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Douglas Emmett, Inc.808 Wilshire Boulevard, 2nd Floor • Santa Monica, California 90401 • 310.255.7751 • www.douglasemmett.comDouglas EmmettAnnual Report2011Honolulu ProPerties 62. Bishop Place 63. Harbor Court 64. The Honolulu Club65. Bishop Square 66. Moanalulu Hillside Apartments 67. Villas at Royal KuniaConCentration in attraCtive la submarketsWarner Center/ Woodland Hills 1. Warner Center Towers 2. Warner Corporate Center 3. The TrilliumWestWood 4. One Westwood 5. Westwood PlacebrentWood 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 14. Saltair/San Vicente 15. Brentwood San Vicente Medical 16. San Vicente Plaza 17. Brentwood Court18. Wilshire Bundy Plaza 19. Barrington Plaza Commercial20. Barrington Plaza 21. 555 Barrington 22. Barrington/Kiowa23. Barry 24. Kiowasanta moniCa 25. 100 Wilshire 26. 401 Wilshire 27. Palisades Promenade 28. Second Street Plaza 29. Santa Monica Square 30. Lincoln/Wilshire 31. Verona32. 2001 Wilshire 33. The Shores 34. Pacific Plazaburbank 35. Studio PlazasHerman oaks/enCino 36. Sherman Oaks Galleria 37. Encino Terrace 38. Valley Executive Tower 39. Encino Gateway 40. Valley Office Plaza 41. Encino Plaza 42. Tower at Sherman Oaks 43. MB Plaza 44. Columbus Center45. 15250 Ventura46. 16000 Venturabeverly Hills 47. 9601 Wilshire 48. 9100 Wilshire 49. Village on Canon 50. Camden Medical Arts 51. Beverly Hills Medical Center 52. 8383 Wilshire53. 150 South RodeoCentury City 54. 1901 Avenue of the Stars 55. Century Park Plaza 56. Century Park WestolymPiC Corridor 57. Westside Towers 58. Executive Tower 59. Olympic Center 60. Bundy/Olympic 61. Cornerstone PlazaHonolulu submarket overvieWPortfolio consists of 58 office properties and 9 multi-family communities.2011
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Douglas Emmett, Inc.808 Wilshire Boulevard, 2nd Floor • Santa Monica, California 90401 • 310.255.7751 • www.douglasemmett.comDouglas EmmettAnnual Report2011Honolulu ProPerties 62. Bishop Place 63. Harbor Court 64. The Honolulu Club65. Bishop Square 66. Moanalulu Hillside Apartments 67. Villas at Royal KuniaConCentration in attraCtive la submarketsWarner Center/ Woodland Hills 1. Warner Center Towers 2. Warner Corporate Center 3. The TrilliumWestWood 4. One Westwood 5. Westwood PlacebrentWood 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 14. Saltair/San Vicente 15. Brentwood San Vicente Medical 16. San Vicente Plaza 17. Brentwood Court18. Wilshire Bundy Plaza 19. Barrington Plaza Commercial20. Barrington Plaza 21. 555 Barrington 22. Barrington/Kiowa23. Barry 24. Kiowasanta moniCa 25. 100 Wilshire 26. 401 Wilshire 27. Palisades Promenade 28. Second Street Plaza 29. Santa Monica Square 30. Lincoln/Wilshire 31. Verona32. 2001 Wilshire 33. The Shores 34. Pacific Plazaburbank 35. Studio PlazasHerman oaks/enCino 36. Sherman Oaks Galleria 37. Encino Terrace 38. Valley Executive Tower 39. Encino Gateway 40. Valley Office Plaza 41. Encino Plaza 42. Tower at Sherman Oaks 43. MB Plaza 44. Columbus Center45. 15250 Ventura46. 16000 Venturabeverly Hills 47. 9601 Wilshire 48. 9100 Wilshire 49. Village on Canon 50. Camden Medical Arts 51. Beverly Hills Medical Center 52. 8383 Wilshire53. 150 South RodeoCentury City 54. 1901 Avenue of the Stars 55. Century Park Plaza 56. Century Park WestolymPiC Corridor 57. Westside Towers 58. Executive Tower 59. Olympic Center 60. Bundy/Olympic 61. Cornerstone PlazaHonolulu submarket overvieWPortfolio consists of 58 office properties and 9 multi-family communities.2011
Dear Fellow Shareholders,
I am happy to report that we made real progress in our leasing fundamentals during 2011.
Los Angeles’ tourism and foreign trade industries had record years, while entertainment,
Reflecting this strength, we have raised our dividend by 50% since this time last year
to an annualized rate of $0.60 per share.
media and technology continued to benefit from their industries’ convergence. All of these
Acquisitions in 2011 were slow, with little market activity. While we cannot control
industries in turn supported the continued recovery of our legal, accounting and financial
when properties will come to market at attractive pricing, we are actively working on
service tenants. In 2011, we gained 106,000 square feet of positive absorption compared to
potential office and apartment acquisitions.
a loss of 220,000 square feet in 2010. We have also
begun to increase office rents in select submarkets.
In our multifamily portfolio, we are achieving
strong rent increases while keeping our occupancy
rate very high.
On the capital side, we have completed the
refinancing of all our near term debt and significantly
lowered our leverage. Over the last eighteen months,
we closed approximately $2.7 billion in loans at an
average interest rate of 4 percent. We also reduced
our aggregate consolidated debt by $402 million. By
February 1, 2012, we had lowered our consolidated
“Today, our
balance sheet is
the strongest it
has been since we
became a public
company.”
We enter 2012 with more optimism than any
year since the recession began. We are confident
in the strength of our submarkets, which combine
significant supply constraints with support from
a vibrant, diverse group of industries. Our
integrated operating platform is more efficient
and effective than ever while delivering the
high quality service and speed required in our
small tenant markets. As a percent of revenues,
our G&A continues to be the lowest among
our peers.
Of course, we will continue to face
loan-to-value ratio to approximately 47 percent.
unexpected opportunities and challenges as markets and politics shift in the future. As
Today, our balance sheet is the strongest it has been since we became a public company.
always, the one thing I can promise for the future is that Ken, Bill, Ted, Dan, and I, along
We have no near-term debt maturities, and we have locked in very low interest rates
with the rest of the Douglas Emmett team, are committed to the strong work ethic and
for many years into the future. In addition, we have ample liquidity for acquisitions
high standards that have been the hallmark of Douglas Emmett over the last 40 years.
from our institutional funds, cash on-hand, growing positive cash flow and totally
unencumbered properties.
Sincerely,
Jordan L. Kaplan
President & CEO
March 30, 2012
s H a r e H o l d e r i n F o r m a t i o n
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 filed the certifications
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, 2011, and submitted to the
New York Stock Exchange the certification
required by Section 303A.12(a) of the
NYSE Listed Company Manual.
CORPORATE HEADQUARTERS
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
www.douglasemmett.com
ANNUAL MEETING
Sheraton Delfina
530 Pico Boulevard
Santa Monica, CA 90405
May 24, 2012 9:00 a.m. (PDT)
LEGAL COUNSEL
Manatt l Phelps l Phillips LLP
Los Angeles, CA
BOARD OF DIRECTORS
dan a. emmett
Chairman of the Board
Jordan l. kaPlan
Director
kennetH m. Panzer
Director
CHristoPHer H. anderson
Director
leslie e. bider
Director
dr. david t. Feinberg
Director
gHebre selassie meHreteab
Director
tHomas e. o’Hern
Director
dr. andrea l. riCH
Director
SENIOR MANAGEMENT
Jordan l. kaPlan
President & Chief Executive Officer
kennetH m. Panzer
Chief Operating Officer
William kamer
Chief Investment Officer
tHeodore e. gutH
Chief Financial Officer
allan golad
Senior Vice President,
Property Management
miCHael means
Senior Vice President,
Commercial Leasing
Dear Fellow Shareholders,
I am happy to report that we made real progress in our leasing fundamentals during 2011.
Los Angeles’ tourism and foreign trade industries had record years, while entertainment,
Reflecting this strength, we have raised our dividend by 50% since this time last year
to an annualized rate of $0.60 per share.
media and technology continued to benefit from their industries’ convergence. All of these
Acquisitions in 2011 were slow, with little market activity. While we cannot control
industries in turn supported the continued recovery of our legal, accounting and financial
when properties will come to market at attractive pricing, we are actively working on
service tenants. In 2011, we gained 106,000 square feet of positive absorption compared to
potential office and apartment acquisitions.
a loss of 220,000 square feet in 2010. We have also
begun to increase office rents in select submarkets.
In our multifamily portfolio, we are achieving
strong rent increases while keeping our occupancy
rate very high.
On the capital side, we have completed the
refinancing of all our near term debt and significantly
lowered our leverage. Over the last eighteen months,
we closed approximately $2.7 billion in loans at an
average interest rate of 4 percent. We also reduced
our aggregate consolidated debt by $402 million. By
February 1, 2012, we had lowered our consolidated
“Today, our
balance sheet is
the strongest it
has been since we
became a public
company.”
We enter 2012 with more optimism than any
year since the recession began. We are confident
in the strength of our submarkets, which combine
significant supply constraints with support from
a vibrant, diverse group of industries. Our
integrated operating platform is more efficient
and effective than ever while delivering the
high quality service and speed required in our
small tenant markets. As a percent of revenues,
our G&A continues to be the lowest among
our peers.
Of course, we will continue to face
loan-to-value ratio to approximately 47 percent.
unexpected opportunities and challenges as markets and politics shift in the future. As
Today, our balance sheet is the strongest it has been since we became a public company.
always, the one thing I can promise for the future is that Ken, Bill, Ted, Dan, and I, along
We have no near-term debt maturities, and we have locked in very low interest rates
with the rest of the Douglas Emmett team, are committed to the strong work ethic and
for many years into the future. In addition, we have ample liquidity for acquisitions
high standards that have been the hallmark of Douglas Emmett over the last 40 years.
from our institutional funds, cash on-hand, growing positive cash flow and totally
unencumbered properties.
Sincerely,
Jordan L. Kaplan
President & CEO
March 30, 2012
s H a r e H o l d e r i n F o r m a t i o n
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 filed the certifications
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, 2011, and submitted to the
New York Stock Exchange the certification
required by Section 303A.12(a) of the
NYSE Listed Company Manual.
CORPORATE HEADQUARTERS
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
www.douglasemmett.com
ANNUAL MEETING
Sheraton Delfina
530 Pico Boulevard
Santa Monica, CA 90405
May 24, 2012 9:00 a.m. (PDT)
LEGAL COUNSEL
Manatt l Phelps l Phillips LLP
Los Angeles, CA
BOARD OF DIRECTORS
dan a. emmett
Chairman of the Board
Jordan l. kaPlan
Director
kennetH m. Panzer
Director
CHristoPHer H. anderson
Director
leslie e. bider
Director
dr. david t. Feinberg
Director
gHebre selassie meHreteab
Director
tHomas e. o’Hern
Director
dr. andrea l. riCH
Director
SENIOR MANAGEMENT
Jordan l. kaPlan
President & Chief Executive Officer
kennetH m. Panzer
Chief Operating Officer
William kamer
Chief Investment Officer
tHeodore e. gutH
Chief Financial Officer
allan golad
Senior Vice President,
Property Management
miCHael means
Senior Vice President,
Commercial Leasing
Douglas Emmett. Inc.
Douglas Emmett. Inc.
Douglas Emmett. Inc.
10-K
10-K
10-K
At Douglas Emmett, concern for the environment is ingrained in our corporate culture.
We are committed to implementing and maintaining fi nancially responsible sustainability
programs in our properties. Through the years we have proactively introduced conservation
and sustainability measures across our portfolio that have signifi cantly reduced our energy
consumption, increased our operational effi ciencies and reduced our carbon footprint. We
engage our service providers, suppliers, and tenants to join our mission and work with them to
pursue opportunities where cost savings and social responsibility merge.
We continue to strive to further our sustainability goals through ongoing energy benchmarking,
re-commissioning, cost effective retrofi tting, and implementation of best practices in the day
to day operation of our properties. We take an active policy making role with government and
with utility providers to promote economically viable energy saving and sustainability programs.
And, by staying abreast of the progress in technological advancements, we endeavor to quickly
implement proven innovations.
At Douglas Emmett we know that sustainability is a yard stick for both social
responsibility and fi scal management. Simply put, thoughtful implementation of
sustainable initiatives is good business.
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, 2011
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 Stock, $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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ 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, 2011, was $2.3 billion.
The registrant had 139,598,003 shares of its common stock, $0.01 par value, outstanding as of February 15, 2012.
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 2012 (“Proxy Statement”) are incorporated by reference in Part III of this Report on Form 10-K. 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, 2011.
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
Reserved
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 Operations
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 Accounting Fees and Services
Exhibits and Financial Statement Schedules
PART III
PAGE NO.
4
8
19
20
29
29
30
32
33
43
43
43
43
43
44
44
44
44
44
45
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 (Securities Act), and Section 21E of the Securities Exchange Act of 1934 as amended (Exchange Act). You can find many
(but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,”
“intends,” “plans,” “would,” “may” or other similar expressions in this Report. We claim the protection of the safe harbor contained
in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this
Report, or those which we may make orally or in writing from time to time, are based on our beliefs and assumptions, as well as
information currently available to us. Such statements are based on assumptions and the actual outcome will be affected by known
and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our
assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result,
our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly,
investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time
they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from
those expressed or implied by forward-looking statements include the following: adverse economic or real estate developments in
Southern California and Honolulu; a general downturn in the economy, such as the recent global financial crisis; decreased rental
rates or increased tenant incentive and vacancy rates; defaults on, early termination of, or non-renewal of leases by tenants;
increased interest rates and operating costs; failure to generate sufficient cash flows to service our outstanding indebtedness;
difficulties in raising capital for our unconsolidated institutional real estate funds; difficulties in identifying properties to acquire and
completing acquisitions; failure to successfully operate acquired properties and operations; failure to maintain our status as a Real
Estate Investment Trust (REIT) under the Internal Revenue Code of 1986, as amended (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. We focus on owning, acquiring and operating a substantial share of top-tier office properties and premier multifamily
communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities. We
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.
Through our interest in Douglas Emmett Properties, LP (our operating partnership) and its subsidiaries, including our
investments in our unconsolidated institutional real estate funds (Funds), we own or partially own, manage, lease, acquire and develop
real estate, consisting primarily of office and multifamily properties. At December 31, 2011, our consolidated portfolio of properties
included 50 Class A office properties (including ancillary retail space) totaling approximately 12.9 million rentable square feet of
space and 9 multifamily properties containing 2,868 apartment units, as well as the fee interests in 2 parcels of land subject to ground
leases. We also manage and own equity interests in unconsolidated Funds that, at December 31, 2011, owned 8 additional Class A
office properties totaling approximately 1.8 million square feet of space. We manage these 8 properties alongside our consolidated
portfolio; therefore we present our office portfolio statistics on a total portfolio basis, with a combined 58 Class A office properties
totaling approximately 14.7 million square feet. All of these properties are concentrated in 9 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.
We employ a focused business strategy that we have developed and implemented over the last four decades:
(cid:120) Concentration of High Quality Office and Multifamily Assets in Premier Submarkets. First, we select submarkets that
are supply constrained, with high barriers to entry, key lifestyle amenities, proximity to high-end executive housing and a
strong, diverse economic base. Virtually no entitled Class A office space is currently under construction in any of our
targeted submarkets. Our submarkets are dominated by small, affluent tenants, whose rent is very small relative to their
revenues and often not the paramount factor in their leasing decisions. In addition, our diverse base of office tenants operates
in a variety of legal, medical, entertainment, technology, financial and other professional businesses, reducing our
dependence on any one industry. For 2011, 2010 and 2009, no tenant exceeded 10% of our total rental revenue and tenant
reimbursements.
(cid:120) Disciplined Strategy of Acquiring Substantial Market Share. Once we select a submarket, we follow a disciplined
strategy of gaining substantial market share to provide us with extensive local transactional market information, pricing
power in lease and vendor negotiations and an enhanced ability to identify and negotiate investment opportunities. As a
result, we average over 20% of the market share of the Class A office space in our targeted submarkets.
(cid:120) Proactive Asset and Property Management. Finally, our fully integrated focused operating platform provides the
unsurpassed tenant service demanded in our submarkets, with in-house leasing, proactive asset and property management and
internal design and construction services. We believe this provides a key competitive advantage in managing our office
portfolio, which at December 31, 2011 consisted of 2,300 offices leases, with a median size of approximately 2,400 square
feet, and our 2,868 apartment units. 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, closing an average of approximately three office leases per day. Finally, our in house
construction company allows us to compress the time required for building out many smaller spaces, so that we can reduce
the resulting structural vacancy.
4
Insurance
We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the
properties in our portfolio under a blanket insurance policy. We believe the policy specifications and insured limits are appropriate and
adequate given the relative risk of loss, the cost of the coverage and industry practice; however, our insurance coverage may not be
sufficient to fully cover our losses. We do not carry insurance for certain losses, including, but not limited to, losses caused by riots or
war. Some of our policies, like those covering losses due to terrorism, earthquakes and floods, are insured subject to limitations
involving substantial self-insurance portions and significant deductibles and co-payments for such events. In addition, most of our
properties are located in Southern California, an area subject to an increased risk of earthquakes. While we presently carry earthquake
insurance on our properties, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from
earthquakes. We may reduce or discontinue earthquake, terrorism or other insurance on some or all of our properties in the future if
the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. In
addition, if certain of our properties were destroyed, we might not be able to rebuild them due to current zoning and land use
regulations. Also, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not
intend to increase our title insurance coverage as the market value of our portfolio increases.
Competition
We compete with a number of developers, owners and operators of office and commercial real estate, many of which own
properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below
current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants and we may face pressure
to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early
termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. In that case, our
financial condition, results of operations, cash flows, per share trading price of our common stock and ability to satisfy our debt
service obligations and to pay dividends to our stockholders may be adversely affected.
In addition, all of our multifamily properties are located in developed areas that include a number of other multifamily
properties, as well as single-family homes, condominiums and other residential properties. The number of competitive multifamily
and other residential properties in a particular area could have a material adverse effect on our ability to lease units and on our rental
rates.
Regulation
Our properties are subject to various covenants, laws, ordinances and regulations, including for example regulations relating
to common areas, fire and safety requirements, various environmental laws, the Americans with Disabilities Act of 1990 (ADA) and
rent control laws. Various environmental laws impose liability for release, disposal or exposure to various hazardous materials,
including for example asbestos-containing materials, a substance known to be present in a number of our buildings. Such laws could
impose liability on us even if we neither knew about nor were responsible for the contamination. Under the ADA, we must meet
federal requirements related to access and use by disabled persons to the extent that our properties are “public accommodations”. The
costs of our on-going efforts to comply with these laws are substantial. Moreover, as we have not conducted a comprehensive audit or
investigation of all of our properties to determine our compliance with applicable laws, we may be liable for investigation and
remediation costs, penalties, and/or damages, which could be substantial and could adversely affect our ability to sell or rent our
property or to borrow using such property as collateral.
The Cities of Los Angeles and Santa Monica have enacted rent control legislation, and portions of the Honolulu multifamily
market are subject to low and moderate-income housing regulations. Such laws and regulations limit our ability to increase rents, evict
tenants or recover increases in our operating expenses and could make it more difficult for us to dispose of properties in certain
circumstances. In addition, any failure to comply with low and moderate-income housing regulations could result in the loss of certain
tax benefits and the forfeiture of rent payments. Although under current California law we are able to increase rents to market rates
once a tenant vacates a rent-controlled unit, any subsequent increases in rental rates will remain limited by Los Angeles and Santa
Monica rent control regulations.
For more information about the potential impact of laws and regulations, see Item 1A “Risk Factors” of this Report.
Taxation of Douglas Emmett, Inc.
We believe that we qualify, and intend to continue to qualify, for taxation as a REIT under the Internal Revenue Code,
although we cannot assure that this has happened or will happen. See Item 1A. Risk Factors of this Report. The following summary is
qualified in its entirety by the applicable Internal Revenue Code provisions and related rules, and administrative and judicial
interpretations.
5
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 25% of the value of our total assets may be
represented by securities of one or more taxable REIT subsidiaries.
We own interests in various partnerships and limited liability companies. In the case of a REIT that is a partner in a
partnership or a member of a limited liability company that is treated as a partnership under the Internal Revenue Code, Treasury
Regulations provide that for purposes of the REIT income and asset tests, the REIT will be deemed to own its proportionate share of
the assets of the partnership or limited liability company (determined in accordance with its capital interest in the entity), subject to
special rules related to the 10% asset test, and will be deemed to be entitled to the income of the partnership or limited liability
company attributable to such share. The ownership of an interest in a partnership or limited liability company by a REIT may involve
special tax risks, including the challenge by the Internal Revenue Service (IRS) of the allocations of income and expense items of the
partnership or limited liability company, which would affect the computation of taxable income of the REIT, and the status of the
partnership or limited liability company as a partnership (as opposed to an association taxable as a corporation) for federal income tax
purposes.
We also own an interest in a subsidiary which is intended to be treated as a qualified REIT subsidiary (QRS). The Internal
Revenue Code provides that a QRS will be ignored for federal income tax purposes and all assets, liabilities and items of income,
deduction and credit of the QRS will be treated as our assets, liabilities and items of income. If any partnership, limited liability
company, or subsidiary in which we own an interest were treated as a regular corporation (and not as a partnership, subsidiary REIT,
QRS or taxable REIT subsidiary, as the case may be) for federal income tax purposes, we would likely fail to satisfy the REIT asset
tests described above and would therefore fail to qualify as a REIT, unless certain relief provisions apply. We believe that each of the
partnerships, limited liability companies, and subsidiaries (other than taxable REIT subsidiaries) in which we own an interest will be
treated for tax purposes as a partnership, disregarded entity (in the case of a 100% owned partnership or limited liability company),
REIT or QRS, as applicable, although no assurance can be given that the IRS will not successfully challenge the status of any such
organization.
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As of December 31, 2011, we owned interests in certain corporations which have elected to be treated as a taxable REIT
subsidiary. A REIT may own any percentage of the voting stock and value of the securities of a corporation which jointly elects with
the REIT to be a taxable REIT subsidiary, provided certain requirements are met. A taxable REIT subsidiary generally may engage in
any business, including the provision of customary or non-customary services to tenants of its parent REIT and of others, except a
taxable REIT subsidiary may not manage or operate a hotel or healthcare facility. A taxable REIT subsidiary is treated as a regular
corporation and is subject to federal income tax and applicable state income and franchise taxes at regular corporate rates. In addition,
a 100% tax may be imposed on a REIT if its rental, service or other agreements with its taxable REIT subsidiary, or the taxable REIT
subsidiary’s agreements with the REIT’s tenants, are not on arm’s-length terms.
In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in
an amount at least equal to (A) the sum of (i) 90% of our “real estate investment trust taxable income” (computed without regard to
the dividends paid deduction and our net capital gain) and (ii) 90% of the net income, if any (after tax), from foreclosure property,
minus (B) the sum of certain items of non-cash income. Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before we timely file our tax return for such year, if paid on or before the first regular dividend
payment date after such declaration and if we so elect and specify the dollar amount in our tax return. To the extent that we do not
distribute all of our net long-term capital gain or distribute at least 90%, but less than 100%, of our REIT taxable income, we will be
required to pay tax thereon at regular corporate tax rates. Furthermore, if we should fail to distribute during each calendar year at least
the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, we would be required to pay a 4% excise tax on the excess of such required distributions over the
amounts actually distributed.
If we fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, we will be required
to pay tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to our
stockholders in any year in which we fail to qualify will not be deductible by us nor will such distributions be required to be made.
Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be
entitled to the statutory relief. Failure to qualify for even one year could substantially reduce distributions to stockholders and could
result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to
pay the resulting taxes.
We and our stockholders may be required to pay state or local tax in various state or local jurisdictions, including those in
which we or they transact business or reside. The state and local tax treatment of us and our stockholders may not conform to the
federal income tax consequences discussed above. We may also be subject to certain taxes applicable to REITs, including taxes in lieu
of disqualification as a REIT, on undistributed income, on income from prohibited transactions and on built-in gains from the sale of
certain assets acquired from C corporations in tax-free transactions during a specified time period.
Our Funds each own 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.
Employees
As of December 31, 2011, we employed approximately 530 people. We believe that our relationships with our employees are
good.
Corporate Structure
We were formed as a Maryland corporation on June 28, 2005 to continue and expand the operations of Douglas Emmett
Realty Advisors and its 9 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.
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Funds
At December 31, 2011, our unconsolidated Funds had combined equity commitments totaling $554.7 million, of which we
committed $196.4 million and certain of our officers committed $2.25 million on the same terms as the other investors. The
investment period of our Funds expires not later than October 2012, followed by a ten-year value creation period. With limited
exceptions, our Funds will be our exclusive investment vehicle during their investment period, using the same underwriting and
leverage principles and focusing primarily on the same markets as we have. While the financial data in this Report does not include
our Funds on a consolidated basis, much of the property level data in this Report includes the properties owned by our Funds, as we
believe it assists in understanding our business. For further information, see Note 3 to our consolidated financial statements in Item 8
of this Report.
Segments
We have two reportable segments: Office Properties and Multifamily Properties. Information related to our business
segments for 2011, 2010 and 2009 is set forth in Note 16 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.
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 forward-looking statements, please
refer to the section entitled “Forward Looking Statements” at the beginning of this Report immediately prior to Item 1.
