cid:47)(cid:86)(cid:83)(cid:83)(cid:96)(cid:94)(cid:86)(cid:86)(cid:75)
(cid:41)(cid:92)(cid:89)(cid:73)(cid:72)(cid:85)(cid:82)
(cid:44)(cid:85)(cid:74)(cid:80)(cid:85)(cid:86)
42
4(cid:28)
36
3(cid:31)
40
3(cid:28) 3(cid:32) 43
3(cid:30) 44
(cid:58)(cid:79)(cid:76)(cid:89)(cid:84)(cid:72)(cid:85)
(cid:54)(cid:72)(cid:82)(cid:90)
41
(cid:61)(cid:72)(cid:83)(cid:83)(cid:76)(cid:96)
(cid:61)(cid:80)(cid:83)(cid:83)(cid:72)(cid:78)(cid:76)
101
(cid:53)(cid:86)(cid:47)(cid:86)(cid:3)(cid:40)(cid:89)(cid:91)(cid:90)
(cid:43)(cid:80)(cid:90)(cid:91)(cid:89)(cid:80)(cid:74)(cid:91)
5
134
(cid:61)(cid:76)(cid:89)(cid:75)(cid:92)(cid:78)(cid:86)
(cid:47)(cid:80)(cid:83)(cid:83)(cid:90)
(cid:46)(cid:83)(cid:76)(cid:85)(cid:75)(cid:72)(cid:83)(cid:76)
(cid:58)(cid:91)(cid:92)(cid:75)(cid:80)(cid:86)
(cid:42)(cid:80)(cid:91)(cid:96)
34
(cid:59)(cid:86)(cid:83)(cid:92)(cid:74)(cid:72)(cid:3)(cid:51)(cid:72)(cid:82)(cid:76)
(cid:60)(cid:85)(cid:80)(cid:93)(cid:76)(cid:89)(cid:90)(cid:72)(cid:83)
(cid:58)(cid:91)(cid:92)(cid:75)(cid:80)(cid:86)(cid:90)
(cid:47)(cid:86)(cid:83)(cid:83)(cid:96)(cid:94)(cid:86)(cid:86)(cid:75)(cid:3)
(cid:50)(cid:85)(cid:86)(cid:83)(cid:83)(cid:90)
101
(cid:47)(cid:86)(cid:83)(cid:83)(cid:96)(cid:94)(cid:86)(cid:86)(cid:75)
(cid:62)(cid:76)(cid:90)(cid:91)
(cid:47)(cid:86)(cid:83)(cid:83)(cid:96)(cid:94)(cid:86)(cid:86)(cid:75)
(cid:54)(cid:74)(cid:74)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:72)(cid:83)
(cid:42)(cid:86)(cid:83)(cid:83)(cid:76)(cid:78)(cid:76)
5
(cid:43)(cid:86)(cid:75)(cid:78)(cid:76)(cid:89)
(cid:58)(cid:91)(cid:72)(cid:75)(cid:80)(cid:92)(cid:84)
405
(cid:46)(cid:76)(cid:91)(cid:91)(cid:96)
(cid:52)(cid:92)(cid:90)(cid:76)(cid:92)(cid:84)
(cid:41)(cid:76)(cid:83)(cid:3)(cid:40)(cid:80)(cid:89)
(cid:42)(cid:86)(cid:92)(cid:85)(cid:91)(cid:89)(cid:96)
(cid:42)(cid:83)(cid:92)(cid:73)
(cid:60)(cid:42)(cid:51)(cid:40)
23
6
22
1(cid:31)
1(cid:32)
(cid:28)(cid:32)
(cid:28)(cid:28)
(cid:28)(cid:31)
(cid:31)
(cid:30)
10
(cid:58)(cid:72)(cid:85)(cid:91)(cid:72)(cid:3)(cid:52)(cid:86)(cid:85)(cid:80)(cid:74)(cid:72)
33
29
30
27
26
28
24
25
32
31
Santa
Monica
Bay
(cid:41)(cid:76)(cid:93)(cid:76)(cid:89)(cid:83)(cid:96)(cid:3)(cid:47)(cid:80)(cid:83)(cid:83)(cid:90)
(cid:51)(cid:86)(cid:90)
(cid:40)(cid:85)(cid:78)(cid:76)(cid:83)(cid:76)(cid:90)
(cid:42)(cid:86)(cid:92)(cid:85)(cid:91)(cid:89)(cid:96)
(cid:42)(cid:83)(cid:92)(cid:73)
4(cid:31)
4(cid:32)
46
(cid:51)(cid:86)(cid:90)(cid:3)(cid:40)(cid:85)(cid:78)(cid:76)(cid:83)(cid:76)(cid:90)
4(cid:30) (cid:28)0 (cid:28)1
(cid:52)(cid:80)(cid:89)(cid:72)(cid:74)(cid:83)(cid:76)(cid:3)(cid:52)(cid:80)(cid:83)(cid:76)
(cid:50)(cid:86)(cid:89)(cid:76)(cid:72)(cid:91)(cid:86)(cid:94)(cid:85)
20
(cid:32)
12
16
10
1(cid:28)
21
(cid:62)(cid:76)(cid:90)(cid:91)(cid:94)(cid:86)(cid:86)(cid:75)
(cid:28)
4
(cid:28)4
(cid:28)3
(cid:28)2
(cid:42)(cid:76)(cid:85)(cid:91)(cid:92)(cid:89)(cid:96)
(cid:42)(cid:80)(cid:91)(cid:96)
(cid:41)(cid:89)(cid:76)(cid:85)(cid:91)(cid:94)(cid:86)(cid:86)(cid:75)
13
1(cid:30)
14
11
WESTSIDE
(cid:28)6
(cid:28)(cid:30)
10
DOWNTOWN
(cid:58)(cid:72)(cid:85)(cid:91)(cid:72)(cid:3)(cid:52)(cid:86)(cid:85)(cid:80)(cid:74)(cid:72)
(cid:52)(cid:92)(cid:85)(cid:80)(cid:74)(cid:80)(cid:87)(cid:72)(cid:83)(cid:3)(cid:40)(cid:80)(cid:89)(cid:87)(cid:86)(cid:89)(cid:91)
(cid:42)(cid:92)(cid:83)(cid:93)(cid:76)(cid:89)(cid:3)(cid:42)(cid:80)(cid:91)(cid:96)
405
(cid:42)(cid:89)(cid:76)(cid:85)(cid:90)(cid:79)(cid:72)(cid:94)
(cid:60)(cid:58)(cid:42)
110
N
PACIFIC OCEAN
WARNER CENTER/
WOODLAND HILLS
1. Warner Center Towers
2. Warner Corporate Center
3. The Trillium
WESTWOOD
4. One Westwood
5. Westwood Place
BRENTWOOD
6. Landmark II
7. Gateway Los Angeles
8. 12400 Wilshire
9. 11777 San Vicente
10. Brentwood
Executive Plaza
11. Brentwood
Medical Plaza
12. Coral Plaza
13. Brentwood/Saltair
(cid:52)(cid:72)(cid:89)(cid:80)(cid:85)(cid:72)(cid:3)(cid:75)(cid:76)(cid:83)(cid:3)(cid:57)(cid:76)(cid:96)
(cid:51)(cid:86)(cid:96)(cid:86)(cid:83)(cid:72)
(cid:52)(cid:72)(cid:89)(cid:96)(cid:84)(cid:86)(cid:92)(cid:85)(cid:91)
(cid:60)(cid:85)(cid:80)(cid:93)(cid:76)(cid:89)(cid:90)(cid:80)(cid:91)(cid:96)
14. Saltair/San Vicente
15. Brentwood San Vicente
Medical
16. San Vicente Plaza
17. Brentwood Court
18. Barrington Plaza
Commercial
19. Barrington Plaza
20. 555 Barrington
21. Barrington/Kiowa
22. Barry
23. Kiowa
SANTA MONICA
24. 100 Wilshire
25. First Federal Square
26. Palisades Promenade
27. Second Street Plaza
28. Santa Monica Square
29. Lincoln/Wilshire
30. Verona
31. The Shores
32. Pacifi c Plaza
33. 2001 Wilshire
BURBANK
34. Studio Plaza
SHERMAN OAKS/ENCINO
35. Sherman Oaks Galleria
36. Encino Terrace
37. Valley Executive Tower
38. Encino Gateway
39. Valley Offi ce Plaza
40. Encino Plaza
41. Tower at Sherman Oaks
42. MB Plaza
43. Columbus Center
44. 15250 Ventura
45. 16000 Ventura
BEVERLY HILLS
46. 9601 Wilshire
47. 9100 Wilshire
48. Village on Canon
49. Camden Medical Arts
50. Beverly Hills
Medical Center
51. 8383 Wilshire
CENTURY CITY
52. 1901 Avenue
of the Stars
53. Century Park Plaza
54. Century Park West
OLYMPIC CORRIDOR
55. Westside Towers
56. Executive Towers
57. Olympic Center
58. Bundy/Olympic
59. Cornerstone Plaza
Honolulu Submarket Overview
H2
Pearl City
Village Park
63
H1
Walpahu
Waimalu
H1
Alea
Halawa
62
HONOLULU PROPERTIES
60. Bishop Place
61. Harbor Court
62. Moanalulu Hillside Apartments
63. Villas at Royal Kunia
64. The Honolulu Club
Iroquois
Point
Ewa Beach
H1
Honolulu
International
Airport
N
M A M A L A B A Y
Honolulu
60
61
64
Portfolio consists
of 55 offi ce properties
and 9 multi-family
communities.
2008 Annual Report
Douglas Emmett, Inc.
Dear Fellow Shareholders,
Clearly, the most signifi cant development in 2008 was the severe shock to the global
economic system that began last September. While we are not immune to these
negative forces, I am pleased to report that, as a result of the prudent and focused
policies that we have followed for many years, we feel that we are well positioned to
meet the challenges of the current fi nancial landscape. In addition, our solid balance
sheet, access to capital, and fully-integrated operating platform positions us to take
advantage of emerging opportunities that should make the company even stronger.
With virtually no near-term debt maturities and no major development or other
capital funding requirements, we are in the enviable position of not needing to obtain
any additional fi nancing for our existing operations. Moreover, our operations are
generating cash fl ow that is well above our expenses and capital needs, as well as in
(cid:81) …our solid balance sheet, access to
capital, and fully-integrated operating
platform positions us to take advantage
of emerging opportunities that should
make the company even stronger. (cid:81)
excess of our dividend payments; so we
are also building a strong cash position
on our balance sheet.
Douglas Emmett’s core business
strategy is designed to maximize returns
in an up cycle and to be resilient in
a down cycle. We own many of the
highest quality properties concentrated
in some of the most desirable, supply-
constrained submarkets in Los Angeles and Honolulu. This is a time when the
expertise and experience of our management group and leasing team is most evident.
I should note that, as a result of M&A activity in recent years, there are not many real
estate companies with strong integrated operating platforms left in our markets. We
feel that having one of the few remaining seasoned management groups will provide
us with a tremendous competitive advantage in running our portfolio operationally
and in acquiring attractively priced, high quality properties within our core markets.
Very little new supply has been delivered in our markets over the last several years
and virtually no new offi ce supply is coming on line in the foreseeable future.
Our markets are supported by a variety of strong and competitive industries as
well as a well diversifi ed set of smaller tenants with almost no large single tenant
concentrations. These characteristics, combined with our markets’ supply / demand
fundamentals, place our markets among the best of the major U.S. port cities and
position Douglas Emmett for a quicker and stronger recovery once the national
economy shows signs of improvement.
(cid:81) Though we are prepared for a
long and tough road ahead, we
remain very optimistic about
our company ’s prospects. (cid:81)
100 WILSHIRE
Santa Monica, California
The greatest acquisition opportunities usually arise during periods of turmoil in the
credit markets. During the early to mid-nineties, when capital for commercial real estate
was also highly constrained, Douglas Emmett took advantage of many extraordinary
real estate acquisition opportunities; today, these properties form the core of our
portfolio. We believe that this new period of fi nancial distress will once again provide
us with opportunities to substantially enhance our portfolio at attractive pricing and we
are working to maintain our access to capital to enable us to realize these opportunities.
Despite the severely reduced availability of debt capital for commercial real estate, we
believe Douglas Emmett still retains the ability to source loans for new acquisitions.
This is the result of a focused debt-fi nancing strategy that we have practiced for many
years – even prior to our IPO. We have avoided securitized loans, preferring instead
to develop and maintain ongoing relationships with lenders in the bank and insurance
company syndicated market. Having long-term relationships with these providers of
debt capital is a signifi cant advantage in the current environment.
As I mentioned, we are increasing our available cash. Additionally, we plan on
utilizing fund equity for future acquisitions. Our fund will be focused on real estate
opportunities within our core markets, using the same disciplined underwriting and
leverage principles that have governed acquisitions at Douglas Emmett for more
than 20 years.
Though we are prepared for a long and tough road ahead, we remain very optimistic
about our company’s prospects. As I said last year, the one thing I can promise is that
Ken, Bill, Dan and I and the rest of the Douglas Emmett team are committed as ever
to the same high standards and hard-work ethic that we have relied upon in the past to
achieve our goals in the future.
Sincerely,
Jordan L. Kaplan
President & CEO
May 1, 2009
2 0 0 8
Douglas
Emmett, Inc.
1 0 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
Commission file number: 1-33106
DOUGLAS EMMETT, INC.
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of incorporation or organization)
(20-3073047)
(I.R.S. Employer Identification No.)
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
Common Shares, $0.01 par value per share
Name of Each Exchange on Which Registered
New York Stock Exchange
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.
Yes [ x ] or No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
Yes [ ] or No [ x ]
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 [ ]
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 ]
The aggregate market value of the common stock, $0.01 par value, held by non-affiliates of the registrant, as of June 30, 2008, was $2.4 billion.
The registrant had 121,976,841 shares of its common stock, $0.01 par value, outstanding as of February 17, 2009.
Portions of the registrant’s definitive proxy statement to be issued in conjunction with the registrant’s annual meeting of shareholders to be
held in 2009 (“Proxy Statement”) are incorporated by reference in Part III of this Report on Form 10-K (this “Report”). The Proxy Statement will be
filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended
December 31, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
DOUGLAS EMMETT, INC.
FORM 10-K TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
PART III
PAGE NO.
4
8
18
19
26
26
27
29
30
9
3
39
39
39
39
40
40
40
40
40
41
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
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; 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.
Item 1. Business
Overview
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed Real Estate Investment Trust (REIT) and one
of the largest owners and operators of high-quality office and multifamily properties located in premier submarkets in California and
Hawaii. Our properties, which include approximately 13.3 million square feet of Class A office space and 2,868 apartment units, are
concentrated in ten submarkets – Brentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills, Westwood, Sherman
Oaks/Encino, Warner Center/Woodland Hills, Burbank and Honolulu. We focus on owning and acquiring a substantial share of top-
tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end
executive housing and key lifestyle amenities. We maintain a web site at www.douglasemmett.com.
We believe that we distinguish ourselves from other owners and operators of office and multifamily properties through the
following competitive strengths and strategies:
(cid:120) 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.
(cid:120) 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.
(cid:120) Diverse Tenant Base. Our markets attract a diverse base of office tenants that operate a variety of legal, medical, financial
and other professional businesses.
(cid:120) 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.
(cid:120) 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 our newly formed institutional fund, Douglas Emmett Fund X, LLC
(Fund X). Fund X is the first fund formed by us since our IPO, when the nine institutional funds previously formed by our
predecessor were consolidated with us. As of the date of its initial closing, Fund X had obtained equity commitments totaling
$300 million, of which we committed $150 million and certain of our officers committed $2.25 million on the same terms as the other
investors. Fund X contemplates a fund raising period until July 2009 and an investment period of up to four years from the initial
closing, followed by a ten-year value creation period. With limited exceptions, Fund X will be our exclusive investment vehicle
during its investment period, using the same underwriting and leverage principles and focusing primarily on the same markets as we
have. For further information, see Note 19 to our consolidated financial statements in Item 8 of this Report.
Insurance
We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the
properties in our portfolio under a blanket insurance policy. We believe the policy specifications and insured limits are appropriate
and adequate given the relative risk of loss, the cost of the coverage and industry practice; however, our insurance coverage may not
be sufficient to fully cover our losses. We do not carry insurance for certain losses, including, but not limited to, losses caused by riots
or war. Some of our policies, like those covering losses due to terrorism, earthquakes and floods, are insured subject to limitations
involving substantial self-insurance portions and significant deductibles and co-payments for such events. In addition, most of our
properties are located in Southern California, an area subject to an increased risk of earthquakes. While we presently carry earthquake
insurance on our properties, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from
earthquakes. We may reduce or discontinue earthquake, terrorism or other insurance on some or all of our properties in the future if
the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. In
addition, if certain of our properties were destroyed, we might not be able to rebuild them due to current zoning and land use
4
regulations. In addition, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do
not intend to increase our title insurance coverage as the market value of our portfolio increases.
Competition
We compete with a number of developers, owners and operators of office and commercial real estate, many of which own
properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below
current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants and we may face pressure
to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early
termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. In that case, our
financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service
obligations and to pay dividends to our stockholders may be adversely affected.
In addition, all of our multifamily properties are located in developed areas that include a number of other multifamily
properties, as well as single-family homes, condominiums and other residential properties. The number of competitive multifamily
and other residential properties in a particular area could have a material adverse effect on our ability to lease units and on our rental
rates.
Taxation of Douglas Emmett, Inc.
We believe that we qualify, and intend to continue to qualify, for taxation as a REIT under the Internal Revenue Code,
although we cannot assure that this has or will happen. See Item 1A. Risk Factors of this Report. The following summary is qualified
in its entirety by the applicable Internal Revenue Code provisions, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
If we qualify for taxation as a REIT, we will generally not be required to pay federal corporate income taxes on the portion of
our net income that is currently distributed to stockholders. This treatment substantially eliminates the “double taxation” (i.e., at the
corporate and stockholder levels) that generally results from investment in a corporation. However, we will be required to pay federal
income tax under certain circumstances.
The Internal Revenue Code defines a REIT as a corporation, trust or association (i) which is managed by one or more trustees
or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial
interest; (iii) which would be taxable, but for Sections 856 through 860 of the Internal Revenue Code, as a domestic corporation; (iv)
which is neither a financial institution nor an insurance company subject to certain provisions of the Internal Revenue Code; (v) the
beneficial ownership of which is held by 100 or more persons; (vi) of which, during the last half of each taxable year, not more than
50% in value of the outstanding stock is owned, actually or constructively, by five or fewer individuals; and (vii) which meets certain
other tests, described below, regarding the amount of its distributions and the nature of its income and assets. The Internal Revenue
Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.
There are presently two gross income requirements. First, at least 75% of our gross income (excluding gross income from
“prohibited transactions” as defined below) for each taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property or from certain types of temporary investment income. Second, at least 95% of our gross
income (excluding gross income from prohibited transactions and qualifying hedges) for each taxable year must be derived from
income that qualifies under the 75% test and from other dividends, interest and gain from the sale or other disposition of stock or
securities. A “prohibited transaction” is a sale or other disposition of property (other than foreclosure property) held for sale to
customers in the ordinary course of business.
At the close of each quarter of our taxable year, we must also satisfy four tests relating to the nature of our assets. First, at
least 75% of the value of our total assets must be represented by real estate assets including shares of stock of other REITs, certain
other stock or debt instruments purchased with the proceeds of a stock offering or long term public debt offering by us (but only for
the one-year period after such offering), cash, cash items and government securities. Second, not more than 25% of our total assets
may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and we may not own more than
10% of the vote or value of the securities of a non-REIT corporation, other than certain debt securities and interests in taxable REIT
subsidiaries or qualified REIT subsidiaries, each as defined below. Fourth, not more than 20% of the value of our total assets may be
represented by securities of one or more taxable REIT subsidiaries.
5
We own interests in various partnerships and limited liability companies. In the case of a REIT that is a partner in a
partnership or a member of a limited liability company that is treated as a partnership under the Internal Revenue Code, Treasury
Regulations provide that for purposes of the REIT income and asset tests, the REIT will be deemed to own its proportionate share of
the assets of the partnership or limited liability company (determined in accordance with its capital interest in the entity), subject to
special rules related to the 10% asset test, and will be deemed to be entitled to the income of the partnership or limited liability
company attributable to such share. The ownership of an interest in a partnership or limited liability company by a REIT may involve
special tax risks, including the challenge by the Internal Revenue Service (IRS) of the allocations of income and expense items of the
partnership or limited liability company, which would affect the computation of taxable income of the REIT, and the status of the
partnership or limited liability company as a partnership (as opposed to an association taxable as a corporation) for federal income tax
purposes.
We also own interests in a number of subsidiaries which are intended to be treated as qualified REIT subsidiaries (each a
QRS). The Internal Revenue Code provides that such subsidiaries will be ignored for federal income tax purposes and all assets,
liabilities and items of income, deduction and credit of such subsidiaries will be treated as our assets, liabilities and items of income. If
any partnership, limited liability company, or subsidiary in which we own an interest were treated as a regular corporation (and not as
a partnership, subsidiary REIT, QRS or taxable REIT subsidiary, as the case may be) for federal income tax purposes, we would likely
fail to satisfy the REIT asset tests described above and would therefore fail to qualify as a REIT, unless certain relief provisions apply.
We believe that each of the partnerships, limited liability companies, and subsidiaries (other than taxable REIT subsidiaries) in which
we own an interest will be treated for tax purposes as a partnership, disregarded entity (in the case of a 100% owned partnership or
limited liability company), REIT or QRS, as applicable, although no assurance can be given that the IRS will not successfully
challenge the status of any such organization.
As of December 31, 2008, we owned interests in Douglas Emmett Builders (DEB) and we have elected, jointly with DEB,
for DEB to be treated as a taxable REIT subsidiary. A REIT may own any percentage of the voting stock and value of the securities
of a corporation which jointly elects with the REIT to be a taxable REIT subsidiary, provided certain requirements are met. A taxable
REIT subsidiary generally may engage in any business, including the provision of customary or noncustomary services to tenants of
its parent REIT and of others, except a taxable REIT subsidiary may not manage or operate a hotel or healthcare facility. A taxable
REIT subsidiary is treated as a regular corporation and is subject to federal income tax and applicable state income and franchise taxes
at regular corporate rates. In addition, a 100% tax may be imposed on a REIT if its rental, service or other agreements with its taxable
REIT subsidiary, or the taxable REIT subsidiary’s agreements with the REIT’s tenants, are not on arm’s-length terms.
In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in
an amount at least equal to (A) the sum of (i) 90% of our “real estate investment trust taxable income” (computed without regard to
the dividends paid deduction and our net capital gain) and (ii) 90% of the net income, if any (after tax), from foreclosure property,
minus (B) the sum of certain items of non-cash income. Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before we timely file our tax return for such year, if paid on or before the first regular dividend
payment date after such declaration and if we so elect and specify the dollar amount in our tax return. To the extent that we do not
distribute all of our net long-term capital gain or distribute at least 90%, but less than 100%, of our REIT taxable income, we will be
required to pay tax thereon at regular corporate tax rates. Furthermore, if we should fail to distribute during each calendar year at least
the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, we would be required to pay a 4% excise tax on the excess of such required distributions over the
amounts actually distributed.
If we fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, we will be required
to pay tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to our
stockholders in any year in which we fail to qualify will not be deductible by us nor will such distributions be required to be made.
Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be
entitled to the statutory relief. Failure to qualify for even one year could substantially reduce distributions to stockholders and could
result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to
pay the resulting taxes.
We and our stockholders may be required to pay state or local tax in various state or local jurisdictions, including those in
which we or they transact business or reside. The state and local tax treatment of us and our stockholders may not conform to the
federal income tax consequences discussed above. We may also be subject to certain taxes applicable to REITs, including taxes in
lieu of disqualification as a REIT, on undistributed income, on income from prohibited transactions and on built-in gains from the sale
of certain assets acquired from C corporations in tax-free transactions during a specified time period.
Fund X owns its properties through an entity which is intended to also qualify as a REIT, and its failure to so qualify could
have similar impacts on us.
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 was responsible for the contamination. Under the ADA, we must meet federal
requirements related to access and use by disabled persons to the extent that our properties are “public accommodations”. The costs of
our on-going efforts to comply with these laws are substantial. Moreover, as we have not conducted a comprehensive audit or
investigation of all of our properties to determine our compliance with applicable laws, we may be liable for investigation and
remediation costs, penalties, and/or damages, which could be substantial and could adversely affect our ability to sell or rent our
property or to borrow using such property as collateral.
The City of Los Angeles and Santa Monica have enacted rent control legislation, and portions of the Honolulu multifamily
market are subject to low and moderate-income housing regulations. Such laws and regulations limit our ability to increase rents,
evict tenants or recover increases in our operating expenses and could make it more difficult for us to dispose of properties in certain
circumstances. In addition, any failure to comply with low and moderate-income housing regulations could result in the loss of certain
tax benefits and the forfeiture of rent payments. Although under current California law we are able to increase rents to market rates
once a tenant vacates a rent-controlled unit, any subsequent increases in rental rates will remain limited by Los Angeles and Santa
Monica rent control regulations.
For more information about the potential impacts of laws and regulations, see Item 1A Risk Factors of this Report.
