Annual Report
2014
Dear Fellow Shareholders,
Our markets experienced another year of strong fundamentals growth during 2014. Unemployment in West
Los Angeles has dropped from approximately 8% two years ago to approximately 6% at year-end 2014 and in Honolulu
unemployment is now just over 3%. During 2014, we executed 733 leases covering a record 3.1 million square feet.
Rental rates continue to increase across our submarkets; at year-end our office assets were 92.5% leased, our highest
since the recession. Our FFO per share grew to $1.54, up 3.4% from 2013 and 32% from 2007, our first full year as a
public company. Our AFFO per share increased to $1.21, up 2.5% from 2013 and 70% since 2007.
I am very pleased that we kept same store expense growth under 2% last year. This is a tribute to our
operating group, and especially to our sustainability team, since 2014 was the warmest year on record in Los Angeles
County. “Degree days”, a key measure of cooling requirements, were up an incredible 141% at the measuring station
in Santa Monica. Despite this, we were able to keep electrical utilization in our portfolio essentially flat by continuing to
implement the latest “best practices” in sustainability. Over 90% of our eligible office space is ENERGY STAR certified
by the EPA as having energy efficiency in the top 25 percent of office buildings nationwide.
I would like to highlight a few other accomplishments of our
company in 2014. Our integrated operating platform has always
given us a competitive advantage in servicing the typically
small tenants in our markets, and it has enabled us to keep our
occupancy well above submarket averages. In 2014, we further
supplemented that already very strong platform by adding senior
team members in leasing, accounting, portfolio management, and
capital markets and enhanced the automated processes we use
to run our operations – still, we kept our G&A at less than 5% of
revenues. More importantly, in our annual on-line survey of our
2,600 office tenants, the 1,450 tenants who responded gave us an
average satisfaction score of 4.45 out of 5, an increase of 7 basis
points over 2013.
Our expanded capital markets team had a very productive 2014 as well. We refinanced the loan on our
Moanalua Hillside Apartments in Honolulu, acquired an office building just outside Beverly Hills and acquired a multi-
family property near downtown Honolulu; and in December we agreed to purchase an office building in Encino that we
then closed early in 2015.
Our balance sheet remains strong, with leverage well within our target range and no material debt maturities
during 2015. We increased our dividend to an annualized $0.84 per share and our dividend coverage is still one of the
best in our peer group. During 2015, we also plan to secure permanent property level debt for our new properties and
to refinance some of our debt maturing in future years to capitalize on favorable interest rates.
Overall, I’m excited as we move into 2015. Given our expanding economy, we expect to see meaningful
submarket occupancy growth fuel significant rent increases, and, with our expanded capital markets team, hope to see
continued investment activity.
Like every year, I promise that the Douglas Emmett Team continues to be committed to the high standards that
have been our hallmark for more than 40 years.
Sincerely,
Jordan L. Kaplan
President & CEO
DOUGLAS EMMETT, INC.
TABLE OF CONTENTS
Business Overview
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements of Douglas Emmett, Inc.
Forward Looking Statements.
PAGE NO.
2
3
5
6
18
19
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 that 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. 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:
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adverse economic or real estate developments in Southern California and Honolulu, Hawaii;
a general downturn in the economy, such the global financial crisis that commenced in 2008;
decreased rental rates or increased tenant incentive and vacancy rates;
defaults on, early termination of, or non-renewal of leases by tenants;
increased interest rates and operating costs;
failure to generate sufficient cash flows to service our outstanding indebtedness;
difficulties in raising capital for our institutional funds;
difficulties in identifying properties to acquire and completing acquisitions;
failure to successfully operate acquired properties and operations;
failure to maintain our status as a Real Estate Investment Trust (REIT) under federal tax laws;
possible adverse changes in rent control laws and regulations;
environmental uncertainties;
risks related to natural disasters;
lack or insufficient amount of insurance, or changes to the cost of maintaining existing insurance coverage;
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;
the negative results of litigation or governmental proceedings; and
the consequences of any future terrorist attacks.
For further discussion of these and other factors, see “Item 1A. Risk Factors” included in our 2014 Annual Report on
Form 10-K. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting
on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do
not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances
after the date of this Report.