Risks Related to Our Properties and Our Business
All of our properties (including the properties owned by our Funds) are located in Los Angeles County, California
and Honolulu, Hawaii, and we are dependent on the Southern California and Honolulu economies. Therefore, we are
susceptible to adverse local conditions and regulations, as well as 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 and
Honolulu economic and regulatory environments (such as business layoffs or downsizing, industry slowdowns, relocations of
businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other
factors) as well as natural disasters that occur in these areas (such as earthquakes, floods, wildfires and other events). In addition,
California is also regarded as more litigious and more highly regulated and taxed than many other states, which may reduce demand
for office space in California. Any adverse developments in the economy or real estate market in Los Angeles County and the
surrounding region, or in Honolulu, or any decrease in demand for office space resulting from the California or Honolulu regulatory or
business environment could adversely impact the market price of our common stock, our financial condition, our results of operations
and our cash flows, including our ability to satisfy our debt service obligations and to pay dividends to our stockholders. We cannot
assure any level of growth in the Los Angeles County 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)
adverse changes in international, national or local economic and demographic conditions, such as the recent global economic
downturn;
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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, and the pronounced tightening of credit markets that has occurred
in the recent liquidity crisis, which could adversely affect our ability, or the ability of buyers and tenants of properties, to
obtain financing on favorable terms or at all;
increases in expenses and the possible inability to recover from our tenants the increased expenses, including, without
limitation, insurance costs, labor costs (such as the unionization of our employees and our subcontractors’ employees that
provide services to our buildings could substantially increase our operating costs), energy prices, real estate assessments and
other taxes, as well as costs of compliance with laws, regulations and governmental policies;
the effects of rent controls, stabilization laws and other laws or covenants regulating rental rates; and
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health,
safety, environmental, zoning and tax laws, governmental fiscal policies and the ADA.
In addition, periods of economic slowdown or recession, such as the recent global economic downturn, rising interest rates or
declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents
and property values and an increased incidence of defaults under existing leases. If we cannot operate our properties effectively, or if
we do not acquire desirable properties, and when appropriate dispose of properties, on favorable terms at appropriate times, the market
price of our common stock, our financial condition, our results of operations and our cash flows, including our ability to satisfy our
debt service obligations and to pay dividends to our stockholders, could be adversely affected. There can be no assurance that we can
achieve our return objectives.
We have a substantial amount of indebtedness, which may affect our ability to pay dividends, may expose us to
interest rate fluctuation risk and may expose us to the risk of default under our debt obligations. As of December 31, 2011, our
total consolidated indebtedness was approximately $3.62 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.
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 and other constraints 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 flows 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 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;
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(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, the market price of our common stock, our financial condition, our results of
operations and our cash flows, including our ability to satisfy our debt service obligations and to pay dividends to our stockholders,
could be adversely affected. In addition, any foreclosure on our properties could create taxable income without accompanying cash
proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Internal Revenue Code.
The recent global financial downturn 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 crisis and
recession, with some financial and economic analysts predicting that the world economy may encounter a prolonged economic period
characterized by high unemployment, limited availability of credit and decreased consumer and business spending.
The downturn has had, and may continue to have, an unprecedented negative impact on the global credit markets. Credit
tightened significantly. If this reoccurs or other factors affect the availability of credit to us, 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 Funds’ ability to make distributions to its respective members, including us.
The economic downturn has adversely affected, and may continue to adversely affect, the businesses of many of our tenants.
As a result, we have seen increases in bankruptcies of our tenants and increased defaults by tenants, which could continue, 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 may 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
recent 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 (including in 2011) rental rates for expiring leases may be higher than starting
rental rates for new leases. Significant rent reductions could result in a write-down of one or more of our consolidated properties, or
our equity investments in our Funds.
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Potential losses, including from adverse weather conditions, natural disasters and title claims, may not be covered by
insurance. Our business operations in Los Angeles County, 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 reduce or discontinue earthquake or any other insurance coverage on some
or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage
discounted for the risk of loss.
Furthermore, we do not carry insurance for certain losses, including, but not limited to, losses caused by certain
environmental conditions, asbestos, riots or war. In addition, our title insurance policies may not insure for the current aggregate
market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio
increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title
claims.
If we experience a loss that is uninsured or which exceeds policy limits, we could incur significant costs and lose the capital
invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged
properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were
irreparably damaged.
In addition, if any of our properties were destroyed or damaged, then we might not be permitted to rebuild many of those
properties to their existing height or size at their existing location under current land-use laws and policies. In the event that we
experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing
specifications and otherwise may have to upgrade such property to meet current code requirements.
Terrorism and other factors affecting demand for our properties could harm our operating results. The strength and
profitability of our business depends on demand for and the value of our properties. 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 substantially affected the availability and price of insurance coverage for certain types of damages or occurrences,
and our insurance policies for terrorism include large deductibles and co-payments. The lack of sufficient insurance for these types of
acts could expose us to significant losses and could have a negative impact on our operations.
We face intense competition, which may decrease or prevent increases of the occupancy and rental rates of our
properties. We compete with a number of developers, owners and operators of office and multifamily real estate, many of which own
properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below
current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants, and we may
be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant
improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. In
that case, the market price of our common stock, our financial condition, our results of operations and our cash flows, including our
ability to satisfy our debt service obligations and to pay dividends to our stockholders, may be adversely affected.
In addition, all of our multifamily properties are located in developed areas that include a significant number of other
multifamily properties, as well as single-family homes, condominiums and other residential properties. The number of competitive
multifamily and other residential properties in a particular area could have a material adverse effect on our ability to lease units and on
our rental rates.
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We may be unable to renew leases or lease vacant space. As of December 31, 2011, 10.7% of the square footage of the
properties in our total office portfolio, including 10.0% of our consolidated office portfolio, was available for lease. As of December
31, 2011, 21.8% of leases (representing 11.2% of the square footage) in our total portfolio, including 21.0% of leases (representing
10.7% of the square footage) in our consolidated portfolio, were scheduled to expire in 2012. In addition, as of December 31, 2011,
approximately 0.4% of the units in our multifamily portfolio were available for lease, and substantially all of the leases in our
multifamily portfolio are originally renewable on an annual basis at the tenant’s option and, if not renewed or terminated,
automatically convert to month-to-month terms. Our leases may not be renewed, in which case we must find new tenants for that
space. To attract new tenants or retain existing tenants, particularly in periods of contraction, we may have to accept rental rates below
our existing rental rates or offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal
options. Accordingly, portions of our office and multifamily properties may remain vacant for extended periods of time. In addition,
some existing leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current
market rate or to terminate their leases prior to the expiration date thereof.
Furthermore, as part of our business strategy, we have focused and intend to continue to focus on securing smaller-sized
companies as tenants for our office portfolios. Smaller tenants may present greater credit risks and be more susceptible to economic
downturns than larger tenants, and may be more likely to cancel or elect not to renew their leases. In addition, we intend to actively
pursue opportunities for what we believe to be well-located and high quality buildings that may be in a transitional phase due to
current or impending vacancies. We cannot assure you that any such vacancies will be filled following a property acquisition, or that
any new tenancies will be established at or above market rates. If the rental rates for our properties decrease, other tenant incentives
increase, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space, the market
price of our common stock, our financial condition, our results of operations and our cash flows, including our ability to satisfy our
debt service obligations and to pay dividends to our stockholders, would be adversely affected.
Real estate investments are generally illiquid. Our real estate investments are relatively difficult to sell quickly. Return of
capital and realization of gains, if any, from an investment generally will occur upon disposition or refinance of the underlying
property. We may be unable to realize our investment objectives by sale, other disposition or refinance at attractive prices within any
given period of time or may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in
or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers,
changes in national or international economic conditions, such as the recent economic downturn, and changes in laws, regulations or
fiscal policies of jurisdictions in which the property is located. Furthermore, certain properties may be adversely affected by
contractual rights, such as rights of first offer.
Because we own real property, we are subject to extensive environmental regulation, which creates uncertainty
regarding future environmental expenditures and liabilities. Environmental laws regulate, and impose liability for, releases of
hazardous or toxic substances into the environment. Under various provisions of these laws, an owner or operator of real estate may be
liable for costs related to soil or groundwater contamination on, in, or migrating to or from its property. In addition, persons who
arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the
disposal site. Such laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the
hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these
substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow using
such property as collateral. In addition, persons exposed to hazardous or toxic substances may sue for personal injury damages. For
example, some laws impose liability for release of or exposure to asbestos-containing materials, a substance known to be present in a
number of our buildings. In other cases, some of our properties have been (or may have been) impacted by contamination from past
operations or from off-site sources. As a result, in connection with our current or former ownership, operation, management and
development of real properties, we may be potentially liable for investigation and cleanup costs, penalties, and damages under
environmental laws.
Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I
assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and
may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable
laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments.
We cannot assure you that these or other environmental studies identified all potential environmental liabilities, or that we
will not incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may
face significant remediation costs, and we may find it difficult to sell any affected properties.
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We may incur significant costs complying with laws, regulations and covenants that are applicable to our properties.
The properties in our portfolio are subject to various covenants and federal, state and local laws and regulatory requirements,
including permitting and licensing requirements. Such laws and regulations, including municipal or local ordinances, zoning
restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to
obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to
acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may
relate to fire and safety, seismic, asbestos-cleanup or hazardous material abatement requirements. There can be no assurance that
existing laws and regulations will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that
additional regulations will not be adopted that increase such delays or result in additional costs. Our failure to obtain required permits,
licenses and zoning relief or to comply with applicable laws could have a material adverse effect on our business, financial condition
and results of operations.
Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents
and pass through new or increased operating costs to our tenants. Certain states and municipalities have adopted laws and
regulations imposing restrictions on the timing or amount of rent increases or have imposed regulations relating to low- and moderate-
income housing. Currently, neither California nor Hawaii have state mandated rent control, but various municipalities within Southern
California, such as the Cities of Los Angeles and Santa Monica, have enacted rent control legislation. All but one of the properties in
our Los Angeles County multifamily portfolio are affected by these laws and regulations. In addition, we have agreed to provide low-
and moderate-income housing in many of the units in our Honolulu multifamily portfolio in exchange for certain tax benefits. We
presently expect to continue operating and acquiring properties in areas that either are subject to these types of laws or regulations or
where legislation with respect to such laws or regulations may be enacted in the future. Such laws and regulations limit our ability to
charge market rents, increase rents, evict tenants or recover increases in our operating expenses and could make it more difficult for us
to dispose of properties in certain circumstances. Similarly, compliance procedures associated with rent control statutes and low- and
moderate-income housing regulations could have a negative impact on our operating costs, and any failure to comply with low- and
moderate-income housing regulations could result in the loss of certain tax benefits and the forfeiture of rent payments. In addition,
such low- and moderate-income housing regulations require us to rent a certain number of units at below-market rents, which has a
negative impact on our ability to increase cash flows from our properties subject to such regulations. Furthermore, such regulations
may negatively impact our ability to attract higher-paying tenants to such properties.
We may be unable to complete acquisitions that would grow our business, and even if consummated, we may fail to
successfully integrate and operate acquired properties. Our planned growth strategy includes the disciplined acquisition of
properties as opportunities arise. Our ability to acquire properties on favorable terms and successfully integrate and operate them is
subject to significant risks, including the following:
(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 flows 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
13
(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, the market price of our common stock, our financial condition, our results of operations and our cash flows, including
our ability to satisfy our debt service obligations and to pay dividends to our stockholders, could be adversely affected.
We may be unable to successfully expand our operations into new markets. If the opportunity arises, we may explore
acquisitions of properties in new markets. Each of the risks applicable to our ability to acquire, integrate and operate properties in our
current markets is also applicable to our ability to acquire and successfully integrate and operate properties in new markets. In addition
to these risks, we will not possess the same level of familiarity with the dynamics and market conditions of any new markets that we
may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share
or achieve a desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could
adversely affect the market price of our common stock, our financial condition, our results of operations and our cash flows, including
our ability to satisfy our debt service obligations and to pay dividends to our stockholders.
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 the market price of our common
stock, our financial condition, our results of operations and our cash flows, including our ability to satisfy our debt service obligations
and to pay dividends to our stockholders.
If we default on the leases to which some of our properties are subject, our business could be adversely affected. We
have leasehold interests in certain of our properties. If we default under the terms of these leases, we may be liable for damages and
could lose our leasehold interest in the property or our options to purchase the fee interest in such properties. If any of these events
were to occur, our business and results of operations would be adversely affected.
The cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can
we assure you of our ability to make distributions in the future. We may elect to distribute the minimum amount to remain
compliant with REIT requirements while retaining excess capital for future operations. We may use borrowed funds to make
distributions or pay some of the required distributions in equity. Our annual distributions may exceed estimated cash available
from operations. While we intend to fund the difference out of excess cash or by incurring additional debt, if necessary, our inability
to make, or election to not make, the expected distributions could result in a decrease in the market price of our common stock.
Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash
flows. Even as a REIT for federal income tax purposes, we are required to pay some state and local taxes on our properties. The real
property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing
authorities. In California, under current law, reassessment occurs primarily as a result of a “change in ownership”. The impact of a
potential reassessment may take a considerable amount of time, during which the property taxing authorities make a determination of
the occurrence of a “change of ownership”, as well as the actual reassessed value. Therefore, the amount of property taxes we pay
could increase substantially from what we have paid in the past. If the property taxes we pay increase, our cash flows would be
impacted, and our ability to pay expected dividends to our stockholders could be adversely affected.
14
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 executive
officers, 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, 2011, our executive officers
owned approximately 5% of our outstanding common stock, or approximately 25% assuming that they convert all of their interests in
our operating partnership and exercise all of their options. As a result, our 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.
Our growth depends on external sources of capital which are outside of our control. In order to qualify as a REIT, we
are required under the Internal Revenue Code to distribute annually at least 90% of our “real estate investment trust” taxable income,
determined without regard to the dividends paid deduction and by excluding any net capital gain. To the extent that we do not
distribute all of our net long-term capital gain or distribute at least 90%, of our REIT taxable income, we will be required to pay tax
thereon at regular corporate tax rates. Because of these distribution requirements, we may not be able to fund future capital needs,
including any necessary acquisition financing, from operating cash flows. Consequently, we may 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 on many factors, some of which include:
(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 flows and cash dividends; and
the market price per share of our common stock.
Recently, the credit markets have been subject to significant disruptions. If we cannot obtain capital from third-party sources,
we may not be able to acquire or develop properties when strategic opportunities exist, meet the capital and operating needs of our
existing properties, satisfy our debt service obligations or pay dividends to our stockholders necessary to maintain our qualification as
a REIT.
Our charter, the partnership agreement of our operating partnership and Maryland law contain provisions that may
delay or prevent a change of control transaction.
Our charter contains a 5.0% ownership limit. Our charter, subject to certain exceptions, contains restrictions on ownership
that limit, and authorizes our directors to take such actions as are necessary and desirable to limit, any person to actual or constructive
ownership of no more than 5.0% in value of the outstanding shares of our stock and no more than 5.0% of the value or number,
whichever is more restrictive, of the outstanding shares of our common stock. Our board of directors, in its sole discretion, may
exempt a proposed transferee from the ownership limit. However, our board of directors may not grant an exemption from the
ownership limit to any proposed transferee whose ownership, direct or indirect, of more than 5.0% of the value or number of our
outstanding shares of our common stock could jeopardize our status as a REIT. The ownership limit contained in our charter and the
restrictions on ownership of our common stock may delay or prevent a transaction or a change of control that might involve a
premium price for our common stock or otherwise be in the best interest of our stockholders.
15
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)
(cid:120)
(cid:120)
redemption rights of qualifying parties;
transfer restrictions on our operating partnership units;
the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited
partners; and
the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified
circumstances.
Any potential change of control transaction may be further limited as a result of provisions of the partnership unit designation
for certain long-term incentive plan units (LTIP units), which require us to preserve the rights of LTIP unit holders and may restrict us
from amending the partnership agreement for our operating partnership in a manner that would have an adverse effect on the rights of
LTIP unit holders.
Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the Maryland General
Corporation Law (MGCL) may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change
of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-
prevailing market price of our common stock, including:
(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.
16
Under their employment agreements, certain of our executive officers will have the right to terminate their
employment and receive severance if there is a change of control. We have employment agreements with Jordan L. Kaplan,
Kenneth M. Panzer, William Kamer and Theodore E. Guth, which provide that each executive may terminate his employment under
certain conditions, including after a change of control, and receive severance based on two or three times (depending on the officer)
his annual total of salary, bonus and incentive compensation such as LTIP units, options or outperformance grants. In addition, these
executive officers would not be restricted from competing with us after their departure.
Our fiduciary duties as sole stockholder of the general partner of our operating partnership could create conflicts of
interest. We, as the sole stockholder of the general partner of our operating partnership, have fiduciary duties to the other limited
partners in our operating partnership, the discharge of which may conflict with the interests of our stockholders. The limited partners
of our operating partnership have agreed that, in the event of a conflict in the fiduciary duties owed by us to our stockholders and, in
our capacity as general partner of our operating partnership, to such limited partners, we are under no obligation to give priority to the
interests of such limited partners. In addition, those persons holding operating partnership units will have the right to vote on certain
amendments to the operating partnership agreement (which require approval by a majority in interest of the limited partners, including
us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a
manner that conflicts with the interests of our stockholders. For example, we are unable to modify the rights of limited partners to
receive distributions as set forth in the operating partnership agreement in a manner that adversely affects their rights without their
consent, even though such modification might be in the best interest of our stockholders.
The loss of any member of our 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, William Kamer and Theodore E. Guth. If we lose the
services of any member of our executive officers, our business may be significantly impaired. In addition, many of our executives
have strong industry reputations, which aid us in identifying acquisition and borrowing opportunities, having such opportunities
brought to us, and negotiating with tenants and sellers of properties. The loss of the services of these key personnel could materially
and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants, property sellers
and industry personnel.
If we fail to maintain an effective system of integrated internal control over financial reporting, we may not be able to
accurately report our financial results. An effective system of internal control over financial reporting is necessary for us to provide
reliable financial reports, prevent fraud and operate successfully as a public company. As part of our ongoing monitoring of internal
controls, we may discover material weaknesses or significant deficiencies in our internal controls that we believe require remediation.
If we discover such weaknesses, we will make efforts to improve our internal controls in a timely manner. Any system of internal
controls, however well designed and operated, is based in part on certain assumptions and can only provide reasonable, not absolute,
assurance that the objectives of the system are met. Any failure to maintain effective internal controls, or implement any necessary
improvements in a timely manner, could have a material adverse effect on our business and operating results, or cause us to not meet
our reporting obligations, which could affect our ability to remain listed with the New York Stock Exchange. Ineffective internal
controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect
on the trading price of our securities.
Our board of directors may change significant corporate policies without stockholder approval. Our investment,
financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization
and operations, will be determined by our board of directors. These policies may be amended or revised at any time and from time to
time at the discretion of the board of directors without a vote of our stockholders. In addition, the board of directors may change our
policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in
these policies could have an adverse effect on the market price of our common stock, our financial condition, our results of operations
and our cash flows, including our ability to satisfy our debt service obligations and to pay dividends to our stockholders.
Compensation awards to our management may not be tied to or correspond with our improved financial results or
share price. The compensation committee of our board of directors is responsible for overseeing our compensation and employee
benefit plans and practices, including our executive compensation plans and our incentive compensation and equity-based
compensation plans. Our compensation committee has significant discretion in structuring compensation packages and may make
compensation decisions based on any number of factors. As a result, compensation awards may not be tied to or correspond with
improved financial results at our company or the share price of our common stock.
17
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 may 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.
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.
Our Funds each own properties through an entity which is intended to also qualify as a REIT, and the failure of those entities
to so qualify could have similar impacts on us.
Even if we qualify as a REIT, we will be required to pay some taxes. Even if we qualify as a REIT for federal income tax
purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject
to income tax to the extent we distribute less than 100% of our REIT taxable income (including capital gains). Moreover, if we have
net income from “prohibited transactions,” that income will be subject to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property held primarily for sale to customers in the ordinary course of business.
The tax imposed on REITs engaging in “prohibited transactions” will limit our ability to engage in transactions which
would be treated as sales for federal income tax purposes. A REIT’s net income from prohibited transactions is subject to a 100%
tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property but including any
property held in inventory primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any
properties that would be characterized as inventory held for sale to customers in the ordinary course of our business, such
characterization is a factual determination and we cannot guarantee that the IRS would agree with our characterization of our
properties.
18
In addition, any net taxable income earned directly by our taxable REIT subsidiaries, 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 several subsidiaries as taxable REIT subsidiaries, 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
19
Item 2. Properties
Our total portfolio of 67 properties consists of 50 office properties that we directly own and operate, 8 office properties that
we operate and indirectly own through our equity interest in our unconsolidated Funds, and 9 wholly-owned multifamily properties.
Our properties are located in the Brentwood, Olympic Corridor, Century City, Beverly Hills, Santa Monica, Westwood, Sherman
Oaks/Encino, Warner Center/Woodland Hills and Burbank submarkets of Los Angeles County, California, and in Honolulu, Hawaii.
Office Portfolio
Presented below is an overview of certain information regarding our total office portfolio as of December 31, 2011:
Office Portfolio by Submarket (1)
Number of
Properties
Rentable Square
Feet (2)
Square Feet as a
Percent of Total
Beverly Hills
Brentwood
Burbank
Century City
Honolulu
Olympic Corridor
Santa Monica
Sherman Oaks/Encino
Warner Center/Woodland Hills
Westwood
Total
7
14
1
3
4
5
8
11
3
2
58
1,416,762
1,700,882
420,949
916,059
1,716,697
1,098,068
970,704
3,181,172
2,855,877
396,807
9.6 %
11.6
2.9
6.2
11.7
7.5
6.6
21.7
19.5
2.7
14,673,977
100.0 %
(1) All properties are 100% owned except 8 properties totaling 1.8 million square feet owned by our Funds and a 79,000 square foot property owned by a consolidated
(2)
joint venture in which we own a 66.7% interest.
Based on Building Owners and Managers Association (BOMA) 1996 remeasurement. Total consists of 12,917,612 leased square feet (includes 268,230 square
feet with respect to signed leases not commenced), 1,567,805 available square feet, 99,834 building management use square feet, and 88,726 square feet of BOMA
1996 adjustment on leased space.
20
The following table presents our total office portfolio occupancy and in-place rents as of December 31, 2011:
Office Portfolio by Submarket (1)
Percent Leased(2)
Annualized Rent(3)
Beverly Hills
Brentwood
Burbank
Century City
Honolulu
Olympic Corridor
Santa Monica (5)
Sherman Oaks/Encino
Warner Center/Woodland Hills
Westwood
Total / Weighted Average
90.1 %
$
50,395,015
$
86.5
100.0
94.8
89.2
90.1
97.8
92.2
81.2
87.7
89.3
55,771,077
14,243,935
32,044,730
47,547,653
31,628,050
50,025,230
91,361,197
66,553,818
12,637,837
$
452,208,542
Annualized Rent
Per Leased
Square Foot (4)
42.18
39.34
33.84
37.43
32.67
33.04
53.91
32.23
29.62
37.46
35.75
(1)
(2)
(3)
(4)
(5)
All properties are 100% owned except 8 properties totaling 1.8 million square feet owned by our Funds and a 79,000 square foot property owned by a consolidated
joint venture in which we own a 66.7% interest.
Includes 268,230 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) before abatements under leases commenced as of
December 31, 2011 (does not include 268,230 square feet with respect to signed leases not yet commenced). For our triple net Burbank and Honolulu office
properties, annualized rent is calculated by adding expense reimbursements to base rent.
Represents annualized rent divided by leased square feet (excluding 268,230 square feet with respect to signed leases not commenced as set forth in note (2) above
for the total).
Includes $1,332,386 of annualized rent attributable to our corporate headquarters at our Lincoln/Wilshire property.
21
The following table presents the submarket concentration for our total office portfolio as of December 31, 2011:
Office Portfolio by Submarket (1)
Square Feet
Square Feet
Market Share
Douglas Emmett
Submarket
Rentable
Rentable
Douglas Emmett
Beverly Hills
Brentwood
Burbank
Century City
Honolulu (2)
Olympic Corridor
Santa Monica
Sherman Oaks/Encino
Warner Center/Woodland Hills
Westwood
Total (2)
1,416,762
1,700,882
420,949
916,059
7,709,880
3,356,126
6,662,410
10,064,599
1,637,712
5,128,779
1,098,068
970,704
3,181,172
2,855,877
396,807
3,022,969
8,700,348
6,171,530
7,239,293
4,443,398
14,594,992
62,499,332
18.4 %
50.7
6.3
9.1
31.9
36.3
11.2
51.5
39.4
8.9
23.4
(1) All properties are 100% owned except 8 properties totaling 1.8 million square feet owned by our Funds.
(2)
In addition, a joint venture in which we hold a 66.7% interest owns a 79,000 square foot building in the Kapiolani District of Honolulu.
22
Tenant Diversification
Our total office portfolio is currently leased to approximately 2,200 tenants in a variety of industries, including entertainment,
real estate, technology, legal and financial services. The following table sets forth information regarding tenants with 1.0% or more of
annualized rent in our total office portfolio as of December 31, 2011:
Office Portfolio by Tenant (1)
Time Warner(4)
William Morris Endeavor(5)
AIG (Sun America Life Insurance)
Bank of America(6)
The Macerich Partnership, L.P.