Employees
As of December 31, 2008, we employed more than 500 people. We believe that our relationships with our employees are
good.
Corporate Structure
We were formed as a Maryland corporation on June 28, 2005 to continue and expand the operations of Douglas Emmett
Realty Advisors (DERA), our predecessor, and its nine institutional funds. All of our assets are directly or indirectly held by our
operating partnership, which was formed as a Delaware limited partnership on July 25, 2005. Our interest in our operating partnership
entitles us to share in cash distributions, profits and losses of our operating partnership in proportion to our percentage ownership. As
the sole stockholder of the general partner of our operating partnership, under the partnership agreement of our operating partnership
we generally have the exclusive power to manage and conduct its business, subject to certain limited approval and voting rights of the
other limited partners.
Segments
We operate in two business segments: Office Properties and Multifamily Properties. Information related to our business
segments for 2008, 2007 and 2006 is set forth in Note 17 to our consolidated financial statements in Item 8 of this Report.
Principal Executive Offices
Our principal executive offices are located in the building we own at 808 Wilshire Boulevard, Santa Monica, California
90401 (telephone 310-255-7700). We believe that our current facilities are adequate for our present and future operations.
Available Information
We make available free of charge on our website at www.douglasemmett.com our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments thereto, as soon as reasonably practicable after we file such
reports with, or furnish them to, the Securities and Exchange Commission (SEC). None of the information on or hyperlinked from our
website is incorporated into this Report.
7
Item 1A. Risk Factors
The following section includes the most significant factors that may adversely affect our business and operations. This is not
an exhaustive list, and additional factors could adversely affect our business and financial performance. Moreover, we operate in a
very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict
all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This
discussion of risk factors includes many forward-looking statements. For cautions about relying on such forward-looking statements,
please refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to Item 1.
Risks Related to Our Properties and Our Business
All of our properties are located in Los Angeles County, California and Honolulu, Hawaii, and we are dependent on
the Southern California and Honolulu economies and are susceptible to adverse local regulations and natural disasters in
those areas. Because all of our properties are concentrated in Los Angeles County, California and Honolulu, Hawaii, we are exposed
to greater economic risks than if we owned a more geographically dispersed portfolio. Further, within Los Angeles County, our
properties are concentrated in certain submarkets, exposing us to risks associated with those specific areas. We are susceptible to
adverse developments in the Los Angeles County, Southern California and Honolulu economic and regulatory environment (such as
business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of
complying with governmental regulations or increased regulation and other factors) as well as natural disasters that occur in these
areas (such as earthquakes, floods and other events). In addition, the State of California is also regarded as more litigious and more
highly regulated and taxed than many states, which may reduce demand for office space in California. Any adverse developments in
the economy or real estate market in Los Angeles County, Southern California in general, or Honolulu, or any decrease in demand for
office space resulting from the California or Honolulu regulatory or business environment could adversely impact our financial
condition, results of operations, cash flow, the per share trading price of our common stock and our ability to satisfy our debt service
obligations and to pay dividends to our stockholders. We cannot assure any level of growth in the Los Angeles County, Southern
California or Honolulu economies or of our company.
Our operating performance is subject to risks associated with the real estate industry. Real estate investments are
subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may
decrease cash available for dividends, as well as the value of our properties. These events include, but are not limited to:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 occurred in
the fourth quarter of 2008, which could adversely affect our ability, or the ability of buyers and tenants of properties, to
obtain financing on favorable terms or at all;
increases in expenses, including, without limitation, insurance costs, labor costs (the unionization of our employees and our
subcontractors’ employees that provide services to our buildings could substantially increase our operating costs), energy
prices, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies, and
we may be restricted in passing on these increases to our tenants;
8
(cid:120)
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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.
In addition, periods of economic slowdown or recession, such as the current global economic downturn, rising interest rates
or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in
rents or an increased incidence of defaults under existing leases. If we cannot operate our properties to meet our financial
expectations, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to
satisfy our debt service obligations and to pay dividends to our stockholders could be adversely affected. There can be no assurance
that we can achieve our return objectives.
We have a substantial amount of indebtedness, which may affect our ability to pay dividends, may expose us to
interest rate fluctuation risk and may expose us to the risk of default under our debt obligations. As of December 31, 2008, our
total consolidated indebtedness was approximately $3.67 billion, excluding loan premiums, and we may incur significant additional
debt for various purposes, including, without limitation, to fund future acquisition and development activities and operational needs.
In addition, we had approximately $320.7 million remaining for use under our $370 million senior secured revolving credit facility.
Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties or to
pay the distributions currently contemplated or necessary to maintain our REIT qualification. Our substantial outstanding
indebtedness, and the limitations imposed on us by our debt agreements, especially in periods like the present when credit is harder to
obtain, could have significant other adverse consequences, including the following:
(cid:120)
our cash flow may be insufficient to meet our required principal and interest payments;
(cid:120) 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;
(cid:120) 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;
(cid:120) we may not meet the criteria that would allow us to exercise one or both of the one-year extensions on our existing revolving
credit facility, which is scheduled to mature on October 30, 2009, or the availability of borrowings under the facility may be
reduced upon extension;
(cid:120) we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;
(cid:120) we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt
obligations;
(cid:120) 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;
(cid:120) 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
(cid:120)
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, our financial condition, results of operations, cash flow, per share trading price of
our common stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders could be adversely
affected. In addition, any foreclosure on our properties could create taxable income without accompanying cash proceeds, which
could adversely affect our ability to meet the REIT distribution requirements imposed by the Internal Revenue Code.
The current global financial crisis may adversely affect our business and performance. Our operations and performance
depend on general economic conditions. The United States economy has recently experienced a financial downturn, with some
financial and economic analysts predicting that the world economy may be entering into a prolonged economic downturn
characterized by high unemployment, limited availability of credit and decreased consumer and business spending.
9
This downturn has had, and may continue to have, an unprecedented negative impact on the global credit markets. Credit has
tightened significantly in the last several months. If this continues or worsens, we might not be able to obtain mortgage loans to
purchase additional properties or successfully refinance our properties as loans become due. Further, even if we are able to obtain the
financing we need, it may be on terms that are not favorable to us, with increased financing costs and restrictive covenants, including
restricting our ability to pay dividends and our institutional fund’s ability to make distributions to its members.
The economic downturn has adversely affected, and is expected to continue to adversely affect, the businesses of many of our
tenants. As a result, we may see increases in bankruptcies of our tenants and increased defaults by tenants, and we may experience
higher vacancy rates and delays in re-leasing vacant space, which could negatively impact our business and results of operations.
Overall, these factors have resulted in uncertainty in the real estate markets. As a result, the valuation of real-estate related
assets has been volatile and is likely to continue to be volatile in the future. This volatility in the markets may make it more difficult
for us to obtain adequate financing or realize gains on our investments, which could have an adverse effect on our business and results
of operations.
The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may
experience lease roll down from time to time. As a result of various factors, including competitive pricing pressure in our
submarkets, adverse conditions in the Los Angeles County or Honolulu real estate market, a general economic downturn, such as the
current global economic downturn, and the desirability of our properties compared to other properties in our submarkets, we may be
unable to realize our asking rents across the properties in our portfolio. In addition, the degree of discrepancy between our asking
rents and the actual rents we are able to obtain may vary both from property to property and among different leased spaces within a
single property. If we are unable to obtain rental rates that are on average comparable to our asking rents across our portfolio, then our
ability to generate cash flow growth will be negatively impacted. In addition, depending on asking rental rates at any given time as
compared to expiring leases in our portfolio, from time to time rental rates for expiring leases may be higher than starting rental rates
for new leases.
Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by
insurance. Our business operations in Southern California and Honolulu, Hawaii are susceptible to, and could be significantly
affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, wind, floods,
landslides and fires. These adverse weather conditions and natural disasters could cause significant damage to the properties in our
portfolio, the risk of which is enhanced by the concentration of our properties’ locations. Our insurance may not be adequate to cover
business interruption or losses resulting from adverse weather or natural disasters. In addition, our insurance policies include
substantial self-insurance portions and significant deductibles and co-payments for such events, and we are subject to the availability
of insurance in the United States and the pricing thereof. As a result, we may be required to incur significant costs in the event of
adverse weather conditions and natural disasters. We may discontinue earthquake or any other insurance coverage on some or all of
our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage
discounted for the risk of loss.
Furthermore, we do not carry insurance for certain losses, including, but not limited to, losses caused by certain
environmental conditions, such as mold, asbestos, riots or war. In addition, our title insurance policies may not insure for the current
aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our
portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from
adverse title claims.
If we experience a loss that is uninsured or which exceeds policy limits, we could incur significant costs and lose the capital
invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged
properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were
irreparably damaged.
In addition, many of our properties could not be rebuilt to their existing height or size at their existing location under current
land-use laws and policies. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not
be able to rebuild such property to its existing specifications and otherwise may have to upgrade such property to meet current code
requirements.
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, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to satisfy
our debt service obligations and to pay dividends to our stockholders may be adversely affected.
In addition, all of our multifamily properties are located in developed areas that include a significant number of other
multifamily properties, as well as single-family homes, condominiums and other residential properties. The number of competitive
multifamily and other residential properties in a particular area could have a material adverse effect on our ability to lease units and on
our rental rates.
We may be unable to renew leases or lease vacant space. As of December 31, 2008, leases representing approximately
13.4% of the square footage of the properties in our office portfolio will expire in 2009, and an additional 6.9% of the square footage
of the properties in our office portfolio was available for lease. In addition, as of December 31, 2008, approximately 0.9% of the units
in our multifamily portfolio were available for lease, and substantially all of the leases in our multifamily portfolio are renewable on
an annual basis at the tenant’s option and, if not renewed or terminated, automatically convert to month-to-month terms. We cannot
assure you that leases will be renewed or that our properties will be re-leased at rental rates equal to or above our existing rental rates
or that substantial rent abatements, tenant improvements, early termination rights or below-market renewal options will not be offered
to attract new tenants or retain existing tenants. Accordingly, portions of our office and multifamily properties may remain vacant for
extended periods of time. In addition, some existing leases currently provide tenants with options to renew the terms of their leases at
rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof.
Furthermore, as part of our business strategy, we have focused and intend to continue to focus on securing smaller-sized
companies as tenants for our office portfolios. Smaller tenants may present greater credit risks and be more susceptible to economic
downturns than larger tenants, and may be more likely to cancel or elect not to renew their leases. In addition, we intend to actively
pursue opportunities for what we believe to be well-located and high quality buildings that may be in a transitional phase due to
current or impending vacancies. We cannot assure you that any such vacancies will be filled following a property acquisition, or that
any new tenancies will be established at or above-market rates. If the rental rates for our properties decrease or other tenant incentives
increase, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space, our financial
condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our debt service
obligations and to pay dividends to our stockholders would be adversely affected.
Real estate investments are generally illiquid. Our real estate investments are relatively difficult to sell quickly. Return of
capital and realization of gains, if any, from an investment generally will occur upon disposition or refinance of the underlying
property. We may be unable to realize our investment objectives by sale, other disposition or refinance at attractive prices within any
given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in
or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers,
changes in national or international economic conditions, such as the current economic downturn, and changes in laws, regulations or
fiscal policies of jurisdictions in which the property is located. Furthermore, certain properties may be adversely affected by the
contractual rights, such as rights of first offer.
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 is or
may be liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. In addition, persons
who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at
the disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of
the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these
substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow using
such property as collateral. In addition, persons exposed to hazardous or toxic substances may sue for personal injury damages. For
example, some laws impose liability for release of or exposure to asbestos-containing materials, a substance known to be present in a
number of our buildings. In other cases, some of our properties have been (or may have been) impacted by contamination from past
operations or from off-site sources. As a result, in connection with our current or former ownership, operation, management and
development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under
environmental laws.
Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I
assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and
may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable
laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments.
We cannot assure you that these or other environmental studies identified all potential environmental liabilities, or that we
will not incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may
face significant remediation costs, and we may find it difficult to sell any affected properties.
We may incur significant costs complying with laws, regulations and covenants that are applicable to our properties.
The properties in our portfolio are subject to various covenants and federal, state and local laws and regulatory requirements,
including permitting and licensing requirements. Such laws and regulations, including municipal or local ordinances, zoning
restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to
obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to
acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may
relate to fire and safety, seismic, asbestos-cleanup or hazardous material abatement requirements. There can be no assurance that
existing laws and regulations will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that
additional regulations will not be adopted that increase such delays or result in additional costs. Our failure to obtain required permits,
licenses and zoning relief or to comply with applicable laws could have a material adverse effect on our business, financial condition
and results of operations.
Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents
and pass through new or increased operating costs to our tenants. Certain states and municipalities have adopted laws and
regulations imposing restrictions on the timing or amount of rent increases or have imposed regulations relating to low- and moderate-
income housing. Currently, neither California nor Hawaii have state mandated rent control, but various municipalities within
Southern California, such as the City of Los Angeles and Santa Monica, have enacted rent control legislation. All but one of the
properties in our Los Angeles County multifamily portfolio are affected by these laws and regulations. In addition, we have agreed to
provide low- and moderate-income housing in many of the units in our Honolulu multifamily portfolio in exchange for certain tax
benefits. We presently expect to continue operating and acquiring properties in areas that either are subject to these types of laws or
regulations or where legislation with respect to such laws or regulations may be enacted in the future. Such laws and regulations limit
our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses and could make it more
difficult for us to dispose of properties in certain circumstances. Similarly, compliance procedures associated with rent control
statutes and low- and moderate-income housing regulations could have a negative impact on our operating costs, and any failure to
comply with low- and moderate-income housing regulations could result in the loss of certain tax benefits and the forfeiture of rent
payments. In addition, such low- and moderate-income housing regulations require us to rent a certain number of units at below-
market rents, which has a negative impact on our ability to increase cash flow from our properties subject to such regulations.
Furthermore, such regulations may negatively impact our ability to attract higher-paying tenants to such properties.
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 the following significant risks:
(cid:120) 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;
(cid:120) 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;
(cid:120)
competition from other potential acquirers may significantly increase the purchase price of a desired property;
(cid:120) 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;
(cid:120)
our cash flow may be insufficient to meet our required principal and interest payments;
(cid:120) we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
(cid:120)
(cid:120)
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;
(cid:120) we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties,
into our existing operations;
(cid:120) market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
(cid:120) 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, our financial condition, results of operations, cash flow, per share trading price of our common stock and ability to
satisfy our debt service obligations and to pay dividends to our stockholders could be adversely affected.
We may be unable to successfully expand our operations into new markets. If the opportunity arises, we may explore
acquisitions of properties in new markets. Each of the risks applicable to our ability to acquire and successfully integrate and operate
properties in our current markets are also applicable to our ability to acquire and successfully integrate and operate properties in new
markets. In addition to these risks, we will not possess the same level of familiarity with the dynamics and market conditions of any
new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a
significant market share or achieve a desired return on our investments in new markets. If we are unsuccessful in expanding into new
markets, it could adversely affect our financial condition, results of operations, cash flow, per share trading price of our common stock
and ability to satisfy our debt service obligations and to pay dividends to our stockholders.
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:
(cid:120)
(cid:120)
(cid:120)
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 our financial condition, results of
operations, cash flow, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay
dividends to our stockholders.
If we default on the leases to which some of our properties are subject, our business could be adversely affected. We
have leasehold interests in certain of our properties. If we default under the terms of these leases, we may be liable for damages and
could lose our leasehold interest in the property or our options to purchase the fee interest in such properties. If any of these events
were to occur, our business and results of operations would be adversely affected.
The cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can
we assure you of our ability to make distributions in the future. We may elect to distribute the minimum amount to remain
compliant with REIT requirements while retaining excess capital for future operations. We may use borrowed funds to make
distributions. Our annual distributions may exceed estimated cash available from operations. While we intend to fund the difference
out of excess cash or borrowings under our senior secured revolving credit facility, our inability to make, or election to not make, the
expected distributions could result in a decrease in the market price of our common stock.
Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash
flows. Even as a REIT for federal income tax purposes, we are required to pay some state and local taxes on our properties. The real
property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing
authorities. In California, under current law reassessment occurs primarily as a result of a “change in ownership”. The impact of a
potential reassessment may take a considerable amount of time, during which the property taxing authorities make a determination of
the occurrence of a “change of ownership”, as well as the actual reassessed value. Therefore, the amount of property taxes we pay
could increase substantially from what we have paid in the past. If the property taxes we pay increase, our cash flow would be
impacted, and our ability to pay expected dividends to our stockholders could be adversely affected.
Risks Related to Our Organization and Structure
Tax consequences to holders of operating partnership units upon a sale or refinancing of our properties may cause the
interests of our executive officers to differ from the interests of other stockholders. As a result of the unrealized built-in gain
attributable to the contributed property at the time of contribution, some holders of operating partnership units, including our
principals, may suffer different and more adverse tax consequences than holders of our common stock upon the sale or refinancing of
the properties owned by our operating partnership, including disproportionately greater allocations of items of taxable income and
gain upon a realization event. As those holders will not receive a correspondingly greater distribution of cash proceeds, they may
have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain
properties, or whether to sell or refinance such properties at all.
Our executive officers will have significant influence over our affairs. At December 31, 2008, our executive officers
owned approximately 8% of our outstanding common stock, or approximately 27% assuming that they convert all of their interests in
our operating partnership and exercise all of their options. As a result, our executive officers, to the extent they vote their shares in a
similar manner, will have influence over our affairs and could exercise such influence in a manner that is not in the best interests of
our other stockholders, including by attempting to delay, defer or prevent a change of control transaction that might otherwise be in
the best interests of our stockholders. If our executive officers exercises their redemption rights with respect to their operating
partnership units and we issue common stock in exchange for those units, our executive officers’ influence over our affairs would
increase substantially.
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 flow. Consequently, we rely on third-party sources to fund our
capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our
leverage. Our access to third-party sources of capital depends, in part, on:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
general market conditions;
the market’s perception of our growth potential;
our current debt levels;
our current and expected future earnings;
our cash flow and cash dividends; and
the market price per share of our common stock.
In recent months, the credit markets have been subject to significant disruptions. If we cannot obtain capital from third-party
sources, we may not be able to acquire or develop properties when strategic opportunities exist, meet the capital and operating needs
of our existing properties, satisfy our debt service obligations or pay dividends to our stockholders necessary to maintain our
qualification as a REIT.
Our charter, the partnership agreement of our operating partnership and Maryland law contain provisions that may
delay or prevent a change of control transaction.
Our charter contains a 5.0% ownership limit. Our charter, subject to certain exceptions, contains restrictions on ownership
that limit, and authorizes our directors to take such actions as are necessary and desirable to limit, any person to actual or constructive
ownership of no more than 5.0% in value of the outstanding shares of our stock and no more than 5.0% of the value or number,
whichever is more restrictive, of the outstanding shares of our common stock. Our board of directors, in its sole discretion, may
exempt a proposed transferee from the ownership limit. However, our board of directors may not grant an exemption from the
ownership limit to any proposed transferee whose ownership, direct or indirect, of more than 5.0% of the value or number of our
outstanding shares of our common stock could jeopardize our status as a REIT. The ownership limit contained in our charter and the
restrictions on ownership of our common stock may delay or prevent a transaction or a change of control that might involve a
premium price for our common stock or otherwise be in the best interest of our stockholders.
Our board of directors may create and issue a class or series of preferred stock without stockholder approval. Our board
of directors is empowered under our charter to amend our charter to increase or decrease the aggregate number of shares of our
common stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time
to time one or more classes or series of preferred stock and to classify or reclassify any unissued shares of our common stock or
preferred stock without stockholder approval. Our board of directors may determine the relative rights, preferences and privileges of
any class or series of preferred stock issued. As a result, we may issue series or classes of preferred stock with preferences, dividends,
powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could
also have the effect of delaying or preventing a change of control transaction that might otherwise be in the best interests of our
stockholders.
Certain provisions in the partnership agreement for our operating partnership may delay or prevent unsolicited
acquisitions of us. Provisions in the partnership agreement for our operating partnership may delay or make more difficult unsolicited
acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an
unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable.
These provisions include, among others:
(cid:120)
(cid:120)
redemption rights of qualifying parties;
transfer restrictions on our operating partnership units;
15
(cid:120)
(cid:120)
the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited
partners; and
the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified
circumstances.
Any potential change of control transaction may be further limited as a result of provisions of the partnership unit designation
for certain long-term incentive units or LTIP units, which require us to preserve the rights of LTIP unit holders and may restrict us
from amending the partnership agreement for our operating partnership in a manner that would have an adverse effect on the rights of
LTIP unit holders.
Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the Maryland General
Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a
change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over
the then-prevailing market price of our common stock, including:
(cid:120)
(cid:120)
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an
“interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our
shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested
stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these
combinations; and
“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with
other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power
in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or
control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of
at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have elected to opt out of these provisions of the MGCL, in the case of the business combination provisions of the
MGCL, by resolution of our board of directors, and in the case of the control share provisions of the MGCL, pursuant to a provision in
our bylaws. However, our board of directors may by resolution elect to repeal the foregoing opt-outs from the business combination
provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Our charter, bylaws, the partnership agreement for our operating partnership and Maryland law also contain other provisions
that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or
otherwise be in the best interest of our stockholders.
Under their employment agreements, certain of our executive officers will have the right to terminate their
employment and receive severance if there is a change of control. In connection with our IPO, we entered into employment
agreements with Jordan L. Kaplan, Kenneth M. Panzer and William Kamer. These employment agreements provide that each
executive may terminate his employment under certain conditions, including after a change of control, and receive severance based on
two or three times (depending on the officer) his annual total of salary, bonus and incentive compensation such as LTIP units, options
or out performance grants plus a “gross up” for any excise taxes under Section 280G of the Internal Revenue Code. In addition, these
executive officers would not be restricted from competing with us after their departure.
Our fiduciary duties as sole stockholder of the general partner of our operating partnership could create conflicts of
interest. We, as the sole stockholder of the general partner of our operating partnership, have fiduciary duties to the other limited
partners in our operating partnership, the discharge of which may conflict with the interests of our stockholders. The limited partners
of our operating partnership have agreed that, in the event of a conflict in the fiduciary duties owed by us to our stockholders and, in
our capacity as general partner of our operating partnership, to such limited partners, we are under no obligation to give priority to the
interests of such limited partners. In addition, those persons holding operating partnership units will have the right to vote on certain
amendments to the operating partnership agreement (which require approval by a majority in interest of the limited partners, including
us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a
manner that conflicts with the interests of our stockholders. For example, we are unable to modify the rights of limited partners to
receive distributions as set forth in the operating partnership agreement in a manner that adversely affects their rights without their
consent, even though such modification might be in the best interest of our stockholders.
16
The loss of any member of our executive officers or certain other key senior personnel could significantly harm our
business. Our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of our executive
officers, including Dan A. Emmett, Jordan L. Kaplan, Kenneth M. Panzer and William Kamer. If we lose the services of any member
of our executive officers, our business may be significantly impaired. In addition, many of our executives have strong industry
reputations, which aid us in identifying acquisition and borrowing opportunities, having such opportunities brought to us, and
negotiating with tenants and sellers of properties. The loss of the services of these key personnel could materially and adversely affect
our operations because of diminished relationships with lenders, existing and prospective tenants, property sellers and industry
personnel.
If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our
financial results. Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively
prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our
reputation and operating results would be harmed. As part of our ongoing monitoring of internal controls we may discover material
weaknesses or significant deficiencies in our internal controls. As a result of weaknesses that may be identified in our internal
controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require
remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure controls. However, there is no
assurance that we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our
internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect
our ability to remain listed with the New York Stock Exchange. Ineffective internal and disclosure controls could also cause investors
to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our
securities.
Our board of directors may change significant corporate policies without stockholder approval. Our investment,
financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization
and operations, will be determined by our board of directors. These policies may be amended or revised at any time and from time to
time at the discretion of the board of directors without a vote of our stockholders. In addition, the board of directors may change our
policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in
these policies could have an adverse effect on our financial condition, results of operations, cash flow, per share trading price of our
common stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders.
Compensation awards to our management may not be tied to or correspond with our improved financial results or
share price. The compensation committee of our board of directors is responsible for overseeing our compensation and employee
benefit plans and practices, including our executive compensation plans and our incentive compensation and equity-based
compensation plans. Our compensation committee has significant discretion in structuring compensation packages and may make
compensation decisions based on any number of factors. As a result, compensation awards may not be tied to or correspond with
improved financial results at our company or the share price of our common stock.