1
Business Overview
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed Real Estate Investment Trust (REIT). We
are 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, 2014, we owned a consolidated
portfolio of fifty-three office properties (including ancillary retail space) totaling approximately 13.5 million rentable square feet
of space and 10 multifamily properties containing 3,336 apartment units, as well as the fee interests in two parcels of land subject
to ground leases. Alongside our consolidated portfolio, we also manage and own equity interests in our Funds which, at
December 31, 2014, owned eight additional office properties totaling approximately 1.8 million square feet of space. We manage
these eight properties alongside our consolidated portfolio; therefore we present our office portfolio statistics on a total portfolio
basis, with a combined sixty-one Class A office properties totaling approximately 15.3 million square feet. All of 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.
We employ a focused business strategy that we have developed and implemented over the last four decades:
• 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. In 2012, 2013 and 2014, no tenant provided more than 10% of our total rental
revenue and tenant reimbursements.
• 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 approximately a 24% share of the Class A office space in our targeted submarkets.
• Proactive Asset and Property Management. 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, 2014 included 2,606 office leases with a median size of approximately 2,400 square feet, and our
multifamily portfolio, which at December 31, 2014 included 3,336 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 each business 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.
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.
2
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 December 31, 2014, the
reported closing sale price per share of our common stock on the New York Stock Exchange was $28.40. The following table
shows our dividends declared, and the high and low sales prices for our common stock as reported by the New York Stock Exchange
for the periods indicated:
2014
Dividend declared
Common Stock Price
High
Low
2013
Dividend declared
Common Stock Price
High
Low
Holders of Record
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
0.20
27.43
23.40
0.18
25.32
23.29
$
$
$
$
$
$
0.20
29.29
26.31
0.18
28.18
23.74
$
$
$
$
$
$
0.20
29.38
25.67
0.18
26.53
22.41
$
$
$
$
$
$
0.21
28.88
25.61
0.20
25.54
22.27
We had 20 holders of record of our common stock on February 20, 2015. 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 quarterly dividends to common stockholders at the discretion of the Board of Directors. Dividend
amounts depend on our available cash flows, financial condition and capital requirements, 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.
3
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, 2009 to December 31, 2014 with the cumulative total return of the Standard & Poor’s 500 Index and an
appropriate “peer group” index (assuming a $100 investment in our common stock and in each of the indexes on December 31,
2009, 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 presented in this graph is not necessarily
indicative of, and is not intended to suggest, the total future return performance.
Douglas Emmett, Inc.
Douglas Emmett, Inc.
Total Return Performance
Douglas Emmett, Inc.
S&P 500
NAREIT Equity
DEI Peer group
12-31-10
12-31-11
12-31-12
12-31-13
12-31-14
12-31-09
100.00
100.00
100.00
100.00
12-31-10
119.40
115.06
127.96
127.83
Period Ending
12-31-11
134.72
117.49
138.57
133.92
12-31-12
176.94
136.30
163.60
149.15
12-31-13
182.33
180.44
167.63
163.47
12-31-14
228.98
205.14
218.16
221.51
250
225
200
175
150
125
100
e
u
l
a
V
x
e
d
n
I
75
12-31-09
Index
Douglas Emmett, Inc.
S&P 500
NAREIT Equity
DEI Peer group
*DEI Peer Group index consist of Boston Properties, Inc. (BXP), Kilroy Realty Corporation (KRC), SL Green Realty Corp. (SLG), and
Vornado Realty Trust (VNO)
4
Selected Financial Data
The table below presents selected consolidated financial and operating data on an historical basis, and should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our 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
Income (Loss) per share - diluted
Weighted average common shares
outstanding (in thousands):
Basic
Diluted
Dividends declared per common share
2014
Year Ended December 31,
2012
2011
2013
2010
$
519,422
$
514,600
$
505,276
$
505,077
$
502,700
80,117
599,539
167,854
76,936
591,536
178,691
73,723
578,999
175,810
70,260
575,337
152,474
68,144
570,844
140,027
44,621
45,311
22,942
1,451
(26,423)
$
$
$
0.31
0.30
$
$
0.32
0.31
$
$
0.16
0.16
$
$
0.01
0.01
$
$
(0.22)
(0.22)
144,013
176,221
142,556
174,802
139,791
173,120
126,187
159,966
0.81
$
0.74
$
0.63
$
0.49
$
122,715
122,715
0.40
2014
2013
2012
2011
2010
As of December 31,
Balance Sheet Data (in thousands):
Total assets
$
5,954,596
$
5,847,789
$
6,103,807
$
6,231,602
$
6,279,289
Secured notes payable and revolving credit
facility
Other Data:
Number of consolidated properties(1)
3,435,290
3,241,140
3,441,140
3,624,156
3,668,133
63
61
59
59
59
(1) All properties are wholly-owned by our operating partnership, except one property owned by a consolidated joint venture in which
we held a two-thirds interest.