Total
Number of
Leases
Number of
Properties
Lease
Expiration(2)
Total Leased
Square Feet
4
2
1
12
1
20
4
1
1
9
1
16
2013-2020
2027
2013
2012-2018
2018
625,748
148,071
182,010
132,508
90,832
1,179,169
Percent of
Rentable
Square
Feet
Annualized
Rent(3)
Percent of
Annualized
Rent
4.3 %
$21,175,355
4.7 %
1.0
1.2
0.9
0.6
8.0
7,268,763
6,052,536
5,616,527
4,579,778
$44,692,959
1.6
1.3
1.2
1.0
9.9
(1) All properties are 100% owned except 8 properties totaling 1.8 million square feet owned by our Funds and a 79,000 square foot property owned by a
(2)
(3)
(4)
(5)
(6)
consolidated joint venture in which we own a 66.7% interest .
Expiration dates are per leases and do not assume exercise of renewal, extension or termination options. For tenants with multiple leases, other than storage,
ATM and similar leases, expirations are shown as a range.
Represents annualized monthly cash base rent (i.e. excludes tenant reimbursements, parking and other revenue) before abatements under leases commenced as
of December 31, 2011 (excluding 268,230 square feet with respect to signed leases not yet commenced at December 31, 2011). For our triple net Burbank and
Honolulu office properties, annualized rent is calculated by adding expense reimbursements to base rent.
Includes a 10,000 square foot lease expiring in October 2013, a 150,000 square foot lease expiring in April 2016, a 421,000 square foot lease expiring in
September 2019 and a 45,000 square foot lease expiring in December 2020.
Includes a 146,000 square foot lease expiring in June 2027 and a 2,000 square foot month-to-month storage lease. Does not include an additional 24,000
square feet under leases that commence in 2012 and 2013, expiring in 2027.
Includes a 21,000 square foot lease expiring in September 2012, an 8,000 square foot lease expiring in July 2013, a 7,000 square foot lease expiring in March
2014, a 9,000 square foot lease expiring in September 2014, an 11,000 square foot lease expiring in October 2014, an 11,000 square foot lease expiring in
November 2014, a 4,000 square foot lease expiring in February 2015, a 21,000 square foot lease expiring in February 2015, a 6,000 square foot lease expiring
in May 2015, a 23,000 square foot lease expiring in December 2015, a 12,000 square foot lease expiring in March 2018 and a small ATM lease.
23
Industry Diversification
The following table sets forth information relating to tenant diversification by industry in our total office portfolio based on
annualized rent as of December 31, 2011:
Industry
Legal
Financial Services
Entertainment
Real Estate
Accounting & Consulting
Health Services
Insurance
Retail
Technology
Advertising
Public Administration
Educational Services
Other
Total
Number of
Leases (1)
Annualized Rent as
a Percent of Total
461
295
141
173
282
313
103
188
100
67
65
21
91
18.3 %
14.3
12.4
9.7
8.8
8.1
7.8
7.0
4.4
3.1
2.5
1.4
2.2
2,300
100.0 %
(1) All properties are 100% owned except 8 properties totaling 1.8 million square feet owned by our Funds and a 79,000 square foot property owned by a
consolidated joint venture in which we own a 66.7% interest.
24
Lease Distribution
The following table sets forth information relating to the distribution of leases in our total office portfolio, based on rentable
square feet leased as of December 31, 2011:
Square Feet Under Lease
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
Signed leases not commenced
Available
Building Management Use
BOMA Adjustment(5)
Total
Number of
Leases
Leases as a
Percent of
Total
Rentable
Square Feet (1)
Square Feet
as a Percent
of Total
Annualized
Rent(2)(3)
Annualized
Rent as a
Percent of Total
1,193
51.9
%
1,605,114
10.9
%
$
57,573,571
12.7
%
801
202
80
19
5
34.8
8.8
3.5
0.8
0.2
3,853,119
2,791,001
2,177,908
1,197,708
1,024,532
26.3
19.0
14.8
8.2
7.0
136,820,200
101,570,915
76,010,365
44,651,958
35,581,533
30.2
22.5
16.8
9.9
7.9
2,300
100.0
%
12,649,382
86.2
%
$
452,208,542
100.0
%
268,230
1,567,805
99,834
88,726
1.8
10.7
0.7
0.6
2,300
100.0
%
14,673,977
100.0
%
$
452,208,542
100.0
%
(1)
(2)
(3)
(4)
(5)
Based on Building Owners and Managers Association (BOMA) 1996 remeasurement.
Represents annualized monthly cash base rent (i.e. excludes tenant reimbursements, parking and other revenue) before abatements under leases commenced as of
December 31, 2011 (excluding 268,230 square feet with respect to signed leases not yet commenced at December 31, 2011). For our triple net Burbank and
Honolulu office properties, annualized rent is calculated by adding expense reimbursements to base rent.
All properties are 100% owned except 8 properties totaling 1.8 million square feet owned by our Funds and a 79,000 square foot property owned by a consolidated
joint venture in which we own a 66.7% interest.
Average tenant size is approximately 5,500 square feet. Median is approximately 2,400 square feet.
Represents square footage adjustments for leases that do not reflect BOMA 1996 remeasurement.
25
Lease Expirations
The following table sets forth a summary schedule of lease expirations for leases in place as of December 31, 2011, plus
available space, for each of the ten years beginning January 1, 2012 and thereafter in our total office portfolio (unless otherwise stated
in the footnotes, the information set forth in the table assumes that tenants exercise no renewal options and no early termination
rights):
Year of Lease Expiration
Expiring
Number of
Leases
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Thereafter
Subtotal
Signed leases not commenced
Available
Building management use
BOMA adjustment (6)
Expiring
Sqaure Feet
as a Percent
of Total
Annualized
Rent as a
Percent
of Total
Annualized
Rent Per
Leased Square
Foot (4)
Annualized
Rent (2)(3)
11.2
%
$
59,800,082
13.2
%
$
36.29
13.0
12.8
11.2
11.7
8.2
4.5
5.6
2.9
2.5
2.6
86.2
1.8
10.7
0.7
0.6
74,440,004
66,255,072
55,636,860
57,000,805
40,590,293
26,722,900
28,772,317
14,397,572
12,590,915
16,001,722
16.5
14.6
12.3
12.6
9.0
5.9
6.4
3.2
2.8
3.5
%
$
452,208,542
100.0
%
39.03
35.28
33.88
33.16
33.88
40.52
34.86
33.94
33.79
42.60
35.75
-
-
-
-
Annualized
Rent Per
Leased
Square
Foot at
Expiration (5)
$
36.38
40.38
37.63
36.95
36.82
37.82
47.80
42.18
42.82
41.14
58.67
39.43
Rentable
Square
Feet (1)
1,647,705
1,907,401
1,877,973
1,642,223
1,718,872
1,198,025
659,465
825,277
424,186
372,619
375,636
501
438
391
291
294
177
76
42
44
33
13
2,300
12,649,382
268,230
1,567,805
99,834
88,726
Total/Weighted Average
2,300
14,673,977
100.0
%
$
452,208,542
100.0
%
$
35.75
$
39.43
(1) Based on Building Owners and Managers Association (BOMA) 1996 remeasurement.
(2) Represents annualized monthly cash base rent (i.e. excludes tenant reimbursements, parking and other revenue) before abatements under leases commenced as of
December 31, 2011 (excluding 268,230 square feet with respect to signed leases not yet commenced at December 31, 2011). For our triple net Burbank and Honolulu
office properties, annualized rent is calculated by adding expense reimbursements to base rent.
(3) All properties are 100% owned except 8 properties totaling 1.8 million square feet owned by our Funds and a 79,000 square foot property owned by a consolidated
joint venture in which we own a 66.7% interest.
(4) Represents annualized base rent divided by leased square feet.
(5) Represents annualized base rent at expiration divided by leased square feet.
(6) Represents the square footage adjustments for leases that do not reflect BOMA 1996 remeasurement.
26
Multifamily Portfolio
The following table presents an overview of our wholly-owned multifamily portfolio, including occupancy and in-place rents, as of
December 31, 2011:
Submarket
Brentwood
Honolulu
Santa Monica
Total
Submarket
Brentwood
Honolulu
Santa Monica(2)
Total / Weighted Average
Number of
Properties
Number of
Units
5
2
2
9
950
1,098
820
2,868
Percent
Leased
Annualized
Rent (1)
99.3 %
$
22,988,516
$
99.9
99.6
99.6
18,796,140
22,197,936
$
63,982,592
Unit as a
Percent
of Total
%
33
38
29
100
%
Monthly
Rent per
Lease Unit
2,032
1,428
2,264
1,866
(1) Represents annualized monthly multifamily rental income under leases commenced as of December 31, 2011.
(2) Excludes 8,013 square feet of ancillary retail space, which generates $221,971 of annualized rent as of December 31, 2011.
27
Historical Tenant Improvements and Leasing Commissions
The following table sets forth certain historical information regarding tenant improvement and leasing commission costs for
tenants at the properties in our total office portfolio (including properties owned by our Funds) through December 31, 2011:
Renewals (1)
Number of leases
Square feet
Tenant improvement costs per square foot (2)(3)
Leasing commission costs per square foot (2)
Total tenant improvement and leasing commission costs (2)
New leases (4)
Number of leases
Square feet
Tenant improvement costs per square foot (2)(3)
Leasing commission costs per square foot (2)
Total tenant improvement and leasing commission costs (2)
Total
Number of leases
Square feet
Tenant improvement costs per square foot (2)(3)
Leasing commission costs per square foot (2)
Total tenant improvement and leasing commission costs (2)
Year Ended December 31,
2011
2010
2009
427
406
324
1,916,602
1,808,739
1,516,453
$
9.51
$
10.66
$
7.14
$
5.72
$
6.29
$
6.53
$
15.23
$
16.95
$
13.67
322
275
223
1,004,811
897,196
654,558
$
19.37
$
18.43
$
15.21
$
7.22
$
7.61
$
8.65
$
26.59
$
26.04
$
23.86
749
681
547
2,921,413
2,705,935
2,171,011
$
12.90
$
13.23
$
9.57
$
6.24
$
6.73
$
7.17
$
19.14
$
19.96
$
16.74
Includes retained tenants that have relocated or expanded into new space within our portfolio.
(1)
(2) 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.
(3) 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.
(4) Excludes retained tenants that have relocated or expanded into new space within our portfolio.
28
Historical Capital Expenditures
The following table sets forth certain information regarding historical recurring capital expenditures at the properties in our
total office portfolio through December 31, 2011:
Office
Recurring capital expenditures
Total square feet (1)
Recurring capital expenditures per square foot
Year Ended December 31,
2011
2,746,628
$
2010
2,854,605
$
2009
2,709,654
$
11,892,726
11,891,541
11,810,724
$
0.23
$
0.24
$
0.23
(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, 2011:
Multifamily
Recurring capital expenditures
Total units
Recurring capital expenditures per unit
Year Ended December 31,
2011
1,440,962
$
2010
1,124,886
$
2009
1,118,460
$
2,868
2,868
2,868
$
502
$
392
$
390
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 $24,000 and
$40,000 per unit, depending on apartment size, to bring the unit up to our standards. We have characterized these expenditures as non-
recurring capital expenditures. Our make-ready costs associated with the turnover of our other units are included in recurring capital
expenditures.
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. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we
believe would reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.
Item 4. Reserved
29
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 15, 2012, the reported
closing sale price per share of our common stock on the New York Stock Exchange was $20.90. 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:
2011
Dividend
Common Stock Price
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
0.10
$
0.13
$
0.13
$
0.13
High
Low
$
$
19.25
16.86
$
$
21.05
18.73
$
$
20.80
15.54
$
$
19.70
15.92
2010
Dividend
Common Stock Price
$
0.10
$
0.10
$
0.10
$
0.10
High
Low
$
$
16.07
13.00
$
$
17.75
14.22
$
$
17.69
13.27
$
$
18.56
15.87
Holders of Record
We had 18 holders of record of our common stock on February 15, 2012. Certain of our shares are held in “street” name and
accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Dividend Policy
We typically pay dividends to common stockholders quarterly at the discretion of the Board of Directors. Dividend amounts
depend on our available cash flows, financial condition and capital requirements, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code and such other factors as the Board of Directors deems relevant.
Sales of Unregistered Securities
None
Repurchases of Equity Securities
None
30
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
December 31, 2006 to December 31, 2011 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 December 31, 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
120
100
80
60
40
l
e
u
a
V
x
e
d
n
I
20
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Douglas Emmett, Inc.
S&P 500
NAREIT Equity
DEI Peer Group*
Index
Douglas Emmett, Inc.
S&P 500
NAREIT Equity
DEI Peer Group*
Period Ending
12/31/06
100.00
100.00
100.00
100.00
12/31/07
87.52
105.49
84.31
78.05
12/31/08
52.63
66.46
52.50
44.48
12/31/09
59.71
84.05
67.20
59.36
12/31/10
71.30
96.71
85.98
78.29
12/31/11
80.45
98.76
93.11
80.05
*DEI Peer Group consist of Boston Properties, Inc. (BXP), Brookfield Office Properties Inc. (BPO), Kilroy Realty Corporation (KRC)
SL Green Realty Corp. (SLG), Vornado Realty Trust (VNO)
Source: SNL Financial LC
31
Item 6. Selected Financial Data
The following table sets forth summary financial and operating data as of, and for the years ended, December 31, 2011, 2010,
2009, 2008 and 2007. You should read the following summary financial and operating data in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, and the financial statements included elsewhere in this
Report.
Statement of Operations Data (in thousands):
Total office revenues
Total multifamily revenues
Total revenues
Operating income
Income (Loss) attributable to common stockholders
Per Share Data:
Income (Loss) per share - basic and diluted
Weighted average common shares outstanding (in thousands):
Basic
Diluted
Dividends declared per common share
$
$
$
2011
505,077
70,260
575,337
152,474
1,451
Year Ending December 31,
2009
2008
2010
$
$
502,700
68,144
570,844
140,027
(26,423)
$
502,767
68,293
571,060
148,358
(27,064)
$
537,377
70,717
608,094
154,234
(27,993)
2007
468,569
71,059
539,628
141,232
(13,008)
0.01
$
(0.22)
$
(0.22)
$
(0.23)
$
(0.12)
126,187
159,966
0.49
$
122,715
122,715
0.40
$
121,553
121,553
0.40
$
120,726
120,726
0.75
$
112,646
112,646
0.70
2011
2010
As of December 31,
2009
2008
2007
Balance Sheet Data (in thousands):
Total assets
Secured notes payable
Other Data:
Number of consolidated properties (1)
$ 6,231,602
3,624,156
$ 6,279,289
3,668,133
$ 6,059,932
3,273,459
$ 6,761,034
3,692,785
$ 6,189,968
3,105,677
59
59
58
64
57
(1) Includes (i) 57 properties that are 100% owned by our operating partnership, (ii) commencing with 2008, 1 property owned by a consolidated joint venture in which we
held a 66.7% interest, (iii) in 2008 only, 6 properties owned by one of our Funds which was consolidated in that year, and (iv) 1 property acquired in 2010 that is 100%
owned by our operating partnership.
32
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, including our
investments in unconsolidated Funds, we own or partially own, manage, lease, acquire and develop real estate, consisting primarily of
office and multifamily properties. As of December 31, 2011, our consolidated portfolio of properties included 50 Class A office
properties (including ancillary retail space) totaling approximately 12.9 million rentable square feet and 9 multifamily properties
containing 2,868 apartment units, as well as the fee interests in 2 parcels of land subject to ground leases. Our total office portfolio
consisted of 58 office properties with approximately 14.7 million rentable square feet, which includes our consolidated office
properties and the 8 Class A office properties owned by the Funds we manage, and in which we invested an average of 35% of the
total capital. As of December 31, 2011, our consolidated office portfolio was 90.0% leased and 88.4% occupied, our total office
portfolio (including properties owned by our Funds and our operating partnership) was 89.3% leased and 87.5% occupied, and our
multifamily properties were 99.6% leased and 98.4% occupied. At December 31, 2011, the annualized rent of our consolidated
portfolio reflected approximately 86.3% from our office properties and the remaining 13.7% from our multifamily properties. Our
properties are located in 9 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. At
December 31, 2011, the annualized rent of our consolidated portfolio reflected approximately 85.8% from our Los Angeles County
office and multifamily properties and the remaining 14.2% from our Honolulu, Hawaii office and multifamily properties.
Recent Year Acquisitions, Dispositions, Repositionings and Financings
Financings
(cid:120)
(cid:120)
(cid:120)
(cid:120)
In January 2011, we modified and extended the maturity of our $18.0 million loan that was scheduled to mature on
March 1, 2011. The modified loan has an outstanding balance of $16.1 million, bears interest at a floating rate equal to
one-month LIBOR plus 185 basis points and matures on March 3, 2014.
In February 2011, we obtained a secured, non-recourse $350.0 million term loan. This loan has a maturity date of March
1, 2020, including 2 one-year extension options. The loan bears interest at a fixed interest rate of 4.46% until March 1,
2018. The loan proceeds were primarily used to repay a term loan that was scheduled to mature in 2012.
In March 2011, we obtained a secured, non-recourse $510.0 million term loan. This loan has a maturity date of April 2,
2018, with an annual interest rate effectively fixed at 4.12% until April 1, 2016. The loan proceeds were used in the
repayment of a term loan that was scheduled to mature in 2012.
In July 2011, we obtained 2 additional secured, non-recourse term loans totaling $885.0 million. The first loan, for $355.0
million, bears interest at a fixed rate of 4.14% through its maturity date of August 5, 2018. The second loan, for $530.0
million, matures August 1, 2018, and has an annual interest rate effectively fixed at 3.74% until August 1, 2016. The
proceeds of these loans were used in the repayment of term loans that were scheduled to mature in 2012.
(cid:120) During 2011, we sold 6.2 million shares of our common stock for aggregate gross proceeds of $119.8 million pursuant to
a $250 million “At the Market” (ATM) program. Subsequent to year end, in January 2012, we completed our ATM
program by selling an additional 6.9 million shares of our common stock for aggregate gross proceeds of $130.2 million.
(cid:120) Subsequent to year end, in January 2012, we obtained a secured, non-recourse $155.0 million term loan. The loan bears
interest at a fixed interest rate of 4.00% through its maturity date of February 1, 2019. Monthly interest payments are
interest-only until February 2015, with principal amortization thereafter based upon a 30-year amortization table.
(cid:120) Subsequent to year end, in January and February 2012, we repaid all of our remaining 2012 debt maturities from the
proceeds of our new $155.0 million loan and our ATM program, as well as cash on hand.
33
Acquisitions: In April 2011, one of our Funds acquired a Class A office building located on Rodeo Drive in Beverly Hills for
a contract price of $42.0 million. We did not make any property acquisitions in our consolidated portfolio during 2011.
Dispositions: During 2011, we had no property dispositions.
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. Each repositioning
effort is unique and determined based on the property, tenants and overall trends in the general market and specific submarket.
Accordingly, the results are varying degrees of depressed rental revenue and occupancy levels for the affected property, which impacts
our results and, therefore, comparisons of our performance from period to period. The repositioning process generally occurs over the
course of months or even years. Although usually associated with newly-acquired properties, repositioning efforts can also occur at
properties we already own, therefore repositioning properties discussed in the context of this paragraph exclude acquisition properties
where the plan for improvement is implemented as part of the acquisition. During 2011, we had no properties that qualify as
repositioning properties.
Rental rate trends
Office Rental Rates: The following table sets forth the average effective annual rental rate per leased square foot and the annualized
lease transaction costs for leases executed in our total office portfolio during the specified periods:
Twelve Months Ended December 31,
Historical straight-line rents: (1)
2011
2010
2009
2008
2007
Average rental rate (2)
$32.76
$32.33
$35.11
$41.90
$43.37
Annualized lease transaction costs (3)
$3.64
$3.68
$3.33
$3.23
$3.62
(1) Because straight-line rent takes into account the full economic value of each lease, including accommodations and rent escalations, we believe that
it may provide a better comparison than ending cash rents, which include the impact of the annual escalations over the entire term of the terminating
lease. However, care should be taken in any comparison, as the averages can be affected in each period by factors such as buildings, types of space
and term involved in the leases executed during the period.
(2) Represents the weighted average straight-line annualized base rent (i.e., excludes tenant reimbursements, parking and other revenue) per leased
square foot for leases entered into within our total office portfolio. For our triple net Burbank and Honolulu office properties, annualized rent is
calculated by adding expense reimbursements to base rent
(3) Represents the weighted average leasing commissions and tenant improvement allowances under all office leases within our total office portfolio
that were entered into during the applicable period, divided by the number of years of the lease.
Office rental rates in our markets generally peaked in 2007 and early 2008, so that rental rates on new leases since that period have
generally been less than the rental rates on the expiring leases for the same space. During the fourth quarter of 2011, the average
straight-line rent under new and renewal leases we signed was 4.9% higher than the average straight-line rent under the expiring leases
for the same space. However, net changes in our office rental rates have not had a significant impact on our revenues in recent periods,
as the negative effect of rent roll downs, which affect approximately 11% to 14% of our office portfolio each year, have been offset by
the positive impact of the annual 3% to 5% rent escalations contained in virtually all of our continuing in-place office leases.
34
Over the next four quarters, we expect to see expiring cash rents as set forth in the following table:
Expiring cash rents:
Expiring square feet (1)
Expiring rent per square foot (2)
Three Months Ended
March 31,
2012
June 30,
2012
September 30,
2012
December 31,
2012
379,890
$35.17
298,846
$35.65
369,529
$38.62
599,440
$36.14
(1)
Includes scheduled expirations for our total office portfolio, including our consolidated portfolio of 50 properties as well as 8 properties
totaling 1.8 million square feet owned by our Funds. Expiring square footage reflects all existing leases that are scheduled to expire in the
respective quarter shown above, excluding the square footage under leases where the existing tenant has renewed the lease prior to December
31, 2011. These numbers (i) include leases for space where someone other than the existing tenant (for example, a subtenant) had executed a
lease for the space prior to December 31, 2011 but that had not commenced as of that date but (ii) do not include exercises of early
termination options (unless exercised prior to December 31, 2011) or defaults occurring after December 31, 2011. All month-to-month
tenants are included in the expiring leases in the first quarter listed.
(2) Represents annualized base rent (i.e., excludes tenant reimbursements, parking and other revenue) per leased square foot at expiration. The
amount reflects total cash base rent before abatements. For our Burbank and Honolulu office properties, we calculate annualized base rent for
triple net leases by adding expense reimbursements to base rent. Expiring rent per square foot on a quarterly basis is impacted by a number
of variables, including variations in the submarkets or buildings involved.
Multifamily Rental Rates: With respect to our residential properties, our average rent on leases to new tenants during the fourth quarter
of 2011 was 4.2% higher than the rent for the same unit at the time it became vacant. The following table sets forth the average
effective annual rental rate per leased unit for leases executed in our residential portfolio during the specified periods:
Twelve Months Ended December 31,
2011
2010
2009
2008
2007
Rental rate
$24,502
$22,497
$22,776
$23,427
$23,837
Results of Operations and Basis of Presentation
The accompanying consolidated financial statements as of December 31, 2011 and 2010 and for the three years ended
December 31, 2011, 2010 and 2009 are the consolidated financial statements of Douglas Emmett, Inc. and our subsidiaries including
our operating partnership. All significant intercompany balances and transactions have been eliminated in our consolidated financial
statements. The comparability of our results of operations between 2011, 2010 and 2009 is affected by (i) the acquisitions of 1 office
property we acquired during the second quarter of 2010, 1 property acquired during the fourth quarter of 2010 by one of our Funds
and 1 property acquired during the second quarter of 2011 by one of our Funds and (ii) the deconsolidation of one of our Funds, which
owned 6 properties, at the end of February 2009, as described in Note 3 to the consolidated financial statements in Item 8 of this
Report. Beginning in February 2009, we have accounted for our interest in our Funds under the equity method.
Funds From Operations
Many investors use Funds From Operations, or FFO, as a performance yardstick to compare our operating performance with
that of other REITs. FFO represents net income (loss), computed in accordance with GAAP, excluding gains (or losses) from sales of
depreciable operating property, other-than-temporary impairments of investments, real estate depreciation and amortization (other
than amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. We calculate
FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (NAREIT), although
doing so may still involve some judgments (for example, amortization of the impact of swap terminations).
Like any metric, FFO is not perfect as a measure of our performance because it excludes depreciation and amortization and
captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital
expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real
economic effect and could materially impact our results from operations. Other equity REITs may not calculate FFO in accordance
with the NAREIT definition and, accordingly, our FFO may not be comparable to those other REITs’ FFO. Accordingly, FFO should
be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our
liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. FFO should not be used
as a supplement to or substitute measure for cash flow from operating activities computed in accordance with GAAP.