Tax Risks Related to Ownership of REIT Shares
Our failure to qualify as a REIT would result in higher taxes and reduce cash available for dividends. We currently
operate and have operated commencing with our taxable year ended December 31, 2006 in a manner that is intended to allow us to
qualify as a REIT for federal income tax purposes. Qualification as a REIT involves the application of highly technical and complex
Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations. The determination of
various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. To qualify as a
REIT, we must satisfy certain asset, income, organizational, distribution, stockholder ownership and other requirements on a
continuing basis. For example, to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying
sources; at least 75% of the value of our total assets must be represented by certain real estate assets including shares of stock of other
REITs, certain other stock or debt instruments purchased with the proceeds of a stock offering or long term public debt offering by us
(but only for the one-year period after such offering), cash, cash items and government securities; and we must make distributions to
our stockholders aggregating annually at least 90% of our REIT taxable income, excluding capital gains. Our ability to satisfy the
asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to
a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and
quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an
ongoing basis. The fact that we hold most of our assets through the operating partnership further complicates the application of the
REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. In addition, legislation, new
regulations, administrative interpretations or court decisions might significantly change the tax laws with respect to the requirements
for qualification as a REIT or the federal income tax consequences of qualification as a REIT Although we believe that we have been
organized and have operated in a manner that is intended to allow us to qualify for taxation as a REIT, we can give no assurance that
we have qualified or will continue to qualify as a REIT for tax purposes. We have not requested and do not plan to request a ruling
from the IRS regarding our qualification as a REIT.
17
If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be
deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount
of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices
for, our common stock. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from
taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. In addition, if we fail to
qualify as a REIT, we will not be required to make distributions to stockholders, and all distributions to stockholders will be subject to
tax as dividend income to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to
qualify as a REIT also could impair our ability to expand our business and raise capital, and would adversely affect the value of our
common stock. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the
relief provisions under the Internal Revenue Code in order to maintain our REIT status, we would nevertheless be required to pay
penalty taxes of $50,000 or more for each such failure.
Fund X owns its properties through an entity which is intended to also qualify as a REIT, and its failure to so qualify could
have similar impacts on us.
Even if we qualify as a REIT, we will be required to pay some taxes. Even if we qualify as a REIT for federal income tax
purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject
to income tax to the extent we distribute less than 100% of our REIT taxable income (including capital gains). Moreover, if we have
net income from “prohibited transactions,” that income will be subject to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property held primarily for sale to customers in the ordinary course of business.
The tax imposed on REITs engaging in “prohibited transactions” will limit our ability to engage in transactions which
would be treated as sales for federal income tax purposes. A REIT’s net income from prohibited transactions is subject to a 100%
tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property but including any
property held in inventory primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any
properties that would be characterized as inventory held for sale to customers in the ordinary course of our business, such
characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our
properties.
In addition, any net taxable income earned directly by our taxable REIT subsidiary, or through entities that are disregarded
for federal income tax purposes as entities separate from our taxable REIT subsidiary, will be subject to federal and possibly state
corporate income tax. We have elected to treat DEB as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as
taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure
that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT
subsidiary is limited in its ability to deduct interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% tax
on some payments that it receives or on some deductions taken by its taxable REIT subsidiaries if the economic arrangements between
the REIT, the REIT’s tenants, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties.
Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax
on that income because not all states and localities treat REITs the same as they are treated for federal income tax purposes. To the
extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to
our stockholders.
REIT distribution requirements could adversely affect our liquidity. We generally must distribute annually at least 90%
of our REIT taxable income, excluding any net capital gain, in order to qualify as a REIT. To the extent that we do not distribute all
of our net long-term capital gain or distribute at least 90%, of our REIT taxable income, we will be required to pay tax thereon at
regular corporate tax rates. We intend to make distributions to our stockholders to comply with the requirements of the Internal
Revenue Code for REITs and to minimize or eliminate our corporate income tax obligation. However, differences between the
recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-
term basis to meet the distribution requirements of the Internal Revenue Code. Certain types of assets generate substantial mismatches
between taxable income and available cash. Such assets include rental real estate that has been financed through financing structures
which require some or all of available cash flows to be used to service borrowings. As a result, the requirement to distribute a
substantial portion of our taxable income could cause us to sell assets in adverse market conditions, borrow on unfavorable terms, or
distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt in order to
comply with REIT requirements. Further, amounts distributed will not be available to fund our operations.
Item 1B. Unresolved Staff Comments.
None.
18
Item 2. Properties
Our existing portfolio of office properties is located in the Brentwood, Olympic Corridor, Century City, Beverly Hills, Santa
Monica, Westwood, Sherman Oaks/Encino, Warner Center/Woodland Hills and Burbank submarkets of Los Angeles County,
California, and in Honolulu, Hawaii. Presented below is an overview of certain information regarding our existing office portfolio as
of December 31, 2008:
Office Portfolio (1) by Submarket
West Los Angeles
Brentwood
Olympic Corridor
Century City
Santa Monica
Beverly Hills
Westwood
San Fernando Valley
Sherman Oaks/Encino
Warner Center/Woodland Hills
Tri-Cities
Burbank
Honolulu
Total
Number of
Properties
Rentable
Square Feet (2)
Percent of
Total
13
5
3
8
6
2
11
3
1
3
55
1,390,768
1,096,079
915,980
969,971
1,343,094
396,807
3,180,954
2,855,864
420,949
757,636
13,328,102
10.4%
8.2
6.9
7.3
10.1
3.0
23.9
21.4
3.1
5.7
100.0%
(1) All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6
properties in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
(2) Based on Building Owners and Managers Association (BOMA) 1996 remeasurement. Total consists of 12,242,179 leased square feet, 923,081 available square
feet, 76,251 building management use square feet, and 86,591 square feet of BOMA 1996 adjustment on leased space.
The following table presents our office portfolio occupancy and in-place rents as of December 31, 2008:
Office Portfolio (1) by Submarket
West Los Angeles
Brentwood
Olympic Corridor
Century City
Santa Monica (5)
Beverly Hills
Westwood
San Fernando Valley
Sherman Oaks/Encino
Warner Center/Woodland Hills
Tri-Cities
Burbank
Honolulu
Total / Weighted Average
Percent
Leased (2)
Annualized
Rent (3)
Annualized Rent
Per Leased
Square Foot (4)
95.8%
94.6
98.2
93.2
91.9
94.9
93.6
89.0
$50,139,136
32,551,780
32,133,272
44,236,506
46,009,751
13,611,481
89,929,729
71,516,533
100.0
89.8
93.1%
13,383,871
22,706,974
$416,219,033
$38.06
32.14
36.14
49.86
38.36
36.59
31.07
28.71
31.79
34.05
$34.26
(1)
(2)
(3)
(4)
(5)
All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6
properties in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
Includes 91,775 square feet with respect to signed leases not yet commenced.
Represents annualized monthly cash base rent (i.e., excludes tenant reimbursements, parking and other revenue) under leases commenced as of December 31,
2008 (excluding 91,775 square feet with respect to signed leases not yet commenced). The amount reflects total cash rent before abatements. For our Burbank and
Honolulu office properties, annualized rent is converted from triple net to gross by adding expense reimbursements to base rent.
Represents annualized rent divided by leased square feet (excluding 91,775 square feet with respect to signed leases not commenced) as set forth in note (2) above
for the total.
Includes $1,287,232 of annualized rent attributable to our corporate headquarters at our Lincoln/Wilshire property.
19
The following table presents our submarket office concentration as of December 31, 2008:
Office Portfolio (1) by Submarket
West Los Angeles
Brentwood
Olympic Corridor
Century City
Santa Monica
Beverly Hills
Westwood
San Fernando Valley
Sherman Oaks/Encino
Warner Center/Woodland Hills
Tri-Cities
Burbank
Subtotal/Weighted Average Los Angeles County
Honolulu
Total
Source: CB Richard Ellis (other than Douglas Emmett data).
Douglas Emmett
Rentable
Square Feet (2)
Submarket
Rentable
Square Feet (3)
Douglas Emmett
Market Share
1,390,768
1,096,079
915,980
969,971
1,343,094
396,807
3,180,954
2,855,864
420,949
12,570,466
757,636
13,328,102
3,356,126
3,022,969
10,064,599
8,700,348
7,445,875
4,408,094
5,721,621
7,429,172
5,929,318
56,078,122
5,197,904
61,276,026
41.4%
36.3
9.1
11.1
18.0
9.0
55.6
38.4
7.1
22.4
14.6
21.8%
(1) All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6
properties in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
(2) Based on BOMA 1996 remeasurement. Total consists of 12,242,179 leased square feet (includes 91,775 square feet with respect to signed leases not
commenced), 923,081 available square feet, 76,251 building management use square feet, and 86,591 square feet of BOMA 1996 adjustment on leased space.
(3) Represents competitive office space in our nine Los Angeles County submarkets and Honolulu submarket per CB Richard Ellis.
20
Tenant Diversification
Our office portfolio is currently leased to approximately 2,000 tenants in a variety of industries, including entertainment, real
estate, technology, legal and financial services. The following table sets forth information regarding tenants with greater than 1.0% of
portfolio annualized rent in our office portfolio as of December 31, 2008:
Office Portfolio(1) Tenant:
Number
of
Leases
Number of
Properties
Lease
Expiration(2)
Time Warner(4)
AIG (Sun America Life Insurance)
The Endeavor Agency, LLC
Metrocities Mortgage, LLC(5)
Bank of America(6)
Total (7)
4
1
2
2
11
20
4
1
1
2
8
16
2010-2019
2013
2019
2010-2015
2009-2013
Total
Leased
Square Feet
642,845
182,010
113,878
138,040
112,925
1,189,698
Percent
of
Rentable
Square
Feet
Annualized
Rent(3)
Percent of
Annualized
Rent
4.8% $21,256,817
5,704,276
1.4
4,972,648
0.9
1.0
4,101,901
4,039,137
0.8
8.9% $40,074,779
5.1%
1.3
1.2
1.0
1.0
9.6%
(1) All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6
(2)
(3)
(4)
(5)
(6)
(7)
properties in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
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.
Represents annualized monthly cash rent under leases commenced as of December 31, 2008. The amount reflects total cash rent before abatements. For our
Burbank and Honolulu office properties, annualized rent is converted from triple net to gross by adding expense reimbursements to base rent.
Includes a 62,000 square foot lease expiring in June 2010, a 10,000 square foot lease expiring in October 2013, a 150,000 square foot lease expiring in April
2016, and a 421,000 square foot lease expiring in September 2019.
Includes a 8,000 square foot lease expiring in September 2010 and a 130,000 square foot lease expiring in February 2015.
Includes a 5,000 square foot lease expiring in September 2009, a 9,000 square foot lease expiring in September 2010, a 7,000 square foot lease expiring in
December 2010, two leases totaling 19,000 square feet expiring in January 2011, a 2,000 square foot lease expiring in May 2011, a 16,000 square foot lease
expiring in July 2011, a 41,000 square foot lease expiring in January 2012, a 6,000 square foot lease expiring in May 2012, and a 8,000 square foot lease
expiring in July 2013.
Excludes 177,000 square feet occupied by Health Net. Out of total square feet, 126,000 square feet expire in December 2014 and 51,000 square feet expired
at the end of December 31, 2008.
Industry Diversification
The following table sets forth information relating to tenant diversification by industry in our office portfolio based on
annualized rent as of December 31, 2008:
Industry
Legal
Financial Services
Entertainment
Real Estate
Health Services
Accounting & Consulting
Insurance
Retail
Technology
Advertising
Public Administration
Educational Services
Other
Total
Annualized
Rent as a
Percent of
Total
15.9%
14.7
11.3
9.1
9.0
8.4
7.6
7.0
3.9
3.3
1.8
0.7
7.3
100.0%
Number of
Leases (1)
353
270
120
165
297
213
85
163
70
57
29
10
266
2,098
(1) All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6
properties in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
21
Lease Distribution
The following table sets forth information relating to the distribution of leases in our office portfolio, based on rentable
square feet leased as of December 31, 2008:
Square Feet Under Lease (1)
2,500 or less
2,501-10,000
10,001-20,000
20,001-40,000
40,001-100,000
Greater than 100,000
Subtotal
Available
BOMA Adjustment(5)
Building Management Use
Signed leases not commenced
Total
Number
of
Leases
Leases
as a
Percent
of Total
Rentable Square
Feet (2)
1,033
783
188
65
22
7
2,098
-
-
-
-
2,098
49.2%
37.3
9.0
3.1
1.1
0.3
1,413,098
3,809,780
2,637,920
1,784,910
1,247,281
1,257,415
100.0% 12,150,404
923,081
86,591
76,251
91,775
100.0% 13,328,102
-
-
-
-
Square
Feet as a
Percent
of Total
10.6%
28.6
19.8
13.4
9.4
9.4
91.2%
6.9
0.6
0.6
0.7
100.0%
Annualized
Rent(3) (4)
$51,154,968
131,241,752
88,723,238
60,924,562
44,736,346
39,438,167
$416,219,033
-
-
-
-
$416,219,033
Annualized
Rent as a
Percent of
Total
12.3%
31.5
21.3
14.6
10.8
9.5
100.0%
-
-
-
-
100.0%
(1)
(2)
(3)
(4)
(5)
Based on BOMA 1996 remeasurement. Total consists of 12,242,179 leased square feet (includes 91,775 square feet with respect to signed leases not commenced),
923,081 available square feet, 76,251 building management use square feet, and 86,591 square feet of BOMA 1996 adjustment on leased space.
Average tenant size is approximately 5,800 square feet. Median is approximately 2,500 square feet.
All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6
properties in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
Represents annualized monthly cash base rent (i.e., excludes tenant reimbursements, parking and other revenue) under leases commenced as of December 31, 2008
(excluding 91,775 square feet with respect to signed leases not yet commenced). The amount reflects total cash rent before abatements. For our Burbank and
Honolulu office properties, annualized rent is converted from triple net to gross by adding expense reimbursements to base rent.
Represents square footage adjustments for leases that do not reflect BOMA 1996 remeasurement.
22
Lease Expirations
The following table sets forth a summary schedule of lease expirations for leases in place as of December 31, 2008, plus
available space, for each of the ten years beginning January 1, 2009 and thereafter in our office portfolio (Unless otherwise stated in
the footnotes, the information set forth in the table assumes that tenants exercise no renewal options and no early termination rights):
Year of Lease(1)
Expiration
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Thereafter
Available
BOMA Adjustment(6)
Building Management
Use
Signed leases not
commenced
Total/Weighted
Average
Number
of Leases
Expiring
Rentable
Square
Feet
Expiring
Square
Feet as a
Percent of
Total
459
424
391
292
257
121
57
30
28
28
6
5
-
-
-
-
1,779,677
1,764,955
1,767,625
1,546,975
1,658,473
962,824
650,171
615,805
321,680
289,460
622,359
170,400
923,081
86,591
76,251
91,775
13.4%
13.2
13.3
11.6
12.4
7.2
4.9
4.6
2.4
2.2
4.7
1.3
6.9
0.6
0.6
0.7
Annualized
Rent(2) (3)
$57,697,675
59,400,755
61,155,401
52,106,515
60,385,850
31,550,518
21,176,002
20,131,321
11,020,923
13,511,401
21,371,681
6,710,991
-
-
-
-
Annualized
Rent as a
Percent of
Total
Annualized
Rent Per
Leased Square
Foot(4)
Annualized
Rent Per
Leased Square
Foot at
Expiration(5)
13.9%
14.3
14.7
12.5
14.5
7.6
5.1
4.8
2.7
3.2
5.1
1.6
-
-
-
-
$32.42
33.66
34.60
33.68
36.41
32.77
32.57
32.69
34.26
46.68
34.34
39.38
-
-
-
-
$32.76
34.97
37.27
37.72
42.25
41.14
41.19
39.46
47.59
65.37
44.04
55.15
-
-
-
-
2,098
13,328,102
100.0%
$416,219,033
100.0%
$34.26
$39.18
(1) Based on BOMA 1996 remeasurement. Total consists of 12,242,179 leased square feet (includes 91,775 square feet with respect to signed leases not commenced),
923,081 available square feet, 76,251 building management use square feet, and 86,591 square feet of BOMA 1996 adjustment on leased space.
(2) All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6 properties
in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
(3) Represents annualized monthly cash base rent (i.e., excludes tenant reimbursements, parking and other revenue) under leases commenced as of December 31, 2008
(excluding 91,775 square feet with respect to signed leases not yet commenced). The amount reflects total cash rent before abatements. For our Burbank and Honolulu
office properties, annualized rent is converted from triple net to gross by adding expense reimbursements to base rent.
(4) Represents annualized rent divided by leased square feet.
(5) Represents annualized rent at expiration divided by leased square feet.
(6) Represents the square footage adjustments for leases that do not reflect BOMA 1996 remeasurement.
23
Multifamily Portfolio
The following table presents an overview of our multifamily portfolio, including occupancy and in-place rents, as of December 31,
2008:
Submarket
West Los Angeles
Brentwood
Santa Monica
Honolulu
Total
Submarket
West Los Angeles
Brentwood
Santa Monica (2)
Honolulu
Total / Weighted Average
Number of
Properties
Number of
Units
Percent of
Total
5
2
2
9
950
820
1,098
2,868
Percent
Leased
Annualized
Rent (1)
33%
29
38
100%
Monthly
Rent Per
Leased
Unit
99.5%
98.7
99.0
99.1%
$24,096,283
20,501,004
18,273,968
$62,871,255
$2,125
2,112
1,401
$1,844
(1) Represents December 2008 multifamily rental income annualized.
(2) Excludes 10,013 square feet of ancillary retail space, which generates $293,022 of annualized rent as of December 31, 2008.
24
Historical Tenant Improvements and Leasing Commissions
The following table sets forth certain historical information regarding tenant improvement and leasing commission costs for
tenants at the properties in our office portfolio through December 31, 2008:
Renewals(2)
Number of leases
Square feet
Tenant improvement costs per square foot(3) (5)
Leasing commission costs per square foot(3)
Total tenant improvement and leasing commission costs(3)
New leases(4)
Number of leases
Square feet
Tenant improvement costs per square foot(3) (5)
Leasing commission costs per square foot(3)
Total tenant improvement and leasing commission costs(3)
Total
Number of leases
Square Feet
Tenant improvement costs per square foot(3) (5)
Leasing commission costs per square foot(3)
Total tenant improvement and leasing commission costs(3)
2008(1)
252
1,075,281
$4.07
7.60
$11.67
172
586,574
$10.96
8.55
$19.51
424
1,661,855
$6.50
7.94
$14.44
Year Ended December 31,
2007
247
905,306
$5.21
7.39
$12.60
225
890,962
$14.38
9.44
$23.82
472
1,796,268
$9.75
8.41
$18.16
2006
252
908,982
$7.28
5.86
$13.14
239
840,994
$16.29
7.45
23.74
491
1,749,976
$11.61
6.63
$18.24
(1) All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6 properties
in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
Includes retained tenants that have relocated or expanded into new space within our portfolio.
(2)
(3) Assumes all tenant improvement and leasing commissions are paid in the calendar year in which the lease is executed, which may be different than the year in
which they were actually paid.
(4) Does not include retained tenants that have relocated or expanded into new space within our portfolio.
(5) Tenant improvement costs are based on negotiated tenant improvement allowances set forth in leases, or, for any lease in which a tenant improvement allowance
was not specified, the aggregate cost originally budgeted, at the time the lease commenced.
25
Historical Capital Expenditures
The following table sets forth certain information regarding historical recurring capital expenditures at the properties in our
office portfolio through December 31, 2008:
Recurring capital expenditures
Total square feet(1)
Recurring capital expenditures per square foot
2008
$ 5,457,340
11,810,609
0.46
$
Office
Year Ended December 31,
2007
$ 5,331,325
11,666,107
0.46
$
2006
$ 5,812,721
11,554,829
0.50
$
(1)
Excludes square footage attributable to acquired properties with only non-recurring capital expenditures in the respective period.
The following table sets forth certain information regarding historical recurring capital expenditures at the properties in our
multifamily portfolio through December 31, 2008:
Recurring capital expenditures
Total units
Recurring capital expenditures per unit
2008
$ 1,570,154
2,868
547
$
Multifamily
Year Ended December 31,
2007
$ 1,348,063
2,868
470
$
2006
$ 1,950,713
2,868
680
$
Our multifamily portfolio contains a large number of units that, due to Santa Monica rent control laws, have had only
insignificant rent increases since 1979. Historically, when a tenant has vacated one of these units, we have spent between $15,000 and
$30,000 per unit, depending on apartment size, to bring the unit up to our standards. We have characterized these expenditures as
non-recurring capital expenditures. Our make-ready costs associated with the turnover of our other units are included in recurring
capital expenditures.
Item 3. Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our
business. We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate,
would be expected to have a material adverse effect on our business, financial condition or results of operation if determined adversely
to us.
Item 4. Submission of Matters to a Vote of Security Holders
None.
26
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Stock; Dividends
Our common stock is traded on the New York Stock Exchange under the symbol “DEI”. On February 17, 2009, the reported
closing sale price per share of our common stock on the New York Stock Exchange was $8.53. The following table shows our
dividends, and the high and low sales prices for our common stock as reported by the New York Stock Exchange, for the periods
indicated:
Fiscal Year Ended 2008
Dividend
Common Stock Price
High
Low
Fiscal Year Ended 2007
Dividend
Common Stock Price
High
Low
Holders of Record
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
0.1875
$
0.1875 $
0.1875 $
0.1875
23.39
20.28
24.81
21.64
24.97
20.06
22.45
8.26
$
0.175
$
0.175
$
0.175
$
0.175
29.01
24.99
27.15
24.74
25.75
22.81
27.44
22.61
We had 22 holders of record of our common stock on February 17, 2009. Certain shares of the Company are held in “street”
name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Dividend Policy
We typically pay dividends to common stockholders quarterly at the discretion of the Board of Directors. Dividend amounts
depend on our available cash flow, financial condition and capital requirements, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code and such other factors as the Board of Directors deems relevant.
Sales of Unregistered Securities
None.
Repurchases of Equity Securities
None.
27
Performance Graph
The information below shall not be deemed to be “soliciting material” or to be “filed” with the U.S. Securities and Exchange
Commission or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K , or to the liabilities of
Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or
specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The following graph compares the cumulative total stockholder return on the Common Stock of Douglas Emmett Inc. from
October 24, 2006 to December 31, 2008 with the cumulative total return of the Standard & Poor’s 500 Index and an appropriate “peer
group” index (assuming the investment of $100 in our Common Stock and in each of the indexes on October 30, 2006 and that all
dividends were reinvested into additional shares of common stock at the frequency with which dividends are paid on the common
stock during the applicable fiscal year). The total return performance shown in this graph is not necessarily indicative of and is not
intended to suggest future total return performance.
Total Return Performance
Douglas Emmett, Inc.
S&P 500
NAREIT Equity
150
125
100
75
50
l
e
u
a
V
x
e
d
n
I
25
10/24/06
Index
Douglas Emmett, Inc.
S&P 500
NAREIT Equity
Source: SNL Financial LC
12/31/06
06/30/07
12/31/07
06/30/08
12/31/08
Period Ending
10/24/06
100.00
100.00
100.00
12/31/06
112.95
103.39
109.47
06/30/07
106.57
110.59
103.02
12/31/07
98.85
109.07
92.29
06/30/08
97.71
96.08
88.97
12/31/08
59.45
68.72
57.47
28
Item 6. Selected Financial Data
The following table sets forth summary financial and operating data on a historical basis for our “predecessor” prior to our
IPO and Douglas Emmett, Inc. subsequent to our IPO. Our “predecessor” owned 42 office properties, the fee interest in two parcels of
land leased to third parties under long-term ground leases and six multifamily properties prior to the IPO/formation transactions. We
have not presented historical financial information for Douglas Emmett, Inc. for periods prior to October 31, 2006 because we believe
that a discussion of the results of Douglas Emmett, Inc. would not be meaningful since it was not involved in any significant activity
prior to that date.
You should read the following summary financial and operating data in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operation”, and the other financial statements included elsewhere in this Report.
The summary historical consolidated financial and operating data as of and for the years ended December 31, 2008, 2007,
2006, 2005 and 2004 have been derived from our audited historical consolidated financial statements subsequent to our IPO and those
of our predecessor prior to our IPO.
Statement of Operations Data:
Total office revenues
Total multifamily revenues
Total revenues
Operating income (loss)
Loss from continuing operations
Per Share Data:
Loss per share -
basic and diluted
Weighted average common
shares outstanding -
basic and diluted
Dividends declared per
common share
$
$
$
Balance Sheet Data (as of December 31)
Total assets
Secured notes payable
Other Data:
Year Ending
12/31/08
Douglas Emmett, Inc.
Year Ending
12/31/07
10/31/06 to
12/31/06
01/01/06 to
10/30/06
The Predecessor
Year Ending
12/31/05
Year Ending
12/31/04
$
537,377
70,717
608,094
154,234
(27,993)
$
468,569
71,059
539,628
141,232
(13,008)
$
77,566
11,374
88,940
(3,417)
(20,591)
$
300,939
45,729
346,668
113,784
(16,362)
$
348,566
45,222
393,788
138,935
(16,520)
286,638
33,793
320,431
106,853
(56,765)
(0.23) $
(0.12) $
(0.18) $
(251,723)
$
(254,154)
$
(870,631)
120,725,928
112,645,587
115,005,860
65
65
65
0.75
$
0.70
$
0.12
$
-
$
-
$
-
2008
Douglas Emmett, Inc.
2007
2006
2005
2004
The Predecessor
$
6,760,804
3,692,785
$
6,189,968
3,105,677
$
6,200,118
2,789,702
$
2,904,647
2,223,500
$
2,585,697
1,982,655
Number of properties (as of December 31)
64 (1)
57
55
47
45
(1) All properties are 100% owned by our operating partnership except (i) the Honolulu Club (78,000 square feet) in which we held a 66.7% interest, and (ii) 6 properties
in Fund X totaling 1.4 million square feet in which we held a 50% interest of the common equity.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking
statements. For cautions about relying on such forward looking statements, please refer to the section entitled “Forward Looking
Statements” at the beginning of this Report immediately prior to “Item 1”.