5
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 after the table of contents.
Executive Summary
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. 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. We
focus on owning and acquiring a substantial share of top-tier office properties and premier multifamily communities in
neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities.
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, 2014:
• Our consolidated portfolio of properties included fifty-three Class A office properties (including ancillary retail space)
totaling 13.5 million rentable square feet and ten multifamily properties containing 3,336 apartment units, as well as the
fee interests in two parcels of land subject to ground leases.
• Our total office portfolio consisted of sixty-one Class A office properties aggregating 15.3 million rentable square feet,
consisting of both our consolidated office properties and eight properties owned by our Funds (in which we own a weighted
average of 59.3% based on square footage).
• Our consolidated office portfolio was 92.0% leased and 90.2% occupied and our total office portfolio was 92.5% leased
and 90.5% occupied.
• Our multifamily properties were 99.3% leased and 98.2% occupied.
• Approximately 83.7% of the annualized rent of our consolidated portfolio was contributed by our office properties and
the remaining 16.3% was contributed by our multifamily properties.
• Approximately 84.0% of the annualized rent of our consolidated portfolio was contributed by our Los Angeles County
office and multifamily properties and the remaining 16.0% was contributed by our Honolulu, Hawaii office and multifamily
properties.
Financings, Acquisitions, Dispositions, Development and Repositionings
Development: We are developing two multifamily projects, one in Brentwood, Los Angeles, and one in Honolulu, Hawaii. Each
development is on land which we already own:
• We are working on an additional 500 apartments at our Moanalua Hillside Apartments in Honolulu. We have targeting
completing construction in 2016 or 2017 at a cost of approximately $120 million, which includes the cost of upgrading
the existing 696 apartments, improving the parking and landscaping, building a new leasing and management office, and
building a new recreation building with a fitness facility, a new pool and deck area.
•
In Los Angeles, we are seeking to build a high rise apartment project currently projected to include 376 apartments.
Because development in our markets, particularly West Los Angeles, remains a long and uncertain process, even if
successful, we would not expect to break ground in Los Angeles before late 2015. We expect the cost of this development
to be approximately $100 million to $120 million.
6
Financings:
• During the first quarter of 2014, we refinanced a $16.1 million loan that was scheduled to mature on March 3, 2014,
lowering the interest rate to LIBOR + 1.60% and extending the maturity date to March 1, 2016.
• On October 1, 2014, we closed a $145.0 million interest only five year term loan with a floating interest rate of LIBOR
+ 1.25%. We used $111.9 million of the proceeds to pay off an existing loan that was scheduled to mature on February 1,
2015 and the remaining proceeds for an acquisition.
• On December 24, 2014, we closed a $20.0 million interest only one year term loan with a floating interest rate of LIBOR
+ 1.45%.
See Note 6 to our consolidated financial statements included in this Report for more information regarding our debt.
Acquisitions and Dispositions:
• During the second quarter of 2014, we acquired a very small land parcel in connection with our Moanalua apartment
development project.
• On October 16, 2014, we purchased a 216,000 square foot Class "A" multi-tenant office property adjacent to Beverly
Hills for $74.5 million, or approximately $345 per square foot.
• On December 30, 2014, we purchased a 468 unit multifamily property in Honolulu for $146.0 million, or approximately
$312,000 per unit.
• On December 29, 2014, we agreed to purchase a 224,000 square foot Class “A” multi-tenant office property in Encino
for $89.0 million, or approximately $397 per square foot. Subject to typical closing conditions, the purchase is scheduled
to close in the first quarter of 2015.
See Note 3 to our consolidated financial statements included in this Report for more information regarding our acquisitions.
Repositionings: 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 reposition the property for the optimal use and tenant mix. The work we undertake
to reposition a building typically takes months or even years, and could involve a range of improvements from a complete structural
renovation to a targeted remodeling of selected spaces. We generally select a property for repositioning at the time we purchase
it, although repositioning efforts can also occur at properties that we already own. During the repositioning, the affected property
may display depressed rental revenue and occupancy levels which impacts our results and, therefore, comparisons of our
performance from period to period. We are currently repositioning a 79,000 square foot office property in Honolulu in which we
own a two-thirds interest, and a a 413,000 square foot office property which included a 35,000 square foot store on which we
expect to develop a residential tower.