35
For the reasons described below, our FFO for 2011 increased by $26.8 million, or 13.8%, to $221.2 million compared to
$194.4 million for 2010. The following table (in thousands) sets forth a reconciliation of our FFO to net income (loss) computed in
accordance with GAAP:
Funds From Operations (FFO)
Net income (loss) attributable to common stockholders
Depreciation and amortization of real estate assets
Net income (loss) attributable to noncontrolling interests
Gain on disposition of interest in unconsolidated real estate fund
Swap termination fee
Amortization of swap termination fee (1)
Less: adjustments attributable to consolidated joint venture and
unconsolidated investment in real estate funds
FFO
$
$
2011
Year ended December 31,
2010
2009
$
1,451
205,696
807
-
(10,120)
11,701
$
(26,423)
225,030
(6,533)
-
(13,931)
3,495
11,675
221,210
$
12,716
194,354
$
(27,064)
226,620
(7,093)
(5,573)
-
-
11,183
198,073
(1) We terminated certain interest rate swaps in November 2010 and December 2011 by paying an amount based on the projected payments due under the swap. For FFO purposes, we
recognize the full impact of the termination in the quarter in which the swap is terminated. In contrast, under GAAP, we amortize the impact over the remaining life of the swap. With
respect to the swaps terminated in November 2010, GAAP net income for the fourth quarter and full year of 2010 was reduced by only $3.5 million, while FFO in both periods was
reduced by an additional $10.4 million to reflect the full impact of terminating those swaps. As that additional $10.4 million of non cash interest expense was amortized for GAAP
purposes during the first 7 months of 2011, we offset that amortization by an equivalent amount in calculating FFO for each period. As a result, the November 2010 swap termination
had a net zero impact on 2011 FFO. Similarly, with respect to the swaps terminated in December 2011, GAAP net income for the fourth quarter and full year of 2011 was reduced by
only $1.3 million, while FFO in both periods was reduced by an additional $8.8 million to reflect the full impact of terminating those swaps. During the first 7 months of 2012, as that
additional $8.8 million of non cash interest expense is amortized for GAAP purposes, we will offset that amortization by an equivalent amount in calculating FFO for each period.
Accordingly, there will be a net zero impact from the December 2011 swap termination on 2012 FFO.
Comparison of year ended December 31, 2011 to year ended December 31, 2010
Revenues
Office Rental Revenue: Rental revenue includes rental revenues from our office properties, percentage rent on the retail space
contained within our office properties, and lease termination income. Total office rental revenue decreased by $5.8 million, or 1.4%,
to $393.4 million for 2011 compared to $399.2 million for 2010. The decrease was primarily due to $12.7 million lower revenue from
the 49 office properties we owned during both comparable periods, partially offset by $6.9 million of incremental rent from the
property we acquired at the end of the second quarter of 2010. The decrease for the 49 office properties owned during both periods
was primarily due to decreases in occupancy and lower accretion from below-market leases in place at the time of our initial public
offering (IPO) as the result of the ongoing expiration of these leases.
Office Tenant Recoveries: Total office tenant recoveries increased by $6.5 million, or 17.4%, to $43.9 million for 2011
compared to $37.4 million for 2010. The increase was primarily due to $6.6 million in additional revenue from the property we
acquired at the end of the second quarter of 2010.
Office Parking and Other Income: Total office parking and other income increased by $1.6 million, or 2.4%, to $67.7 million
for 2011 compared to $66.1 million for 2010. The increase was primarily due to $3.4 million of additional revenue from the property
we acquired at the end of the second quarter of 2010, partly offset by a decrease of $1.7 million for the 49 office properties owned
during both periods as a result of lower occupancy.
Multifamily Revenue: Total multifamily revenue increased by $2.1 million, or 3.1%, to $70.3 million for 2011 compared to
$68.1 million for 2010. The increase was primarily due to increases in average rental rates.
Operating Expenses
Office Rental Expenses: Total office rental expense increased by $9.7 million, or 6.1%, to $168.9 million for 2011 compared
to $159.2 million for 2010. The increase was primarily due to $7.9 million of additional expense from the property we acquired at the
end of the second quarter of 2010, as well as an increase of $2.0 million for the remainder of our office portfolio primarily due to
increases in utilities expenses, scheduled services and ancillary property tax assessments.
Multifamily Rental Expenses: Total multifamily rental expense increased by $685 thousand, or 3.7%, to $19.0 million for
2011 compared to $18.3 million for 2010. The increase was primarily due to increases in utilities expenses and payroll.
36
Depreciation and Amortization: Depreciation and amortization expense decreased $19.3 million, or 8.6%, to $205.7 million
for 2011 compared to $225.0 million for 2010. The decrease was primarily due to a decrease of $23.9 million for the 49 office
properties owned during both periods resulting from the completion of the depreciation of certain tenant-related assets which were
acquired at the time of our IPO in 2006, partially offset by $4.6 million of incremental depreciation expense from the property we
acquired at the end of the second quarter of 2010.
Non-Operating Income and Expenses
Loss, including Depreciation, from Unconsolidated Real Estate Funds: This amount represents our equity interest in the
operating results from our Funds, including the operating income net of historical cost-basis depreciation, for the full year. Our share
of the loss, including depreciation, from our Funds decreased by $4.1 million or 58.9%, to $2.9 million for 2011 compared to $7.0
million for 2010, which was primarily due to better operating results for the Funds, as well as an increase in revenue we earned for
managing our Funds.
Interest Expense: Interest expense decreased $18.4 million, or 11.1%, to $148.5 million for 2011, compared to $166.9 million
for 2010. The decrease was primarily due to lower effective interest rates, both as a result of our refinancings and the expiration and
termination of certain interest rate swaps. These decreases were partially offset by increased interest expense related to the
amortization of the remaining accumulated other comprehensive income balance associated with certain cash flow swaps that we
terminated in 2010. This accumulated other comprehensive income balance was fully amortized by the end of the third quarter of
2011. In December 2011, we terminated certain swaps for which a portion of the accumulated other comprehensive income balance
was amortized to interest expense in 2011. The remaining accumulated other comprehensive income balance will be amortized during
2012. See Notes 8 and 10 to our consolidated financial statements in Item 8 of this Report
Comparison of year ended December 31, 2010 to year ended December 31, 2009
Revenues
Office Rental Revenue: Total office rental revenue decreased by $6.9 million, or 1.7%, to $399.2 million for 2010 compared
to $406.1 million for 2009. The decrease was primarily due to $7.6 million of rent reflected in our 2009 consolidated results from the
6 properties owned by the Fund that was deconsolidated at the end of February 2009, as well as a decrease of $7.3 million for the
remainder of our portfolio, partially offset by $8.0 million of incremental rent from the property we acquired during the second quarter
of 2010. The $7.3 million decrease for the remainder of our portfolio was primarily due to lower accretion of net below-market rents
and decreases in occupancy and rental rates.
Office Tenant Recoveries: Total office tenant recoveries increased by $6.0 million, or 19.1%, to $37.4 million for 2010
compared to $31.4 million for 2009. The increase was primarily due to $6.2 million of additional revenue from the property we
acquired during 2010 and $520 thousand from the remainder of our office portfolio, partially offset by $710 thousand of recoveries in
2009 from the 6 properties owned by the Fund that was deconsolidated at the end of February 2009. The increase for the remainder of
our portfolio was primarily due to the completion of 2009 common area management (CAM) reconciliations during 2010 and the
corresponding recognition of incremental amounts due.
Office Parking and Other Income: Total office parking and other income increased by $867 thousand, or 1.3%, to $66.1
million for 2010 compared to $65.2 million for 2009. The increase was primarily due to $3.2 million of additional revenue from the
property we acquired during 2010, partially offset by $1.2 million of parking income in 2009 from the 6 properties owned by the Fund
that was deconsolidated at the end of February 2009, as well as decreases in parking and other income of $1.1 million for the
remainder of our portfolio as a result of lower occupancy and usage.
Operating Expenses
Office Rental Expenses: Total office rental expense increased by $4.9 million, or 3.2%, to $159.2 million for 2010 compared
to $154.3 million for 2009. The increase was primarily due to $7.3 million of incremental expense from the property we acquired
during 2010, partially offset by $2.7 million in office rental expenses in 2009 from the 6 properties owned by the Fund that was
deconsolidated at the end of February 2009. Office rental expense was essentially unchanged for the remainder of our portfolio.
General and Administrative Expenses: General and administrative expenses increased $4.4 million, or 18.5%, to $28.3
million for 2010 compared to $23.9 million for 2009. The increase was primarily due to the cost of our multi-year equity grants that
were announced during the fourth quarter of 2010.
37
Depreciation and Amortization: Depreciation and amortization expense decreased $1.6 million, or 0.7%, to $225.0 million
for 2010 compared to $226.6 million for 2009. The decrease was primarily due to $4.9 million in depreciation and amortization in
2009 from the 6 properties owned by the Fund that was deconsolidated at the end of February 2009 and $1.4 million for the remainder
of our portfolio due to certain assets being fully depreciated, partially offset by $4.7 million of incremental depreciation from the
property we acquired during 2010.
Non-Operating Income and Expenses
Gain on Disposition of Interest in Unconsolidated Real Estate Fund: In February 2009, we recorded a gain of $5.6 million
related to the 6 properties previously contributed to one of our Funds that was deconsolidated in February 2009, as described in Note 3
to our consolidated financial statements in Item 8 of this Report.
Other Income (Loss): Other income (loss) in 2010 reflected a net income of $1.2 million, which included $665 thousand of
net profit generated by our management of the properties owned by our Funds as well as $526 thousand of interest income. Other
income (loss) reflected a net loss in 2009 which represents the allocation to outside ownership interest of profit generated by the 6
properties we contributed to the Fund that were deconsolidated at the end of February 2009, net of the profit generated by our
management of those properties during the 10 months of 2009 following deconsolidation.
Loss, including Depreciation, from Unconsolidated Real Estate Funds: This totaled $7.0 million for 2010 and $3.3 million
for 2009. The 2009 amount reflects only the 10 months after the Fund involved was deconsolidated.
Interest Expense: Interest expense decreased $17.9 million, or 9.7%, to $166.9 million for 2010 compared to $184.8 million
for 2009. This decrease was primarily due to the expiration of various interest rate swaps during the third and fourth quarters of 2010,
which caused $1.66 billion of our variable-rate debt to no longer have corresponding swap payments at a higher fixed rate in exchange
for lower variable interest. Additionally, as a result of the natural expiration and early termination of approximately $1.40 billion of
our pre-IPO swaps, there was lower non-cash interest expense from the amortization of these interest rate swaps. The decrease was
partially offset by the amortization of other comprehensive income resulting from the early termination of our cash flow swaps.
Liquidity and Capital Resources
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. 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, may cause us to have substantial liquidity
needs over the long term, although we have not had any taxable income to date. With respect to 2011, we declared dividends
aggregating $0.49 per share, at the rate of $0.10 per share for the first quarter of the year and $0.13 per each quarter during the
remaining three quarters of the year. We will seek to satisfy our long-term liquidity needs through cash flows from operations, long-
term secured and unsecured indebtedness, the issuance of debt and equity securities, including units in our operating partnership,
property dispositions and joint venture transactions. We have historically financed our operations, acquisitions and development,
through long-term secured floating rate mortgage debt. To mitigate the impact of fluctuations in short-term interest rates on our cash
flows from operations, we generally enter into interest rate swap or interest rate cap agreements at the time we enter into term
borrowings. We expect to meet our operating liquidity requirements generally through cash on hand and cash provided by operations.
Excluding any acquisitions and debt refinancings, we anticipate that cash on hand and provided by operations will be sufficient to
meet our liquidity requirements for at least the next 12 months.
Available Borrowings, Cash Balances and Capital Resources
We had total indebtedness of $3.62 billion at December 31, 2011, excluding a loan premium representing the mark-to-market
adjustment on variable rate debt assumed from our IPO.
We have typically financed our capital needs through short-term lines of credit and long-term secured mortgages, some of
which are fixed and some of which are at floating rates. To mitigate the impact of fluctuations in short-term interest rates on our cash
flows from operations, we generally enter into interest rate swap or interest rate cap agreements with respect to our long-term secured
mortgages with floating rates. At December 31, 2011, approximately $2.97 billion or 82.1% of our debt had an annual interest rate that
was effectively fixed at an average rate of 4.20% (on an actual / 360-day basis). See Item 7A of this Report for a description of the
impact of variable rates on our interest expense. See also Note 8 and Note 10 to our consolidated financial statements in Item 8 of this
Report.
As of December 31, 2011, only one loan with a balance of $522.0 million was scheduled to mature in 2012. On January 3,
2012 we paid down $222.0 million of the $522.0 million loan and on February 1, 2012, we paid down the remaining $300.0 million.
38
On January 18, 2012, we obtained a secured, non-recourse $155.0 million term loan. The loan bears interest at a fixed interest
rate of 4.00% through its maturity date of February 1, 2019. Monthly interest payments are interest-only until February 2015, with
principal amortization thereafter based upon a 30-year amortization table. The loan proceeds were primarily used to pay down a
portion of the remaining $522.0 million of the 2012 debt maturities.
At December 31, 2011, our $3.62 billion of borrowings under secured loans represented 54.7% of our total market
capitalization of $6.63 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, 2011 on the New York Stock Exchange of
$18.24 per share.
During 2011 we sold 6.2 million shares of our common stock in open market transactions under our ATM program for gross
proceeds of approximately $119.8 million. During the fourth quarter of 2011 we sold 3.2 million shares of our common stock under
the ATM program, in exchange for gross proceeds of approximately $58.7 million. After commissions of $881 thousand and other
expenses, the net proceeds from the sales during the quarter totaled $57.8 million. We did not make any repurchases of shares or share
equivalents during 2011. We did not sell or repurchase any share equivalents during 2010. During 2009, we repurchased 819,500
share equivalents in open market transactions and 250,000 share equivalents in a private transaction for a total combined consideration
of approximately $8.2 million.
Subsequent to year end, we sold an additional 6.9 million shares of our common stock in open market transactions under our
ATM program for gross proceeds of approximately $130.2 million, which completed our $250.0 million ATM program. We used the
proceeds from the ATM program and the new $155 million loan, as well as cash on hand, to repay the remaining $522.0 million of our
debt scheduled to mature in 2012. As a result of these actions, we reduced our outstanding consolidated debt from $3.62 billion on
December 31, 2011 to $3.26 billion on February 1, 2012.
Commitments
The following table sets forth our principal obligations and commitments, excluding periodic interest payments, as of
December 31, 2011:
Contractual Obligations
Long-term debt obligations(1)
Minimum lease payments
Remaining capital commitment to
unconsolidated real estate funds(2)
Purchase commitments related to capital expenditures
associated with tenant improvements and
repositioning and other purchase obligations
Total
Payment due by period (in thousands)
Less than
1-3
years
1 year
4-5
years
Total
Thereafter
$
3,623,096
54,974
$
521,956
733
$
$
20,381
1,466
551,013
1,466
$
2,529,746
51,309
37,963
37,963
-
-
3,798
3,719,831
$
$
3,798
564,450
$
-
21,847
$
-
552,479
-
-
$
2,581,055
(1) For detail of the rates that determine our periodic interest payments related to our long-term debt obligations, see Note 8 to our consolidated financial statements
in Item 8 of this Report. All of the long-term debt shown as due in less than one year was fully repaid as of February 1, 2012.
(2) Because there is not an explicit date for when our remaining capital commitment will be called, we reflect the entire commitment in the earliest category.
Off-Balance Sheet Arrangements
We have established and manage Funds through which institutional investors provide capital commitments for acquisition of
properties. The capital we invest in our Funds is invested on a pari passu basis with the other investors. In addition, we also receive
certain additional distributions based on committed capital and on any profits that exceed certain specified cash returns to the
investors. We do not expect to receive additional significant liquidity from our investments in our Funds until the disposition of the
properties held by the relevant Fund, which may not be for many years. Certain of our wholly-owned affiliates provide property
management and other services with respect to the real estate owned by our Funds for which we are paid fees and/or reimbursed our
costs.
At December 31, 2011, our Funds had obtained capital commitments of $554.7 million, of which $171.3 million remained
undrawn. This amount included commitments from us of $196.4 million, of which $38.0 million remained undrawn.
39
We do not have any debt outstanding in connection with our interest in our Funds. Each of our Funds may have its own debt,
secured by the properties it owns. The following table summarizes the debt of our Funds at December 31, 2011:
Type of Debt
Variable rate term loan
(swapped to fixed rate) (1) (2)
Fixed rate term loan (4)
Principal
Balance
(in millions)
Maturity
Date
Variable Rate
Fixed Rate
Swap
Maturity
Date
$365.0
08/17/13
LIBOR + 1.65%
$55.3
04/01/16
N/A
5.52% (3) 09/04/12
5.67%
N/A
(1) The loan is secured by 6 properties in a collateralized pool. Requires monthly payments of interest only, with
outstanding principal due upon maturity.
(2) We transferred this loan to one of our Funds during the fourth quarter of 2008 when we contributed the properties
securing it to that Fund. We remain responsible under certain environmental and other limited indemnities and
guarantees covering customary non-recourse carve outs under this loan, which we entered into prior to our
contribution of this debt and the related properties, although we have an indemnity from that Fund for any
amounts we would be required to pay under these agreements. In addition, if that Fund fails to perform any
obligations under a swap agreement related to this loan, we remain liable to the swap counterparties. The
maximum future payments under the swap agreements were approximately $9.7 million as of December 31, 2011.
To date, all obligations under the swap agreements have been performed by that Fund in accordance with the
terms of the agreements.
(3) Effective annual rate including the effect of interest rate contracts. Based on actual/360-day basis and excludes
amortization of loan fees.
(4) Requires monthly payments of principal and interest.
Cash Flows
Our cash and cash equivalents were $407.0 million and $272.4 million at December 31, 2011 and 2010, respectively.
Our cash flows from operating activities is primarily dependent upon the occupancy level of our portfolio, the rental rates
achieved on our leases, the collectability of rent and recoveries from our tenants and the level of operating expenses and other general
and administrative costs. Net cash provided by operating activities increased by $19.0 million to $207.8 million for 2011 compared to
$188.9 million for 2010. The increase was primarily due to a decrease in cash interest paid in the 2011 period resulting from lower
effective interest rates, both as a result of our refinancings and the expiration and termination of certain interest rate swaps. This
increase was partly offset by an decrease in cash generated from our office rental portfolio in 2011 due to lower occupancy rates in
2011. The decrease in cash generated from our office rental portfolio in 2011was partly offset by incremental cash flows from the
property we acquired at the end of the second quarter of 2010.
Our net cash used in investing activities is generally used to fund property acquisitions, development and redevelopment
projects recurring and non-recurring capital expenditures. Net cash used in investing activities decreased $244.7 million to $60.0
million for 2011 compared to $304.6 million for 2010. The decrease is primarily due to (i) a property acquisition by us in 2010, while
the acquisition in the 2011 period was made by one of our Funds, and (ii) decreased contributions to our Funds in 2011. This decrease
was partly offset by an increase in capital expenditures in 2011 for the property acquired in 2010.
Our net cash related to financing activities is generally impacted by our borrowings, capital activities net of dividends and
distributions paid to common stockholders and noncontrolling interests. Net cash flows from financing activities amounted to a net use
of cash for 2011 totaling $13.3 million compared to a net provision of cash for 2010 totaling $315.4 million. The decrease was
primarily due to the fact that 2011 reflects our debt refinancing program and our ATM program that almost entirely offset each other,
compared to 2010 which reflects additional debt borrowing related to an acquired property.
40
Critical Accounting Policies
Our discussion and analysis of the historical financial condition and results of operations of Douglas Emmett, Inc. and our
predecessor are based upon their respective consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP). The preparation of these financial statements in conformity with GAAP requires us
to make estimates of certain items and judgments as to certain future events, for example with respect to the allocation of the purchase
price of acquired property among land, buildings, improvements, equipment, and any related intangible assets and liabilities. These
determinations, even though inherently subjective and subject to change, affect the reported amounts of our assets, liabilities, revenues
and expenses. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made,
some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ
from our accruals, and those differences—positive or negative—could be material. Some of our accruals are subject to adjustment as
we believe appropriate based on revised estimates and reconciliation to the actual results when available. For a discussion of recently
issued accounting literature, see Note 2 to our consolidated financial statements in Item 8 of this Report
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. Transaction costs related to acquisitions have been expensed, rather than included with the
consideration paid. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired
property between land, buildings and improvements, equipment and identifiable intangible assets and liabilities such as amounts
related to in-place at-market leases, acquired above- and below-market ground leases, and acquired above- and below-market tenant
leases. 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 6 months.
Above-market and below-market in-place lease values are recorded as an asset or liability based on the present value (using
an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be
received or paid pursuant to the in-place tenant or ground leases, respectively, and our estimate of fair market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease.
Expenditures for repairs and maintenance are expensed to operations as incurred. Significant improvements are capitalized.
Interest, insurance and property tax costs incurred during the period of construction of real estate facilities are capitalized. When assets
are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses
reflected in net income or loss for the period.
The values allocated to land, buildings, site improvements, in-place leases and tenant improvements are depreciated on a
straight-line basis using an estimated life of 40 years for buildings, 15 years for site improvements, the average term of existing leases
in the building acquired 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 is
terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off.
41
Impairment of Long-Lived Assets: We assess whether there has been impairment in the value of our long-lived assets
whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount to the undiscounted future cash flows expected to be
generated by the asset. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If our evaluation indicates that we may be unable to recover the carrying value of an
investment in real estate or an investment in one of our Funds, an impairment loss is recorded to the extent that the carrying value
exceeds the estimated fair value of the property or equity investment. These losses have a direct impact on our net income because
recording an impairment loss results in an immediate negative adjustment to net income. Assets to be disposed of are reported at the
lower of the carrying amount or fair value, less costs to sell. The evaluation of anticipated cash flows is highly subjective and is based
in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results
in future periods. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be
recognized and such loss could be material.
Income Taxes: As a REIT, we are permitted to deduct distributions paid to our stockholders, eliminating the federal taxation
of income represented by such distributions at the corporate level. REITs are subject to a number of organizational and operational
requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate tax rates.
Revenue Recognition: Four basic criteria must be met before revenue can be recognized: persuasive evidence of an
arrangement exists; services are 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 term
of the lease. Deferred rent receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. Lease
termination fees, which are included in rental revenues in the accompanying consolidated statements of operations, are recognized
when the related lease is canceled and we have no continuing obligation to provide services to such former tenant.
Estimated recoveries from tenants for real estate taxes, common area maintenance and other recoverable operating expenses
are recognized as revenues in the period that the expenses are incurred. Subsequent to year-end, we perform final reconciliations on a
lease-by-lease basis and bill or credit each tenant for any cumulative annual adjustments. In addition, we record a capital asset for
leasehold improvements constructed by us that are reimbursed by tenants, with the offsetting side of this accounting entry recorded to
deferred revenue which is included in accounts payable and accrued expenses. The deferred revenue is amortized as additional rental
revenue over the life of the related lease. Rental revenue from month-to-month leases or leases with no scheduled rent increases or
other adjustments is recognized on a monthly basis when earned.
The recognition of gains on sales of real estate requires that we measure the timing of a sale against various criteria related to
the terms of the transaction, as well as any continuing involvement in the form of management or financial assistance associated with
the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by
applying the finance, profit-sharing or leasing method. If the sales criteria have been met, we further analyze whether profit
recognition is appropriate using the full accrual method. If the criteria to recognize profit using the full accrual method have not been
met, we defer the gain and recognize it when the criteria are met or use the installment or cost recovery method as appropriate under
the circumstances.
Monitoring of Rents and Other Receivables: We maintain an allowance for estimated losses that may result from the inability
of tenants to make required payments. If a tenant fails to make contractual payments beyond any allowance, we may recognize bad
debt expense in future periods equal to the amount of unpaid rent and deferred rent. We generally do not require collateral or other
security from our tenants, other than security deposits or letters of credit. If our estimates of collectability 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 LTIP units. We estimate the fair value of the awards and recognize this value over
the requisite vesting period. We utilize a Black-Scholes model to calculate the fair value of options, which uses assumptions related to
the stock, including volatility and dividend yield, as well as assumptions related to the stock award itself, such as the expected term
and estimated forfeiture rate. Option valuation models require the input of somewhat subjective assumptions for which we have relied
on observations of both historical trends and implied estimates as determined by independent third parties. For LTIP units, the fair
value is based on the market value of our common stock on the date of grant and a discount for post-vesting restrictions estimated by a
third-party consultant.
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.
42
Interest Rate Agreements: We manage our interest rate risk associated with borrowings by obtaining interest rate swap and
interest rate cap contracts. No other derivative instruments are used. We recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. If
the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the
change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive
income, which is a component of our stockholders’ equity accounts. The ineffective portion of a derivative’s change in fair value is
immediately recognized in earnings.
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. 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 10 to our
consolidated financial statements contained in Item 8 of this Report.
At December 31, 2011, $705.0 million or 19% of our debt was fixed rate debt, $2.27 billion or 63% of our debt was floating
rate debt hedged with derivative instruments that swapped to fixed interest rates, and $650.0 million or 18% was unhedged floating
rate debt. Based on the level of unhedged floating rate debt outstanding at December 31, 2011, a 50 basis point change in LIBOR
would result in an annual impact to our earnings of approximately $3.3 million. Subsequent to year end, we repaid a portion of our
floating rate debt that was scheduled to mature in 2012. Therefore at February 1, 2012, $860.0 million or 26% of our debt was fixed
rate debt, $2.27 billion or 70% of our debt was floating rate debt hedged with derivative instruments that swapped to fixed interest
rates, and $128.1 million or 4% was unhedged floating rate debt. Based on the level of unhedged floating rate debt outstanding at
February 1, 2012, a 50 basis point change in LIBOR would result in an annual impact to our earnings of approximately $649
thousand.
We calculate interest sensitivity by multiplying the amount of unhedged floating rate debt by the respective change in rate.
The sensitivity analysis does not take into consideration possible changes in the balances or fair value of our floating rate debt.