Executive Summary
Through our interest in Douglas Emmett Properties, LP (our operating partnership) and its subsidiaries, at December 31,
2008 our office portfolio consisted of 55 properties with approximately 13.3 million rentable square feet, and our multifamily portfolio
consisted of nine properties with a total of 2,868 units. As of December 31, 2008, our office portfolio was 93.1% leased, and our
multifamily properties were 99.1% leased. Our office portfolio contributed approximately 86.9% of our annualized rent as of
December 31, 2008, while our multifamily portfolio contributed the remaining 13.1%. As of December 31, 2008, our Los Angeles
County office and multifamily portfolio contributed approximately 91.4% of our annualized rent, and our Honolulu, Hawaii office and
multifamily portfolio contributed the remaining 8.6%. Our properties are concentrated in nine premier Los Angeles County
submarkets—Brentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner
Center/Woodland Hills and Burbank—as well as in Honolulu, Hawaii.
Acquisitions, Dispositions, Repositionings and Financings.
Acquisitions. During 2008, we completed the following acquisition transactions:
(cid:121)
(cid:121)
In March 2008, we acquired a 1.4 million square foot office portfolio consisting of six Class A buildings, all located in
our core Los Angeles submarkets – Santa Monica, Beverly Hills, Sherman Oaks/Encino and Warner Center/Woodland
Hills – for a contract price of approximately $610 million. As described below, we have contributed these six properties
to Fund X. See Note 19 to our consolidated financial statements in Item 8 of this Report.
In February 2008, we acquired a two-thirds interest in a 78,298 square-foot office building located in Honolulu, Hawaii.
As part of the same transaction, we also acquired all of the assets of The Honolulu Club, a private membership athletic
and social club, which is located in the building. The aggregate contract price was approximately $18 million and the
purchase was made through a consolidated joint venture with our local partner. In May 2008, the operations of the
athletic club were sold to a third party for a nominal cost. Simultaneously, the acquirer leased from us the space
occupied by the athletic club. The results of operations and loss on sale of the assets of the athletic club were not
material.
(cid:121)
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.
Repositionings. We generally select a property for repositioning at the time we purchase it. We often strategically purchase
properties with large vacancies or expected near-term lease roll-over and use our knowledge of the property and submarket to
determine the optimal use and tenant mix. A repositioning can consist of a range of improvements to a property. A repositioning may
involve a complete structural renovation of a building to significantly upgrade the character of the property, or it may involve targeted
remodeling of common areas and tenant spaces to make the property more attractive to certain identified tenants. Because each
repositioning effort is unique and determined based on the property, tenants and overall trends in the general market and specific
submarket, the results are varying degrees of depressed rental revenue and occupancy levels for the affected property, which impacts
our results and, accordingly, comparisons of our performance from period to period. The repositioning process generally occurs over
the course of months or even years. During 2008, we had on-going repositioning efforts on three of our office properties representing
13 buildings and approximately 3.1 million rentable square feet. Repositioning properties exclude acquisition properties where the
plan for improvement is implemented as part of the acquisition.
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Financings. During 2008, we completed the following financing transactions:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
In October 2008, we completed the initial closing of $300 million of equity commitments for our newly formed
institutional fund, Douglas Emmett Fund X, LLC, of which we committed $150 million. In connection with the
initial closing, we contributed to Fund X the six office properties which we acquired in March 2008 as well as
the related $365 million loan. Fund X contemplates a fund raising period until July 2009 and an investment
period of up to four years from the initial closing, followed by a ten-year value creation period. With limited
exceptions, Fund X will be our exclusive investment vehicle during its investment period, using the same
underwriting and leverage principles and focusing primarily on the same markets as we have. See Note 19 to
our consolidated financial statements in Item 8 of this Report.
In August 2008, we obtained a non-recourse $365 million term loan secured by the six-property portfolio that
we acquired in March 2008 as described above and in Note 3 to our consolidated financial statements in Item 8
of this Report. This loan bears interest at a floating rate equal to one-month LIBOR plus 165 basis points,
however we have entered into interest rate swap contracts that effectively fix the interest at 5.515% (based on
an actual/360-day basis) until September 4, 2012. This loan facility matures on August 18, 2013. This long-
term loan replaces the $380 million bridge loan obtained in March 2008 in connection with the property
acquisition.
In March 2008, we obtained a non-recourse $340 million term loan secured by four of our previously
unencumbered office properties. This loan bears interest at a floating rate equal to one-month LIBOR plus 150
basis points, however we have entered into interest rate swap contracts that effectively fix the interest rate at
4.77% (based on an actual/360-day basis) until January 2, 2013. This loan facility matures on April 1, 2015.
Proceeds from this loan were utilized to repay our secured revolving credit facility and for general corporate
purposes.
In February 2008, the joint venture in which we have a two-thirds interest obtained an $18 million loan that
financed our February 2008 acquisition described above and in Note 3 to our consolidated financial statements
in Item 8 of this Report. This loan has an interest rate of one-month LIBOR plus 125 basis points and a two-
year term with a one-year extension.
Basis of Presentation
For the periods subsequent to October 31, 2006, the financial statements presented are the consolidated financial statements
of Douglas Emmett, Inc. and its subsidiaries including our operating partnership. Douglas Emmett, Inc. did not have any meaningful
operating activity until the consummation of our IPO and the related acquisition of our predecessor and certain other entities in
October 2006. For a detailed description of this transaction and our resulting organization, see Note 1 to our consolidated financial
statements included in this Report. The financial statements for the periods prior to October 31, 2006 are the consolidated financial
statements of our predecessor. They include the accounts of DERA and certain institutional funds, but do not include the accounts of
other entities which were acquired at the time of our IPO. Because the 2006 period reflects significant differences in the ongoing
economic impact resulting from our IPO/formation transactions, the results are in many cases not directly comparable to 2007 or 2008
and we urge readers to be even more than usually cautious in using them to predict future results. As a result of these facts, investors
are urged to exercise caution in using these past results as an indicator for our future performance.
Critical Accounting Policies
Our discussion and analysis of the historical financial condition and results of operations of Douglas Emmett, Inc. and our
predecessor are based upon their respective consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP). The preparation of these financial statements in conformity with GAAP requires us
to make estimates of certain items and judgments as to certain future events, for example with respect to the allocation of the purchase
price of acquired property among land, buildings, improvements, equipment, and any related intangible assets and liabilities, or the
effect of a property tax reassessment of our properties in connection with the IPO. These determinations, even though inherently
subjective and subject to change, affect the reported amounts of our assets, liabilities, revenues and expenses. While we believe that
our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and
judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals, and those
differences—positive or negative—could be material. Some of our accruals are subject to adjustment as we believe appropriate based
on revised estimates and reconciliation to the actual results when available.
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Investment in Real Estate. Acquisitions of properties and other business combinations are accounted for utilizing the
purchase method and, accordingly, the results of operations of acquired properties are included in our results of operations from the
respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of
acquired property between land, buildings and improvements, equipment and identifiable intangible assets and liabilities such as
amounts related to in-place at-market leases, acquired above- and below-market leases and tenant relationships. Initial valuations are
subject to change until such information is finalized no later than 12 months from the acquisition date. Each of these estimates
requires a great deal of judgment, and some of the estimates involve complex calculations. These allocation assessments have a direct
impact on our results of operations because if we were to allocate more value to land there would be no depreciation with respect to
such amount. If we were to allocate more value to the buildings as opposed to allocating to the value of tenant leases, this amount
would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over
the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the remaining terms of the leases.
The fair values of tangible assets are determined on an ‘‘as-if-vacant’’ basis. The ‘‘as-if-vacant’’ fair value is allocated to
land, where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information
obtained in connection with the acquisition of the property.
The estimated fair value of acquired in-place at-market leases are the costs we would have incurred to lease the property to
the occupancy level of the property at the date of acquisition. Such estimates include the fair value of leasing commissions and legal
costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluate the time period over which such
occupancy level would be achieved and we include an estimate of the net operating costs (primarily real estate taxes, insurance and
utilities) incurred during the lease-up period, which is generally six months.
Above-market and below-market in-place lease values are recorded as an asset or liability based on the present value (using
an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be
received or paid pursuant to the in-place tenant or ground leases, respectively, and our estimate of fair market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease.
Expenditures for repairs and maintenance are expensed to operations as incurred. Significant betterments are capitalized.
Interest, insurance and property tax costs incurred during the period of construction of real estate facilities are capitalized. When
assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or
losses reflected in net income or loss for the period.
The values allocated to land, buildings, site improvements, tenant improvements, and in-place leases are depreciated on a
straight-line basis using an estimated life of 40 years for buildings, 15 years for site improvements, a portfolio average term of existing
leases for in-place lease values and the respective remaining lease terms for tenant improvements and leasing costs. The values of
above- and below-market tenant leases are amortized over the remaining life of the related lease and recorded as either an increase (for
below-market tenant leases) or a decrease (for above-market tenant leases) to rental income. The value of above- and below-market
ground leases are amortized over the remaining life of the related lease and recorded as either an increase (for below-market ground
leases) or a decrease (for above-market ground leases) to office rental operating expense. The amortization of acquired in-place leases
is recorded as an adjustment to depreciation and amortization in the consolidated statements of operations. If a lease were to be
terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.
Impairment of Long-Lived Assets. We assess whether there has been impairment in the value of our long-lived assets
whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount to the undiscounted future cash flows expected to be
generated by the asset. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If our evaluation indicates that we may be unable to recover the carrying value of a real estate
investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. These
losses have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net
income. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. The evaluation of
anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital
requirements that could differ materially from actual results in future periods. If our strategy changes or market conditions otherwise
dictate an earlier sale date, an impairment loss may be recognized and such loss could be material.
Income Taxes. As a REIT, we are permitted to deduct distributions paid to its stockholders, eliminating the federal taxation
of income represented by such distributions at the corporate level. REITs are subject to a number of organizational and operational
requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate tax rates.
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Revenue Recognition. Revenue and gain is recognized in accordance with Staff Accounting Bulletin No. 104 of the
Securities and Exchange Commission, Revenue Recognition in Financial Statements (SAB 104), as amended. SAB 104 requires that
four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has
occurred or services rendered; the fee is fixed and determinable; and collectibility is reasonably assured. All leases are classified as
operating leases. For all lease terms exceeding one year, rental income is recognized on a straight-line basis over the terms of the
leases. Deferred rent receivables represent rental revenue recognized on a straight-line basis in excess of billed rents.
Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenues in the period
the applicable costs are incurred. In addition, we record a capital asset for leasehold improvements constructed by us that are
reimbursed by tenants, with the offsetting side of this accounting entry recorded to deferred revenue which is included in accounts
payable and accrued expenses. The deferred revenue is amortized as additional rental revenue over the life of the related lease. Rental
revenue from month-to-month leases or leases with no scheduled rent increases or other adjustments is recognized on a monthly basis
when earned.
Recoveries from tenants for real estate taxes, common area maintenance and other recoverable costs are recognized in the
period that the expenses are incurred. Lease termination fees, which are included in rental income in the accompanying consolidated
statements of operations, are recognized when the related leases are canceled and we have no continuing obligation to provide services
to such former tenants.
We recognize gains on sales of real estate pursuant to the provisions of Statement of Financial Accounting Standards (FAS)
No. 66, Accounting for Sales of Real Estate (FAS 66). The specific timing of a sale is measured against various criteria in FAS 66
related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated
with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property
by applying the finance, profit-sharing or leasing method. If the sales criteria have been met, we further analyze whether profit
recognition is appropriate using the full accrual method. If the criteria to recognize profit using the full accrual method have not been
met, we defer the gain and recognize it when the criteria are met or use the installment or cost recovery method as appropriate under
the circumstances.
Monitoring of Rents and Other Receivables. We maintain an allowance for estimated losses that may result from the inability
of tenants to make required payments. If a tenant fails to make contractual payments beyond any allowance, we may recognize bad
debt expense in future periods equal to the amount of unpaid rent and deferred rent. We generally do not require collateral or other
security from our tenants, other than security deposits or letters of credit. If our estimates of collectibility differ from the cash
received, the timing and amount of our reported revenue could be impacted.
Stock-Based Compensation. We have awarded stock-based compensation to certain key employees and members of our
Board of Directors in the form of stock options and long-term incentive plan units (LTIP units). These awards are accounted for under
FAS No. 123R (revised 2004), Share-Based Payment (FAS 123R), which was effective beginning January 1, 2006. We had no stock-
based compensation awards outstanding prior to our IPO in October 2006. This pronouncement requires that we estimate the fair
value of the awards and recognize this value over the requisite vesting period. We utilize a Black-Scholes model to calculate the fair
value of options, which uses assumptions related to the stock, including volatility and dividend yield, as well as assumptions related to
the stock award itself, such as the expected term and estimated forfeiture rate. Option valuation models require the input of somewhat
subjective assumptions for which we have relied on observations of both historical trends and implied estimates as determined by
independent third parties. For LTIP units, the fair value is based on the market value of our common stock on the date of grant and a
discount for post-vesting restrictions estimated by a third-party consultant.
Financial Instruments. The estimated fair values of financial instruments are determined using available market information
and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair values.
The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.
Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.
Interest Rate Agreements. We manage our interest rate risk associated with borrowings by obtaining interest rate swap and
interest rate cap contracts. No other derivative instruments are used. We recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. If
the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the
change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive
income, which is a component of our stockholders’ equity account. The ineffective portion of a derivative’s change in fair value is
immediately recognized in earnings.
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Results of Operations
The comparability of our results of operations between 2008, 2007 and 2006 is affected by our acquisition and repositioning
activities in all years presented. This includes the acquisition of four office properties, three multifamily properties and the fee interest
in one parcel of land that we lease to a third-party under a long-term ground lease that we acquired from our non-predecessor entities
at the time of our IPO. This also includes nine office properties, one multifamily property and the remaining fee interest in one parcel
of land that we acquired from unaffiliated entities subsequent to our IPO. As a consequence, our results are not comparable from
period to period due to the varying timing of individual property acquisitions, the impact of the IPO/formation transactions and lease
up or increased vacancy resulting from repositioning activities.
Our repositioning efforts have also impacted our operating results, and we expect that to continue. In our office portfolio, our
repositioning properties include Warner Center Towers, The Trillium and Bishop Place for all periods presented. In addition, Harbor
Court, Sherman Oaks Galleria and 9601 Wilshire were repositioning properties in 2006. Our acquisition properties in our office
portfolio include Brentwood Court, Brentwood Medical Plaza, Brentwood San Vicente Medical and San Vicente Plaza, which were
acquired at the time of our IPO, as well as Century Park West and Cornerstone Plaza, which were acquired in 2007. During 2008, we
acquired the Honolulu Club and a portfolio of six properties as described in Note 3 to the consolidated financial statements in Item 8
of this Report. As of December 31, 2008, the repositioning and acquisition properties represented 48.9% of our total office portfolio
based on rentable square feet. In addition, during the three years we acquired four properties in our multifamily portfolio: Royal
Kunia in March 2006 and Barrington/Kiowa, Barry and Kiowa at the time of our IPO. As of December 31, 2008, our multifamily
acquisitions represented 18.4% of the total units in our multifamily portfolio. During the periods discussed, we had no multifamily
repositioning properties.
As discussed under “Basis of Presentation”, our results of operations for 2006 contain the consolidated results of Douglas
Emmett, Inc. and its subsidiaries, including our operating partnership, for the period from October 31, 2006 through December 31,
2006. The results of operations for the period January 1, 2006 through October 30, 2006 consist of our predecessor, which includes
the accounts of DERA and the institutional funds. In our analysis below, we have combined the results for the year ended
December 31, 2006 to compare to our consolidated results for 2007.
Comparison of year ended December 31, 2008 to year ended December 31, 2007
Revenue
Office Revenue
Total Office Revenue. Total office revenue consists of rental revenue, tenant recoveries and parking and other income. Total
office portfolio revenue increased by $68.8 million, or 14.7%, to $537.4 million for 2008 compared to $468.6 million for 2007 for the
reasons described below.
Rental Revenue. Rental revenue includes rental revenues from our office properties, percentage rent on the retail space
contained within office properties, and lease termination income. Total office rental revenue increased by $56.6 million, or 15.0%, to
$433.5 million for 2008 compared to $376.9 million for 2007. The increase is due to $45.9 million of incremental rent from the nine
properties we acquired subsequent to the beginning of 2007, as well as increases in average rental rates for new and renewal leases
across our existing office portfolio.
Parking and Other Income. Total office parking and other income increased by $10.1 million, or 16.5%, to $71.5 million for
2008 compared to $61.4 million for 2007. The increase is primarily due to incremental revenues of $6.7 million from the nine
properties we acquired subsequent to the beginning of 2007, as well as increases in parking rates implemented across the portfolio and
increases in ground rent income.
Multifamily Revenue
Total Multifamily Revenue. Total multifamily revenue consists of rent, parking income and other income. Total multifamily
revenue decreased by $0.3 million, or 0.5%, to $70.7 million for 2008 compared to $71.1 million for 2007. The decrease is primarily
due to $3.1 million in amortization of below-market leases for certain multifamily units initially recorded at the time of our IPO and
formation that were fully amortized during the second quarter of 2008, thus causing a decline when comparing 2007 to 2008. This
decrease was partially offset by an increase of $2.2 million resulting from increased occupancy and an increase in rents charged to
both new and existing tenants, including increases for select Santa Monica multifamily units. These units were under leases signed
prior to a 1999 change in California Law that allows landlords to reset rents to market rates when a tenant moves out. Therefore, a
portion of the multifamily increase was due to the rollover to market rents of several of these rent-controlled units, or “Pre-1999
Units”, since January 1, 2007.
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Operating Expenses
Office Rental Expenses. Total office rental expenses increased by $17.5 million, or 11.8%, to $166.1 million for 2008
compared to $148.6 million for 2007. The increase is primarily due to $21.0 million of incremental operating expenses from the nine
properties we acquired subsequent to the beginning of 2007. The increase was offset by a net reduction in various operating expenses
in our existing portfolio, consisting primarily of lower property tax accruals offset by higher utility expenses.
Depreciation and Amortization. Depreciation and amortization expense increased $38.4 million, or 18.3%, to $248.0 million
for 2008 compared to $209.6 million for 2007. The increase was primarily due to incremental depreciation and amortization of $28.0
million from the nine properties we acquired subsequent to the beginning of 2007, as well as the finalization of the purchase price
allocation and related lives of real estate assets combined at the time of our IPO/formation transactions.
Non-Operating Income and Expenses
Interest and Other Income. Interest and other income of $0.7 million in 2007 consisted of interest income earned on the
investment of excess cash. In 2008, interest and other income of $3.6 million consisted primarily of interest income and the allocation
of operating results related to our institutional fund, Douglas Emmett Fund X, LLC, as well as miscellaneous income from the
temporary operation of the Honolulu Athletic Club during 2008. See Note 3 and Note 19 to our consolidated financial statements in
Item 8 of this Report.
Interest Expense. Interest expense increased $33.1 million, or 20.6%, to $193.7 million for 2008 compared to $160.6 million
for 2007. The increase for the comparable periods was primarily due to an increase in outstanding borrowings during 2008 to fund
property acquisitions, including the six properties acquired in March 2008 that were contributed to Fund X in October 2008, and for
general corporate purposes. See Note 19 to our consolidated financial statements in Item 8 of the Report.
Comparison of year ended December 31, 2007 to year ended December 31, 2006
Revenue
Office Revenue
Total Office Revenue. Total office revenue consists of rental revenue, tenant recoveries and parking and other income. Total
office portfolio revenue increased by $90.1 million, or 23.8%, to $468.6 million for 2007 compared to $378.5 million for 2006 for the
reasons described below.
Rental Revenue. Rental revenue includes rental revenues from our office properties, percentage rent on the retail space
contained within office properties, and lease termination income. Total office rental revenue increased by $61.8 million, or 19.6%, to
$376.9 million for 2007 compared to $315.1 million for 2006. This increase is primarily due to incremental rent from the four
properties we acquired at the time of our IPO in October 2006, the two additional properties we acquired in the second and fourth
quarters of 2007 as described above, and gains in occupancy at our repositioning properties. Rent also increased for the remainder of
our office portfolio that was not acquired or repositioned during the periods presented, primarily due to gains in occupancy and
increases in average rental rates for new and renewal leases signed since January 1, 2006. In addition, we recognized approximately
$25.7 million of incremental rent related to the amortization of net below-market rents that resulted from the mark to market
adjustments to our leases that we recorded in connection with our IPO.
Tenant Recoveries. Total office tenant recoveries increased by $9.6 million, or 46.6%, to $30.3 million for 2007 compared to
$20.6 million for 2006 primarily due to incremental recoveries from the four properties acquired in the fourth quarter of 2006, and the
two additional properties we acquired in 2007. The overall increase is also attributable to increases in tenant recoveries at our
repositioning properties resulting from increases in occupancy, as well as an increase in recoverable scheduled services, payroll
expense and property taxes as described in office rental expenses below.
Parking and Other Income. Total office parking and other income increased by $18.6 million, or 43.5%, to $61.4 million for
2007 compared to $42.8 million for 2006. This increase was primarily due to gains in occupancy in our repositioning and acquisition
properties and parking rate increases implemented in July 2006 and July 2007 across the portfolio.
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Multifamily Revenue
Total Multifamily Revenue. Total multifamily revenue consists of rent, parking income and other income. Total multifamily
revenue increased by $14.0 million, or 24.4%, to $71.1 million for 2007 compared to $57.1 million for 2006, primarily due to the
three multifamily property acquisitions in our IPO/formation transactions, as well as Villas at Royal Kunia, which we acquired in
March 2006. In addition, a significant number of our Santa Monica multifamily units were under leases signed prior to a 1999 change
in California Law that allows landlords to reset rents to market rates when a tenant moves out. A portion of the multifamily increase
was due to the rollover to market rents of several of these rent-controlled units, or “Pre-1999 Units”, since January 1, 2006. The
remainder of the increase was primarily due to increases in rents charged to other existing and new tenants. In addition, we
recognized approximately $6.4 million of incremental rent related to the amortization of net below-market rents that resulted from the
mark to market adjustments to our leases that we recorded in connection with our IPO.
Operating Expenses
Office Rental Expenses. Total office rental expense increased $17.7 million, or 13.5%, to $148.6 million for 2007 compared
to $130.9 for 2006. Expenses increased due to higher levels of scheduled services, payroll expense and property tax expense,
reflecting both additional properties acquired at and after our IPO, as well as higher costs at existing properties between comparative
periods. The increased expense was offset by lower operating expenses in 2007 that resulted from the elimination of fees for property
management services, which were provided by Douglas, Emmett and Company (DECO) in 2006 prior to the acquisition and
consolidation of DECO in the IPO/formation transactions.
General and Administrative Expenses. General and administrative expenses for 2007 decreased $26.6 million to $21.5
million for 2007, compared to $48.1 million for 2006. The level of general and administrative expenses for 2006 was primarily
attributable to one-time non-cash compensation costs at the time of our IPO totaling approximately $27.7 million and the payment by
our predecessor of $13.2 million in one-time discretionary cash bonuses prior to the consummation of our IPO. There were no such
costs during 2007, however, these savings were partially offset by publicly-traded REIT-related costs subsequent to our IPO, including
legal and audit fees, directors and officers insurance and costs related to our compliance with section 404 of Sarbanes-Oxley.
Depreciation and Amortization. Depreciation and amortization expense increased $81.6 million, or 63.8%, to $209.6 million
for 2007 compared to $128.0 million for 2006. The increase was primarily due to depreciation of the higher cost basis for each
existing property in our portfolio as a result of recording these real estate assets at market value in connection with our IPO and
formation transactions, as well as incremental depreciation related to the ten office and multifamily properties we acquired as
described above.
Non-Operating Income and Expenses
Gain on Investments in Interest Rate Contracts, Net. We recognized a net gain of $6.8 million on investments in interest rate
contracts in 2006 due to changes in the fair market value of our in-place interest rate swap contracts during the ten-month period of
2006 prior to our IPO/formation transactions. In conjunction with our IPO, we entered into a series of interest rate swaps that
effectively offset any future changes in the fair value of our predecessor’s existing interest rate contracts. Therefore, no comparable
gain or loss was recognized during 2007.
Interest Expense. Interest expense increased $38.5 million, or 31.5%, to $160.6 million for 2007 compared to $122.2 million
for 2006. The increase was primarily due to an increase in our average outstanding debt related to the $545 million borrowed in the
fourth quarter of 2006 to fund a portion of the formation transactions related to our IPO and an additional $150 million borrowed
during the second quarter of 2007 to fund repurchase of our equity and the purchase of our new property in Century City. The
remaining increase in interest expense was primarily due to borrowings outstanding under our corporate revolver during 2007 to fund
additional repurchases of our equity and the purchase of our new property in the Olympic Corridor.