Results of Operations and Basis of Presentation
The accompanying consolidated financial statements as of December 31, 2014 and 2013 and for the three years ended
December 31, 2014, 2013 and 2012 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 during this period was affected by a number of acquisitions: two
properties that we acquired in each of 2014 and 2013, and additional interests that we acquired in our Funds in both 2012 and
2013. See Notes 3 and 18 to our consolidated financial statements included in this Report.
7
Funds From Operations
Many investors use Funds From Operations (FFO) as one 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, impairments of depreciable operating property and 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), adjusted to treat debt interest rate swaps as terminated for all purposes in the quarter of termination.
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 REITs may not calculate FFO in accordance with
the NAREIT definition or may not adjust that definition to treat debt interest rate swaps as terminated for all purposes in the quarter
of termination 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.
FFO increased by $11.0 million, or 4.2%, to $271.0 million for 2014 compared to $260.1 million for 2013. The increase
was primarily due to (i) increased operating income from our multifamily portfolio due to higher rents, which primarily reflects
higher rental rates, (ii) additional operating income from our office properties that we acquired in 2013 and 2014, (iii) an increase
in our share of the FFO of our unconsolidated funds, (iv) insurance recoveries related to property damage, and (v) a decrease in
interest expense as a result of lower debt balances. FFO (adjusted for our terminated swaps)(see footnote to table below) increased
by $24.7 million, or 10.5%, to $260.1 million for 2013 compared to $235.4 million for 2012. The increase was primarily due to
(i) an increase in operating income from our office portfolio due to properties that we acquired in 2013, (ii) an increase in operating
income from our multifamily portfolio due to increases in rental rates, (iii) an increase in our share of the FFO of our unconsolidated
funds due to lower interest expense of one of our Funds as a result of a debt refinancing, as well as (iv) a decrease in interest
expense as a result of the maturing of $340.0 million in notional amount of interest rate swaps in the first quarter of 2013.
The table below (in thousands) reconciles our FFO to net income attributable to common stockholders computed in
accordance with GAAP:
Year Ended December 31,
2014
2013
2012
Funds From Operations (FFO)
Net income attributable to common stockholders
$
44,621
$
45,311
$
Depreciation and amortization of real estate assets
Net income attributable to noncontrolling interests
Less: adjustments attributable to consolidated joint venture and
unconsolidated investment in real estate funds (1)
FFO (before adjustments for terminated swaps)
Amortization of accumulated other comprehensive income
as a result of terminated swaps (2)
FFO (after adjustments for terminated swaps)
202,512
8,233
15,670
271,036
191,351
7,526
15,894
260,082
22,942
184,849
5,403
13,311
226,505
—
—
8,855
$
271,036
$
260,082
$
235,360
___________________________________________________
(1) Adjusts for (i) the portion of each listed adjustment item that is attributed to the noncontrolling interest in our consolidated joint
venture and (ii) the effect of each listed adjustment item on our share of the results of our unconsolidated Funds.
(2) In 2012, GAAP net income was reduced by amortization expense as a result of swaps terminated in December 2011 in connection
with the refinancing of related loans. In calculating FFO, we treat interest rate swaps as terminated for all purposes in the quarter of
termination. In contrast, under GAAP, terminated swaps can continue to impact net income over their original lives as if they were
still outstanding.
8
Rental Rate Trends
Office Rental Rates: The table below presents the average effective annual rental rate per leased square foot and the
annualized lease transaction costs for leases executed in our total office portfolio:
Historical straight-line rents:(1)
Average rental rate(2)
Annualized lease transaction costs(3)
2014
$35.93
$4.66
____________________________________________________
Year Ended December 31,
2012
2011
2013
$34.72
$4.16
$32.86
$4.06
$32.76
$3.64
2010
$32.33
$3.68
(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 lease. However, care should be taken in any comparison, as the averages are often
significantly affected from period to period by factors such as the buildings, submarkets, 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 each office lease within our
total office portfolio that were executed during the applicable period, divided by the number of years of that lease. This number
increased as a result of increased leasing to larger tenants, in submarkets with more vacancy, and in larger to lease spaces
throughout our portfolio.