By using derivative instruments to hedge exposure to changes in interest rates, we expose ourselves to credit risk and the
potential inability of our counterparties to perform under the terms of the agreements. We attempt to minimize this credit risk by
contracting with high-quality bank financial counterparties.
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
As of December 31, 2011, the end of the period covered by this Report, we carried out an evaluation, under the supervision and
with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) at the end of the period covered by this Report. Based on the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that
information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated
and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
for timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2011, 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
43
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item is incorporated by reference to the information set forth under the captions “Election of
Directors (Proposal 1) – Information Concerning Nominees,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Corporate Governance” and “Board Meetings and Committees” in our Proxy Statement for the 2012 Annual Meeting
of Stockholders to be filed with the SEC within 120 days after the end of 2011.
Item 11. Executive Compensation
Information required by this item is incorporated by reference to the information set forth under the captions “Executive
Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation
Committee Report” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of 2011.
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, 2011 with respect to shares of our common stock that may be
issued under our existing stock incentive plan (in thousands, except exercise price):
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
(b)
Number of shares of common
stock remaining available for
future issuance under equity
compensation plans
(excluding shares reflected in
column (a))
(c)
12,540
$18.10
22,670
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
contained in Item 8 of this Report. We did not have any other equity compensation plans as of December 31, 2011.
The remaining information required by this item is incorporated by reference to the information set forth under the caption
“Voting Securities and Principal Stockholders—Security Ownership of Certain Beneficial Owners and Management” in our Proxy
Statement for the 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of 2011.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated by reference to the information set forth under the captions “Transactions
With Related Persons,” “Election of Directors (Proposal 1) – Information Concerning Nominees” and “Corporate Governance” in our
Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of 2011.
Item 14. Principal Accounting Fees and Services
Information required by this item is incorporated by reference to the information set forth under the caption “Independent
Registered Public Accounting Firm” in our Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed with the SEC
within 120 days after the end of 2011.
44
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) and (c) Financial Statements and Financial Statement Schedule
Index to Financial Statements
The following financial statements and the Reports of Ernst & Young, LLP, Independent Registered Public
Accounting Firm, are included in Part IV of this Report on the pages indicated:
1. Consolidated Financial Statements of Douglas Emmett, Inc.
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, 2011 and 2010
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010 and
2009
Consolidated Statements of Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Schedule III - Consolidated Real Estate and Accumulated Depreciation as of December 31, 2011
2. Consolidated Financial Statements of Douglas Emmett Fund X, LLC
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010, and
2009 (unaudited)
Consolidated Statements of Equity for the years ended December 31, 2011, 2010 and 2009 (unaudited)
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
(unaudited)
Notes to Consolidated Financial Statements
All other schedules have been omitted since the required information is not present or not present in
amounts sufficient to require submission of the schedule, or because the information required is
included in the consolidated financial statements or notes thereto.
(b) Exhibits
Page No.
F-1
F-2
F-3
F-4
F-5
F-5
F-6
F-7
F-8
F-30
F-32
F-33
F-34
F-35
F-36
F-37
3.1 Articles of Amendment and Restatement of Douglas Emmett, Inc. (4)
3.2 Bylaws of Douglas Emmett, Inc. (4)
3.3 Certificate of Correction to Articles of Amendment and Restatement of Douglas Emmett, Inc.(5)
4.1 Form of Certificate of Common Stock of Douglas Emmett, Inc.(3)
10.1 Form of Agreement of Limited Partnership of Douglas Emmett Properties, LP. (3)
10.2 Registration Rights Agreement among Douglas Emmett, Inc. and the Initial Holders named therein.(1) +
10.3 Form of Indemnification Agreement between Douglas Emmett, Inc. and its directors and officers. (2) +
10.4 Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan. (6) +
10.5 Form of Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan Non-Qualified Stock Option
Agreement.(2) +
10.6 Form of Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan LTIP Unit Award Agreement.(3)+
10.7 Form of Douglas Emmett Properties, LP Partnership Unit Designation – LTIP Units. (3) +
10.8 Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan Amendment No. 1. (7) +
10.9 Form of Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan LTIP Unit Award Agreement (for
independent directors) . (8) +
10.10 Employment agreement dated December 6, 2010 between Douglas Emmett, Inc., Douglas Emmett
Properties, LP and Jordan L. Kaplan. (9)+
10.11 Employment agreement dated December 6, 2010 between Douglas Emmett, Inc., Douglas Emmett
Properties, LP and Kenneth Panzer. (9)+
10.12 Employment agreement dated December 6, 2010 between Douglas Emmett, Inc., Douglas Emmett
Properties, LP and William Kamer. (9)+
10.13 Employment agreement dated January 1, 2011 between Douglas Emmett, Inc., Douglas Emmett
Properties, LP and Theodore Guth. (10)+
21.1 List of Subsidiaries of the Registrant.
45
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. (11)
32.2 Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (11)
101 The following financial information from Douglas Emmett Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2010, formatted in XBRL (eXtensible Business Reporting Language):
(i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated
Statements of Comprehensive Income, (iv) Consolidated Statements of Equity, (v) Consolidated
Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
Footnotes to Exhibits
+ Denotes management contract or compensatory plan, contract or arrangement
(1) Filed with Registration Statement on Form S-11 (Registration No. 333-135082) filed June 16, 2006
and incorporated herein by this reference.
(2) Filed with Registrant’s Amendment No. 2 to Form S-11 filed September 20, 2006 and incorporated
herein by this reference.
(3) Filed with Registrant’s Amendment No. 3 to Form S-11 filed October 3, 2006 and incorporated herein
by this reference.
(4) Filed with Registrant’s Amendment No. 6 to Form S-11 filed October 19, 2006 and incorporated herein
by this reference.
(5) Filed with Registrant's Current Report on Form 8-K filed October 30, 2006 and incorporated herein by
this reference.
(6) Filed with Registrant’s Registration Statement on Form S-8 (File No. 333-148268) filed December 21,
2007 and incorporated herein by this reference.
(7) Filed August 6, 2009 with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 and incorporated herein by this reference.
(8) Filed February 26, 2010 with Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 and incorporated herein by this reference.
(9) Filed February 25, 2011 with Registrants Annual Report on Form 10-K for the year ended December
31, 2010 and incorporated herein by this reference.
(10) Filed May 6, 2011 with Registrants Quarterly Report on Form 10-Q for the quarter ended March 31,
2011 and incorporated herein by this reference.
(11) In accordance with SEC Release No. 33-8212, this exhibit is being furnished, and is not being filed as
part of this Report or as a separate disclosure document, and is not being incorporated by reference
into any Securities Act of 1933 registration statement.
46
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 24, 2012
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/ THEODORE E. GUTH
Theodore E. Guth
/s/ DAN A. EMMETT
Dan A. Emmett
/s/ KENNETH M. PANZER
Kenneth M. Panzer
/s/ LESLIE E. BIDER
Leslie E. Bider
/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/ CHRISTOPHER ANDERSON
Christopher Anderson
/s/ DR. DAVID T. FEINBERG
Dr. David T. Feinberg
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and 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 24, 2012.
47
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, 2011. In conducting its assessment, management used
the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control—Integrated
Framework. Based on this assessment, management concluded that, as of December 31, 2011, 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, 2011, 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, 2011.
/s/ JORDAN L. KAPLAN
Jordan L. Kaplan
Chief Executive Officer
/s/ THEODORE E. GUTH
Theodore E. Guth
Chief Financial Officer
February 24, 2012
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,
2011 and 2010, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the
three years in the period ended December 31, 2011. 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, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2011, 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, 2011, 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, 2012 expressed an unqualified opinion thereon.
Los Angeles, California
February 24, 2012
/s/ Ernst & Young LLP
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, 2011, 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, 2011, 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, 2011 and 2010, and the related consolidated statements of
operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2011, and our
report dated February 24, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
February 24, 2012
F-3
Douglas Emmett, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
December 31, 2011
December 31, 2010
Assets
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Investment in real estate, gross
Less: accumulated depreciation
Investment in real estate, net
Cash and cash equivalents
Tenant receivables, net
Deferred rent receivables, net
Interest rate contracts
Acquired lease intangible assets, net
Investment in unconsolidated real estate funds
Other assets
Total assets
Liabilities
Secured notes payable, including loan premium
Accounts payable and accrued expenses
Security deposits
Acquired lease intangible liabilities, net
Interest rate contracts
Dividends payable
Total liabilities
Equity
Douglas Emmett, Inc. stockholders' equity:
Common Stock, $0.01 par value 750,000,000 authorized,
131,070,239 and 124,131,557 outstanding at December 31,
2011 and December 31, 2010, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total Douglas Emmett, Inc. stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
$
$
$
851,679
5,233,692
640,647
6,726,018
(1,119,619)
5,606,399
406,977
1,722
58,681
699
6,379
117,055
33,690
6,231,602
3,624,156
55,280
33,954
86,801
98,417
17,039
3,915,647
1,311
2,461,649
(89,180)
(508,674)
1,865,106
450,849
2,315,955
6,231,602
$
$
$
$
851,679
5,226,269
592,735
6,670,683
(913,923)
5,756,760
272,419
1,591
48,933
52,528
9,356
110,920
26,782
6,279,289
3,668,133
57,793
31,850
110,244
99,687
12,413
3,980,120
1,241
2,332,307
(58,765)
(447,722)
1,827,061
472,108
2,299,169
6,279,289
See notes to consolidated financial statements.
F-4
Douglas Emmett, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended December 31,
2010
2009
2011
$
$
393,434
43,914
67,729
505,077
$
399,184
37,406
66,110
502,700
65,267
4,993
70,260
63,564
4,580
68,144
406,117
31,407
65,243
502,767
64,127
4,166
68,293
Revenues:
Office rental
Rental revenues
Tenant recoveries
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
575,337
570,844
571,060
168,869
19,012
29,286
205,696
422,863
159,155
18,327
28,305
225,030
430,817
154,270
17,925
23,887
226,620
422,702
152,474
140,027
148,358
-
1,106
(2,867)
(148,455)
-
2,258
(807)
1,451
0.01
0.01
$
$
$
-
1,191
(6,971)
(166,907)
(296)
(32,956)
6,533
(26,423)
(0.22)
(0.22)
$
$
$
5,573
(12)
(3,279)
(184,797)
-
(34,157)
7,093
(27,064)
(0.22)
(0.22)
Gain on disposition of interest in unconsolidated real estate fund
Other income (loss)
Loss, including depreciation, from unconsolidated real estate funds
Interest expense
Acquisition-related expenses
Net income (loss)
Less: net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to common stockholders
Net income (loss) attributable to common stockholders per share – basic
Net income (loss) attributable to common stockholders per share – diluted
$
$
$
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
Net income (loss)
Other comprehensive income (loss): cash flow hedge adjustment
Comprehensive income (loss)
Less comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to common stockholders
Year Ended December 31,
2010
2009
2011
2,258
(37,011)
(34,753)
5,789
(28,964)
$
$
(32,956)
87,985
55,029
(14,015)
41,014
$
$
(34,157)
112,217
78,060
(17,268)
60,792
$
$
See notes to consolidated financial statements
F-5
Douglas Emmett, Inc.
Consolidated Statements of Equity
(in thousands, except per share data)
2011
Year Ended December 31,
2010
2009
Shares of Common Stock
Balance at beginning of period
Repurchase of equity units
Conversion of operating partnership units
Issuance of common stock
Balance at end of period
Common Stock
Balance at beginning of period
Repurchase of equity units
Conversion of operating partnership units
Issuance of common stock
Balance at end of period
Additional Paid-in Capital
Balance at beginning of period
Repurchase of equity units
Conversion of operating partnership units
Issuance of common stock
Stock compensation
Balance at end of period
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period
Cash flow hedge adjustment
Balance at end of period
Accumulated Deficit
Balance at beginning of period
Net income (loss)
Dividends
Balance at end of period
Noncontrolling Interests
Balance at beginning of period
Net income (loss)
Cash flow hedge adjustment
Repurchase of equity units
Deconsolidation of Douglas Emmett Fund X, LLC
Contributions
Distributions
Conversion of operating partnership units
Stock compensation
Balance at end of period
Total Equity
Balance at beginning of period
Net income (loss)
Cash flow hedge adjustment
Issuance of common stock
Repurchase of equity units
Dividends
Deconsolidation of Douglas Emmett Fund X, LLC
Contributions
Distributions
Stock compensation
Balance at end of period
Dividends declared per common share
$
$
$
$
$
$
$
$
$
$
$
$
$
124,131
-
714
6,225
131,070
1,241
-
8
62
1,311
2,332,307
-
10,453
117,397
1,492
2,461,649
(58,765)
(30,415)
(89,180)
(447,722)
1,451
(62,403)
(508,674)
472,108
807
(6,596)
-
-
10
(14,904)
(10,461)
9,885
450,849
2,299,169
2,258
(37,011)
117,459
-
(62,403)
-
10
(14,904)
11,377
2,315,955
$
$
$
$
$
$
$
$
$
$
$
$
121,596
-
2,535
-
124,131
1,216
-
25
-
1,241
2,290,419
-
37,119
-
4,769
2,332,307
(126,202)
67,437
(58,765)
(372,070)
(26,423)
(49,229)
(447,722)
499,022
(6,533)
20,548
-
-
167
(13,595)
(37,144)
9,643
472,108
2,292,385
(32,956)
87,985
-
-
(49,229)
-
167
(13,595)
14,412
2,299,169
$
$
$
$
$
$
$
$
$
$
$
$
121,897
(820)
519
-
121,596
1,219
(8)
5
-
1,216
2,284,429
(4,606)
7,665
-
2,931
2,290,419
(214,058)
87,856
(126,202)
(296,401)
(27,064)
(48,605)
(372,070)
505,025
(7,093)
24,361
(3,603)
10
450
(16,571)
(7,670)
4,113
499,022
2,280,214
(34,157)
112,217
-
(8,217)
(48,605)
10
450
(16,571)
7,044
2,292,385
0.49
$
0.40
$
0.40
See notes to consolidated financial statements.
F-6
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Net accretion of acquired lease intangibles
Loss, including depreciation, from unconsolidated real estate funds
Gain on disposition of interest in unconsolidated real estate fund
Non-cash profit sharing allocation to consolidated real estate fund
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 and accrued expenses
Security deposits
Other assets
Net cash provided by operating activities
Investing Activities
Capital expenditures and property acquisitions
Deconsolidation of Douglas Emmett Fund X, LLC
Contributions to unconsolidated real estate funds
Distributions from unconsolidated real estate funds
Net cash used in investing activities
Financing Activities
Proceeds from long-term borrowings
Deferred loan costs
Repayment of borrowings
Net change in short-term borrowings
Payment of refundable loan deposit
Contributions by Douglas Emmett Fund X, LLC investors
Contributions by noncontrolling interests
Distributions to noncontrolling interests
Distributions of capital to noncontrolling interests
Redemption of noncontrolling interests
Issuance of common stock, net
Repurchase of common stock
Cash dividends
Termination of interest rate contracts
Net cash (used in) provided by financing activities
Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Noncash transactions:
Investing activity related to contribution of properties to unconsolidated
real estate fund
Financing activity related to contribution of debt and noncontrolling interest
to unconsolidated real estate fund
Supplemental disclosure of cash flow information
Cash paid during the year for interest
2011
Year Ended December 31,
2010
2009
$
2,258
$
(32,956)
$
(34,157)
205,696
(20,466)
2,867
-
-
4,512
(9,073)
16,497
7,995
(131)
(9,748)
1,498
2,104
3,829
207,838
(55,963)
-
(9,211)
5,218
(59,956)
1,745,000
(13,400)
(1,779,904)
-
(1,575)
-
10
(15,090)
-
-
117,752
-
(57,777)
(8,340)
(13,324)
134,558
272,419
406,977
-
-
$
$
$
225,030
(26,260)
6,971
-
-
2,424
(5,326)
17,610
10,127
766
(8,538)
(11,276)
(935)
11,238
188,875
(283,398)
-
(26,923)
5,710
(304,611)
788,080
(10,168)
(388,080)
-
-
-
167
(13,400)
(400)
-
-
-
(48,976)
(11,808)
315,415
199,679
72,740
272,419
-
-
135,278
$
158,641
$
$
$
$
$
$
$
$
226,620
(32,468)
3,279
(5,573)
660
2,018
(5,026)
20,062
5,101
(132)
(8,961)
9,739
(75)
(744)
180,343
(42,151)
(6,625)
-
-
(48,776)
82,640
(446)
(106,665)
(25,275)
-
66,074
450
(16,742)
-
(2,880)
-
(5,337)
(59,301)
-
(67,482)
64,085
8,655
72,740
476,852
(483,477)
163,244
See notes to consolidated financial statements for additional non-cash items.
F-7
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements
1. Organization and Description of Business
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed Real Estate Investment Trust (REIT). The
terms “us,” “we” and “our” as used in these financial statements refer to Douglas Emmett, Inc. and its subsidiaries. Through our
interest in Douglas Emmett Properties, LP (our operating partnership) and its subsidiaries, as well as our investment in our Funds, we
own or partially own, manage, lease, acquire and develop real estate, consisting primarily of office and multifamily properties. As of
December 31, 2011, we own a consolidated portfolio of 50 office properties (including ancillary retail space) and 9 multifamily
properties, as well as the fee interests in 2 parcels of land subject to ground leases. Alongside our consolidated portfolio, we also
manage and own equity interests in Funds that, at December 31, 2011, owned 8 additional office properties, for a combined 58 office
properties in our total portfolio. All of these properties are located in Los Angeles County, California and Honolulu, Hawaii.
We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County,
California and in Honolulu, Hawaii. Our presence in Los Angeles and Honolulu is the result of a consistent and focused strategy of
identifying submarkets that are supply constrained, have high barriers to entry and typically exhibit strong economic characteristics
such as population and job growth and a diverse economic base. In our office portfolio, we focus primarily on owning and acquiring a
substantial share of top-tier office properties within submarkets located near high-end executive housing and key lifestyle amenities.
In our multifamily portfolio, we focus primarily on owning and acquiring select properties at premier locations within these same
submarkets. Our properties are concentrated in 9 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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements presented are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries,
including our operating partnership. Substantially all of our business is conducted through our consolidated operating partnership, in
which other investors own a noncontrolling interest. See Note 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.
The accompanying financial statements have been prepared pursuant to the rules and regulations of the United States
Securities and Exchange Commission (SEC) in conformity with Generally Accepted Accounting Principles of the United States
(GAAP) as established by the Financial Accounting Standards Board (FASB) in the Accounting Standards Codification (ASC)
including modifications issued under Accounting Standards Updates (ASUs). The accompanying financial statements include, in our
opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth
therein. Any reference to the number of properties and square footage are unaudited and outside the scope of our independent
registered public accounting firm’s audit of our financial statements in accordance with the standards of the United States Public
Company Accounting Oversight Board.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 materially from those estimates.
Segment Information
Segment information is prepared on the same basis that our management reviews information for operational decision-
making purposes. We operate two business segments: the acquisition, redevelopment, ownership and management of office real estate
and the acquisition, redevelopment, ownership and management of multifamily real estate.
The products for our office segment include primarily rental of office space and other tenant services including parking and
storage space rental. The products for our multifamily segment include rental of apartments and other tenant services including
parking and storage space rental.
F-8
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
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. Transaction costs related to
acquisitions are expensed, rather than included with the consideration paid. Estimates of future cash flows and other valuation
techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment and
identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above- and below-market
ground leases, and acquired above- and below-market tenant leases. Initial valuations are subject to change until such information is
finalized, but no later than 12 months from the acquisition date.
The fair values of tangible assets are determined on an ‘‘as-if-vacant’’ basis. The ‘‘as-if-vacant’’ fair value is allocated to
land, where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information
obtained in connection with the acquisition of the property.
The estimated fair value of acquired in-place at-market tenant leases are the costs we would have incurred to lease the
property to the occupancy level of the property at the date of acquisition. Such estimates include the fair value of leasing commissions
and legal costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluate the time period over
which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate taxes,
insurance and utilities) incurred during the lease-up period, which is generally 6 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 non-cancelable 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, in-place leases, tenant improvements and leasing costs are
depreciated on a straight-line basis using an estimated life of 40 years for buildings; 15 years for site improvements; the average term
of existing leases in the building acquired 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. Any unamortized amounts relating to a lease that is
terminated prior to its stated expiration are written off in the period of termination.
Investment in Unconsolidated Real Estate Funds
At December 31, 2011, we managed and held equity interests in two Funds: Douglas Emmett Fund X, LLC and Douglas
Emmett Partnership X, LP. We held a 48.82% interest in Douglas Emmett Fund X, LLC and an aggregate 21.52% interest in the
properties held by Douglas Emmett Partnership X, LP and its subsidiaries. Our investment balance represents our share of the net
assets of the combined Funds, plus additional basis of approximately $4.2 million, primarily due to the inclusion of the cost of raising
capital that is accounted for as part of our investment basis.
Impairment of Long-Lived Assets
We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the
current carrying value exceeds the estimated undiscounted cash flows, an impairment loss is recorded equal to the difference between
the asset’s current carrying value and its value based on the discounted estimated future cash flows. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less costs to sell. Based upon such periodic assessments, no impairments
occurred during 2011, 2010 or 2009.
F-9
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We assess whether there has been impairment in the value of our investments in our Funds periodically. An impairment
charge is recorded when events or change in circumstances indicate that a decline in the fair value below the carrying value has
occurred and such decline is other-than-temporary. The ultimate realization of the investments in our Funds is dependent on a number
of factors, including the performance of the investment and market conditions. We will record an impairment charge if we determine
that a decline in the value of an investment in one of our Funds is other-than-temporary. Based upon such periodic assessments, no
impairment occurred during 2011.
An asset is classified as an asset held for disposition when it meets certain requirements, including the approval of the sale of
the asset, the marketing of the asset for sale and our expectation that the sale will likely occur within the next 12 months. Upon
classification of an asset as held for disposition, the net book value of the asset, excluding long-term debt, is included on the balance
sheet as properties held for disposition, depreciation of the asset is ceased and the operating results of the asset are included in
discontinued operations for all periods presented.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, we consider short-term investments with maturities of three
months or less when purchased to be cash equivalents.
Revenue and Gain Recognition
Four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; services are
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 term of the lease. Deferred rent
receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. Lease termination fees, which are
included in rental revenues in the accompanying consolidated statements of operations, are recognized when the related lease is
canceled and we have no continuing obligation to provide services to such former tenant. We recorded total lease termination revenue
of $444 thousand for 2011, $844 thousand for 2010 and $1.0 million for 2009.
Estimated recoveries from tenants for real estate taxes, common area maintenance and other recoverable operating expenses
are recognized as revenues in the period that the expenses are incurred. Subsequent to year-end, we perform reconciliations on a lease-
by-lease basis and bill or credit each tenant for any cumulative annual adjustments. In addition, we record a capital asset for leasehold
improvements constructed by us that are reimbursed by tenants, with the offsetting side of this accounting entry recorded to deferred
revenue which is included in accounts payable and accrued expenses. The deferred revenue is amortized as additional rental revenue
over the life of the related lease. Rental revenue from month-to-month leases or leases with no scheduled rent increases or other
adjustments is recognized on a monthly basis when earned.
The recognition of gains on sales of real estate requires that we measure the timing of a sale against various criteria related to
the terms of the transaction, as well as any continuing involvement in the form of management or financial assistance associated with
the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by
applying the finance, profit-sharing or leasing method. If the sales criteria have been met, we further analyze whether profit
recognition is appropriate using the full accrual method. If the criteria to recognize profit using the full accrual method have not been
met, we defer the gain and recognize it when the criteria are met or use the installment or cost recovery method as appropriate under
the circumstances.
Monitoring of Rents and Other Receivables
We maintain an allowance for estimated losses that may result from the inability of tenants to make required payments. If a
tenant fails to make contractual payments beyond any allowance, we may recognize bad debt expense in future periods equal to the
amount of unpaid rent and deferred rent. We take into consideration many factors to evaluate the level of reserves necessary,
including historical termination/default activity and current economic conditions. As of December 31, 2011 and 2010, we had an
allowance for doubtful accounts of $19.1 million and $17.1 million, 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, 2011 and 2010, we had a total of approximately $18.4 million and $17.2 million, respectively, of lease security
available on existing letters of credit, as well as $34.0 million and $31.9 million, respectively, of lease security available in security
deposits.
F-10
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2011 and 2010. 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.
Interest Rate Agreements
We generally manage our interest rate risk associated with floating rate borrowings by obtaining interest rate swap and
interest rate cap contracts. The interest rate swap agreements we utilize effectively modify our exposure to interest rate risk by
converting our floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense.
These agreements involve the receipt of floating-rate amounts in exchange for fixed-rate interest payments over the life of the
agreements without an exchange of the underlying principal amount. We do not use any other derivative instruments.
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the
fair value of an asset, liability, or firm commitment attributable to a particular risk, are considered fair value hedges. Derivatives used
to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow
hedges.
Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate
movements and 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 10.
Stock-Based Compensation
We account for stock-based compensation, including stock options and long-term incentive plan units, using the fair value
method of accounting. The estimated fair value of the stock options and the long-term incentive units is amortized over their
respective vesting periods.
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) attributable to common stockholders for the
period by the weighted average of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by
dividing the net income attributable 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.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (IRC), commencing with our
initial taxable year ending December 31, 2006. To qualify as a REIT, we are required (among other things) to distribute at least 90%
of our REIT taxable income to our stockholders and meet the various other requirements imposed by the IRC relating to matters such
as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT,
we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from
our REIT qualifying activities. We are subject to corporate-level tax on the earnings we derive through our taxable REIT subsidiaries
(TRS). If we fail to qualify as a REIT in any taxable year, and were unable to avail ourselves of certain savings provisions set forth in
the IRC, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable
alternative minimum tax.