Deficit Distributions to Minority Partners, Net. Deficit distributions to minority partners, net, was a $10.6 million net
distribution for 2006. The expense was primarily due to cash distributions to limited partners exceeding the carrying amount of
minority interest in the institutional funds included in our predecessor. This category was not applicable subsequent to our IPO and
therefore no such amount was recorded in 2007.
Minority Interests. Minority interest income totaling $5.7 million was recognized for 2007 compared to minority expense
of $25.9 million expense for 2006. The amount in 2006 represents the limited partners’ ownership interest in our predecessor,
including a preferred minority investor. The amount in 2007 represents the portion of results attributable to minority ownership
interests in our operating partnership.
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Liquidity and Capital Resources
Available Borrowings, Cash Balances and Capital Resources
In October 2008, we completed the initial closing of Fund X. As of the date of its initial closing, Fund X had obtained equity
commitments totaling $300 million, of which we committed $150 million and certain of our officers committed $2.25 million on the
same terms as the other investors. Fund X contemplates a fund raising period until July 2009 and an investment period of up to four
years from the initial closing, followed by a ten-year value creation period. With limited exceptions, Fund X will be our exclusive
investment vehicle during its investment period, using the same underwriting and leverage principles and focusing primarily on the
same markets as we have. See Note 3 to our consolidated financial statements in Item 8 of this Report for further description of the
acquisition and Note 6 to our consolidated financial statements in Item 8 of this Report for further description of the debt.
We had total indebtedness of $3.7 billion at December 31, 2008, excluding a loan premium representing the mark-to-market
adjustment on variable rate debt assumed from our predecessor. Our debt increased $592 million from December 31, 2007 primarily
as a result of acquisitions as discussed in Note 3 to our consolidated financial statements in Item 8 of this Report. See Note 6 to our
consolidated financial statements in Item 8 of this Report for further description of the debt.
We have a revolving credit facility with a group of banks led by Bank of America, N.A. and Banc of America Securities LLC
totaling $370 million. At December 31, 2008, there was approximately $320.7 million available to us under this credit facility. This
revolving credit facility bears interest at a rate per annum equal to either LIBOR plus 70 basis points or Federal Funds Rate plus 95
basis points if the amount outstanding is $262.5 million or less. However, if the amount outstanding is greater than $262.5 million,
the credit facility bears interest at a rate per annum equal to either LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis
points The facility is scheduled to mature on October 30, 2009 but has two one-year extensions available to us. In the current
economic environment and credit market, there is a chance that we may not meet the criteria necessary to utilize the extensions, or the
availability under the facility may be reduced upon extension. We have used our revolving credit facility for general corporate
purposes, including acquisition funding, redevelopment and repositioning opportunities, tenant improvements and capital
expenditures, share equivalent repurchases, recapitalizations and working capital.
We have historically financed our capital needs through short-term lines of credit and long-term secured mortgages of which
have been at floating rates. To mitigate the impact of fluctuations in short-term interest rates on our cash flow from operations, we
generally enter into interest rate swap or interest rate cap agreements. At December 31, 2008, 98% of our debt was effectively fixed at
an overall rate of 5.14% (on an actual / 360-day basis) by virtue of interest rate swap and interest rate cap agreements in place at the
end of the reporting period. See Notes 6 and 8 to our consolidated financial statements in Item 8 of this Report.
At December 31, 2008, our total borrowings under secured loans represented 64.3% of our total market capitalization of
$5.7 billion. Total market capitalization includes our consolidated debt and the value of common stock and operating partnership
units each based on our common stock closing price at December 31, 2008 on the New York Stock Exchange of $13.06 per share.
The nature of our business, and the requirements imposed by REIT rules that we distribute a substantial majority of our
income on an annual basis, will cause us to have substantial liquidity needs over both the short term and the long term. In 2008, we
declared an annual dividend of $0.75 per share, paid quarterly following the end of each quarter.
We expect to meet our short-term liquidity requirements generally through cash provided by operations and, if necessary, by
drawing upon our senior secured revolving credit facility. We anticipate that cash provided by operations and borrowings under our
senior secured revolving credit facility will be sufficient to meet our liquidity requirements for at least the next 12 months.
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, redevelopment and repositioning
of properties, non-recurring capital expenditures, and repayment of indebtedness at maturity. We do not expect that we will have
sufficient funds on hand to cover all of these long-term cash requirements. We will seek to satisfy these needs through cash flow from
commitments to Fund X, operations, long-term secured and unsecured indebtedness, the issuance of debt and equity securities,
including units in our operating partnership, property dispositions and joint venture transactions. We have historically financed our
operations, acquisitions and development, through the use of our revolving credit facility or other short term acquisition lines of credit,
which we subsequently repay with long-term secured floating rate mortgage debt. To mitigate the impact of fluctuations in short-term
interest rates on our cash flow from operations, we generally enter into interest rate swap or interest rate cap agreements at the time we
enter into term borrowings.
37
Commitments
The following table sets forth our principal obligations and commitments, excluding periodic interest payments, as of
December 31, 2008:
Contractual Obligations
Long-term debt obligations(1)
Minimum lease payments
Purchase commitments related to capital expenditures
associated with tenant improvements and
repositioning and other purchase obligations
Total
$
$
Less than
1 year
Payment due by period (in thousands)
4-5
1-3
years
years
3,053,080
1,466
18,000
1,466
49,300
707
$
$
$
Thereafter
551,920
3,787
Total
3,672,300
7,426
$
1,153
3,680,879
$
1,153
51,160
$
-
19,466
-
$
3,054,546
$
-
555,707
(1)
Includes $18 million of debt carried by the Honolulu Club joint venture in which we held a 66.7% interest and $365 million of debt carried by Fund X in which we held
a 50% interest of the common equity.
Off-Balance Sheet Arrangements
At December 31, 2008, we did not have any off balance sheet financing arrangements.
Cash Flows
Cash and cash equivalents were $8.7 million and $5.8 million, respectively, at December 31, 2008 and 2007.
Net cash provided by operating activities increased $28.0 million to $182.8 million for 2008 compared to $154.8 million for
2007. The increase in 2007 reflects higher net cash flow from existing properties that generated improved results, as well as
incremental cash flow from acquired properties.
Net cash used in investing activities increased $511.8 million to $684.6 million for 2008 compared to $172.8 million for
2007. The increase was primarily due to a higher level of spending on property acquisitions in the 2008 period compared to the 2007
period.
Net cash provided by financing activities increased $485.3 million to $504.6 million for 2008 compared to $19.3 million for
2007. The comparative difference was primarily due to the increased level of borrowings associated with property acquisitions in 2008
as compared to the use of funds primarily for equity repurchases in 2007.
38
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest
rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use derivative financial
instruments to manage, or hedge, interest rate risks related to our borrowings. In conjunction with our IPO, we entered into two new
series of interest rate swap and interest rate cap contracts. The first series effectively offset all future changes in fair value from our
existing interest rate swap and interest rate cap contracts, and the second series effectively replaced the existing interest rate contracts
and qualified for cash flow hedge accounting under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS
133), as amended and interpreted. We only enter into contracts with major financial institutions based on their credit rating and other
factors. For a description of our interest rate contracts, please see Note 8 to our consolidated financial statements contained in this
Report.
As of December 31, 2008, approximately 98% (or $3.61 billion) of our total outstanding debt of $3.67 billion, excluding loan
premiums, was subject to floating interest rates which were effectively fixed by virtue of interest rate contracts. The remaining
$67.3 million, including $18 million of debt held by a consolidated joint venture in which we own a two-thirds interest, bears interest
at a floating rate and was not mitigated by interest rate contracts. Based on the level of variable rate debt outstanding at December 31,
2008, by virtue of the mitigating effect of our interest rate contracts, a 50 basis point change in LIBOR would result in an annual
impact to earnings of approximately $337.
As of December 31, 2007, approximately 94% (or $2.90 billion) of our total outstanding debt of $3.08 billion, excluding loan
premiums, was subject to floating interest rates which were effectively fixed by virtue of interest rate contracts. The remaining $180.5
million bears interest at a floating rate and was not mitigated by interest rate contracts. Based on the level of variable rate debt
outstanding at December 31, 2007, by virtue of the mitigating effect of our interest rate contracts, a 50 basis point change in LIBOR
would result in an annual impact to earnings of approximately $900.
We calculate interest sensitivity by computing the amount of floating rate debt not mitigated by interest rate contracts by the
respective change in rate. The sensitivity analysis does not take into consideration possible changes in the balances or fair value of
our floating rate debt.
Item 8. Financial Statements and Supplementary Data
All information required by this item is listed in the Index to Financial Statements in Part IV, Item 15(a)(1).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2008, the end
of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that as of December 31, 2008 our disclosure controls and procedures were effective at the reasonable assurance level such that the
information relating to us and our consolidated subsidiaries required to be disclosed in our SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
There have not been any changes in our internal control over financial reporting that occurred during the fiscal quarter ended
December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public
Accounting Firm thereon appear at pages F-1 and F-3, respectively, and are incorporated herein by reference.
Item 9B. Other Information
None
39
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors, executive officers and corporate governance is incorporated by reference to the
information set forth under the caption “Directors and Executive Officers” in our Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of our year ended December 31, 2008.
We have adopted a Code of Business Conduct and Ethics for all of our employees, including our Chief Executive Officer,
Chief Financial Officer and Principal Accounting Officer, which is a “code of ethics” as defined by applicable rules of the SEC. The
purpose of the code is to ensure that our business is conducted in a consistently legal and ethical matter. We have posted the text of
the code on our website at www.douglasemmett.com. If we make any amendments to this code other than technical, administrative or
other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of this code to our Chief
Executive Officer, Chief Financial officer or Principal Accounting Officer, we will disclose the nature of any such amendment or
waiver to the code, its effective date and to whom it applies, on our website or in a report on Form 8-K filed with the SEC. We will
provide a copy of our code or our Annual Report on Form 10-K free of charge to any person upon request by writing to us at the
following address: Douglas Emmett, Inc., 808 Wilshire Blvd., Santa Monica, California 90401, Attn: Corporate Secretary.
Item 11. Executive Compensation
Information regarding executive compensation is incorporated by reference to the information set forth under the caption
“Compensation of Directors and Executive Officers” in our Proxy Statement for the Annual Meeting of Stockholders to be filed with
the Commission within 120 days after the end of our year ended December 31, 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plan
The following table provides information as of December 31, 2008 with respect to shares of our common stock that may be
issued under our existing stock incentive plan (in thousands, except price per option):
Number of shares of common
stock to be issued upon
exercise of outstanding
options, warrants and rights
(a)
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))
8,057
$21.26
7,088
Plan Category
Equity compensation
Plans approved by stockholders
For a description of our 2006 Omnibus Stock Incentive Plan, please see Note 13 to our consolidated financial statements
included in this Report. We did not have any other equity compensation plans as of December 31, 2008.
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the
information set forth under the caption “Voting Securities of Principal Stockholders and Management” in our Proxy Statement for the
Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our year ended December 31, 2008.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions is incorporated by reference to the information set forth
under the caption “Certain Transactions” in our Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our year ended December 31, 2008.
Item 14. Principal Accountant Fees and Services
Information regarding accounting fees and disclosures is incorporated by reference to the information set forth under the
caption “Fees Paid to Independent Auditors” in our Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our year ended December 31, 2008.
40
PART IV.
Item 15. Exhibits and Financial Statement Schedules
(a) and (c) Financial Statements and Financial Statement Schedule
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
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the years ended December 31, 2008 and 2007, for the period from
October 31, 2006 through December 31, 2006, and for the period from January 1, 2006 through October 30,
2006 (Predecessor)
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2008 and 2007, for
the period from October 31, 2006 through December 31, 2006, and for the period from January 1, 2006 through
October 30, 2006 (Predecessor)
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007, for the period from
October 31, 2006 through December 31, 2006, and for the period from January 1, 2006 through October 30,
2006 (Predecessor)
Notes to Consolidated Financial Statements
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2008
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.
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-33
(b) Exhibits.
3.1 Articles of Amendment and Restatement of Douglas Emmett, Inc. (6)
3.2 Amended and Restated Bylaws of Douglas Emmett, Inc. (6)
3.3 Certificate of Correction to Articles of Amendment and Restatement of Douglas Emmett, Inc.(2)
4.1 Form of Certificate of Common Stock of Douglas Emmett, Inc.(4)
10.1 Form of Agreement of Limited Partnership of Douglas Emmett Properties, LP. (4)
10.2 Amended and Restated Discount MBS Multifamily Note for $153,630,000 between Fannie Mae and
Barrington Pacific, LLC, dated June 1, 2007. (7)
10.3 Amended and Restated Discount MBS Multifamily Note for $46,400,000 between Fannie Mae and
Barrington Pacific, LLC, dated June 1, 2007. (7)
10.4 Amended and Restated Discount MBS Multifamily Note for $43,440,000 between Fannie Mae and Shores
Barrington LLC, dated June 1, 2007. (7)
10.5 Amended and Restated Discount MBS Multifamily Note for $144,610,000 between Fannie Mae and Shores
Barrington LLC, dated June 1, 2007. (7)
10.6 Discount MBS Multifamily Note for $111,920,000 between Fannie Mae and DEG Residential, LLC, dated
June 1, 2007. (7)
10.7 Form of Registration Rights Agreement among Douglas Emmett, Inc. and the persons named therein. (1)
10.8 Form of Indemnification Agreement between Douglas Emmett, Inc. and its directors and officers. (3)
10.9 Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan. (8)+
10.10 Form of Stock Option Agreement. (3)
10.11 Form of LTIP Unit Award Agreement. (4) +
10.12 $170,000,000 Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1993, LLC, the lenders
party thereto, Eurohypo AG, New York Branch, and Barclays Capital Real Estate Inc. (3)
10.13 $260,000,000 Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1995, LLC, the lenders
party thereto, Eurohypo AG, New York Branch, and Barclays Capital Real Estate Inc. (3)
10.14 $215,000,000 Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1996, LLC, the lenders
party thereto, Eurohypo AG, New York Branch, and Barclays Capital Real Estate Inc. (3)
10.15 $425,000,000 Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1997, LLC, Westwood
Place Investors, LLC, the lenders party thereto, Eurohypo AG, New York Branch, and Barclays Capital Real
Estate Inc. (3)
10.16 $150,000,000 Loan Agreement dated as of August 25, 2005 among Douglas Emmett 1998, LLC, the lenders
party thereto, Eurohypo AG, New York Branch, and Barclays Capital Real Estate Inc. (3)
41
10.17 $425,000,000 Loan Agreement dated as of August 25, 2005 among Douglas Emmett 2000, LLC, the lenders
party thereto, Eurohypo AG, New York Branch, and Barclays Capital Real Estate Inc. (3)
10.18 $110,000,000 Loan Agreement dated as of August 25, 2005 among Douglas Emmett 2002, LLC, DEG, LLC,
the lenders party thereto, Eurohypo AG, New York Branch, and Barclays Capital Real Estate Inc. (3)
10.19 Joinder and Supplement Agreement dated as of August 25, 2005 among Douglas Emmett 2002, LLC, and
DEG, LLC, made with reference to the Loan Agreement dated as of August 25, 2005 by and among Douglas
Emmett 2002, LLC, the lenders party thereto and Eurohypo AG, New York Branch. (3)
10.20 Form of LTIP Unit Designation. (4)
10.21 Form of Credit Agreement among Douglas Emmett 2006, LLC, Bank of America, N.A., Banc of America
Securities, LLC, Bank of Montreal, Bayerische Landesbank, Wachovia Bank, N.A. and the other lenders
party thereto. (4)
10.22 Form of Modification Agreement among Douglas Emmett 1993, LLC, Brentwood Plaza, the lenders party
thereto and Eurohypo AG, New York Branch. (4)
10.23 Form of Modification Agreement among Douglas Emmett 1995, LLC, the lenders party thereto and Eurohypo
AG, New York Branch. (4)
10.24 Form of Modification Agreement among Douglas Emmett 1996, LLC, the lenders party thereto and Eurohypo
AG, New York Branch. (4)
10.25 Form of Modification Agreement among Douglas Emmett 1997, LLC, Westwood Place Investors, LLC, the
lenders party thereto and Eurohypo AG, New York Branch. (4)
10.26 Form of Modification Agreement among Douglas Emmett 1998, LLC, Brentwood Court, Brentwood-San
Vicente Medical, Ltd., the lenders party thereto and Eurohypo AG, New York Branch. (4)
10.27 Form of Modification Agreement among Douglas Emmett 2000, LLC, the lenders party thereto and Eurohypo
AG, New York Branch. (4)
10.28 Form of Modification Agreement among Douglas Emmett 2002, LLC, DEG, LLC, San Vicente Plaza,
Owensmouth/Warner, LLC, the lenders party thereto and Eurohypo AG, New York Branch. (4)
10.29 Form of Joinder and Supplement Agreement among Douglas Emmett 1993, LLC and Brentwood Plaza made
with reference to the Modification Agreement among Douglas Emmett 1993, LLC, the lenders party thereto
and Eurohypo AG, New York Branch. (4)
10.30 Form of Joinder and Supplement Agreement among Douglas Emmett 1998, LLC, Brentwood Court and
Brentwood-San Vicente Medical, Ltd. made with reference to the Modification Agreement among Douglas
Emmett 1998, LLC, the lenders party thereto and Eurohypo AG, New York Branch. (4)
10.31 Form of Joinder and Supplement Agreement among Douglas Emmett 2002, LLC, DEG, LLC, San Vicente
Plaza and Owensmouth/Warner, LLC made with reference to the Modification Agreement among Douglas
Emmett 2002, LLC, DEG, LLC, the lenders party thereto and Eurohypo AG, New York Branch. (4)
10.32 Adjustable Rate Multifamily Note for $7,750,000 between Fannie Mae and Douglas Emmett Residential 2006,
LLC, dated June 1, 2007. (7)
10.33 Adjustable Rate Multifamily Note for $7,150,000 between Fannie Mae and Douglas Emmett Residential 2006,
LLC, dated June 1, 2007. (7)
10.34 Adjustable Rate Multifamily Note for $3,100,000 between Fannie Mae and Douglas Emmett Residential 2006,
LLC, dated June 1, 2007. (7)
10.35 Second Amendment to Credit Agreement and Reaffirmation of Loan Documents Entered into as of August 31,
2007, by and among Douglas Emmett 2006, LLC; Bank Of America, N.A.; BMO Capital Markets
Financing, Inc.; Bayerische Landesbank; ING Real Estate Finance (USA) LLC; and Bank Of America,
N.A. (12)
10.36 $18,000,000 Loan Agreement dated as of February 12, 2008 among DEG III, LLC and Wells Fargo Bank,
National Association. (9)
10.37 $340,000,000 Loan Agreement dated as of March 18, 2008 among Douglas Emmett 2007, LLC; Douglas
Emmett Realty Fund 2002; Douglas Emmett 1995, LLC; the lenders party thereto, EuroHypo AG and ING
Real Estate (USA), LLC. (9)
10.38 $380,000,000 Loan Agreement dated as of March 26, 2008 among Douglas Emmett 2008, LLC; the lenders
party thereto and General Electric Capital Corporation. (9)
10.39 Employment agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas Emmett Properties,
LP and Jordan L. Kaplan. (10) +
10.40 Employment agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas Emmett Properties,
LP and Kenneth Panzer. (10) +
10.41 Employment agreement dated October 23, 2006 between Douglas Emmett, Inc., Douglas Emmett Properties,
LP and William Kamer. (10) +
10.42 $365,000,000 Loan Agreement dated as of August 18, 2008 among Douglas Emmett 2008, LLC, the lenders
party thereto and EuroHypo AG. (11)
21.1 List of Subsidiaries of the Registrant.
42
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. (5)
32.2 Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)
+
Denotes management contract or compensatory plan, contract or arrangement
Previously filed with the Form S-11 filed by the Registrant on June 16, 2006 and incorporated herein by this
reference.
(1)
(2) Previously filed with Amendment No. 1 to the Form S-11 filed by the Registrant on August 4, 2006 and
incorporated herein by this reference.
(3) Previously filed with Amendment No. 2 to the Form S-11 filed by the Registrant on September 20, 2006 and
incorporated herein by this reference.
(4) Previously filed with Amendment No. 3 to the Form S-11 filed by the Registrant on October 3, 2006 and
incorporated herein by this reference.
(5)
In accordance with SEC Release No. 33-8212, the following exhibit is being furnished, and is not being filed
as part of this Report or as a separate disclosure document, and is not being incorporated by reference into
any Securities Act of 1933 registration statement.
(6) Previously filed with Amendment No. 6 to the Form S-11 filed by the Registrant on October 19, 2006.
(7) Previously filed with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed by the
Registrant on August 10, 2007 and incorporated herein by this reference.
(8) Previously filed with the Form S-8 filed by the Registrant on December 21, 2007 and incorporated herein by
this reference.
(9) Previously filed with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 filed by the
Registrant on May 8, 2008 and incorporated herein by this reference.
(10) Copy originally filed with Amendment No. 3 to the Form S-11 filed by the Registrant on October 3, 2006;
re-filed with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 7,
2008 to include conformed signatures.
(11) Previously filed with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 filed by
the Registrant on November 6, 2008 and incorporated herein by this reference.
(12) Previously filed with the Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed by
the Registrant on February 22, 2008 and incorporated herein by this reference.
43
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.
Signatures
Dated: February 25, 2009
DOUGLAS EMMETT, INC.
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
/s/ WILLIAM KAMER
William Kamer
/s/ GREGORY R. HAMBLY
Gregory R. Hambly
/s/ DAN A. EMMETT
Dan A. Emmett
/s/ KENNETH M. PANZER
Kenneth M. Panzer
/s/ LESLIE E. BIDER
Leslie E. Bider
/s/ VICTOR J. COLEMAN
Victor J. Coleman
/s/ GHEBRE SELASSIE MEHRETEAB
Ghebre Selassie Mehreteab
/s/ THOMAS E. O’HERN
Thomas E. O’Hern
/s/ DR. ANDREA L. RICH
Dr. Andrea L. Rich
/s/ WILLIAM WILSON III
William Wilson III
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Chairman of the Board
Chief Operating Officer and Director
Director
Director
Director
Director
Director
Director
Each of the above signatures is affixed as of February 25, 2009.
44
Report of Management on Internal Control over Financial Reporting
The management of Douglas Emmett, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Our system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and
preparation of our financial statements for external reporting purposes in accordance with United States generally accepted accounting
principles. Our management, including the undersigned Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of our internal control over financial reporting as of December 31, 2008. In conducting its assessment, management used
the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated
Framework. This framework consists of eight components: internal environment, objective setting, event identification, risk
assessment, risk response, control activities, information and communication, and monitoring. Based on this assessment, management
concluded that, as of December 31, 2008, our internal control over financial reporting was effective based on those criteria.
Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls
and procedures, or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected.
The effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by Ernst & Young
LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this annual
report, as stated in their report appearing on page F-3, which expresses an unqualified opinion on the effectiveness of our internal
control over financial reporting as of December 31, 2008.
/s/ JORDAN L. KAPLAN
Jordan L. Kaplan
Chief Executive Officer
/s/ WILLIAM KAMER
William Kamer
Chief Financial Officer
February 25, 2009
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Douglas Emmett, Inc.
We have audited the accompanying consolidated balance sheets of Douglas Emmett, Inc. (the “Company”) as of December 31,
2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years
ended December 31, 2008 and 2007 and for the period from October 31, 2006 through December 31, 2006, and of Douglas Emmett
Realty Advisors, Inc. and subsidiaries (the “predecessor”), as defined in Note 1, for the period from January 1, 2006 through
October 30, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Douglas Emmett, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for the years
ended December 31 2008, and 2007 and for the period from October 31, 2006 through December 31, 2006, and the consolidated
results of the predecessor’s operations and cash flows for the period from January 1, 2006 through October 30, 2006, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Douglas Emmett, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 24, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
February 24, 2009
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Douglas Emmett, Inc.
We have audited Douglas Emmett, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Douglas Emmett, Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Douglas Emmett, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Douglas Emmett, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2008 and 2007, and for the period from
October 31, 2006 to December 31, 2006, and of Douglas Emmett Realty Advisors, Inc. and subsidiaries for the period from January 1,
2006 to October 30, 2006, and our report dated February 24, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
February 24, 2009
F-3
Douglas Emmett, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
December 31, 2008
December 31, 2007
Assets
Investment in real estate
Land
Buildings and improvements
Tenant improvements and lease intangibles
Less: accumulated depreciation
Net investment in real estate
Cash and cash equivalents
Tenant receivables, net
Deferred rent receivables, net
Interest rate contracts
Acquired lease intangible assets, net
Other assets
Total assets
Liabilities
Secured notes payables, including loan premium
Accounts payable and accrued expenses
Security deposits
Acquired lease intangible liabilities, net
Interest rate contracts
Dividends payable
Other liabilities
Total liabilities
Minority interests
Stockholders' Equity
Common stock, $0.01 par value 750,000,000 authorized, 121,897,388 and
109,833,903 outstanding at December 31, 2008 and 2007, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
$
$
900,213
5,528,567
552,536
6,981,316
(490,125)
6,491,191
8,655
2,197
33,039
176,255
18,163
31,304
6,760,804
$
$
3,692,785
69,215
35,890
195,036
407,492
22,856
57,316
4,480,590
505,025
1,219
2,284,429
(274,111)
(236,348)
1,775,189
825,560
4,978,124
460,486
6,264,170
(242,114)
6,022,056
5,843
955
20,805
84,600
24,313
31,396
6,189,968
3,105,677
62,704
31,309
218,371
129,083
19,221
-
3,566,365
793,764
1,098
2,019,716
(101,163)
(89,812)
1,829,839
Total liabilities and stockholders' equity
$
6,760,804
$
6,189,968
See notes to consolidated financial statements.