During the fourth quarter of 2014, we experienced positive rent roll up, with the average straight-line rent of $39.39 under
new and renewal leases that we signed in the quarter averaging 6.2% greater than the average straight-line rent of $37.10 under
the expiring leases for the same space. This improvement reflects both (i) continuing increases in average starting rental rates,
and (ii) more leases containing annual rent escalations in excess of 3% per annum. Quarterly fluctuations in submarkets, buildings
and term of the expiring leases make predicting the changes in rent in any specific quarter difficult.
Our average starting cash rental rate on new leases of $37.58 signed during the fourth quarter of 2014 were 6.1% greater
than the average starting cash rental rate on the expiring leases for the same space of $35.42, although, as a result of our high
annual rent escalations, less than the average ending cash rental rate of $39.95 on those expiring leases. However, the negative
effect of cash rent roll downs, which affect approximately 10 to 16 percent of our office portfolio each year, was offset by the
positive impact of the annual cash rent escalations in virtually all of our continuing in-place office leases.
Over the next four quarters, we expect to see expiring cash rents in our total office portfolio as presented in the table below:
Three Months Ended
Expiring cash rents:
Expiring square feet (1)
Expiring rent per square foot (2)
$
March 31, 2015
June 30, 2015
September 30, 2015 December 31, 2015
255,892
32.99
$
415,506
34.32
$
262,304
34.46
$
504,475
34.33
___________________________________________________
(1) Includes scheduled expirations for our total office portfolio, including our consolidated portfolio of fifty-three properties totaling
13.5 million square feet, as well as eight 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 quarters shown above, excluding the square footage under
leases where (i) the existing tenant renewed the lease prior to December 31, 2014, (ii) a new tenant has executed a lease on or
before December 31, 2014 that will commence after December 31, 2014, (iii) early termination options are exercised
after December 31, 2014, (iv) defaults occurring after December 31, 2014, and (v) short term leases, such as month to month leases
and other short term leases. Short term leases are excluded because (i) they are not included in our changes in rental rate data, (ii)
have rental rates that may not be reflective of market conditions, and (iii) can distort the data trends, particularly in the first upcoming
quarter. The variations in this number from quarter to quarter primarily reflect the mix of buildings/submarkets involved, although
it is also impacted by the varying terms and square footage of the individual leases involved.
(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.
9
Multifamily Rental Rates: With respect to our residential properties, our average rent on leases to new tenants during the
fourth quarter of 2014 was 6.6% higher than the rent for the same unit at the time it became vacant. The table below presents the
average effective annual rental rate per leased unit for leases executed in our residential portfolio:
Average annual rental rate - new tenants:
Rental rate
Occupancy Rates
2014
Year Ended December 31,
2012
2011
2013
2010
$
28,870
$
27,392
$
26,308
$
24,502
$
22,497
Occupancy Rates: The tables below present the occupancy rates for our total office portfolio and multifamily portfolio:
Occupancy Rates as of:
Office Portfolio
Multifamily Portfolio
December 31,
2014
2013
2012
2011
2010
90.5%
98.2%
90.4%
98.7%
89.6%
98.7%
87.5%
98.4%
86.9%
98.4%
Average Occupancy Rates(1)(2) for:
Office Portfolio
Multifamily Portfolio
2014
90.0%
98.5%
______________________________________________________
Year Ended December 31,
2012
2013
2011
89.7%
98.6%
88.3%
98.5%
87.0%
98.2%
2010
88.0%
98.3%
(1) Average occupancy rates are calculated by averaging the occupancy rates on the first and last day of a quarter, and for periods
longer than a quarter, by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the
quarter immediately prior to the start of the period.
(2) Occupancy rates include the negative impact of property acquisitions, most of whose occupancy rates at the time of acquisition
are well below that of our existing portfolio.
Comparison of 2014 to 2013
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 increased by $1.8 million,
or 0.5%, to $396.5 million for 2014 compared to $394.7 million for 2013. The increase was primarily due to an increase in rental
revenue of $8.3 million from properties that we acquired in the second and third quarters of 2013 and the fourth quarter of 2014,
partly offset by a decrease in rental revenue of $6.5 million from the properties that we owned throughout both years. The decrease
in rental revenue from properties that we owned throughout both years was primarily due to a decrease in our revenues of $5.5
million (on a straight line basis), as well as a decrease from the net accretion of above- and below-market leases of $2.6 million,
largely as the result of the ongoing expiration of leases in place at the time of our IPO. See Note 3 to our consolidated financial
statements included in this Report for more information regarding our acquisitions.