In addition, we are subject to taxation by various state and local jurisdictions, including those in which we transact business
or reside. Our non-TRS subsidiaries, including our operating partnership, are either partnerships or disregarded entities for federal
income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss from disregarded
entities (including limited partnerships and S-Corporations) is reportable in the income tax returns of the respective partners and
stockholders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements.
F-11
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We have elected to treat several of our subsidiaries as taxable REIT subsidiaries which generally may engage in any business,
including the provision of customary or non-customary services for our tenants. A TRS is treated as a regular corporation and is
subject to federal income tax and applicable state income and franchise taxes at regular corporate rates. Our TRS subsidiaries did not
have significant tax provisions or deferred income tax items for 2011, 2010 or 2009.
Recently Issued Accounting Literature
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income. This ASU requires an entity to present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but
consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders’ equity. This ASU is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011, which for us means the first quarter of 2012. In December 2011, the FASB issued ASU No. 2011-12 which
effectively deferred those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated
other comprehensive income. The amendments will be temporary to allow the FASB time to redeliberate the presentation
requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for
public, private, and non-profit entities. We adopted ASU 2011-05 during the fourth quarter of 2011, and it did not have a material
effect on our financial position or results of operations, as it only affects presentation.
In December 2011, the FASB issued ASU No. 2011-10, Derecognition of in Substance Real Estate - a Scope Clarification
(Topic 360). This ASU modifies ASC Subtopic 360-20, which specifies circumstances under which the parent (reporting entity) of an
“in substance real estate” entity derecognizes that in substance real estate. Generally, if the parent ceases to have a controlling
financial interest (as described under ASC Subtopic 810-10) in the subsidiary as a result of a default on the subsidiary’s nonrecourse
debt, then the subsidiary’s in substance real estate and related debt, as well as the corresponding results of operations, will continue to
be included in the consolidated financial statements and not be removed from the consolidated results until legal title to the real estate
is transferred. ASU 2011-10 will be effective for fiscal years, and interim periods within those years, beginning on or after June 15,
2012, which for us means the third quarter of 2012. We do not expect ASU 2011-10 to have a material effect on our financial position
or results of operations.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). The
amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in
accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar
agreement. The amendments in this ASU require disclosure of information about the effects of offsetting and related arrangements
under Section 210-20-50. ASU 2011-11 will be effective for annual reporting periods beginning on or after January 1, 2013, and
interim periods within those annual periods, which for us means the first quarter of 2013. The ASU will require retrospective
disclosures for all comparative periods presented. We do not expect ASU 2011-11 to have a material effect on our financial position or
results of operations.
We do not expect any other recently issued ASUs to have any material impact on our consolidated financial position or
results of operations, either because the ASU is not applicable or because we expect its impact to be immaterial.
F-12
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
3. Investment in Real Estate
The results of operations for 2011, 2010 and 2009 were affected by the acquisition of new properties, as well as the
contribution of certain properties to one of our Funds. The operating results of acquired properties are included in our consolidated
statements of operations only from the date each property was acquired, and in the case of the properties contributed to that Fund, only
until the end of February 2009, when that Fund was deconsolidated from our financial statements. During the three years presented in
our results of operations, we made one consolidated acquisition: Bishop Square, an office project containing approximately 960,000
square feet located in Honolulu, Hawaii for a contract price of $232.0 million, which we acquired in June 2010. Bishop Square is the
largest office project in the state of Hawaii, and consists of two Class A office towers, an above-ground parking structure and a one-acre
park. The following table (in thousands) 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
2010 Acquisition
$
$
16,273
200,781
13,012
19
(1,015)
501
229,571
In addition, the total portfolio that we manage was increased by the following acquisitions made by our Funds: (i) the
acquisition of a Class A office building located on Rodeo Drive in Beverly Hills in April 2011 for a contract price of $42.0 million
and (ii) the acquisition of a Class A office building located in West Los Angeles in October 2010 for a contract price of $111.0 million.
F-13
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
4. Acquired Lease Intangibles
The following summarizes our acquired lease intangibles related to above/below-market leases (in thousands) 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
2011
2010
$
$
$
$
34,968
(31,389)
3,198
(398)
6,379
263,220
(189,371)
16,200
(3,248)
86,801
$
$
$
$
34,968
(28,489)
3,198
(321)
9,356
263,220
(166,127)
16,200
(3,049)
110,244
Net accretion of above- and below-market in-place tenant lease value was recorded as an increase to rental income totaling
$20.3 million for 2011, $26.1 million for 2010 and $32.3 million for 2009. The net accretion of above- and below-market ground lease
value has been recorded as a decrease of office rental operating expense totaling $122 thousand for 2011, $123 thousand for 2010 and
$122 thousand for 2009.
Following is the estimated net accretion at December 31, 2011 for the next five years (in thousands):
Year
2012
2013
2014
2015
2016
Thereafter
Total
5. Other Assets
$ 17,626
15,263
12,582
10,281
7,244
17,426
$ 80,422
Other assets consist of the following (in thousands) at December 31:
Deferred loan costs, net of accumulated amortization of $8,850 and
$4,770 at December 31, 2011 and December 31, 2010, respectively
Restricted cash
Prepaid expenses
Interest receivable
Other indefinite-lived intangible
Deposits in escrow
Other
Total other assets
$
$
2011
2010
21,448
2,434
3,770
334
1,988
1,575
2,141
33,690
$
$
12,561
2,675
3,710
3,560
1,988
-
2,288
26,782
We incurred deferred loan cost amortization expense of $4.5 million in 2011, $2.4 million in 2010 and $2.0 million in 2009.
Deferred loan cost amortization is included as a component of interest expense in the consolidated statements of operations.
F-14
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
6. Future Minimum Lease Receipts
We lease space to tenants primarily under noncancelable operating leases that generally contain provisions for a base rent
plus reimbursement for certain operating expenses. Operating expense reimbursements are reflected in our consolidated statements of
operations as tenant recoveries.
We lease space to certain tenants under noncancelable leases that provide for percentage rents based upon tenant revenues.
Percentage rental income totaled $591 thousand for 2011, $603 thousand for 2010 and $654 thousand for 2009.
Future minimum base rentals on our non-cancelable office and ground operating leases at December 31, 2011 were as
follows (in thousands):
Twelve months ending December 31:
2012
2013
2014
2015
2016
Thereafter
Total future minimum base rentals
$
$
358,922
318,572
261,967
209,656
166,577
452,600
1,768,294
The future minimum lease payments in the table above (i) 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 and (ii)
assume that the termination options in some leases, which generally require payment of a termination fee, are not exercised.
7. Future Minimum Lease Payments
As of December 31, 2011, we leased portions of the land underlying two of our office properties. We have an ordinary
purchase option on one of these two leases, which we may exercise at any time prior to May 31, 2014 for a purchase price of $27.5
million. We have the ability and intent to exercise this option, and therefore the future minimum rent payments are excluded from the
table below. We expensed ground lease payments totaling $2.2 million for 2011, $2.2 million for 2010 and $2.1 million for 2009.
The following is a schedule of our minimum ground lease payments (in thousands) as of December 31, 2011:
Twelve months ending December 31:
2012
2013
2014
2015
2016
Thereafter
Total future minimum lease payments
$
$
733
733
733
733
733
51,309
54,974
F-15
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
8. Secured Notes Payable
A summary of our secured notes payable is as follows (in thousands):
Description
Term Loans (2)
Term Loan (3)
Fannie Mae Loan (4)
Term Loan
Fannie Mae Loan
Fannie Mae Loans
Term Loan
Term Loan
Term Loan
Term Loan (5)
Term Loan (6)
Fannie Mae Loans
Maturity
Date (1)
08/31/12
03/03/14
02/01/15
04/01/15
02/01/16
06/01/17
10/02/17
04/02/18
08/01/18
08/05/18
03/01/20 (7)
11/02/20
Aggregate loan principal
Unamortized Loan Premium (8)
Total
Aggregate amount of effective fixed rate loans
Aggregate amount of fixed rate loans
Aggregate amount of variable rate loans
Aggregate loan principal
Unamortized Loan Premium
Total
$
$
$
Outstanding
Principal
Balance as of
December 31,
2011
$
521,956
$
Outstanding
Principal
Balance as of
December 31,
2010
2,300,000
16,140
111,920
340,000
82,000
18,000
400,000
510,000
530,000
355,000
350,000
388,080
3,623,096
1,060
3,624,156
2,268,080
705,000
650,016
3,623,096
1,060
3,624,156
$
$
$
18,000
111,920
340,000
82,000
18,000
400,000
-
-
-
-
388,080
3,658,000
10,133
3,668,133
1,985,000
-
1,673,000
3,658,000
10,133
3,668,133
Variable
Interest Rate
LIBOR + 0.85%
LIBOR + 1.85%
DMBS + 0.707%
LIBOR +1.50%
LIBOR + 0.62%
LIBOR + 0.62%
LIBOR + 2.00%
LIBOR + 2.00%
LIBOR + 1.70%
--
--
LIBOR + 1.65%
Swap
Maturity
Date (1)
--
--
--
01/02/13
03/01/12
06/01/12
07/01/15
04/01/16
08/01/16
--
--
11/01/17
Effective
Annual
Fixed
Interest
Rate (1)
N/A
N/A
N/A
4.77%
5.62%
5.82%
4.45%
4.12%
3.74%
4.14%
4.46%
3.65%
4.17%
4.30%
N/A
(1)
Includes the effect of interest rate contracts and excludes amortization of loan fees, all shown on an actual/360-day basis. As of December 31,
2011, the weighted average remaining life of our consolidated outstanding debt was 5.5 years. Of the $2.97 billion of that debt where the interest
rate was fixed under the terms of the loan or a swap, the weighted average remaining life was 6.5 years, the weighted average remaining period
during which interest was fixed was 4.7 years, and the weighted average annual interest rate was 4.20%. Including the non-cash amortization of
interest rate contracts, loan premium and prepaid financing, the effective weighted average interest rate was 4.66%. Except as otherwise noted,
each loan is secured by a separate collateral pool consisting of one or more properties, requiring monthly payments of interest only with
outstanding principal due upon maturity.
(2)
Includes 1 loan of approximately $522.0 million as of December 31, 2011 and a group of 7 separate loans aggregating $2.30 billion as of December
31, 2010. Originally, the interest rates on all of these loans were effectively fixed by interest rate swaps. As presented in the table, all of the
remaining debt as of December 31, 2011 was variable rate debt due to the expiration or termination of the related swaps. See Note 19 regarding
subsequent events.
(3) The borrower is a consolidated entity in which our operating partnership owns a two-thirds interest.
(4) The loan has a $75.0 million tranche bearing interest at DMBS + 0.76% and a $36.9 million tranche bearing interest at DMBS + 0.60%.
(5) Monthly payments are interest-only until February 5, 2016, with principal amortization thereafter based upon a 30-year amortization table.
(6) Bears interest at a fixed interest rate until March 1, 2018 and a floating interest rate based on LIBOR thereafter. Monthly interest payments are
interest-only until March 1, 2014, with principal amortization thereafter based upon a 30-year amortization table.
(7) We have 2 one-year extension options, which would extend the maturity to March 1, 2020 from March 1, 2018, subject to meeting certain
conditions.
(8) Represents non-cash mark-to-market adjustment on variable rate debt associated with office properties.
F-16
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
In January 2011, we modified and extended the maturity of an $18.0 million loan that was scheduled to mature on March 1,
2011. The modified loan has an outstanding balance of $16.1 million, bears interest at a floating rate equal to one-month LIBOR plus
1.85% and matures on March 3, 2014.
In February 2011, we obtained a secured, non-recourse $350.0 million term loan. This loan has a maturity date of March 1,
2020, including 2 one-year extension options. The loan bears interest at a fixed interest rate of 4.46% until March 1, 2018 and a
floating interest rate thereafter. Monthly loan payments are interest-only until March 1, 2014, with principal amortization thereafter
based upon a 30-year amortization schedule. The loan proceeds were largely used to fully repay a $319.6 million term loan, which was
scheduled to mature in 2012. The balance of the loan proceeds were retained for other corporate purposes.
In March 2011, we obtained a secured, non-recourse $510.0 million term loan. This loan has a maturity date of April 2, 2018.
The loan bears interest at a floating rate equal to LIBOR plus 2.00%, but we have entered into an interest rate swap contract that
effectively fixes the annual interest rate at 4.12% until April 1, 2016. The loan proceeds were used in the repayment of a $531.8
million term loan, which was scheduled to mature in 2012.
In July 2011, we closed two secured, non-recourse loans. The first loan, for $355.0 million, bears interest at a fixed rate of
4.14% through the maturity date of August 5, 2018. Monthly payments are interest-only until February 5, 2016, with principal
amortization thereafter based upon a 30-year amortization table. The second loan, for $530.0 million, bears interest at a floating rate
equal to LIBOR plus 1.70% through the maturity date of August 1, 2018, but we have entered into an interest rate swap contract that
effectively fixes the annual interest rate at 3.74% until August 1, 2016. The loan requires monthly interest-only payments. The
proceeds of these loans were used in the repayment of term loans that were scheduled to mature in 2012.
Including the effect of the refinancings listed above, the minimum future principal payments due on our secured notes
payable at December 31, 2011, excluding the non-cash loan premium amortization, were as follows (in thousands) :
Twelve months ending December 31:
2012
2013
2014
2015
2016
Thereafter
Total future principal payments
$ 521,956
-
20,381
457,799
93,214
2,529,746
$ 3,623,096
Subsequent to year end, we repaid the balance of all the 2012 maturities listed above. See Note 19.
9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands) as of December 31:
Accounts payable
Accrued interest payable
Deferred revenue
Total accounts payable and accrued expenses
2011
2010
$
$
28,360
10,781
16,139
55,280
$
$
29,713
12,789
15,291
57,793
F-17
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
10. Interest Rate Contracts
Cash Flow Hedges of Interest Rate Risk
We manage our interest rate risk associated with floating-rate borrowings by obtaining interest rate swap and interest rate cap
contracts. Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate
movements or other identified risks. To accomplish this objective, we primarily use interest rate swaps as part of our cash flow
hedging strategy to convert our floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future
interest expense and cash flows. These agreements involve the receipt of floating-rate amounts in exchange for fixed-rate interest
payments over the life of the agreements without an exchange of the underlying principal amount. In limited instances, we use interest
rate caps to limit our exposure to interest rate increases on an underlying floating-rate debt instrument. During 2011, we entered into
two new interest rate swaps to fix the floating rate payments on two new borrowings of $510.0 million and $530.0 million, while
certain swaps with a combined notional of $434.4 million reached their natural maturity in August 2011. We entered into interest rate
caps designated as cash flow hedges to replace the $111.9 million of the $434.4 million of interest rate swaps that reached their natural
maturity in August 2011. In December 2011, we terminated $322.5 million of our interest rate swaps by paying a swap termination fee
of approximately $8.3 million. We may enter into derivative contracts that are intended to hedge certain economic risks, even though
hedge accounting does not apply, or for which we elect to not apply hedge accounting. We do not use any other derivative
instruments.
As of December 31, 2011, the totals of our existing swaps that qualified as highly effective cash flow hedges were as follows:
Interest Rate Derivative
Interest Rate Swaps
Number of Instruments
11
Notional (in thousands)
$2,268,080
Interest Rate Caps
2
$111,920
Non-designated Hedges
Derivatives not designated as hedges are not speculative. Prior to our IPO, we entered into certain pay-fixed swaps, as well as
purchased caps to manage our exposure to interest rate movements and other identified risks. At the time of our IPO, we entered into
an equal notional amount of offsetting receive-fixed swaps and sold caps, which were intended to reduce the effect on our reported
earnings by largely offsetting the future cash flows and future change in fair value of our pre-IPO pay-fixed swaps and purchased
caps. Over time, certain swaps have reached their natural maturity and others have been terminated. Most recently, $397.5 million of
our pay-fixed swaps and $397.5 million of the offsetting receive-fixed swaps, as well as $111.9 million of our purchased caps and
$111.9 million of our offsetting sold caps, reached their natural maturity in August 2011. In January 2011, we terminated $388.1
million of our interest rate caps as well as $388.1 million of the offsetting sold caps. In December 2011, we terminated $322.5 million
of our pay-fixed swaps as well as $322.5 million of the offsetting receive-fixed swaps. Accordingly, as of December 31, 2011, we had
the following outstanding interest rate derivatives that were not designated for accounting purposes as hedging instruments, but were
used to hedge our economic exposure to interest rate risk:
Interest Rate Derivative
Pay-Fixed Swaps
Receive-Fixed Swaps
Purchased Caps
Sold Caps
Number of Instruments
1
1
4
4
Notional (in thousands)
$82,000
$82,000
$100,000
$100,000
Credit-risk-related Contingent Features
We have agreements with each of our derivative counterparties that contain a provision under which we could also be
declared in default on our derivative obligations if we default on any of our indebtedness, including any default where repayment of
the indebtedness has not been accelerated by the lender. We have agreements with certain of our derivative counterparties that contain
a provision under which, if we fail to maintain a minimum cash and cash equivalents balance of $1.0 million, then the derivative
counterparty would have the right to terminate the derivative. There have been no events of default on any of our derivatives.
As of December 31, 2011 and 2010, the fair value of derivatives, aggregated by counterparty, in a net liability position was
$105.5 million and $59.7 million, respectively, which includes accrued interest but excludes any adjustment for nonperformance risk
related to these agreements.
F-18
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Accounting for Interest Rate Contracts
Hedge accounting generally provides for the timing of gain or loss recognition on the hedging instrument to match the
earnings effect of the hedged forecasted transactions in a cash flow hedge. All other changes in fair value, with the exception of hedge
ineffectiveness, are recorded in accumulated other comprehensive income (loss) (AOCI), which is a component of equity outside of
earnings. Amounts reported in AOCI related to derivatives designated as accounting hedges will be reclassified to interest expense as
interest payments are made on our hedged variable-rate debt. The ineffective portion of changes in the fair value of the derivative is
recognized directly in earnings as interest expense. 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 directly in earnings as interest
expense.
The change in net unrealized gains and losses on cash flow hedges reflects a reclassification from AOCI to interest expense,
which increased interest expense by $80.9 million for 2011, $128.5 million for 2010 and $144.7 million for 2009. The cash flow
swaps that we terminated in November 2010 had an AOCI balance of $13.9 million at the time they were terminated. Amortization of
$3.5 million relating to this balance was included as part of the reclassification from AOCI to interest expense in 2010, and the
remaining $10.4 million was reclassified in 2011. The cash flow swaps that we terminated in December 2011 had an AOCI balance of
$10.1 million at the time they were terminated. Amortization of $1.3 million relating to this balance was included as part of the
reclassification from AOCI to interest expense in 2011, and the remaining $8.8 million will be reclassified from AOCI to interest
expense in 2012. Including this $8.8 million, we estimate an additional $66.0 million will be reclassified within 12 months after
December 31, 2011 from AOCI to interest expense as an increase to interest expense.
The ineffectiveness attributable to mismatches between certain interest rate contracts and the corresponding items against
which they were designated to hedge produced a gain of $50 thousand in 2011, a gain of $221 thousand in 2010 and a loss of $518
thousand in 2009.
Changes in fair value of derivatives not designated as hedges have been recognized in earnings for all periods. The aggregate
net asset fair value of these swaps decreased $4.8 million in 2011, $14.3 million in 2010 and $19.5 million in 2009. These decreases in
net asset fair value were recorded as additional interest expense.
The following table represents the effect of derivative instruments on our consolidated statements of operations and
comprehensive income (in thousands) for the year ended December 31:
Derivatives Designated as Cash Flow Hedges:
Amount of gain (loss) recognized in other comprehensive income (OCI) on derivatives
(effective portion)
Amount of gain (loss) reclassified from accumulated OCI into earnings under "interest
expense" (effective portion)
Amount of gain (loss) on derivatives recognized in earnings under "interest expense"
(ineffective portion and amount excluded from effectiveness testing)
Derivatives Not Designated as Cash Flow Hedges:
Amount of realized and unrealized gain (loss) on derivatives recognized in earnings
under "interest expense"
$
$
$
$
2011
2010
(117,939)
(80,928)
50
(371)
$
$
$
$
(40,545)
(128,530)
221
47
F-19
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Fair Value Measurement
We record all derivatives on the balance sheet at fair value, using the framework for measuring fair value established by the
FASB. The fair value of these hedges is obtained through independent third-party valuation sources that use conventional valuation
algorithms. The following table represents the fair values of derivative instruments (in thousands) as of December 31:
Derivative assets, disclosed as "Interest Rate Contracts":
Derivatives designated as accounting hedges
Derivatives not designated as accounting hedges
Total derivative assets
Derivative liabilities, disclosed as "Interest Rate Contracts":
Derivatives designated as accounting hedges
Derivatives not designated as accounting hedges
Total derivative liabilities
$
$
$
$
2011
2010
55
644
699
97,774
643
98,417
$
$
$
$
14,204
38,324
52,528
67,990
31,697
99,687
The FASB fair value framework includes a hierarchy that distinguishes between assumptions based on market data obtained
from sources independent of the reporting entity and the reporting entity’s own assumptions about market-based inputs. Level 1 inputs
utilize unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable either directly or
indirectly for similar assets and liabilities in active markets. Level 3 inputs are unobservable assumptions generated by the reporting
entity.
The valuation of our interest rate swaps and caps is determined using widely accepted valuation techniques, including
discounted cash flow analysis on the expected future cash flows of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied
volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect
of nonperformance risk, we considered the impact of netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts and guarantees. We have determined that our derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy. We did not have any fair value measurements using significant unobservable inputs (Level 3) as of December
31, 2011.
The table below presents the derivative assets and liabilities presented in our financial statements at their estimated fair value
on a gross basis as of December 31, 2011 without reflecting any net settlement positions with the same counterparty (in thousands):
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, 2011
Assets
Interest Rate Contracts
$ -
$
699
$ -
$ 699
Liabilities
Interest Rate Contracts
$ -
$
98,417
$ -
$ 98,417
F-20
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
11. Equity
We had 131.1 million shares of common stock and 32.0 million operating partnership units and fully-vested LTIP units
outstanding as of December 31, 2011. Noncontrolling interests in our operating partnership relate to interests in our operating partnership
that are not owned by us. Noncontrolling interests represented approximately 20% of our operating partnership as of December 31, 2011.
A unit in our operating partnership and a share of our common stock have essentially the same economic characteristics as they share
equally in the total net income or loss distributions of our operating partnership. Investors who own units in our operating partnership
have the right to cause our operating partnership to redeem any or all of their units in our operating partnership for cash equal to the
then-current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis.
Noncontrolling interests also includes the interest of a minority partner in a joint venture formed to purchase an office
building in Honolulu, Hawaii. The joint venture is two-thirds owned by our operating partnership and was consolidated in our
financial statements as of December 31, 2011.
During 2011 approximately 714 thousand units in our operating partnership were converted to shares of our common stock
and we sold 6.2 million shares of our common stock in open market transactions under our ATM program for gross proceeds of
approximately $119.8 million, or net proceeds of approximately $117.8 million after commissions and other expenses, leaving
approximately $130.2 million available under our ATM program at December 31, 2011 (all of which was sold subsequent to year end;
see Note 19). We did not make any repurchases of shares or share equivalents during 2011. During 2010, approximately 2.5 million
operating partnership units were exchanged for shares of common stock. We did not make any repurchases of share equivalents during
2010. During 2009, we repurchased 820 thousand share equivalents in open market transactions and 250 thousand share equivalents in
a private transaction for a total combined consideration of approximately $8.2 million. We may make additional purchases of our
share equivalents from time to time in private transactions or in the public markets, but have no commitments to do so.
The table below represents the net income attributable to common stockholders and transfers from noncontrolling interests
(in thousands) for the year ended December 31:
Net income (loss) attributable to common stockholders
Transfers from the noncontrolling interests:
Increase in common stockholders additional paid-in capital for
repurchase of operating partnership units
Increase in common stockholders additional paid-in capital for
exchange of operating partnership units
Net transfers from noncontrolling interests
Change from net income (loss) attributable to common stockholders
and transfers from noncontrolling interests
2011
2010
2009
$ 1,451 $ (26,423) $ (27,064)
-
-
723
10,453
10,453
37,119
37,119
7,665
8,388
$ 11,904 $ 10,696 $ (18,676)
During the second quarter of 2011, we increased our quarterly dividend from $0.10 per share to $0.13 per share, so that we
paid aggregate dividends of $0.46 per share during 2011. During 2010 and 2009, we declared four quarterly dividends of $0.10 per
share, or an aggregate of $0.40 per share.
Earnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for
financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on extinguishment of debt,
revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute
depreciation. Our common stock dividends are classified for United States federal income tax purposes as follows (unaudited):
Record Date Paid Date
Dividend Per Share
12/31/10
3/31/11
6/30/11
9/30/11
1/14/11 $
4/15/11
7/15/11
10/13/11
Total: $
0.1000
0.1000
0.1300
0.1300
0.4600
Ordinary Income % Capital Gain % Return of Capital %
100.0%
100.0%
100.0%
100.0%
100.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
F-21
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
12. Earnings (Loss) Per Share
Year ended December 31,
2010
2011
2009
Numerator (in thousands):
Net income (loss) attributable to common stockholders
Add back: Net income (loss) attributable to noncontrolling interests
in our operating partnership
Numerator for diluted net income (loss) attributable to all equity holders
Denominator (in thousands):
Weighted average shares of common stock outstanding - basic
Effect of dilutive securities (1):
Operating partnership units
Stock options
Unvested LTIP units
Weighted average shares of common stock and common stock equivalents
outstanding - diluted
Basic earnings (loss) per share:
Net income (loss) attributable to common stockholders per share
Diluted earnings (loss) per share:
Net income (loss) attributable to common stockholders per share
$
$
$
$
1,451
$
(26,423)
$ (27,064)
366
1,817
$
-
(26,423)
-
$ (27,064)
126,187
122,715
121,553
31,840
1,412
527
-
-
-
-
-
-
159,966
122,715
121,553
0.01
$
(0.22)
$
(0.22)
0.01
$
(0.22)
$
(0.22)
(1) Diluted shares represent ownership in our company through shares of common stock, units in our operating partnership and other
convertible equity instruments. Basic and diluted shares are calculated in accordance with GAAP and include common stock plus
dilutive equity instruments, as appropriate. For the years ended December 31, 2010 and 2009, all potentially dilutive instruments,
including stock options, OP units and LTIP units have been excluded from our computation of weighted average dilutive shares
outstanding because they were not dilutive.
13. Stock-Based Compensation
2006 Omnibus Stock Incentive Plan
The Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan, our 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. We had an aggregate of 22.7 million shares available for grant as of December 31,
2011, although “full value” awards (such as deferred stock awards, restricted stock awards and LTIP unit awards) are counted against
our stock incentive plan overall limits as two shares (rather than one), while options and Stock Appreciation Rights are counted as one
share (0.9 shares for options or Stock Appreciation Rights with terms of five years or less). The number of shares reserved under our
stock incentive plan is also subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization.
Generally, shares that are forfeited or canceled from awards under our stock incentive plan also will be available for future awards.
Our stock incentive plan is administered by the compensation committee of our board of directors. The compensation
committee may interpret our stock incentive plan and may make all determinations necessary or desirable for the administration of our
plan. The committee 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.
F-22
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
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 LTIP units, which
can be granted either as free-standing awards or in tandem with other awards under our stock incentive plan. Our LTIP units 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.
During each year, we accrue compensation expense as part of annual bonuses which we expect to payout in the form of
immediately vested equity grants shortly after the end of that year. Compensation expense for LTIP units which are not vested at grant
is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. Compensation
expense for options which are not vested at grant is recognized on a straight-line basis over the requisite service period for the entire
award. Certain amounts of equity compensation expense are capitalized for employees who provide leasing and construction services.
During 2011, 2010 and 2009, we granted LTIP units to key employees. Our grants of LTIP units totaled approximately 623
thousand in 2011, 1.1 million in 2010 and 302 thousand in 2009. During 2010 and 2009, we also granted options to purchase shares of
our common stock to key employees. No options were granted in 2011. Our grants of options totaled approximately 1.2 million in
2010 and 3.2 million in 2009. A portion of each award was fully vested at grant and the remainder vests in three equal tranches on the
first, second and third December 31 following the grant.
We make long-term grants of LTIP units every three years to our non-employee directors, which totaled approximately 50
thousand LTIP units in 2010. In 2011, we made long-term grants of 7 thousand LTIP units to new directors. We also granted LTIP
units totaling approximately 23 thousand in 2011, 20 thousand in 2010 and 30 thousand in 2009 in lieu of cash compensation for the
non-employee directors’ services that vest ratably over the year of grant.
Total net equity compensation expense during 2011, 2010 and 2009 for equity grants was $8.0 million, $10.1 million and
$5.1 million, respectively. These amounts do not include (i) capitalized equity compensation totaling $578 thousand, $667 thousand
and $406 thousand during 2011, 2010 and 2009, respectively, and (ii) equity grants vested at grant issued during 2011, 2010 and 2009
totaling $2.8 million, $3.6 million and $1.4 million, respectively, to satisfy a portion of the annual bonuses that were accrued during
the prior year.
F-23
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We calculated the fair value of the stock options granted in 2010 and 2009 using the Black-Scholes option-pricing model
using the following assumptions:
Dividend yield
Expected volatility
Expected life
Risk –free interest rate
Year ended December 31,
2010
2009
5.70%
38.00%
60 months
2.50%
7.70%
24.50%
60 months
1.50%
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 estimated by a third-party consultant for post-vesting restrictions. The total grant date fair value of LTIP units which vested
in 2011, 2010 and 2009 was $8.1 million, $10.3 million and $4.1 million, respectively. Total unrecognized compensation cost related
to nonvested option and LTIP awards was $5.1 million at December 31, 2011. This expense will be recognized over a weighted-
average term of 18 months. The following is a summary of certain information with respect to outstanding stock options and LTIP
units granted under our stock incentive plan:
Stock Options:
Number of
Stock Options
(thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
(months)
Total
Intrinsic
Value
(thousands)
Outstanding at December 31, 2008
8,057
$
Granted
Outstanding at December 31, 2009
Granted
Outstanding at December 31, 2010
Granted
Outstanding at December 31, 2011
Exercisable at December 31, 2011
3,236
11,293
1,247
12,540
-
12,540
12,327
21.26
11.42
18.44
15.05
18.10
18.10
18.16
98 $
-
93 $
9,159
84 $
18,698
72 $
71 $
26,051
25,371
Unvested LTIP Units:
Number
of Units
(thousands)
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2008
200
$
Granted
Vested
Outstanding at December 31, 2009
Granted
Vested
Outstanding at December 31, 2010
Granted
Vested
Forfeited
Outstanding at December 31, 2011
F-24
331
(288)
243
1,189
(805)
627
653
(676)
(1)
603
21.49
10.64
14.27
15.26
11.83
12.75
11.99
12.62
12.01
14.92
12.64
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
14. Fair Value of Financial Instruments
Our estimates of the fair value of financial instruments at December 31, 2011 and 2010 were determined using available
market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop
estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair
value amounts.
The carrying amounts for cash and cash equivalents, restricted cash, rents and other receivables, due from affiliates, accounts
payable and other liabilities approximate fair value because of the short-term nature of these instruments. We calculate the fair value
of our secured notes payable based on a currently available market rate, assuming the loans are outstanding through maturity and
considering the collateral. At December 31, 2011, the aggregate fair value of our secured notes payable was estimated to be
approximately $3.67 billion, based on a credit-adjusted present value of the principal and interest payments that are at floating rates,
compared to a carrying value of $3.62 billion at December 31, 2011. As of December 31, 2010, the estimated fair value of our secured
loans was approximately $3.58 billion compared to a carrying value of $3.66 billion at December 31, 2010.
Currently, we use interest rate swaps and caps to manage interest rate risk resulting from variable interest payments on our
floating rate debt. These financial instruments are carried on our balance sheet at fair value based on the assumptions that market
participants would use in pricing the asset or liability. See Note 10.
F-25
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingencies
We are subject to various legal proceedings and claims that arise in the ordinary course of business. Excluding ordinary,
routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be
expected to have a material adverse effect on our business, financial condition or results of operations.
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. In addition, we have financial
instruments that subject us to credit risk, which consist primarily of accounts receivable, deferred rents receivable and interest rate
contracts. We maintain our cash and cash equivalents at high quality financial institutions with investment grade ratings. Interest
bearing accounts at each U.S. banking institution are insured by the Federal Deposit Insurance Corporation up to $250 thousand, while
non interest bearing accounts (where we have almost all of our funds) do not currently have a limit on insurance. We have not
experienced any losses to date on our deposited cash.
Asset Retirement Obligations
Conditional asset retirement obligations represent a legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement is conditional on a future event that may or may not be within our control. A liability for a
conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated. Environmental
site assessments and investigations have identified 20 properties in our consolidated portfolio containing asbestos, which would have
to be removed in compliance with applicable environmental regulations if these properties undergo major renovations or are
demolished. As of December 31, 2011, the obligations to remove the asbestos from these properties have indeterminable settlement
dates, and we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation.
Investment in Unconsolidated Real Estate Fund
At December 31, 2011, we had commitments for future capital contributions related to our investments in our Funds totaling
$38.0 million.
Guarantees
In 2008, we contributed 6 properties, a related $365.0 million term loan and the benefits and burdens of related interest rate
swap agreements to one of our Funds. If that Fund fails to perform any obligations under the swap agreement, we remain liable to the
swap counterparties. The maximum future payments under the swap agreement were approximately $9.7 million as of December 31,
2011. As of December 31, 2011, all obligations under the swap agreement have been performed by that Fund in accordance with the
terms of that agreement.
Tenant Concentrations
In 2011, 2010 and 2009, no tenant exceeded 10% of our total rental revenue and tenant reimbursements.
F-26
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
16. Segment Reporting
Segment information is prepared on the same basis that our management reviews information for operational decision-
making purposes. We operate in two business segments: (i) the acquisition, redevelopment, ownership and management of office real
estate and (ii) the acquisition, redevelopment, ownership and management of multifamily real estate. The products for our office
segment primarily include rental of office space and other tenant services, including parking and storage space rental. The products for
our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental.
Asset information by segment is not reported because we do not use this measure to assess performance and make decisions
to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. Interest and other income,
management services, general and administrative expenses, interest expense, depreciation and amortization expense and net derivative
gains and losses are not included in segment profit as our internal reporting addresses these items on a corporate level.
Segment profit is not a measure of operating income or cash flows from operating activities as measured by GAAP, and it is
not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
Not all companies may calculate segment profit in the same manner. We consider segment profit to be an appropriate supplemental
measure to net income because it assists both investors and management in understanding the core operations of our properties.
The following table (in thousands) represents operating activity within our reportable segments:
Office Segment
Rental revenue
Rental expense
Segment profit
Multifamily Segment
Rental revenue
Rental expense
Segment profit
Total segments' profit
$
2011
505,077
(168,869)
336,208
70,260
(19,012)
51,248
Year Ended December 31,
2010
502,700
(159,155)
343,545
$
$
68,144
(18,327)
49,817
2009
502,767
(154,270)
348,497
68,293
(17,925)
50,368
$
387,456
$
393,362
$
398,865
The following table (in thousands) is a reconciliation of segment profit to net income (loss) attributable to common
stockholders:
2011
387,456
(29,286)
(205,696)
-
1,106
(2,867)
(148,455)
-
$
$
Year Ended December 31,
2010
393,362
(28,305)
(225,030)
-
1,191
(6,971)
(166,907)
(296)
2,258
(807)
1,451
$
(32,956)
6,533
(26,423)
$
2009
398,865
(23,887)
(226,620)
5,573
(12)
(3,279)
(184,797)
-
(34,157)
7,093
(27,064)
Total segments' profit
General and administrative expenses
Depreciation and amortization
Gain on disposition of interest in unconsolidated real estate fund
Other income (loss)
Loss, including depreciation, from unconsolidated real estate fund
Interest expense
Acquisition-related expenses
Net income (loss)
Less: Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to common stockholders
$
$
F-27
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
17. Quarterly Financial Information (unaudited)
The tables below reflect selected quarterly information for 2011 and 2010 (in thousands, except per share amounts):
Total revenue
Net income (loss) before noncontrolling interests
Net income (loss) attributable to common stockholders
Net income (loss) per common share - basic
Net income (loss) per common share - diluted
Weighted average shares of common stock
outstanding - basic
Weighted average shares of common stock
outstanding - diluted
Total revenue
Net loss before noncontrolling interests
Net loss attributable to common stockholders
Net loss per common share - basic and diluted
Weighted average shares of common stock
outstanding - basic and diluted
Three Months Ended
December 31,
2011
143,279
4,408
3,419
0.03
0.03
$
$
$
September 30,
2011
144,059
4,404
3,397
0.03
0.03
June 30,
2011
145,408
(6,209)
(5,016)
(0.04)
(0.04)
$
$
$
March 31,
2011
142,591
(345)
(349)
(0.00)
(0.00)
$
$
$
128,407
127,462
124,610
124,210
161,924
161,186
124,610
124,210
Three Months Ended
December 31,
2010
$
145,778
(6,439)
(5,249)
September 30,
2010
148,070
(4,743)
(3,896)
$
June 30,
2010
139,209
(11,305)
(8,991)
$
March 31,
2010
137,787
(10,469)
(8,287)
(0.04)
$
(0.03)
$
(0.07)
$
(0.07)
123,778
123,077
122,332
121,644
$
$
$
$
$
18. Investments in Unconsolidated Real Estate Funds
We manage and own an equity interest in two Funds through which institutional investors provide capital commitments for
acquisition of properties. For information regarding Douglas Emmett Fund X, LLC, please see the audited financial statements
beginning on page F-32. The table below reflects selected financial information for Douglas Emmett Partnership X, LP which was
formed in February 2010 and began operations in October 2010. The amounts represent 100% (not our pro-rata share) of amounts
related to this Fund, and are based upon historical acquired book value (in thousands).
$
$
Year Ended
December 31, 2011
12,151
10,470
(1,673)
December 31, 2011
157,727
58,182
99,545
February 19, 2010
(inception) through
December 31, 2010
1,788
2,422
(1,489)
December 31, 2010
118,671
58,539
60,132
$
$
Total revenues
Total operating expense
Net loss
Total assets
Total liabilities
Total equity
F-28
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
19. Subsequent Events
Subsequent to year end we sold 6.9 million shares of our common stock in open market transactions under our ATM program
for gross proceeds of approximately $130.2 million, or net proceeds of approximately $128.2 million after commissions and other
expenses, which completes the $250.0 million ATM program.
On January 3, 2012 we paid down $222.0 million of our $522.0 million loan with a maturity date of August 2012, and on
February 1, 2012, we paid down the remaining $300.0 million.
On January 18, 2012, we obtained a secured, non-recourse $155.0 million term loan. The loan bears interest at a fixed interest
rate of 4.00% through its maturity date of February 1, 2019. Monthly interest payments are interest-only until February 2015, with
principal amortization thereafter based upon a 30-year amortization table.
Also, subsequent to year end we entered into an agreement to purchase an additional 16.3% interest in Douglas Emmett Fund
X, LLC for approximately $33.4 million from an existing Fund investor that is rebalancing its portfolio. The acquisition included the
assumption of approximately $3.15 million in undrawn commitments. The purchase is expected to close during the first quarter of
2012.
F-29
Douglas Emmett, Inc.
Schedule III
Consolidated Real Estate and Accumulated Depreciation
(in thousands)
Initial Cost
Cost Capitalized
Subsequent to
Acquisition
Gross Carrying Amount
at December 31, 2011
Encumbrances at
December 31, 2011
Land
Building &
Improvements
Improvements
Land
Building &
Improvements
Total
Accumulated
Depreciation at
December 31, 2011
Year Built /
Renovated
Year
Aquired
$
139,199
26,000
61,600
148,442
80,000
112,144
31,469
73,813
139,131
6,318
25,461
25,805
13,297
13,100
24,056
28,606
85,010
22,600
10,559
23,327
55,800
51,463
30,011
67,307
77,100
28,429
-
16,140
119,000
24,895
28,091
27,968
45,577
36,000
15,472
9,430
25,487
35,802
264,297
115,591
184,500
-
86,055
35,037
14,300
33,583
373,514
80,216
52,094
$
12,769
5,032
5,013
18,514
9,989
16,597
4,955
8,317
16,273
2,564
3,255
5,934
5,557
4,468
4,201
3,102
10,275
3,717
2,096
4,028
8,245
8,475
5,293
12,535
6,660
2,376
51
1,863
19,156
3,833
4,533
5,473
10,350
5,253
5,075
7,055
5,366
4,377
33,213
9,347
20,688
4,712
8,446
5,731
2,574
5,933
43,110
8,506
8,542
$
78,447
15,768
34,283
131,752
29,187
54,774
27,766
105,651
213,793
8,872
9,654
27,836
16,457
11,615
11,860
12,221
70,761
29,099
10,396
15,019
80,633
48,525
23,125
59,554
32,045
15,302
41,001
16,766
109,259
12,484
22,024
22,850
29,784
15,547
6,946
12,035
18,025
15,277
17,820
73,358
143,263
15,747
67,672
24,329
7,111
11,389
292,147
79,532
44,419
$
139,751
28,423
74,819
108,799
115,096
104,198
27,997
59,635
5,996
635
34,489
1,930
769
11,353
29,473
27,925
105,364
436
9,415
18,721
5,884
53,444
46,214
94,619
62,075
47,078
22,913
4,181
76,448
22,427
31,500
32,215
59,812
51,053
16,662
352
20,095
35,092
407,851
128,949
84,188
37,682
99,699
46,691
14,123
49,356
391,387
77,591
51,905
$
27,108
6,714
8,828
26,163
21,787
17,658
6,435
8,833
16,273
2,563
5,921
5,933
5,557
4,775
6,030
5,298
16,153
3,667
2,333
5,366
8,263
15,653
6,165
15,533
9,471
5,119
-
1,863
26,139
7,475
7,503
8,247
9,194
9,664
7,557
7,055
6,863
7,421
48,328
15,015
21,989
8,685
11,737
8,957
5,111
13,303
59,418
14,568
11,448
$
203,859
42,509
105,287
232,902
132,485
157,911
54,283
164,770
219,789
9,508
41,477
29,767
17,226
22,661
39,504
37,950
170,247
29,585
19,574
32,402
86,499
94,791
68,467
151,175
91,309
59,637
63,965
20,947
178,724
31,269
50,554
52,291
90,752
62,189
21,126
12,387
36,623
47,325
410,556
196,639
226,150
49,456
164,080
67,794
18,697
53,375
667,226
151,061
93,418
$
230,967
49,223
114,115
259,065
154,272
175,569
60,718
173,603
236,062
12,071
47,398
35,700
22,783
27,436
45,534
43,248
186,400
33,252
21,907
37,768
94,762
110,444
74,632
166,708
100,780
64,756
63,965
22,810
204,863
38,744
58,057
60,538
99,946
71,853
28,683
19,442
43,486
54,746
458,884
211,654
248,139
58,141
175,817
76,751
23,808
66,678
726,644
165,629
104,866
$
38,078
8,143
20,205
43,744
23,965
29,901
10,302
34,293
13,906
2,136
9,073
6,534
3,385
5,268
8,470
7,095
33,149
4,670
4,330
6,679
13,152
19,774
14,167
31,103
21,205
11,557
15,534
2,799
34,483
5,360
11,186
10,710
16,969
11,027
4,552
3,005
6,952
10,650
84,130
38,580
46,688
10,807
31,919
13,943
4,111
9,849
134,932
30,242
18,202
1968/2002
1974/1998
1985
1968/2001
1981/2000
1962/2004
1964/2004
1992
1972/1983
1984
1983/1996
1975
1957/1985
1986
1991/1998
1972/1992
1972/1987
1971
1987
1981
1986
1974/1998
1971/1992
1986
1989
1987
1994
1980
1989
1996
1971/1996
1985/1996
1987/2004
1990
1964/1992
1985
1983/2004
1991
1981/2002
1988/2004
1988
1967/1991
1984
1966/2002
1991
1989/1995
1982-1993/2004
1985
1987
43,440
153,630
7,750
7,150
3,100
111,920
46,400
144,610
82,000
6,461
28,568
5,720
6,426
2,605
24,720
10,091
20,809
42,887
27,639
81,485
10,052
8,179
3,263
85,895
16,159
74,191
71,376
40,736
144,731
644
534
327
38,671
73,623
197,871
15,190
14,903
58,208
5,720
6,426
2,605
35,294
27,816
60,555
35,165
59,933
196,576
10,696
8,713
3,590
113,992
72,057
232,316
94,288
74,836
254,784
16,416
15,139
6,195
149,286
99,873
292,871
129,453
10,599
35,522
1,911
1,740
705
19,417
11,948
37,905
18,958
1989
1963/1998
1974
1973
1972
1968/2004
1963/1998
1965-67/2002
1990/1995
1999
1999
1996
2001
1996
2001
2004
2004
2010
2006
1995
2006
2006
2000
1994
1995
1999
2007
2001
1998
2007
2000
2000
1999
1995
1994
2004
2008
1997
2000
1998
1997
1999
1995
1997
2006
2001
1997
1997
1995
2005
1997
1998
1998
1997
1994
2002
1998
1999
1999
1998
2006
2006
2006
2005
1999
1999
2006
-
23,848
-
-
23,848
-
23,848
-
N/A
2006
Property Name
Office Properties
100 Wilshire
11777 San Vicente
12400 Wilshire
1901 Avenue of the Stars
401 Wilshire
9601 Wilshire
Beverly Hills Medical Center
Bishop Place
Bishop Square
Brentwood Court
Brentwood Executive Plaza
Brentwood Medical Plaza
Brentwood San Vicente Medical
Brentwood/Saltair
Bundy/Olympic
Camden Medical Arts
Century Park Plaza
Century Park West
Columbus Center
Coral Plaza
Cornerstone Plaza
Encino Gateway
Encino Plaza
Encino Terrace
Executive Tower
Gateway Los Angeles
Harbor Court
Honolulu Club
Landmark II
Lincoln/Wilshire
MB Plaza
Olympic Center
One Westwood
Palisades Promenade
Saltair/San Vicente
San Vicente Plaza
Santa Monica Square
Second Street Plaza
Sherman Oaks Galleria
Studio Plaza
The Trillium
Tower at Sherman Oaks
Valley Executive Tower
Valley Office Plaza
Verona
Village on Canon
Warner Center Towers
Westside Towers
Westwood Place
Multifamily Properties
555 Barrington
Barrington Plaza
Barrington/Kiowa
Barry
Kiowa
Moanalua Hillside Apartments
Pacific Plaza
The Shores
Villas at Royal Kunia
Ground Lease
Owensmouth/Warner
TOTAL
$
3,623,096
$
585,562
$
2,651,419
$
3,489,037
$
851,679
$
5,874,339
$
6,726,018
$
1,119,619
The aggregate cost of total real estate for federal income tax purposes was approximately $3.8 billion at December 31, 2011.
F-30
Schedule III (continued)
Consolidated Real Estate and Accumulated Depreciation
(in thousands)
Real Estate Assets
Balance, beginning of period
Additions
Deductions
- property acquisitions
- improvements
- deconsolidation
Balance, end of period
Accumulated Depreciation
Balance, beginning of period
- depreciation
- deconsolidation
Additions
Deductions
Balance, end of period
2011
Year ended December 31,
2010
2009
$
$
$
$
6,670,683
-
55,335
-
6,726,018
(913,923)
(205,696)
-
(1,119,619)
$
$
$
$
6,387,060
230,066
53,557
-
6,670,683
(688,893)
(225,030)
-
(913,923)
$
$
$
$
6,981,316
-
44,952
(639,208)
6,387,060
(490,125)
(226,620)
27,852
(688,893)
F-31
Report of Independent Registered Public Accounting Firm
The Members of
Douglas Emmett Fund X, LLC
We have audited the accompanying consolidated balance sheets of Douglas Emmett Fund X, LLC (the “Fund”) as of December
31, 2011 and 2010, and the related consolidated statements of comprehensive loss, equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these
financial statements 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. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial
reporting. 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 Fund X, LLC at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for
the years then ended, in conformity with U.S. generally accepted accounting principles.
Los Angeles, California
February 24, 2012
/s/ Ernst & Young LLP
F-32
Douglas Emmett Fund X, LLC
Consolidated Balance Sheets
(in thousands)
December 31, 2011
December 31, 2010
Assets
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Investment in real estate, gross
Less: accumulated depreciation
Investment in real estate, net
Cash and cash equivalents
Tenant receivables, net
Deferred rent receivables, net
Acquired lease intangible assets, net of accumulated amortization
of $1,102 and $866 as of 2011 and 2010, respectively
Investment in unconsolidated real estate fund
Other assets
Total assets
Liabilities
Secured note payable
Accounts payable and accrued expenses
Interest payable
Security deposits
Acquired lease intangible liabilities, net of accumulated amortization
of $22,377 and $19,344 as of 2011 and 2010, respectively
Interest rate contracts
Total liabilities
Equity
Sub-REIT investors
Members' equity, including $8,561 and $19,948 accumulated other
comprehensive loss as of 2011 and 2010, respectively
Total equity
Total liabilities and equity
$
$
$
$
64,847
530,097
71,242
666,186
(85,284)
580,902
3,919
67
5,056
354
9,126
237
599,661
365,000
4,222
1,736
3,696
4,536
8,561
387,751
121
211,789
211,910
599,661
$
$
$
$
64,847
529,301
64,164
658,312
(62,169)
596,143
7,028
132
3,812
590
5,513
301
613,519
365,000
2,862
1,736
3,220
7,569
19,948
400,335
121
213,063
213,184
613,519
See notes to consolidated financial statements.