F-4
Douglas Emmett, Inc.
Consolidated Statements of Operations
(in thousands, except shares and per share data)
Douglas Emmett, Inc.
The Predecessor
Year Ending
December 31,
2008
Year Ending
December 31,
2007
October 31,
2006 to
December 31,
2006
January 1, 2006
to
October 30, 2006
$
433,487 $
32,392
71,498
537,377
376,921 $
30,269
61,379
468,569
62,384 $
5,436
9,746
77,566
66,510
4,207
70,717
67,427
3,632
71,059
608,094
539,628
166,124
17,079
22,646
248,011
453,860
148,582
18,735
21,486
209,593
398,396
10,954
420
11,374
88,940
26,375
3,260
30,201
32,521
92,357
252,694
15,206
33,039
300,939
44,241
1,488
45,729
346,668
104,524
15,041
17,863
95,456
232,884
Revenues
Office rental
Rental revenues
Tenant revenues
Parking and other income
Total office revenues
Multifamily rental
Rental revenues
Parking and other income
Total multifamily revenues
Total revenues
Operating Expenses
Office expense
Multifamily expense
General and administrative
Depreciation and amortization
Total operating expenses
Operating income (loss)
154,234
141,232
(3,417)
113,784
Gain on investments in interest contracts, net
Interest and other income
Interest expense
Deficit distributions to minority partners, net
(Loss) income before minority interest
-
3,580
(193,727)
-
(35,913)
-
695
(160,616)
-
(18,689)
-
87
(26,213)
-
(29,543)
Minority Interests
Minority interests
Preferred minority investor
Net loss
Net loss per common share - basic and diluted
Dividends declared per common share
$
$
$
7,920
-
(27,993)
$
5,681
-
(13,008)
$
8,952
-
(20,591)
$
(0.23)
$
(0.12)
$
(0.18)
$
(251,723)
0.75
$
0.70
$
0.12
$
-
Weighted average shares of common stock outstanding
- basic and diluted
120,725,928
112,645,587
115,005,860
65
See notes to consolidated financial statements
F-5
6,795
4,515
(95,938)
(10,642)
18,514
(18,673)
(16,203)
(16,362)
Douglas Emmett, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
Douglas Emmett, Inc.
Year Ending
December 31,
2008
Year Ending
December 31,
2007
October 31, 2006
to
December 31, 2006
The Predecessor
January 1, 2006
to
October 30, 2006
Shares of Common Stock
Balance at beginning of period
Exchange of predecessor common stock for common stock of the company
Repurchase of common stock
Conversion of operating partnership units to common stock
Issuance of common stock
Balance at end of period
Common Stock
Balance at beginning of period
Repurchase of common stock
Conversion of operating partnership units to common stock
Issuance of common stock
Balance at end of period
Additional Paid-in Capital
Balance at beginning of period
Reclassify predecessor deficit to additional paid-in capital
Contributions
Repurchase of common stock
Conversion of operating partnership units to common stock
Issuance of common stock
Stock compensation
Balance at end of period
Notes Receivable From Stockholders
Balance at beginning of period
Contributions
Receipt of amounts due under notes receivable from stockholders
Balance at end of period
Accumulated Other Comprehensive Income
Balance at beginning of period
Cash flow hedge adjustment
Balance at end of period
Accumulated Deficit
Balance at beginning of period
Reclassify predecessor deficit to additional paid-in capital
Net loss
Distributions
Minority interests redemption adjustment
Dividends
Balance at end of period
Total Stockholders' Equity (Deficit)
Balance at beginning of period
Net loss
Cash flow hedge adjustment
Comprehensive income
Issuance of common stock
Repurchase of common stock
Contributions
Distributions
Dividends
Conversion of operating partnership units to common stock
Minority interests redemption adjustment
Stock compensation
Balance at end of period
109,833,903
115,005,860
-
-
12,032,532
30,953
121,897,388
-
(5,171,957)
-
-
109,833,903
1,098
-
120
1
1,219
$
$
1,150
(52)
-
-
1,098
$
$
2,019,716
$
2,144,600
$
-
-
-
261,572
667
2,474
2,284,429
-
-
-
-
(101,163)
(172,948)
(274,111)
(89,812)
-
(27,993)
-
(27,377)
(91,166)
(236,348)
1,829,839
(27,993)
(172,948)
(200,941)
668
-
-
-
(91,166)
261,692
(27,377)
2,474
1,775,189
$
$
$
$
$
$
$
$
$
-
-
(125,133)
-
-
249
2,019,716
-
-
-
-
415
(101,578)
(101,163)
(34,392)
-
(13,008)
-
36,138
(78,550)
(89,812)
2,111,773
(13,008)
(101,578)
(114,586)
-
(125,185)
-
-
(78,550)
-
36,138
249
1,829,839
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
See notes to consolidated financial statements.
F-6
65
(65)
-
-
115,005,860
115,005,860
-
-
-
1,150
1,150
60,000
(129,086)
-
-
-
2,202,040
11,646
2,144,600
-
-
-
-
-
415
415
(129,086)
129,086
(20,591)
-
-
(13,801)
(34,392)
(69,086)
(20,591)
415
(20,176)
2,203,190
-
-
-
(13,801)
-
-
11,646
2,111,773
$
$
$
$
$
$
$
$
$
$
$
$
65
-
-
-
-
65
-
-
-
-
-
-
-
60,000
-
-
-
-
60,000
-
(60,000)
60,000
-
-
-
-
(97,791)
-
(16,362)
(14,933)
-
-
(129,086)
(97,791)
(16,362)
-
(16,362)
-
-
60,000
(14,933)
-
-
-
-
(69,086)
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Douglas Emmett, Inc.
The Predecessor
Year Ending
December 31,
2008
Year Ending
December 31,
2007
October 31,
2006 to
December 31,
2006
January 1, 2006
to
October 30, 2006
$
(27,993)
$
(13,008)
$
(20,591)
$
(16,362)
Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interests
Deficit distributions to minority partners
Non-cash profit allocation to consolidated fund
Depreciation and amortization
Net accretion of acquired lease intangibles
Amortization of deferred loan costs
Amortization of loan premium
Non-cash market value adjustments on interest rate
contracts
Non-cash amortization of stock-based compensation
Change in working capital components
Tenant receivables
Deferred rent receivables
Accounts payable, accrued expenses and security
deposits
Other
Net cash provided by operating activities
Investing Activities
Capital expenditures, property acquisitions and purchases
of predecessor owners' interests in real estate
Net cash used in investing activities
Financing Activities
Proceeds from borrowings
Deferred loan costs
Repayment of borrowings
Net change in short-term borrowings
Contributions by minority interests
Distributions to minority interests
Redemption of minority interests
Contributions to stockholders
Distributions to stockholders
Issuance of common stock, net
Repurchase of common stock
Cash dividends
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information
Cash paid during the period for interest, net of amounts
capitalized
$
$
(7,920)
-
(431)
248,011
(42,905)
2,083
(4,742)
13,805
4,400
(1,242)
(12,234)
4,586
7,413
182,831
(5,681)
-
-
209,593
(40,563)
1,136
(4,475)
14,266
2,178
3,229
(17,218)
15,211
(9,863)
154,805
(8,952)
-
-
32,521
(6,871)
168
(721)
2,561
26,600
-
(3,587)
19,509
(19,642)
20,995
34,876
10,642
-
95,456
(1,561)
2,318
-
(6,795)
-
1,065
(6,489)
22,227
(9,752)
125,625
(684,623)
(684,623)
(172,804)
(172,804)
(1,935,476)
(1,935,476)
(165,970)
(165,970)
1,563,275
(6,810)
(946,400)
(25,025)
58,065
(27,880)
(23,758)
-
-
668
-
(87,531)
504,604
404,850
(1,767)
(124,700)
40,300
-
(31,851)
(69,211)
-
-
-
(125,185)
(73,130)
19,306
596,000
(4,524)
(141,500)
-
-
-
(188,128)
-
-
1,497,446
-
-
1,759,294
2,812
5,843
8,655
$
1,307
4,536
5,843
$
(155,187)
159,723
4,536
$
82,000
(1,253)
-
-
33,264
(67,292)
-
60,000
(14,933)
-
-
-
91,786
51,441
108,282
159,723
172,686
$
152,746
$
23,849
$
97,928
See notes to consolidated financial statements for additional non-cash items.
F-7
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements
(in thousands, except shares and per share data)
1. Organization and Description of Business
Douglas Emmett, Inc. is a Maryland corporation formed on June 28, 2005, which did not have any meaningful operating
activity until the consummation of our initial public offering (IPO) and the related acquisition of our predecessor and certain other
entities in October 2006. Accordingly, we believe that a discussion of the results of Douglas Emmett, Inc. would not be meaningful
for the periods covered by these financial statements prior to that acquisition.
We acquired our predecessor and certain other entities simultaneously with the closing of our IPO on October 30, 2006.
Because the formation transactions did not occur until October 30, 2006, the historical financial results in these financial
statements for periods prior to and including that date relate to our accounting predecessor. Our predecessor includes Douglas Emmett
Realty Advisors, Inc. (DERA or the predecessor) as the accounting acquirer, and nine consolidated real estate limited partnerships that
owned, directly or indirectly, office and multifamily properties and fee interests in land subject to ground leases, which we refer to
collectively as the “institutional funds.” For the periods presented prior to our IPO, DERA was the general partner, and had
responsibility for the asset management of the institutional funds.
Our predecessor does not include certain other entities we acquired at the time of our IPO, including Douglas, Emmett and
Company (DECO), P.L.E. Builders, Inc., subsequently renamed Douglas Emmett Builders (DEB), and seven California limited
partnerships and one California limited liability company, which we refer to collectively as the “single-asset entities.” DECO
provided property management and leasing services to all of the properties acquired in the IPO/formation transactions, and DEB
provided construction services in connection with improvements to tenant suites and common areas in the properties. Each
single-asset entity owned, directly or indirectly, one multifamily or office property (or, in one case, a fee interest in land subject to a
ground lease).
After the completion of our IPO and the related formation transactions, we are a fully integrated, self-administered and self-
managed Real Estate Investment Trust (REIT). Through our interest in Douglas Emmett Properties, LP (our operating partnership)
and its subsidiaries, we own, manage, lease, acquire and develop real estate, consisting primarily of office and multifamily properties.
As of December 31, 2008, we own a portfolio of 55 office properties (including ancillary retail space) and nine multifamily properties,
as well as the fee interests in two parcels of land subject to ground leases. All of these properties are located in Los Angeles County,
California and Honolulu, Hawaii.
The terms “us”, “we” and “our” as used in these financial statements refer to Douglas Emmett, Inc. and its subsidiaries
(including our operating partnership) subsequent to our IPO on October 30, 2006 and our predecessor prior to that date.
F-8
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
2. Summary of Significant Accounting Policies
Basis of Presentation
For the periods subsequent to October 30, 2006, the financial statements presented are the consolidated financial statements
of Douglas Emmett, Inc. and its subsidiaries, including our operating partnership. The financial statements presented for periods prior
to October 31, 2006 are the consolidated financial statements of our predecessor, which include the accounts of DERA and the
institutional funds. Substantially all of our business is conducted through our consolidated operating partnership, in which other
investors own a minority interest. See Note 11. Our business also includes a consolidated joint venture in which our operating
partnership owns a two-thirds interest. The balances and results of the property owned by this consolidated joint venture are included
in our financial statements, with a deduction representing the outside ownership included in minority interests. Our business also
includes the consolidated results of six properties owned by Fund X, with the outside ownership reflected in other liabilities and an
adjustment for the allocation of operating results to outside ownership interests in interest and other income. See Note 19. All
significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Approximately $15.2 million and $1.9 million, for the year ended December 31, 2007 and for the period from October 31,
2006 to December 31, 2006, respectively, of office and multifamily parking revenue has been reclassified to office and multifamily
expense to conform to current period presentation in accordance with EITF Issue No. 99-19: Reporting Revenue Gross as a Principal
Versus Net as an Agent and EITF Issue No. 01-14: Income Statement characterization of Reimbursements Received for “Out-of-
Pocket” Expenses Incurred. Revenues in the unaudited financial information in Note 18 have also reflected the impact of this
reclassification. The change reflects our parking operations on a gross basis based on the terms of our management contract with an
outside vendor for parking services. The change has no impact on previously reported operating income or net income.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Segment Information
Statement of Financial Accounting Standards (FAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information (FAS 131), established standards for disclosure about operating segments and related disclosures about products and
services, geographic areas and major customers. Segment information is prepared on the same basis that our management reviews
information for operational decision-making purposes. We operate two business segments: the acquisition, redevelopment, ownership
and management of office real estate and the acquisition, redevelopment, ownership and management of multifamily real estate.
The products for our office segment include primarily rental of office space and other tenant services including parking and
storage space rental. The products for our multifamily segment include rental of apartments and other tenant services including
parking and storage space rental.
Investments in Real Estate
Acquisitions of properties are accounted for utilizing the purchase method and accordingly, the results of operations of
acquired properties are included in our results of operations from the respective dates of acquisition. Estimates of future cash flows
and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements,
equipment and identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above- and
below-market ground leases, acquired above- and below-market tenant leases and tenant relationships. Initial valuations are subject to
change until such information is finalized, but no later than 12 months from the acquisition date.
The fair values of tangible assets are determined on an ‘‘as-if-vacant’’ basis. The ‘‘as-if-vacant’’ fair value is allocated to
land, where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information
obtained in connection with the acquisition of the property.
F-9
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
The estimated fair value of acquired in-place at-market tenant leases are the costs we would have incurred to lease the
property to the occupancy level of the property at the date of acquisition. Such estimates includes the fair value of leasing
commissions and legal costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluate the time
period over which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate
taxes, insurance and utilities) incurred during the lease-up period, which is generally six months.
Above-market and below-market in-place lease intangibles are recorded as an asset or liability based on the present value
(using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to
be received or paid pursuant to the in-place tenant or ground leases, respectively, and our estimate of fair market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease.
Expenditures for repairs and maintenance are charged to operations as incurred. Significant improvements and costs incurred
in the execution of leases are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed
from the accounts with the resulting gains or losses reflected in operations for the period.
The values allocated to land, buildings, site improvements, tenant improvements, leasing costs and in-place leases are
depreciated on a straight-line basis using an estimated life of 40 years for buildings; 15 years for site improvements; a tenant-portfolio
average term, per building, of existing leases for in-place lease values; and the respective lease term for tenant improvements and
leasing costs. The values of above- and below-market tenant leases are amortized over the life of the related lease and recorded as
either an increase (for below-market leases) or a decrease (for above-market leases) to rental income. The values of acquired above-
and below-market ground leases are amortized over the life of the lease and recorded either as an increase (for below-market leases) or
a decrease (for above-market leases) to office rental operating expense. The amortization of acquired in-place leases is recorded as an
adjustment to depreciation and amortization in the consolidated statements of operations. If a lease were to be terminated prior to its
stated expiration, all unamortized amounts relating to that lease would be written off.
Impairment of Long-Lived Assets
We account for properties held for disposition or properties that are sold during the period in accordance with FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144). An asset is classified as an asset held for disposition
when it meets the requirements of FAS 144, which include, among other criteria, the approval of the sale of the asset, the asset has
been marketed for sale and we expect that the sale will likely occur within the next 12 months. Upon classification of an asset as held
for disposition, the net book value of the asset, excluding long-term debt, is included on the balance sheet as properties held for
disposition, depreciation of the asset is ceased and the operating results of the asset are included in discontinued operations for all
periods presented.
We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the
current carrying value exceeds the estimated undiscounted cash flows, an impairment loss is recorded equal to the difference between
the asset’s current carrying value and its value based on the discounted estimated future cash flows. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less costs to sell. Based upon such periodic assessments, no impairments
occurred for the years ended December 31, 2008, 2007 and 2006.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, we consider short-term investments with maturities of three
months or less when purchased to be cash equivalents.
F-10
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
Revenue and Gain Recognition
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104 of the Securities and Exchange Commission,
Revenue Recognition (SAB 104), as amended. SAB 104 requires that four basic criteria must be met before revenue can be
recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed and
determinable; and collectibility is reasonably assured. All leases are classified as operating leases. For all lease terms exceeding one
year, rental income is recognized on a straight-line basis over the terms of the leases. Deferred rent receivables represent rental
revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other
recoverable operating expenses are recognized as revenues in the period the applicable costs are incurred. In addition, we record a
capital asset for leasehold improvements constructed by us that are reimbursed by tenants, with the offsetting side of this accounting
entry recorded to deferred revenue which is included in accounts payable and accrued expenses. The deferred revenue is amortized as
additional rental revenue over the life of the related lease.
Rental revenue from month-to-month leases or leases with no scheduled rent increases or other adjustments is recognized
on a monthly basis when earned.
Lease termination fees, which are included in rental revenues in the accompanying consolidated statements of operations, are
recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants.
Total lease termination revenue was recorded in the amount of $423 for the year ended December 31, 2008; $332 for the year ended
December 31, 2007; $38 for the period of October 31, 2006 to December 31, 2006; and $365 for the period of January 1, 2006 to
October 30, 2006.
We recognize gains on sales of real estate pursuant to the provisions of FAS No. 66, Accounting for Sales of Real Estate
(FAS 66). The specific timing of a sale is measured against various criteria in FAS 66 related to the terms of the transaction and any
continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not
met, we defer gain recognition and account for the continued operations of the property by applying the finance, profit-sharing or
leasing method. If the sales criteria have been met, we further analyze whether profit recognition is appropriate using the full accrual
method. If the criteria to recognize profit using the full accrual method have not been met, we defer the gain and recognize it when
the criteria are met or use the installment or cost recovery method as appropriate under the circumstances.
Monitoring of Rents and Other Receivables
We maintain an allowance for estimated losses that may result from the inability of tenants to make required payments. If a
tenant fails to make contractual payments beyond any allowance, we may recognize bad debt expense in future periods equal to the
amount of unpaid rent and deferred rent. We take into consideration many factors to evaluate the level of reserves necessary,
including historical termination/default activity and current economic conditions. As of December 31, 2008 and 2007, we had an
allowance for doubtful accounts of $9,740 and $4,136, respectively.
We generally do not require collateral or other security from our tenants, other than security deposits or letters of credit.
As of December 31, 2008 and 2007, we had a total of approximately $20,660 and $21,794, respectively, of lease security available
on existing letters of credit, as well as $35,890 and $31,309, respectively, of lease security available in security deposits.
Deferred Loan Costs
Costs incurred in issuing secured notes payable are capitalized. Deferred loan costs are included in other assets in the
consolidated balance sheets at December 31, 2008 and 2007. The deferred loan costs are amortized to interest expense over the life of
the respective loans. Any unamortized amounts upon early repayment of secured notes payable are written-off in the period of
repayment.
F-11
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
Interest Rate Agreements
We manage our interest rate risk associated with borrowings by obtaining interest rate swap and interest rate cap contracts.
The interest rate swap agreements we utilize effectively modify our exposure to interest rate risk by converting our floating-rate debt
to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense. These agreements involve the receipt
of floating-rate amounts in exchange for fixed-rate interest payments over the life of the agreements without an exchange of the
underlying principal amount. We do not use any other derivative instruments.
FAS No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), as amended and interpreted,
establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. As required by FAS 133, we record all derivatives on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a
particular risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges.
Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate
movements or other identified risks. To accomplish this objective, we primarily use interest rate swaps as part of our cash flow
hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for
fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. For derivatives designated
as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive
income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings. The ineffective
portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging
relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value
or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are
recognized in earnings. The fair value of these hedges is obtained through independent third-party valuation sources that use
conventional valuation algorithms. See Note 8 for the accounting of our (and our predecessor’s) interest rate hedges.
Offering Costs
Underwriting discount and commissions and other offering costs are reflected as a reduction in additional paid–in capital.
Stock-Based Compensation
We account for stock-based compensation, including stock options and long-term incentive plan units, using the fair value
method of accounting under FAS No. 123R (revised 2004), Share-Based Payment. The estimated fair value of the stock options and
the long-term incentive units is being amortized over their respective vesting periods.
Income Taxes
As a REIT, we are permitted to deduct distributions paid to our stockholders, eliminating the federal taxation of income
represented by such distributions at the corporate level. REITs are subject to a number of organizational and operational requirements.
If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate tax rates. We believe we have met these tests during 2008 and accordingly,
no provision for income taxes has been made in the accompanying consolidated financial statements.
DERA was an S-Corporation and the institutional funds were limited partnerships. Under applicable federal and state income
tax rules, the allocated share of net income or loss from the limited partnerships and S-Corporation is reportable in the income tax
returns of the respective partners and stockholders. Accordingly, no income tax provision was included in the accompanying
consolidated financial statements of our predecessor other than the 1.5% tax due on taxable income of S-Corporations in the State of
California.
Earnings Per Share
Basic earnings per share is calculated by dividing the net income applicable to common stockholders for the period by the
weighted average of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the net
income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments
outstanding during the period using the treasury stock method. See Note 12.
F-12
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
Recently Issued Accounting Literature
In February 2007, the Financial Accounting Standards Board (FASB) issued FAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (FAS 159). This standard permits
entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year
beginning after November 15, 2007, which for us meant January 1, 2008. The adoption of FAS 159 did not have a material impact on
the Company’s consolidated financial statements since the Company has not elected to apply the fair value option for any of its
eligible financial instruments or other items.
In December 2007, the FASB issued FAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an
Amendment of Accounting Research Bulletin No. 51 (FAS 160). FAS 160 establishes new accounting and reporting standards for a
non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements separate from the
parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on
the face of the income statement. FAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair
value of the non-controlling equity investment on the deconsolidation date. FAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. FAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008, which for us means January 1, 2009. We believe that the adoption of this
standard will not have a material effect on our financial position and results of operations, other than presentation differences.
In December 2007, the FASB issued FAS No. 141 (Revised 2007), Business Combinations (FAS 141R). FAS 141R will
significantly change the accounting for business combinations. Under FAS 141R, an acquiring entity will be required to recognize all
the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS 141R will
require that transaction costs such as legal, accounting and advisory fees be expensed. FAS 141R also includes a substantial number
of new disclosure requirements. FAS 141R applies prospectively to business combinations occurring in any reporting period
beginning on or after December 15, 2008, which for us means January 1, 2009. We believe that the adoption of this standard will not
have a material effect on our financial position and results of operations.
On January 1, 2008, we adopted FAS No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements. FAS 157 applies to reported balances
that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does
not require any new fair value measurements of reported balances. FAS 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or liability.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities
(FAS 161), an amendment of FAS 133, to expand disclosure requirements for an entity's derivative and hedging activities. Under
FAS 161, entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations, and how derivative
instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. In order to meet
these requirements, entities shall include quantitative disclosures about derivative fair values and gains/losses on derivative
instruments, qualitative disclosures about objectives and strategies for using derivatives, and disclosures about credit-risk-related
contingent features in derivative agreements. FAS 161 is effective for fiscal years and interim periods beginning after November 15,
2008. We adopted FAS 161 on January 1, 2009 and do not expect this standard to have a significant impact as this statement only
addresses disclosures.
F-13
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
3. Investment in Real Estate
In March 2008, we acquired a 1.4 million square foot office portfolio consisting of six Class A buildings all located in our
core Los Angeles submarkets – Santa Monica, Beverly Hills, Sherman Oaks/Encino and Warner Center/Woodland Hills – for a
contract price of approximately $610 million. Subsequent to acquiring the properties, we entered into a non-recourse $365 million
term loan secured by the six-property portfolio. In October 2008, we completed the initial closing of equity commitments for our
newly formed institutional fund, Douglas Emmett Fund X, LLC (Fund X). We then contributed these six properties to Fund X in
return for a 50% interest in the common equity of Fund X and other consideration. See Note 6 for a description of the debt and Note
19 for further information on Fund X.
In February 2008, we acquired a two-thirds interest in a 78,298 square-foot office building located in Honolulu, Hawaii. As
part of the same transaction, we also acquired all of the assets of The Honolulu Club, a private membership athletic and social club,
which is located in the building. The aggregate contract price was approximately $18 million and the purchase was made through a
consolidated joint venture with our local partner. The joint venture financed the acquisition with an $18 million loan. See Note 6 for
a description of the debt. In May 2008, the operations of the athletic club were sold to a third party for a nominal cost.
Simultaneously, the acquirer leased from us the space occupied by the athletic club. The results of operations and loss on sale of the
assets of the athletic club were not material.
In December 2008, we acquired the five-sixths that we did not already own of the fee title to the land underlying one of our
existing office properties in the Westwood submarket, for a fixed contract price of $7.8 million. With the completion of this
acquisition, we now own 100% of the fee interest and 100% of the leasehold interest.
In October 2007, we acquired an 8-story, Class A office building comprised of approximately 174,000 square feet, located
within the Olympic Corridor submarket, for a contract price of $84 million.
In May 2007, we acquired an approximate 50,000 rentable square foot Class A office building located in one of our core Los
Angeles submarkets, Century City, for a contract price of $32 million. We obtained the ground leasehold in the property and the
option to acquire fee title to the land for a fixed price of $800 in conjunction with the acquisition. We exercised the option and
acquired fee title to the land at the end of 2007.
The results of operations for each of the acquired properties are included in our consolidated statements of operations only
from the date of each acquisition. The following table summarizes the allocations of estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition. The amounts shown for 2008 acquisitions represent our preliminary purchase price
allocations. These amounts are likely to change based on a more thorough calculation to be performed during the one-year purchase
accounting period provided under the relevant accounting standards.
The following table summarizes the allocations of estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition:
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and other in-place lease assets
Tenant receivables and other assets
Accounts payable, accrued expenses and tenant security deposits
Acquired lease intangibles
Net acquisition costs
2008 Acquisitions
2007 Acquisitions
$
$
74,685
528,179
50,978
2,486
(6,193)
(25,720)
624,415
$
$
11,962
102,449
7,283
24
(700)
(5,109)
115,909
F-14
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
Our acquired lease intangibles related to above/below-market leases is summarized as of December 31:
Above-market tenant leases
Accumulated amortization
Below-market ground leases
Accumulated amortization
Acquired lease intangible assets, net
Below-market tenant leases
Accumulated accretion
Above-market ground leases
Accumulated accretion
Acquired lease intangible liabilities, net
2008
2007
$
$
$
$
34,227
(19,094)
3,198
(168)
18,163
288,437
(106,950)
16,200
(2,651)
195,036
$
$
$
$
32,770
(11,564)
3,198
(91)
24,313
261,260
(57,112)
16,200
(1,977)
218,371
Net accretion of above- and below-market in-place tenant lease value was recorded as an increase to rental income in the
amount of $42,308 for the year ended December 31, 2008; $39,011 for the year ended December 31, 2007; $6,536 for the period of
October 31, 2006 to December 31, 2006; and $1,009 for the period of January 1, 2006 to October 30, 2006. The weighted-average
amortization period for our above and below market tenant leases was approximately 4 years as of December 31, 2008.
The net accretion of above- and below-market ground lease value has been recorded as a decrease of office rental operating
expense in the amount of $597 for the year ended December 31, 2008; $1,552 for the year ended December 31, 2007; $335 for the
period of October 31, 2006 to December 31, 2006; and $552 for the period of January 1, 2006 to October 30, 2006.
Following is the estimated net accretion at December 31, 2008 for the next five years:
Year
2009
2010
2011
2012
2013
Thereafter
Total
$
$
36,361
29,148
24,117
19,833
16,635
50,779
176,873
F-15
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
4. Other Assets
Other assets consist of the following at December 31:
Deferred loan costs, net of accumulated amortization of $3,336 and $1,304
at December 31, 2008 and 2007, respectively
Deposits in escrow
Restricted cash
Prepaid interest
Prepaid expenses
Interest receivable
Other indefinite-lived intangible
Other
2008
2007
$
$
9,714 $
-
2,934
4,360
3,845
5,938
1,988
2,525
31,304 $
4,987
4,000
2,848
7,944
3,095
3,229
1,988
3,305
31,396
We and our predecessor incurred deferred loan cost amortization expense of $2,083 for the year ended December 31, 2008;
$1,136 for the year ended December 31, 2007, $168 for the period of October 31, 2006 to December 31, 2006; and $2,318 for the
period of January 1, 2006 to October 30, 2006. The deferred loan cost amortization is included as a component of interest expense in
the consolidated statements of operations.
F-16
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
5. Minimum Future Lease Rentals
We and our predecessor have leased space to tenants primarily under noncancelable operating leases which generally contain
provisions for a base rent plus reimbursement for certain operating expenses. Operating expense reimbursements are reflected in our
consolidated statements of operations as tenant recoveries.
We and our predecessor have leased space to certain tenants under noncancelable leases, which provide for percentage rents
based upon tenant revenues. Percentage rental income totaled $871 for the year ended December 31, 2008; $1,138 for the year ended
December 31, 2007; $133 for the period of October 31, 2006 to December 31, 2006; and $913 for the period of January 1, 2006 to
October 30, 2006.
Future minimum base rentals on noncancelable office and ground operating leases at December 31, 2008 are as follows:
2009
2010
2011
2012
2013
Thereafter
Total future minimum base rentals
$
$
386,361
338,985
287,757
235,887
179,704
459,603
1,888,297
The above future minimum lease payments exclude residential leases, which typically have a term of one year or less, as well
as tenant reimbursements, amortization of deferred rent receivables and above/below-market lease intangibles. Some leases are subject
to termination options. In general, these leases provide for termination payments should the termination options be exercised. The
preceding table is prepared assuming such options are not exercised.
6. Secured Notes Payable
In August 2008, we obtained a non-recourse $365 million term loan secured by the six-property portfolio that we acquired in
March 2008 as described in Note 3. This loan bears interest at a floating rate equal to one-month LIBOR plus 165 basis points,
however we have entered into interest rate swap contracts that effectively fix the interest at 5.515% (based on an actual/360-day basis)
until September 4, 2012. This loan facility matures on August 18, 2013. This long-term loan replaces the $380 million bridge loan
obtained in March 2008 in connection with the property acquisition. In October 2008, this loan and the related properties that serve as
collateral were contributed to a newly formed institutional fund as described in Note 19.
In March 2008, we obtained a non-recourse $340 million term loan secured by four of our previously unencumbered office
properties. This loan bears interest at a floating rate equal to one-month LIBOR plus 150 basis points, however we have entered into
interest rate swap contracts that effectively fix the interest rate at 4.77% (based on an actual/360-day basis) until January 2, 2013.
This loan facility matures on April 1, 2015. Proceeds from this loan were utilized to repay our secured revolving credit facility and for
general corporate purposes.
In February 2008, the joint venture which owns the Honolulu Club, in which we have a two-thirds interest, obtained an $18
million loan that financed the February 2008 acquisition described in Note 3. This loan has an interest rate of one-month LIBOR plus
125 basis points and a two-year term with a one-year extension.
F-17
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
A summary of our secured notes payable is as follows:
Type of Debt
Variable Rate Swapped to
Fixed Rate:
Fannie Mae loan I (2)
Fannie Mae loan II (2)
Modified Term Loan I (3)(4)
Term Loan II (5)(6)
Fannie Mae loan III (2)
Fannie Mae loan IV (2)
Term Loan III (7)
Fannie Mae loan V (2)
Fannie Mae loan VI (2)
Subtotal
Variable Rate:
Wells Fargo Loan (9)
$370 Million Senior Secured
Maturity
Date
December 31,
2008
December 31,
2007
Variable Rate
Effective
Annual
Interest
Rate (1)
Swap
Maturity
Date
6/1/2012
6/1/2012
$
8/31/2012
8/18/2013
2/1/2015
2/1/2015
4/1/2015
2/1/2016
6/1/2017
293,000
95,080
2,300,000
365,000
36,920
75,000
340,000
82,000
18,000
3,605,000
(8)
$
293,000
95,080
DMBS + 0.60%
DMBS + 0.60%
2,300,000
LIBOR + 0.85%
-
36,920
75,000
-
82,000
18,000
2,900,000
LIBOR +1.65%
DMBS + 0.60%
DMBS + 0.76%
LIBOR +1.50%
LIBOR + 0.62%
LIBOR + 0.62%
3/1/2010 (10)
18,000
-
LIBOR + 1.25%
5.13
4.70 % 08/01/11
5.78
08/01/11
08/01/10-
08/01/12
09/04/12
08/01/11
08/01/11
01/02/13
03/01/12
06/01/12
5.52
5.78
4.86
4.77
5.62
5.82
5.14 %
--
--
--
--
Revolving Credit Facility (11)
10/30/2009 (12)
Subtotal
Unamortized Loan Premium (14)
Total
$
49,300
3,672,300
20,485
3,692,785
$
180,450
3,080,450
25,227
3,105,677
LIBOR/Feds Funds+ (13)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Includes the effect of interest rate contracts. Based on actual/360-day basis and excludes amortization of loan fees and unused fees on
credit line. The total effective rate on an actual/365-day basis is 5.21% at December 31, 2008.
Secured by four separate collateralized pools. Fannie Mae Discount Mortgage-Backed Security (DMBS) generally tracks 90-day LIBOR.
Secured by seven separate collateralized pools. Requires monthly payments of interest only, with outstanding principal due upon
maturity.
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.
Secured by six properties in a collateralized pool. Requires monthly payments of interest only, with outstanding principal due upon
maturity.
This loan is held by Fund X, a consolidated entity in which our operating partnership held one-half of the common equity.
Secured by four properties in a collateralized pool. Requires monthly payments of interest only, with outstanding principal due upon
maturity.
As of December 31, 2008, the weighted average remaining life of our total outstanding debt is 4.1 years, and the weighted average
remaining life of the interest rate swaps is 2.4 years.
This loan is held by a consolidated entity in which our operating partnership held a two-thirds interest. The loan has a one-year extension
option.
(10) Represents maturity date of March 1, 2010 which we may extend to March 1, 2011.
(11) This credit facility is secured by nine properties and has two one-year extension options available.
(12) Represents maturity date of October 30, 2009 which we may extend to October 30, 2011.
(13) This revolver bears interest at either LIBOR +0.70% or Fed Funds +0.95% at our election. If the amount outstanding exceeds
$262.5 million, the credit facility bears interest at either LIBOR +0.80% or Fed Funds +1.05% at our election.
(14) Represents non-cash mark-to-market adjustment on variable rate debt associated with office properties.
F-18
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
The minimum future principal payments due on our secured notes payable, excluding the non-cash loan premium
amortization, at December 31, 2008 are as follows:
Year ending December 31:
2009
2010
2011
2012
2013
Thereafter
Total future principal
Senior Secured Revolving Credit Facility
$
$
49,300
18,000
-
2,688,080
365,000
551,920
3,672,300
We have a $370 million revolving credit facility with a group of banks led by Bank of America, N.A. and Banc of America
Securities, LLC. It bears interest at a rate per annum equal to either LIBOR plus 70 basis points or Federal Funds Rate plus 95 basis
points if the amount outstanding is $262.5 million or less. However, if the amount outstanding is greater than $262.5 million, the
credit facility bears interest at a rate per annum equal to either LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis
points. Our secured revolving credit facility contains an accordion feature that allows us to increase the availability by an additional
$130 million to $500 million under specified circumstances. The facility bears interest at 15 basis points on the undrawn balance.
The facility expires during the fourth quarter of 2009, with two one-year extensions at our option.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of December 31:
Accounts payable
Accrued interest payable
Deferred revenue
2008
2007
$
$
30,199 $
22,982
16,034
69,215 $
43,449
13,963
5,292
62,704
F-19
8. Interest Rate Contracts
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
As of December 31, 2008, approximately 98% or $3.61 billion of our $3.67 billion of outstanding debt had interest payments
designated as hedged transactions to receive-floating/pay-fixed interest rate swap agreements. These derivatives were designated and
qualify as highly effective cash flow hedges under FAS 133 and remove the variability from the hedged cash flows. An unrealized
loss of $172.9 million was recorded in accumulated other comprehensive income in our consolidated balance sheet for the year ended
December 31, 2008. An unrealized loss of $101.6 million was recorded in accumulated other comprehensive income in our
consolidated balance sheet for the year ended December 31, 2007 and an unrealized gain of $415 was recorded in accumulated other
comprehensive income in our consolidated balance sheet for the period October 31, 2006 through December 31, 2006, representing
the change in fair value of the cash flow hedges. An immaterial amount of hedge ineffectiveness has also been recorded in interest
expense.
Amounts reported in accumulated other comprehensive income related to derivatives designated as hedges under FAS 133
will be reclassified to interest expense as interest payments are made on our hedged variable-rate debt. The change in net unrealized
gains and losses on cash flow hedges reflects a reclassification from accumulated other comprehensive income to interest expense, as
an increase of $62.2 million to interest expense for the year ended December 31, 2008 and a reduction of $8.8 million to interest
expense for the year ended December 31, 2007, respectively. For derivatives designated as cash flow hedges, we estimate an
additional $131.9 million will be reclassified during 2009 from accumulated other comprehensive income to interest expense as an
increase to interest expense.
We also have additional interest rate swaps that we acquired from our predecessor at the time of our IPO. Our predecessor
had $2.21 billion notional of pay-fixed interest rate swaps at swap rates ranging between 4.04% and 5.00%. Concurrent with the
completion of our IPO, we executed receive-fixed swaps for the same notional amount at swap rates ranging between 4.96% and
5.00%, which were intended to largely off-set the future cash flows and future change in fair value of our predecessor’s pay-fixed
swaps. The acquired pay-fixed swaps and the new receive-fixed swaps were not designated as hedges under FAS 133 and as such, the
changes in fair value of these interest rate swaps have been recognized in earnings for all periods. The fair value of these swaps
decreased $14.2 million and $13.2 million for the years ended December 31, 2008 and 2007, respectively, and $2.6 million for the
period of October 31, 2006 through December 31, 2006, representing the realization of the pre-IPO fair value of the swaps over their
remaining term. These amounts were recorded in interest expense. We also recorded $19.2 million and $19.1 million of interest
receipts related to swaps not designated as hedges under FAS 133 as a reduction to interest expense for the years ended December 31,
2008 and 2007, respectively, and $3.3 million for period of October 31, 2006 through December 31, 2006. Prior to our IPO, our
predecessor’s existing interest rate swaps were marked to their market value through gain on investments in interest contracts, net,
amounting to a net gain of $6.8 million for the period January 1, 2006 through October 30, 2006.
Our predecessor had $450 million of interest caps and $450 million of sold caps. These derivatives were not designated as
hedges under FAS 133. An immaterial amount related to the changes in fair value of these caps has been recognized in earnings for
all periods presented.
9. Deficit Distributions to Minority Partners, Net
Our predecessor reflected unaffiliated partners’ interests in the institutional funds as minority interest in consolidated real
estate partnerships. Minority interest in consolidated real estate partnerships represented the minority partners’ share of the underlying
net assets of our predecessor’s consolidated real estate partnerships. When these consolidated real estate partnerships made cash
distributions to partners in excess of the carrying amount of the minority interest, our predecessor generally recorded a charge equal to
the amount of such excess distributions, even though there was no economic effect or cost.
If the excess distributions previously absorbed by our predecessor were recovered through the future earnings of the
consolidated real estate partnership, our predecessor would record income in the period of recovery. Our predecessor reported this
charge and any subsequent recovery in the consolidated statements of operations as deficit distributions to minority partners, net.
10. Preferred Minority Investor
Prior to 2006, a minority investor invested $184 million in two of our predecessor’s consolidated subsidiaries. In return, the
minority investor received a preferred profit participation of 8.75% per annum on its unreturned capital contribution. The preferred
profit participation is reflected in our predecessor’s statement of operations as a component of minority interests for the period of
January 1, 2006 to October 30, 2006. The minority investor’s interest was redeemed in conjunction with our IPO and formation
transactions
F-20
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
11. Stockholders’ Equity and Minority Interests in Operating Partnership
Minority interests in our operating partnership relate to interests in our operating partnership that are not owned by us, which
amounted to approximately 22% at December 31, 2008. After the completion of our IPO and the formation transactions, these interests
are comprised of the continuing investors (including our predecessor principals and our executive officers) who elected to own units in
our operating partnership. In our formation transactions, we acquired certain assets of our predecessor and other entities in exchange for
the assumption or discharge of $2.54 billion in indebtedness and preferred equity, the payment of $1.92 billion in cash, and the issuance
of 49.1 million common units of our operating partnership and 39.1 million shares of our common stock. Neither we nor our operating
partnership retained any proceeds from the issuance of common stock.
Continuing investors, including our predecessor principals, holding shares of our common stock or units in our operating
partnership, as a result of the IPO/formation transactions, have the right to cause our operating partnership to redeem any or all of their
units in our operating partnership for cash equal to the then-current market value of one share of common stock, or, at our election,
shares of our common stock on a one-for-one basis.
Shares and Units
A unit in our operating partnership and a share of our common stock have essentially the same economic characteristics as
they share equally in the total net income or loss and distributions of our operating partnership. A unit may be redeemed for cash, or
exchanged at our election for shares of common stock on a one-for-one basis. We had 121,897,388 shares of common stock and
34,197,712 operating partnership units outstanding as of December 31, 2008.
Dividends
During 2008, we declared four quarterly dividends of $0.1875 per share, which equals an annual rate of $0.75 per share.
During 2007, we declared four quarterly dividends of $0.175 per share, which equals an annual rate of $0.70 per share.
Earnings and profits, which determine the taxability of distributions to stockholders, will differ from income reported for
financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on extinguishment of debt,
revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute
depreciation. Our common stock dividends are classified for United States federal income tax purposes as follows (unaudited):
Paid
Record
Date
Date
1/15/08
12/31/07
4/15/08
3/31/08
6/30/08
7/15/08
9/30/08 10/15/08
1/15/09
12/31/08
Total:
Dividend Per
Share
$
$
$
$
$
$
0.1750
0.1875
0.1875
0.1875
0.1875
0.9250
Dividend
Allocable to 2008
$
0.1750
$
0.1875
$
0.1875
$
0.1875
$
-
$
0.7375
2008 Dividend
Ordinary Income %
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2008 Dividend
Capital Gain %
2008 Return of
Capital %
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
100.0%
0.0%
100.0%
The common stock dividend of $0.1750 paid on January 15, 2008, with a record date of December 31, 2007, is allocated to
2008. The common stock dividend of $0.1875 paid on January 15, 2009, with a record date of December 31, 2008, is allocated to
2009.
Equity Repurchases
During the year ended December 31, 2008, we repurchased approximately 1.1 million share equivalents in private
transactions for a total consideration of approximately $23.8 million. During the year ended December 31, 2007, we repurchased
approximately 8.1 million share equivalents in private transactions for a total consideration of approximately $194.4 million. Also
during 2007, we repurchased approximately 640,000 share equivalents from an executive officer who is a member of our board of
directors for $15 million. We may make additional purchases of our share equivalents from time to time in private transactions or in
the public markets, but do not have any commitments to do so.
F-21
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
12. Loss per Share
The following is a summary of the elements used in calculating basic and diluted loss per share (in thousands except share
and per share amounts):
Net loss attributable to common shares
Weighted average common shares
outstanding - basic
Potentially dilutive common shares (1)
Stock options
Adjusted weighted average common shares
Year ended
December 31,
2008
Year ended
December 31,
2007
$
(27,993)
$
(13,008)
$
For the Period
October 31, 2006
through
December 31, 2006
(20,591)
$
For the Period
January 1, 2006
through
October 30, 2006
(16,362)
120,725,928
112,645,587
115,005,860
-
-
-
65
-
65
outstanding - diluted
120,725,928
112,645,587
115,005,860
Net loss per share - basic and diluted
$
(0.23)
$
(0.12)
$
(0.18)
$
(251,723)
(1) For the years ended December 31, 2008, December 31, 2007 and for the period October 31, 2006 through December 31, 2006,
the potentially dilutive shares were not included in the loss per share calculation as their effect is anti-dilutive. No such
potentiality dilutive shares existed prior to our IPO.
F-22
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
13. Stock-Based Compensation
2006 Omnibus Stock Incentive Plan
The Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan, our stock incentive plan, was adopted by our board of
directors and approved by our stockholders prior to the consummation of our IPO. The stock incentive plan permits us to make grants
of “incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards,
dividend equivalent rights and other stock-based awards” within the meaning of Section 422 of the Code, or any combination of the
foregoing. We have initially reserved 16,500,000 shares of our common stock for the issuance of awards under our stock incentive
plan. The number of shares reserved under our stock incentive plan is also subject to adjustment in the event of a stock split, stock
dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under our stock incentive
plan also will be available for future awards.
Our stock incentive plan is administered by the compensation committee of our board of directors. The compensation
committee may interpret the stock incentive plan and may make all determinations necessary or desirable for the administration of the
stock incentive plan and has full power and authority to select the participants to whom awards will be granted, to make any
combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and
conditions of each award, subject to the provisions of our stock incentive plan. All full-time and part-time officers, employees,
directors and other key persons (including consultants and prospective employees) are eligible to participate in our stock incentive
plan.
Other stock-based awards under our stock incentive plan include awards that are valued in whole or in part by reference to
shares of our common stock, including convertible preferred stock, convertible debentures and other convertible or exchangeable
securities, partnership interests in a subsidiary or our operating partnership, awards valued by reference to book value, fair value or
performance of a subsidiary, and any class of profits interest or limited liability company membership interest. We have made certain
awards in the form of a separate series of units of limited partnership interests in our operating partnership called long-term incentive
plan (LTIP) units. LTIP units, which can be granted either as free-standing awards or in tandem with other awards under our stock
incentive plan, were valued by reference to the value of our common stock at the time of grant, and are subject to such conditions and
restrictions as the compensation committee may determine, including continued employment or service, computation of financial
metrics and/or achievement of pre-established performance goals and objectives.
At the time of our IPO, we issued 1,044,000 LTIP units and 5,742,221 options to purchase shares of our common stock to
key employees. 870,000 of the LTIP units and 5,155,556 of these options were fully vested upon grant, while the remaining LTIP
units and options vest one quarter on each of December 31, 2007, 2008, 2009 and 2010.
During 2008, we issued 234,000 LTIP units and 2,483,000 options to purchase shares of our common stock to key
employees. One quarter of the LTIP units and options were fully vested upon grant, while the remaining LTIP units and options vest
one third on each of December 31, 2008, 2009 and 2010.
F-23
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
Upon initial election to our board, each of our non-employee directors received an initial one-time grant of 7,500 LTIP units
that will vest ratably over a three-year period. We also granted each of our non-employee directors 3,430, 1,880 and 325 LTIP units
as compensation for their services in 2008, 2007 and 2006, respectively, for which compensation expense was recognized in full
during the period of service.
Compensation expense for options was recognized on a straight-line basis over the requisite service period for the entire
award, which is equal to the vesting period. Compensation expense for LTIP units was recognized using the accelerated recognition
method. Accordingly, we recognized $4.4 million and $2.1 million of non-cash compensation expense for the years ended December
31, 2008 and 2007, respectively, and $26.6 million of non-cash compensation for the period of October 31, 2006 to December 31,
2006 related to these options and LTIP units. An additional $2.2 million of immediately-vested equity awards were granted during the
first quarter of 2008 to satisfy a portion of the bonuses accrued during 2007.
We calculated the fair value of the stock options using the Black-Scholes option-pricing model using the following
assumptions:
Dividend yield
Expected volatility
Expected life
Risk –free interest rate
Fair value of option on grant date
January 2008
Grant
October 2006
Grant
5.7%
19.2%
60 months
2.8%
$1.89
3.3%
12.0%
52 months
4.5%
$2.25
The weighted average fair value of the LTIP units granted in 2008, 2007 and at our IPO were $20.36, $26.59 and $17.55 per
unit, respectively. We calculated the fair value of the LTIP units granted using the market value of our common stock on the date of
grant and a discount for post-vesting restrictions estimated by a third-party consultant. The total fair value of LTIP units vested in
2008, 2007 and 2006 was $3,658, $1,335 and $14,668, respectively. Total unrecognized compensation cost related to nonvested
option and LTIP awards was $5,217 at December 31, 2008. This expense will be recognized over a weighted-average term of 22
months.
F-24
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
The following is a summary of certain information with respect to outstanding stock options and LTIP units granted under
our stock incentive plan:
Stock Options:
Outstanding at January 1, 2006
Granted
Outstanding at December 31, 2006
Forfeited
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Exercisable at December 31, 2008
LTIP Units:
Outstanding at January 1, 2006
Granted
Vested
Outstanding at December 31, 2006
Granted
Vested
Forfeited
Outstanding at December 31, 2007
Granted
Vested
Forfeited
Outstanding at December 31, 2008
Number of
Stock Options
(thousands)
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contract Life
(months)
Total
Intrinsic
Value
118
$
32,099
106
$
9,173
98
97
$
$
-
-
$
-
5,742
5,742
(44)
5,698
2,483
(31)
(93)
8,057
6,606
-
21.00
21.00
21.00
21.00
21.87
21.56
21.56
21.26
21.16
Number
of Units
(thousands)
Weighted
Average
Grant Date
Fair Value
$
-
1,091
(872)
219
11
(66)
(15)
149
254
(186)
(17)
200
-
17.55
16.82
20.44
26.59
20.21
20.48
21.00
20.36
19.60
21.02
21.49
F-25
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
14. Fair Value of Financial Instruments
FAS No. 107, Disclosures about Fair Value of Financial Instruments, requires us to disclose fair value information about all
financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.
Our estimates of the fair value of financial instruments at December 31, 2008 and 2007, respectively, were determined using
available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and
develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the
estimated fair value amounts.
The carrying amounts for cash and cash equivalents, restricted cash, rents and other receivables, due from affiliates, accounts
payable and other liabilities approximate fair value because of the short-term nature of these instruments. We calculate the fair value
of our secured notes payable based on a currently available market rate; assuming the loans are outstanding through maturity and
considering the collateral. At December 31, 2008, the aggregate fair value of our secured notes payable and secured revolving credit
facility is estimated to be approximately $3,578 million, based on a credit-adjusted present value of the principal and interest
payments which are at floating rates. As of December 31, 2007, the estimated fair value of the secured loans was approximately
$3,106 million.