F-33
Douglas Emmett Fund X, LLC
Consolidated Statements of Comprehensive Loss
(in thousands)
$
Revenues
Rental revenues
Tenant recoveries
Parking and other income
Total revenues
Operating Expenses
Office expense
General and administrative
Depreciation and amortization
Total operating expenses
Operating income (loss)
Other income (loss)
Loss, including depreciation, from unconsolidated
real estate fund
Interest expense
Net loss
Less: net income attributable to Sub-REIT investors
$
Net loss attributable to Members
Other comprehensive income
Comprehensive loss attributable to Members
$
2011
Year Ended December 31,
2010
2009
(unaudited)
$
39,457
728
6,576
46,761
15,767
220
23,115
39,102
7,659
5
(319)
(20,445)
(13,100)
(15)
(13,115)
11,387
(1,728)
$
$
$
38,485
1,731
5,943
46,159
19,593
209
27,319
47,121
(962)
334
(199)
(20,445)
(21,272)
(15)
(21,287)
359
(20,928)
$
$
43,765
3,405
6,643
53,813
20,316
248
29,285
49,849
3,964
(343)
-
(20,526)
(16,905)
(15)
(16,920)
7,703
(9,217)
See notes to consolidated financial statements
F-34
Other Members
$
45,008
69,593
-
-
(736)
(82)
-
(8,659)
3,942
109,066
13,277
-
-
(2,586)
-
(10,895)
184
109,046
2,012
-
-
(1,781)
-
(6,712)
5,828
108,393
$
Total
215,890
133,097
(15)
(125,000)
(1,437)
(109)
15
(16,920)
7,703
213,224
25,941
(15)
(5,053)
-
15
(21,287)
359
213,184
3,932
(15)
(3,478)
-
15
(13,115)
11,387
211,910
Douglas Emmett Fund X, LLC
Consolidated Statements of Equity
(in thousands)
Balance - December 31, 2008 (unaudited)
Contributions
Distributions
Preferred equity redemption
Preferred equity yield
Offering costs
Net income attributable to Sub-REIT investors
Net loss attributable to Members
Other comprehensive income
Balance - December 31, 2009 (unaudited)
Contributions
Distributions
Priority distributions
Priority distribution allocation
Net income attributable to Sub-REIT investors
Net loss attributable to Members
Other comprehensive income
Balance - December 31, 2010
Contributions
Distributions
Priority distributions
Priority distribution allocation
Net income attributable to Sub-REIT investors
Net loss attributable to Members
Other comprehensive income
Balance - December 31, 2011
$
$
Sub-REIT
Investors
119
2
(15)
-
-
-
15
-
-
121
-
(15)
-
-
15
-
-
121
-
(15)
-
-
15
-
-
121
$
$
DEIX, LLC
170,763
63,502
-
(125,000)
(701)
(27)
-
(8,261)
3,761
104,037
12,664
-
(5,053)
2,586
-
(10,392)
175
104,017
1,920
-
(3,478)
1,781
-
(6,403)
5,559
103,396
$
$
See notes to consolidated financial statements.
F-35
Douglas Emmett Fund X, LLC
Consolidated Statements of Cash Flows
(in thousands)
2011
Year Ended December 31,
2010
2009
(unaudited)
$
(13,100)
$
(21,272)
$
(16,905)
Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
Loss, including depreciation, from unconsolidated
real estate fund
Net accretion of acquired lease intangibles
Change in working capital components:
Tenant receivables
Deferred rent receivable
Accounts payable and accrued expenses
Security deposits
Other assets
Net cash provided by (used in) operating activities
Investing Activities:
Capital expenditures and property acquisitions
Contributions to unconsolidated real estate fund
Net cash used in investing activities
Financing Activities:
Member contributions
Distribution to Manager
Distributions to Sub-REIT investors, net
Priority distributions
Offering costs
Net cash provided by financing activities
(Decrease) increase in Cash and Cash Equivalents
Cash and Cash Equivalents Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental disclosure of cash flow information
Cash paid during the year for interest
$
$
23,115
319
(2,797)
65
(1,244)
1,360
476
64
8,258
(7,874)
(3,932)
(11,806)
3,932
-
(15)
(3,478)
-
439
(3,109)
7,028
3,919
$
27,319
29,285
199
(3,961)
121
(1,407)
(3,665)
(95)
25
(2,736)
(7,283)
(5,712)
(12,995)
25,941
-
(15)
(5,053)
-
20,873
5,142
1,886
7,028
$
-
(7,026)
361
(1,112)
1,328
(92)
934
6,773
(13,308)
-
(13,308)
133,095
(126,437)
(13)
-
(109)
6,536
1
1,885
1,886
20,445
$
20,445
$
20,445
See notes to consolidated financial statements
F-36
Douglas Emmett Fund X, LLC
Notes to Consolidated Financial Statements
1. Organization and Description of Business
Douglas Emmett Fund X, LLC (the “Fund”) was organized on October 7, 2008 as a Delaware limited liability company. The
Fund was formed for the purpose of investing in real estate, and at December 31, 2011 had a 100% interest in 6 office properties (the
“Fund Properties”) and a 9.4% interest in two unconsolidated office properties which is accounted for under the equity method.
Douglas Emmett Fund X REIT, Inc (the “Company”), a Maryland corporation, is the Fund’s wholly owned subsidiary. The
Company issued 121 shares of Non-Voting Preferred Stock (the “Sub-REIT Investors”) to qualify as a real estate investment trust for
federal income tax purposes.
DEIX, LLC, a Delaware limited liability company, is the manager of the Fund (the “Manager”) and is also a member of the
Fund. As of December 31, 2011, the Fund had total capital commitments of $307.25 million from DEIX, LLC and the other members
(collectively, the “Members”) of which $19.4 million was unfunded at December 31, 2011.
The Operating Agreement of the Fund (the “Operating Agreement”) provides that the Fund may continue in existence until
ten years after the completion of the Investment Period, as defined in the Operating Agreement, which may be extended under certain
conditions.
Equity distributions by the Fund are allocated between the Members in accordance with the Operating Agreement. Increases
or decreases in net income or net loss, respectively, are allocated between the capital accounts of the Members in accordance with the
Operating Agreement in a manner consistent with cash distributions. Losses are generally allocated to the Members based on their
respective ownership percentage interests.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Fund and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America. The Fund operates in one segment
comprised of real estate office properties.
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.
Investment 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 the Fund’s results of operations from the respective dates of acquisition. Transaction costs related
to acquisitions are expensed, rather than included with the consideration paid. Estimates of future cash flows and other valuation
techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment and
identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above- and below-market
ground leases, and acquired above- and below-market tenant leases. Initial valuations are subject to change until such information is
finalized, but no later than 12 months from the acquisition date.
The fair values of tangible assets are determined on an ‘‘as-if-vacant’’ basis. The ‘‘as-if-vacant’’ fair value is allocated to
land, where applicable, buildings, tenant improvements and equipment based on comparable sales and other relevant information
obtained in connection with the acquisition of the property.
The estimated fair value of acquired in-place at-market tenant leases are the costs the Fund 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, the Fund evaluates 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 6 months.
F-37
Douglas Emmett Fund X, LLC
Notes to Consolidated Financial Statements (continued)
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 the Fund’s 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, in-place leases, tenant improvements and leasing costs are
depreciated on a straight-line basis using an estimated life of 40 years for buildings; 15 years for site improvements; an average term
of existing leases in the building involved 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 comprehensive income. Any unamortized amounts relating to a
lease that is terminated prior to its stated expiration are written off in the period of termination.
The table below presents the expected net accretion related to the acquired above and below-market leases at December 31,
2011 (in thousands):
Year
2012
2013
2014
2015
2016
Thereafter
Total
$
$
1,489
959
880
655
129
70
4,182
Impairment of Long-Lived Assets
The Fund assesses whether there has been impairment in the value of its 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 impairment
occurred during 2011.
The Fund assesses whether there has been impairment in the value of its investment in unconsolidated real estate fund
periodically. An impairment charge is recorded when events or change in circumstances indicate that a decline in the fair value below
the carrying value has occurred and such decline is other-than-temporary. The ultimate realization of the investment in unconsolidated
real estate fund is dependent on a number of factors, including the performance of the investment and market conditions. The Fund
will record an impairment charge if it determines that a decline in the value of an investment in an unconsolidated real estate fund is
other-than-temporary. Based upon such periodic assessments, no impairment occurred during 2011.
An asset is classified as an asset held for disposition when it meets certain requirements, including the approval of the sale of
the asset, the marketing of the asset for sale and the Fund’s expectation that the sale will likely occur within the next 12 months. Upon
classification of an asset as held for disposition, the net book value of the asset, excluding long-term debt, is included on the balance
sheet as properties held for disposition, depreciation of the asset is ceased and the operating results of the asset are included in
discontinued operations for all periods presented.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Fund considers short-term investments with maturities of
three months or less when purchased to be cash equivalents.
F-38
Douglas Emmett Fund X, LLC
Notes to Consolidated Financial Statements (continued)
Revenue and Gain Recognition
Four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists; services are
rendered; the fee is fixed and determinable; and collectability is reasonably assured. All leases are classified as operating leases. For
all lease terms exceeding one year, rental income is recognized on a straight-line basis over the terms of the leases. Deferred rent
receivables represent rental revenue recognized on a straight-line basis in excess of billed rents. Lease termination fees, which are
included in rental revenues in the accompanying consolidated statements of comprehensive income, are recognized when the related
leases are canceled and the Fund has no continuing obligation to provide services to such former tenants.
Estimated recoveries from tenants for real estate taxes, common area maintenance and other recoverable operating expenses
are recognized as revenues in the period that the expenses are incurred. Subsequent to year-end, the Fund performs final
reconciliations on a lease-by-lease basis and bills or credits each tenant for any cumulative annual adjustments. In addition, the Fund
records a capital asset for leasehold improvements constructed by it that are reimbursed by tenants, with the offsetting side of this
accounting entry recorded to deferred revenue which is included in accounts payable and accrued expenses. The deferred revenue is
amortized as additional rental revenue over the life of the related lease. Rental revenue from month-to-month leases or leases with no
scheduled rent increases or other adjustments is recognized on a monthly basis when earned.
The recognition of gains on sales of real estate requires that the Fund measure the timing of a sale against various criteria
related to the terms of the transaction, as well as any continuing involvement in the form of management or financial assistance
associated with the property. If the sales criteria are not met, the Fund defers gain recognition and accounts for the continued
operations of the property by applying the finance, profit-sharing or leasing method. If the sales criteria have been met, the Fund
further analyzes 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, the Fund defers 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
The Fund maintains 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, the Fund may recognize bad debt expense in future
periods equal to the amount of unpaid rent and deferred rent. The Fund takes into consideration many factors to evaluate the level of
reserves necessary, including historical termination/default activity and current economic conditions. As of December 31, 2011 and
2010, the Fund had an allowance for doubtful accounts and deferred rent of $981 thousand and $1.1 million respectively.
Interest Rate Agreements
The Fund manages its interest rate risk associated with borrowings by obtaining interest rate swap contracts. The interest rate
swap agreements the Fund utilizes effectively modify its exposure to interest rate risk by converting its 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. The Fund does not use any other derivative instruments.
At December 31, 2011, all of the Fund’s derivatives were considered cash flow hedges. The effective portion of changes in
the fair value of the derivatives 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 fair value of the derivative is
recognized directly in earnings. The Fund assesses 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. During 2011, 2010 and 2009, the other comprehensive income attributable to the derivatives was $11.4 million, $359
thousand and $7.7 million (unaudited), respectively.
The Fund records all derivatives on the balance sheet at fair value. The fair value of these hedges is obtained through
independent third-party valuation sources that use conventional valuation algorithms.
The Financial Accounting Standards Board (“FASB”) has established a framework for measuring fair value which uses a
market based measurement, not an entity-specific measurement. The FASB established a fair value hierarchy that distinguishes
between assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own
assumptions about market-based inputs. Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or
liabilities. Level 2 inputs are inputs that are observable either directly or indirectly for similar assets and liabilities in active markets.
Level 3 inputs are observable assumptions generated by the reporting entity.
The Fund incorporates credit valuation adjustments to appropriately reflect both own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value or the Fund’s derivative contracts for
F-39
Douglas Emmett Fund X, LLC
Notes to Consolidated Financial Statements (continued)
the effect on nonperformance risk, the Fund considered the impact of netting and any applicable credit enhancements, such as
collateral postings, thresholds, mutual puts and guarantees. The Fund has determined that its derivative valuations in their entirety are
classified in Level 2 of the fair value hierarchy. The Fund did not have any fair value measurements using significant unobservable
inputs (Level 3) as of December 31, 2011.
Income Taxes
No provision is made to the accompanying consolidated financial statements for federal, state and local income taxes. Each
member is responsible for reporting its share of the Fund’s taxable income or loss.
Recently Issued Accounting Literature
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income. This ASU requires an entity to present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but
consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders’ equity. This ASU is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011, which for us means the first quarter of 2012. In December 2011, the FASB issued ASU No. 2011-12 which
effectively deferred those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated
other comprehensive income. The amendments will be temporary to allow the FASB time to redeliberate the presentation
requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for
public, private, and non-profit entities. The Fund adopted ASU 2011-05 during the fourth quarter of 2011, and it did not have a
material effect on the Funds financial position or results of operations, as it only affects presentation.
In December 2011, the FASB issued ASU No. 2011-10, Derecognition of in Substance Real Estate - a Scope Clarification
(Topic 360). This ASU modifies ASC Subtopic 360-20, which specifies circumstances under which the parent (reporting entity) of an
“in substance real estate” entity derecognizes that in substance real estate. Generally, if the parent ceases to have a controlling
financial interest (as described under ASC Subtopic 810-10) in the subsidiary as a result of a default on the subsidiary’s nonrecourse
debt, then the subsidiary’s in substance real estate and related debt, as well as the corresponding results of operations, will continue to
be included in the consolidated financial statements and not be removed from the consolidated results until legal title to the real estate
is transferred. ASU 2011-10 will be effective for fiscal years, and interim periods within those years, beginning on or after June 15,
2012, which for us means the third quarter of 2012. ASU 2011-10 is not expected to have a material effect on the Funds financial
position or results of operations.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). The
amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in
accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar
agreement. The amendments in this ASU require disclosure of information about the effects of offsetting and related arrangements
under Section 210-20-50. ASU 2011-11 will be effective for annual reporting periods beginning on or after January 1, 2013, and
interim periods within those annual periods, which for us means the first quarter of 2013. The ASU will require retrospective
disclosures for all comparative periods presented. ASU 2011-11 is not expected to have a material effect on the Funds financial
position or results of operations.
Other recently issued ASUs are not expected to have any material impact on the Funds consolidated financial position or
results of operations, either because the ASU is not applicable or because its impact is expected to be immaterial.
3. Future Minimum Lease Receipts
The Fund leases space to tenants primarily under noncancelable operating leases that generally contain provisions for a base
rent plus reimbursement for certain operating expenses. Operating expense reimbursements are reflected in the Fund’s consolidated
statements of comprehensive income as tenant recoveries.
F-40
Douglas Emmett Fund X, LLC
Notes to Consolidated Financial Statements (continued)
Future minimum base rentals on the Fund’s non-cancelable office leases at December 31, 2011 were as follows (in
thousands):
Twelve months ending December 31:
2012
2013
2014
2015
2016
Thereafter
Total future minimum base rentals
$
$
34,814
29,284
25,405
20,484
14,973
28,048
153,008
The future minimum lease payments in the table above (i) exclude tenant reimbursements, amortization of deferred rent
receivables and above/below-market lease intangibles and (ii) assume that the termination options in some leases, which generally
require payment of a termination fee, are not exercised.
4. Secured Note Payable
As of December 31, 2011, secured note payable consisted of a term loan in the amount of $365.0 million secured by the Fund
Properties in a cross-collateral pool. The loan matures on August 17, 2013 and bears interest at LIBOR plus 1.65%, which has been
effectively fixed at 5.515% per annum based on an actual/360-day basis under interest rate swaps which mature on September 4, 2012.
The interest rate swaps notional amount was $365.0 million as of December 31, 2011.
5. Fair Value of Financial Instruments
The Fund’s estimates of the fair value of financial instruments at December 31, 2011 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, rents and other receivables, accounts payable and other liabilities
approximate fair value because of the short-term nature of these instruments. The Fund calculates the fair value of its secured note
payable based on a currently available market rate assuming the loan is outstanding through maturity and considering the collateral.
At December 31, 2011, the fair value of the Fund’s secured note payable was estimated to be approximately $356.4 million, based on
a credit-adjusted present value of the principal and interest payments that are at floating rates, in comparison to its carrying value of
$365.0 million at December 31, 2011.
The Fund has used interest rate swaps to manage interest rate risk resulting from variable interest payments on its floating
rate debt. These financial instruments are carried on the Fund’s balance sheet at fair value based on the assumptions that market
participants would be expected use in pricing the asset or liability. See note 2.
6. Related Party Transactions
The Manager receives a priority distribution from the Fund equal to (i) 1.25% per annum of the aggregate capital drawn less
(ii) any Excess Organizational Costs (as defined in the Operating Agreement). During 2011 and 2010, respectively, the Manager
received priority distributions of $3.5 million and $5.1 million, respectively.
The Fund and the Fund Properties have been involved in certain related party transactions with the affiliates of the Manager
as follows:
An affiliate of the Manager provides property management services to the Fund Properties in exchange for fees calculated in
accordance with the Operating Agreement. During 2011, 2010 and 2009, these property management fees aggregated $1.1 million,
$1.0 million and $1.1 million (unaudited), respectively, of which $91 thousand and $88 thousand were payable as of December 31,
2011 and 2010, respectively.
F-41
Douglas Emmett Fund X, LLC
Notes to Consolidated Financial Statements (continued)
An affiliate of the Manager provides leasing services to the Fund Properties in exchange for commissions calculated in
accordance with the Operating Agreement. During 2011, 2010 and 2009, these commissions aggregated $693 thousand, $847
thousand and $675 thousand (unaudited), respectively.
An affiliate of the Manager provides certain construction work in connection with improvements to tenant suites and
common areas related to certain tenants of the Fund Properties in exchange for payments calculated in accordance with the Operating
Agreement. During 2011, 2010 and 2009, these payments aggregated $2.4 million, $3.6 million and $2.5 million (unaudited),
respectively.
An affiliate of the Manager provides certain construction work in connection with improvements to building and common
areas in exchange for payments calculated in accordance with the Operating Agreement. During 2011, 2010 and 2009, these
payments aggregated $156 thousand, $430 thousand and $6.0 million (unaudited), respectively.
During 2011, 2010 and 2009, the Fund incurred certain costs in connection with certain pass-through items aggregating $2.3
million, $2.5 million and $2.5 million (unaudited), respectively, comprised of (i) on-site property level employee costs; (ii) leasing
lawyer costs; (iii) property insurance; and (iv) concierge services. As of December 31, 2011 and 2010, $191 thousand and $197
thousand, respectively, were payable to affiliates of the Manager for such items.
In November 2010, the Fund received $547 thousand from Douglas Emmett Partnership X, L.P. as reimbursement of
organizational costs and is included in other income in the consolidated statements of comprehensive income.
7. Investment in Unconsolidated Real Estate Fund
The Fund owns a 9.4% equity interest in Douglas Emmett Partnership X, L.P. (the “Partnership”), through which institutional
investors provide capital commitments for acquisition of properties. As of December 31, 2011, the Fund’s investment balance was
$9.1 million and it had a commitment for future capital contributions totaling $15.4 million. The Fund accounts for its investment in
the Partnership under the equity method.
8. Commitments and Contingencies
The Fund is subject to various legal proceedings and claims that arise in the ordinary course of its business. Excluding
ordinary, routine litigation incidental to its business, the Fund is not currently a party to any legal proceedings that it believes would
reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.
Concentration of Credit Risk
The Fund maintains cash and cash equivalents at high quality financial institutions with investment grade ratings. Interest
bearing accounts at each U.S. banking institution are insured by the Federal Deposit Insurance Corporation up to $250 thousand, while
non interest bearing accounts do not currently have a limit on insurance. The Fund has not experienced any losses to date on deposited
cash.
Tenant Concentrations
For 2011 and 2010, no tenant exceeded 10% of the Fund’s total rental revenue and tenant reimbursements.
F-42
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 most 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 24, 2012
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, Theodore E. Guth, 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 most 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 24, 2012
By: /s/ THEODORE E. GUTH
Theodore E. Guth
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, 2011 (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 24, 2012
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, 2011 (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 24, 2012
By: /s/ THEODORE E. GUTH
Theodore E. Guth
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.
Dear Fellow Shareholders,
I am happy to report that we made real progress in our leasing fundamentals during 2011.
Los Angeles’ tourism and foreign trade industries had record years, while entertainment,
Reflecting this strength, we have raised our dividend by 50% since this time last year
to an annualized rate of $0.60 per share.
media and technology continued to benefit from their industries’ convergence. All of these
Acquisitions in 2011 were slow, with little market activity. While we cannot control
industries in turn supported the continued recovery of our legal, accounting and financial
when properties will come to market at attractive pricing, we are actively working on
service tenants. In 2011, we gained 106,000 square feet of positive absorption compared to
potential office and apartment acquisitions.
a loss of 220,000 square feet in 2010. We have also
begun to increase office rents in select submarkets.
In our multifamily portfolio, we are achieving
strong rent increases while keeping our occupancy
rate very high.
On the capital side, we have completed the
refinancing of all our near term debt and significantly
lowered our leverage. Over the last eighteen months,
we closed approximately $2.7 billion in loans at an
average interest rate of 4 percent. We also reduced
our aggregate consolidated debt by $402 million. By
February 1, 2012, we had lowered our consolidated
“Today, our
balance sheet is
the strongest it
has been since we
became a public
company.”
We enter 2012 with more optimism than any
year since the recession began. We are confident
in the strength of our submarkets, which combine
significant supply constraints with support from
a vibrant, diverse group of industries. Our
integrated operating platform is more efficient
and effective than ever while delivering the
high quality service and speed required in our
small tenant markets. As a percent of revenues,
our G&A continues to be the lowest among
our peers.
Of course, we will continue to face
loan-to-value ratio to approximately 47 percent.
unexpected opportunities and challenges as markets and politics shift in the future. As
Today, our balance sheet is the strongest it has been since we became a public company.
always, the one thing I can promise for the future is that Ken, Bill, Ted, Dan, and I, along
We have no near-term debt maturities, and we have locked in very low interest rates
with the rest of the Douglas Emmett team, are committed to the strong work ethic and
for many years into the future. In addition, we have ample liquidity for acquisitions
high standards that have been the hallmark of Douglas Emmett over the last 40 years.
from our institutional funds, cash on-hand, growing positive cash flow and totally
unencumbered properties.
Sincerely,
Jordan L. Kaplan
President & CEO
March 30, 2012
s H a r e H o l d e r i n F o r m a t i o n
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 filed the certifications
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, 2011, and submitted to the
New York Stock Exchange the certification
required by Section 303A.12(a) of the
NYSE Listed Company Manual.
CORPORATE HEADQUARTERS
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
www.douglasemmett.com
ANNUAL MEETING
Sheraton Delfina
530 Pico Boulevard
Santa Monica, CA 90405
May 24, 2012 9:00 a.m. (PDT)
LEGAL COUNSEL
Manatt l Phelps l Phillips LLP
Los Angeles, CA
BOARD OF DIRECTORS
dan a. emmett
Chairman of the Board
Jordan l. kaPlan
Director
kennetH m. Panzer
Director
CHristoPHer H. anderson
Director
leslie e. bider
Director
dr. david t. Feinberg
Director
gHebre selassie meHreteab
Director
tHomas e. o’Hern
Director
dr. andrea l. riCH
Director
SENIOR MANAGEMENT
Jordan l. kaPlan
President & Chief Executive Officer
kennetH m. Panzer
Chief Operating Officer
William kamer
Chief Investment Officer
tHeodore e. gutH
Chief Financial Officer
allan golad
Senior Vice President,
Property Management
miCHael means
Senior Vice President,
Commercial Leasing
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Douglas Emmett, Inc.808 Wilshire Boulevard, 2nd Floor • Santa Monica, California 90401 • 310.255.7751 • www.douglasemmett.comDouglas EmmettAnnual Report2011Honolulu ProPerties 62. Bishop Place 63. Harbor Court 64. The Honolulu Club65. Bishop Square 66. Moanalulu Hillside Apartments 67. Villas at Royal KuniaConCentration in attraCtive la submarketsWarner Center/ Woodland Hills 1. Warner Center Towers 2. Warner Corporate Center 3. The TrilliumWestWood 4. One Westwood 5. Westwood PlacebrentWood 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 14. Saltair/San Vicente 15. Brentwood San Vicente Medical 16. San Vicente Plaza 17. Brentwood Court18. Wilshire Bundy Plaza 19. Barrington Plaza Commercial20. Barrington Plaza 21. 555 Barrington 22. Barrington/Kiowa23. Barry 24. Kiowasanta moniCa 25. 100 Wilshire 26. 401 Wilshire 27. Palisades Promenade 28. Second Street Plaza 29. Santa Monica Square 30. Lincoln/Wilshire 31. Verona32. 2001 Wilshire 33. The Shores 34. Pacific Plazaburbank 35. Studio PlazasHerman oaks/enCino 36. Sherman Oaks Galleria 37. Encino Terrace 38. Valley Executive Tower 39. Encino Gateway 40. Valley Office Plaza 41. Encino Plaza 42. Tower at Sherman Oaks 43. MB Plaza 44. Columbus Center45. 15250 Ventura46. 16000 Venturabeverly Hills 47. 9601 Wilshire 48. 9100 Wilshire 49. Village on Canon 50. Camden Medical Arts 51. Beverly Hills Medical Center 52. 8383 Wilshire53. 150 South RodeoCentury City 54. 1901 Avenue of the Stars 55. Century Park Plaza 56. Century Park WestolymPiC Corridor 57. Westside Towers 58. Executive Tower 59. Olympic Center 60. Bundy/Olympic 61. Cornerstone PlazaHonolulu submarket overvieWPortfolio consists of 58 office properties and 9 multi-family communities.2011