Currently, we use interest rate swaps and caps to manage interest rate risk resulting from variable interest payments on our
floating rate debt. These financial instruments are carried on our balance sheet at fair value as determined under FAS157, based on
the assumptions that market participants would use in pricing the asset or liability. The valuation of these instruments is determined
using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based
inputs, including interest rate curves and implied volatilities.
As a basis for considering market participant assumptions in fair value measurements, FAS 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the
reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own
assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs
utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs
are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level
2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset
or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly
quoted intervals.
To comply with the provisions of FAS 157, we incorporate credit valuation adjustments to appropriately reflect both our own
nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value
of our derivative contracts for the effect of nonperformance risk, we considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts and guarantees. We have determined that our derivative valuations
in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements using significant
unobservable inputs (Level 3) as of December 31, 2008.
The table below presents the assets and liabilities measured at fair value on a recurring basis as of December 31, 2008,
aggregated by the level in the fair value hierarchy within which those measurements fall.
Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Balance at
December 31,
2008
Assets
Interest Rate Contracts
Liabilities
Interest Rate Contracts
$
(cid:326)
$
176,255
$
(cid:326)
407,492
(cid:326)
(cid:326)
$
176,255
407,492
F-26
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
15. Predecessor Related-Party Transactions
Prior to DECO being acquired by us in the IPO/formation transactions, our predecessor had a number of transactions during
2006 with DECO, which was then owned by the stockholders of DERA:
(cid:120) Our predecessor paid $6.4 million in real estate commissions to DECO for the period from January 1, 2006 to October 30,
2006. The commissions paid to DECO were accounted for as leasing costs and were included in our predecessor’s investment
in real estate in the consolidated balance sheets for the period prior to our IPO.
(cid:120) Our predecessor expensed $8.2 million in property management fees related to management services by DECO for the period
from January 1, 2006 to October 30, 2006. These management fees were based upon percentages, ranging from 1.75% to
4.00%, of the rental cash receipts collected by the properties.
(cid:120) Our predecessor contributed its share of discretionary profit-sharing contributions (subject to statutory limitations), totaling
$192 for the period from January 1, 2006 to October 30, 2006, for services rendered by employees of DECO.
Our predecessor also contracted with DEB, an operating company owned by the stockholders of DERA and acquired by us in
the IPO/formation transactions, to provide building and tenant improvement work. For such contracting work performed, our
predecessor paid DEB $12.1 million for the period from January 1, 2006 to October 30, 2006. These amounts were included in the
cost basis of buildings and tenant improvements in the consolidated balance sheet of our predecessor.
Our predecessor leased approximately 26,785 square feet of office space to DECO and DEB. The rents from these leases
totaled $655 for the period from January 1, 2006 to October 30, 2006.
On March 15, 2006, DERA’s stockholders contributed $60 million to DERA in the form of promissory notes. As part of the
formation transactions related to our IPO, these notes were paid in full.
F-27
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
16. Commitments and Contingencies
We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are
generally covered by insurance. We believe that the ultimate settlement of these actions will not have a material adverse effect to our
financial position and results of operations or cash flows.
Concentration of Credit Risk
Our properties are located in Los Angeles County, California and Honolulu, Hawaii. The ability of the tenants to honor the
terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the
tenants operate. We perform ongoing credit evaluations of our tenants for potential credit losses. Financial instruments that subject us
to credit risk consist primarily of cash, accounts receivable, deferred rents receivable and interest rate contracts. We maintain our cash
and cash equivalents with high quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $250 under the recently increased limit that the U.S. Congress has temporarily granted until December 31, 2009,
and to date, we have not experienced any losses on our deposited cash.
Asset Retirement Obligations
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an
interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in
FAS No. 143, Accounting for Asset Retirement Obligations, represents a legal obligation to perform an asset retirement activity in
which the timing and/or method of settlement is conditional on a future event that may or may not be within a company’s control.
Under this standard, a liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be
reasonably estimated. Environmental site assessments and investigations have identified 23 properties in our portfolio containing
asbestos, which would have to be removed in compliance with applicable environmental regulations if these properties undergo major
renovations or are demolished. As of December 31, 2008, the obligations to remove the asbestos from these properties have
indeterminable settlement dates, and therefore, we are unable to reasonably estimate the fair value of the associated conditional asset
retirement obligation.
Future Minimum Lease Payments
We lease (and during 2006, our predecessor leased) portions of the land underlying three of our office properties. For one of
the three ground leases, we (and our predecessor) owned a one-sixth interest in the fee title to the land. At the end of the fourth
quarter of 2008, we acquired the remaining five-sixths interest in the fee title to the land. With the completion of this acquisition, we
now own 100% of the fee interest and 100% of the leasehold interest. During the second quarter of 2007, we obtained a fourth ground
leasehold in conjunction with our acquisition of the Century City building described in Note 3. We acquired fee title to the land
subject to this fourth ground lease at the end of 2007. We and our predecessor expensed ground lease payments in the amount of
$3,206 for the year ended December 31, 2008, $3,204 for the year ended December 31, 2007; $281 for the period of October 31, 2006
to December 31, 2006; and $3,082 for the period of January 1, 2006 to October 30, 2006.
The following is a schedule of minimum lease payments on the remaining two ground leases as of December 31, 2008:
2009
2010
2011
2012
2013
Thereafter
$
$
707
733
733
733
733
3,787
7,426
Tenant Concentrations
For the years ended December 31, 2008, 2007 and 2006, no tenant exceeded 10% of our total rental revenue and tenant
reimbursements.
F-28
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
17. Segment Reporting
FAS No. 131, Disclosures about Segments of an Enterprise and Related Information, established standards for disclosure
about operating segments and related disclosures about products and services, geographic areas and major customers. Segment
information is prepared on the same basis that our management reviews information for operational decision making purposes. We
and our predecessor have operated in two business segments: (i) the acquisition, redevelopment, ownership and management of office
real estate and (ii) the acquisition, redevelopment, ownership and management of multifamily real estate. The products for our office
segment include primarily rental of office space and other tenant services including parking and storage space rental. The products for
our multifamily segment include rental of apartments and other tenant services including parking and storage space rental.
Asset information by segment is not reported because we do not use this measure to assess performance and make decisions
to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income,
management services, general and administrative expenses, interest expense, depreciation and amortization expense and net derivative
gains and losses are not included in rental revenues less rental expenses as the internal reporting addresses these items on a corporate
level.
Rental revenues less rental expenses is not a measure of operating results or cash flows from operating activities as measured
by GAAP, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a
measure of liquidity. All companies may not calculate rental revenues less rental expenses in the same manner. We and our
predecessor considered rental revenues less rental expenses to be an appropriate supplemental measure to net income because it
assisted both investors and management to understand the core operations of our and our predecessor’s properties.
Rental revenues
Percentage of total
Rental expenses
Percentage of total
Rental revenues less rental expenses
Percentage of total
Rental revenues
Percentage of total
Rental expenses
Percentage of total
Rental revenues less rental expenses
Percentage of total
$
$
$
$
$
$
Total
608,094
100
183,203
100
424,891
100
Total
539,628
100
167,317
100
372,311
100
%
%
%
%
%
%
Douglas Emmett, Inc.
Year ended December 31, 2008
Multifamily
$
$
$
70,717
12 %
17,079
9 %
53,638
13 %
$
$
$
Douglas Emmett, Inc.
Year ended December 31, 2007
Multifamily
$
$
$
71,059
13 %
18,735
11 %
52,324
14 %
$
$
$
Office
537,377
88 %
166,124
91 %
371,253
87 %
Office
468,569
87 %
148,582
89 %
319,987
86 %
F-29
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
Rental revenues
Percentage of total
Rental expenses
Percentage of total
Rental revenues less rental expenses
Percentage of total
Rental revenues
Percentage of total
Rental expenses
Percentage of total
Rental revenues less rental expenses
Percentage of total
Douglas Emmett, Inc.
October 31, 2006 to December 31, 2006
Multifamily
Total
Office
77,566
87 %
26,375
89 %
51,191
86 %
$
$
$
11,374
13 %
3,260
11 %
8,114
14 %
$
$
$
88,940
100
29,635
100
59,305
100
The Predecessor
January 1, 2006 to October 30, 2006
Multifamily
Total
Office
300,939
87 %
104,524
87 %
196,415
86 %
$
$
$
45,729
13 %
15,041
13 %
30,688
14 %
$
$
$
346,668
100
119,565
100
227,103
100
%
%
%
%
%
%
$
$
$
$
$
$
The following is a reconciliation of rental revenues less rental expenses to net loss:
Douglas Emmett, Inc.
The Predecessor
Year Ending
December 31,
2008
424,891
3,580
-
(22,646)
(193,727)
(248,011)
-
7,920
(27,993)
Year Ending
December 31,
2007
372,311
695
-
(21,486)
(160,616)
(209,593)
-
5,681
(13,008)
$
$
$
$
October 31,
2006 to
December 31,
2006
59,305
87
$
-
(30,201)
(26,213)
(32,521)
-
8,952
(20,591)
$
January 1, 2006
to
October 30, 2006
227,103
4,515
6,795
(17,863)
(95,938)
(95,456)
(10,642)
(34,876)
(16,362)
Rental revenues less rental expenses
$
Interest and other income
Gain on investments in interest rate
contracts, net
General and administrative expenses
Interest expense
Depreciation and amortization
Deficit distributions to minority
partners
Minority interests
Net loss
$
F-30
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
18. Quarterly Financial Information (unaudited)
The tables below reflect selected quarterly information for the years ended December 31, 2008 and 2007:
Total revenue
Loss before minority interest
Net loss
Net loss per common share - basic and diluted
Weighted average shares of common stock
outstanding - basic and diluted
Total revenue
Loss before minority interest
Net loss
Net loss per common share - basic and diluted
Weighted average shares of common stock
outstanding - basic and diluted
Three Months Ended
December 31,
2008
155,570
(8,059)
(6,369)
$
September 30,
2008
157,653
(12,400)
(9,696)
$
June 30,
2008
155,063
(12,213)
(9,428)
$
March 31,
2008
139,808
(3,241)
(2,500)
(0.05)
$
(0.08)
$
(0.08)
$
(0.02)
121,777,360
121,509,098
121,313,515
118,283,579
Three Months Ended
December 31,
2007
139,058
(8,183)
(5,690)
$
September 30,
2007
136,135
(4,007)
(2,785)
$
June 30,
2007
131,682
(1,802)
(1,260)
$
March 31,
2007
132,753
(4,697)
(3,273)
(0.05)
$
(0.03)
$
(0.01)
$
(0.03)
109,833,903
110,956,113
114,861,872
115,005,860
$
$
$
$
F-31
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
19. Douglas Emmett Fund X, LLC
In October 2008, we completed the initial closing of our new institutional fund, Douglas Emmett Fund X, LLC (Fund X).
Fund X is the first fund formed by us since our IPO, when the nine institutional funds previously formed by our predecessor were
consolidated with us. As of the date of its initial closing, Fund X had obtained equity commitments totaling $300 million, of which
we committed $150 million and certain of our officers committed $2.25 million on the same terms as the other investors.
Fund X contemplates a fund raising period until July 2009 and an investment period of up to four years from the initial
closing, followed by a ten-year value creation period. With limited exceptions, Fund X will be our exclusive investment vehicle
during its investment period, using the same underwriting and leverage principles and focusing primarily on the same markets as we
have.
In connection with the initial closing of Fund X, (i) we contributed to Fund X the portfolio of six Class A office properties
totaling approximately 1.4 million square feet located in four of our core Los Angeles submarkets (Santa Monica, Beverly Hills,
Sherman Oaks/Encino and Warner Center/Woodland Hills) which we acquired in March 2008 and (ii) we transferred to Fund X the
related 5-year, $365 million term loan. In exchange, we received an interest in the common equity of Fund X, which represented 50%
as of the initial closing based on our pro rata share of our $150 million equity commitment relative to the $300 million total in equity
commitments. Since the net value of the contributed properties (as valued under the Fund X operating agreement) exceeded our
required capital contribution, we received additional cash from Fund X shortly after the initial closing and expect to receive a second
cash distribution in late February or early March 2009 that would complete the adjustment of our contribution in Fund X to our
required pro rata capital contribution level.
During the life of Fund X, we are entitled to certain additional cash based on committed capital and on any profits which
exceed certain specified cash returns to the investors. Certain of our affiliates (which are wholly-owned by us) are expected to provide
property management and other services to Fund X, for which we will be paid fees and/or reimbursed our costs.
Our business includes the results of Fund X, which is currently accounted for on a consolidated basis. The ownership interest
in Fund X that we do not own is reflected in Other Liabilities on our consolidated balance sheet. An adjustment to our consolidated
results of operations relating to that ownership in Fund X is reflected in Interest and Other Income.
F-32
Douglas Emmett, Inc.
Schedule III
Consolidated Real Estate and Accumulated Depreciation
(dollars in thousands)
Property Name
Office Properties
Bundy Olympic
The Gateway Building
Village on Canon
Brentwood Executive Plaza
Camden Medical Arts
Executive Tower
Palisades Promenade
Studio Plaza
First Federal
Wilshire Brentwood Plaza
Landmark II
Olympic Center
Saltair San Vicente
Second Street
Sherman Oaks Galleria
Tower at Sherman Oaks
The Verona
Coral Plaza
MB Plaza
Valley Executive Tower
Valley Office Plaza
Westside Towers
100 Wilshire
11777 San Vicente
Century Park Plaza
Encino Terrace
One Westwood
Westwood Place
Brentwood Saltair
Encino Gateway
Encino Plaza
Lincoln Wilshire
1901 Avenue of the Stars
Camden/9601 Wilshire
Columbus Center
Santa Monica Square
Warner Center Towers
Beverly Hills Medical Center
Bishop Place
Harbor Court
The Trillium
Brentwood Court
Brentwood Medical Plaza
Brentwood San Vicente Medical
San Vicente Plaza
Century Park West
Cornerstone Plaza
Honolulu Club
15250 Ventura
16000 Ventura
2001 Wilshire
8383 Wilshire
9100 Wilshire
Warner Corporate Center
Multifamily Properties
Barrington Plaza
Barrington 555
Pacific Plaza
The Shores
Moanalua Hillside
The Villas at Royal Kunia
Barrington/Kiowa Apartments
Barry Apartments
Kiowa Apartments
Ground Lease
Owensmouth/Warner
Initial Cost
Cost Capitalized
Subsequent to Acquisition
Gross Carrying Amount
at December 31, 2008
Encumbrances
at December 31,
2008
Land
Building &
Improvements
Improvements
Carrying
Costs
Land
Building &
Improvements
Total
Accumulated
Depreciation at
December 31,
2008
Year Built /
Renovated
Year
Aquired
$
24,979
34,434
5,785
25,235
3,965
77,100
36,970
124,895
79,741
61,702
115,372
27,926
1,888
26,720
244,080
4,474
2,457
20,066
31,185
91,892
40,642
74,383
136,713
25,815
93,107
76,683
10,084
54,190
2,017
54,889
33,621
21,727
148,766
15,066
11,404
3,564
374,330
28,361
86,922
23,475
184,500
6,686
23,957
13,690
10,722
22,600
55,800
18,000
23,000
39,300
33,500
117,600
108,000
43,600
$
4,201
2,376
5,933
3,255
3,102
6,660
5,253
9,347
9,989
5,013
19,156
5,473
5,075
4,377
33,213
4,712
2,574
4,028
4,533
8,446
5,731
8,506
12,769
5,032
10,275
12,535
10,350
8,542
4,468
8,475
5,293
3,833
18,514
16,597
2,096
5,366
43,110
4,955
8,317
51
20,688
2,564
5,934
5,557
7,055
3,717
8,245
1,863
5,039
5,539
6,033
20,987
18,992
8,258
$
11,860
15,302
11,389
9,654
12,221
32,045
15,547
73,358
29,187
34,283
109,259
22,850
6,946
15,277
17,820
15,747
7,111
15,019
22,024
67,672
24,329
79,532
78,447
15,768
70,761
59,554
29,784
44,419
11,615
48,525
23,125
12,484
131,752
54,774
10,396
18,025
292,147
27,766
105,651
41,001
143,263
8,872
27,836
16,457
12,035
29,099
80,633
16,766
30,194
59,977
43,740
209,660
152,143
66,677
$
28,311
44,254
47,785
32,745
27,397
59,074
49,779
128,949
112,356
71,735
69,049
29,946
16,413
34,843
402,201
34,820
13,795
18,187
28,069
95,645
43,332
72,758
134,953
28,011
102,365
88,748
58,013
50,476
10,468
49,917
42,264
20,942
102,023
99,142
8,697
18,878
375,785
26,640
52,048
20,972
77,530
325
965
181
216
392
3,170
1,631
815
1,865
896
4,125
930
721
153,630
43,440
46,400
144,610
111,920
82,000
7,750
7,150
3,100
28,568
6,461
10,091
20,809
24,720
42,887
5,720
6,426
2,605
81,485
27,639
16,159
74,191
85,895
71,376
10,052
8,179
3,263
142,159
40,029
72,275
195,272
37,355
13,781
285
269
190
14,720
23,848
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
6,030
5,119
13,303
5,921
5,298
9,471
9,664
15,015
21,787
8,828
26,139
8,247
7,557
7,421
48,328
8,685
5,111
5,366
7,503
11,737
8,957
14,568
27,108
6,714
16,153
15,533
9,154
11,448
4,775
15,653
6,165
7,475
26,163
17,658
2,333
6,863
59,418
6,435
8,833
-
21,989
2,563
5,933
5,557
7,055
3,669
8,263
1,863
5,039
5,539
6,033
20,987
18,992
8,257
$
38,342
56,813
51,804
39,733
37,422
88,308
60,915
196,639
129,745
102,203
171,325
50,022
20,877
47,076
404,906
46,594
18,369
31,868
47,123
160,026
64,435
146,228
199,061
42,097
167,248
145,304
88,993
91,989
21,776
91,264
64,517
29,784
226,126
152,855
18,856
35,406
651,624
52,926
157,183
62,024
219,492
9,198
28,802
16,638
12,251
29,539
83,785
18,397
31,009
61,842
44,636
213,785
153,073
67,399
$
44,372
61,932
65,107
45,654
42,720
97,779
70,579
211,654
151,532
111,031
197,464
58,269
28,434
54,497
453,234
55,279
23,480
37,234
54,626
171,763
73,392
160,796
226,169
48,811
183,401
160,837
98,147
103,437
26,551
106,917
70,682
37,259
252,289
170,513
21,189
42,269
711,042
59,361
166,016
62,024
241,481
11,761
34,735
22,195
19,306
33,208
92,048
20,260
36,048
67,381
50,669
234,772
172,065
75,656
$
4,107
5,051
4,253
4,160
3,095
9,296
4,606
16,315
9,829
8,387
14,601
4,629
2,003
4,263
35,980
4,935
1,793
2,891
4,822
13,188
5,847
13,077
15,731
3,421
14,104
13,321
7,239
7,806
2,229
8,486
6,233
2,174
18,185
12,745
2,052
2,916
57,747
4,436
13,999
6,827
20,290
897
2,861
1,499
1,362
1,613
3,580
523
1,397
2,900
2,188
8,959
5,453
2,541
1991/1998
1987
1989/1995
1983/1996
1972/1992
1989
1990
1988/2004
1981/2000
1985
1989
1985/1996
1964/1992
1991
1981/2002
1967/1991
1991
1981
1971/1996
1984
1966/2002
1985
1968/2002
1974/1998
1972/1987
1986
1987/2004
1987
1986
1974/1998
1971/1992
1996
1968/2001
1962/2004
1987
1983/2004
1982-1993/2004
1964/2004
1992
1994
1988
1984
1975
1957/1985
1985
1971
1986
1980
1970
1980
1980
1971
1971
1988
58,208
14,903
27,816
60,555
35,294
35,163
5,720
6,426
2,605
194,004
59,226
70,709
229,717
112,676
92,881
10,337
8,448
3,453
252,212
74,129
98,525
290,272
147,970
128,044
16,057
14,874
6,058
14,899
4,459
4,859
15,496
8,020
7,813
762
696
279
1963/1998
1989
1963/1998
1965-67/2002
1968/2004
1990/1995
1974
1973
1972
1994
1994
1994
1995
1995
1995
1995
1995
1996
1996
1997
1997
1997
1997
1997
1997
1997
1998
1998
1998
1998
1998
1999
1999
1999
1999
1999
1999
2000
2000
2000
2000
2001
2001
2001
2001
2002
2004
2004
2004
2005
2006
2006
2006
2006
2007
2007
2008
2008
2008
2008
2008
2008
2008
1998
1999
1999
1999
2005
2006
2006
2006
2006
23,848
-
23,848
-
N/A
2006
TOTAL
$
3,672,300
$
634,137
$
3,000,017
$
3,347,162
$
-
$
900,213
$
6,081,103
$
6,981,316
$
490,125
F-33
Real Estate Assets
Balance, beginning of period
Additions
- property acquisitions
- improvements
Purchase accounting
Balance, end of period
Accumulated Depreciation
Balance, beginning of period
Additions
- depreciation
Purchase accounting
Balance, end of period
2008
Year ended December 31,
2007
2006
6,264,170
653,842
63,304
-
6,981,316
(242,114)
(248,011)
-
(490,125)
6,088,617
121,694
57,300
(3,441)
6,264,170
(32,521)
(209,593)
-
(242,114)
3,128,742
260,666
52,577
2,646,632
6,088,617
(506,258)
(121,620)
595,357
(32,521)
F-34
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, Jordan L. Kaplan, certify that:
1)
I have reviewed this annual report on Form 10-K of Douglas Emmett, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 25, 2009
By: /s/ JORDAN L. KAPLAN
Jordan L. Kaplan
President and Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2
I, William Kamer, certify that:
1)
I have reviewed this annual report on Form 10-K of Douglas Emmett, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 25, 2009
By: /s/ WILLIAM KAMER
William Kamer
Chief Financial Officer
OFFICERS’ CERTIFICATIONS
Certification of Chief Executive Officer
EXHIBIT 32.1
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of
Douglas Emmett, Inc. (the “Company”), hereby certifies, to such officer’s knowledge, that:
(i)
(ii)
the accompanying annual report on Form 10-K of the Company for the period ended December 31, 2008 (the
“Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 25, 2009
By: /s/JORDAN L. KAPLAN
Jordan L. Kaplan
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and is not being
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into
any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such
filing.
OFFICERS’ CERTIFICATIONS
Certification of Chief Financial Officer
EXHIBIT 32.2
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of
Douglas Emmett, Inc. (the “Company”), hereby certifies, to such officer’s knowledge, that:
(i)
(ii)
the accompanying annual report on Form 10-K of the Company for the period ended December 31, 2008 (the
“Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 25, 2009
By: /s/ WILLIAM KAMER
William Kamer
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing
of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
S H A R E H O L D E R I N F O R M A T I O N
CORPORATE HEADQUARTERS
LEGAL COUNSEL
BOARD OF DIRECTORS
808 Wilshire Boulevard
2nd Floor
Santa Monica, CA 90401
310.255.7700
SHAREHOLDER ACCOUNT
ASSISTANCE
Shareholder records are maintained by
Douglas Emmett’s Transfer Agent:
Computershare Investor Services, LLC
312.588.4990
INVESTOR INFORMATION
Company information is available upon
request without charge by contacting:
Mary Jensen
Vice President – Investor Relations
mjensen@douglasemmett.com
310.255.7751
ANNUAL MEETING
Sheraton Delfi na
530 Pico Boulevard
Santa Monica, CA 90405
June 11, 2009 9:00 a.m. (PDT)
Manatt l Phelps l Phillips LLP
Los Angeles, CA
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Los Angeles, CA
STOCK EXCHANGE
The New York Stock Exchange – NYSE
Ticker Symbol – DEI
CERTIFICATION
The Company fi led the certifi cations
required by Section 302 of the Sarbanes-
Oxley Act of 2002 as exhibits to its Annual
Report on Form 10-K for the year ended
December 31, 2008, and submitted to the
New York Stock Exchange the certifi cation
required by Section 303A.12(a) of the
NYSE Listed Company Manual.
DAN EMMETT
Chairman of the Board
JORDAN L. KAPLAN
Director
KEN PANZER
Director
LESLIE E. BIDER
Director
VICTOR J. COLEMAN
Director
THOMAS E. O’HERN
Director
GHEBRE SELASSIE MEHRETEAB
Director
DR. ANDREA L. RICH
Director
WILLIAM WILSON III
Director
SENIOR MANAGEMENT
JORDAN L. KAPLAN
President & Chief Executive Offi cer
KEN PANZER
Chief Operating Offi cer
WILLIAM KAMER
Chief Financial Offi cer
ALLAN GOLAD
Senior Vice President, Property Management
MICHAEL MEANS
Senior Vice President, Commercial Leasing
Douglas Emmett, Inc.
808 Wilshire Boulevard, 2nd Floor • Santa Monica, California 90401 • 310.255.7751 • www.douglasemmett.com