Office Tenant Recoveries: Total office tenant recoveries decreased by $0.7 million, or 1.5%, to $44.5 million for 2014,
compared to $45.1 million for 2013. The decrease was primarily due to an decrease in recoveries of $0.9 million from the properties
that we owned throughout both years, partly offset by an increase in recoveries of $0.2 million primarily from properties that we
acquired in the second and third quarters of 2013 and the fourth quarter of 2014. The decrease from the properties that we owned
throughout both years primarily reflects lower recoverable operating expenses as well as lower income from prior period
reconciliations.
Office Parking and Other Income: Total office parking and other income increased by $3.7 million, or 5.0%, to
$78.4 million for 2014 compared to $74.7 million for 2013. The increase was primarily due to an increase of $2.2 million in
parking and other income from properties that we owned throughout both years, as well as an increase in parking and other income
of $1.5 million primarily from properties that we acquired in the second and third quarters of 2013 and the fourth quarter of 2014.
The increase in parking and other income for the properties that we owned throughout both years reflects increases in rates as well
as higher utilization.
10
Multifamily Revenue: Total multifamily revenue increased by $3.2 million, or 4.1%, to $80.1 million for 2014 compared
to $76.9 million for 2013. The increase was primarily due to increases in rental rates.
Operating Expenses
Office Rental Expenses: Total office rental expense increased by $6.2 million, or 3.6%, to $181.2 million for 2014
compared to $175.0 million for 2013. The increase was primarily due to an increase in office rental expenses of $3.7 million for
properties that we acquired in the second and in the third quarters of 2013 and the fourth quarter of 2014, as well as an increase
in office rental expenses of $2.6 million from properties that we owned throughout both years. The increase in office rental
expenses for the properties that we owned throughout both years primarily reflects higher utilities expense.
Multifamily Rental Expenses: Total multifamily rental expense increased by $0.7 million, or 3.7%, to $20.7 million for
2014 compared to $19.9 million for 2013. The increase was primarily due to higher utilities expense.
General and Administrative Expenses: General and administrative expenses increased by $0.7 million, or 2.7%, to
$27.3 million for 2014, compared to $26.6 million for 2013. The increase was primarily because of the reversal of liability accruals
that reduced expenses in 2013.
Depreciation and Amortization: Depreciation and amortization expense increased by $11.2 million, or 5.8%, to
$202.5 million for 2014 compared to $191.4 million for 2013. The increase was primarily due to depreciation and amortization
of $7.7 million from properties that we owned throughout both periods, as well as depreciation and amortization of $3.5 million
primarily from properties that we acquired in the second and third quarters of 2013 and the fourth quarter of 2014. The increase
in depreciation and amortization for the properties that we owned throughout both years reflects accelerated depreciation with
respect to a former supermarket that we expect to demolish in connection with our residential development project in Los Angeles.
Non-Operating Income and Expenses
Other Income and Other Expenses: Other income increased by $11.3 million, or 176.1% to $17.7 million for 2014,
compared to $6.4 million for 2013, and other expenses increased by $2.9 million, or 69.0% to $7.1 million for 2014, compared to
$4.2 million for 2013. The increase in other income was primarily due to $6.2 million of insurance recoveries related to property
repairs for damage from a fire at one of our residential properties, $2.2 million of accelerated accretion related to an above market
ground lease for which we acquired the underlying fee in 2015, as well as an increase in revenues from a health club at one of
our office properties in Honolulu that we commenced operating in the second quarter of 2013. The increase in other expenses
similarly reflects the increase in expenses for the health club.
Income (Loss), including Depreciation, from Unconsolidated Real Estate Funds: Our share of the income, including
depreciation, from our Funds increased by $0.6 million, or 19.9% to $3.7 million for 2014 compared to $3.1 million for 2013.
The increase was primarily due to an increase in revenue for our Funds. See Note 18 to our consolidated financial statements
included in this Report for more information regarding our Funds.
Interest Expense: Interest expense decreased by $2.0 million, or 1.6%, to $128.5 million for 2014, compared to
$130.5 million for 2013. The decrease was primarily due to lower debt balances. See Notes 6 and 8 to our consolidated financial
statements included in this Report for more information regarding our debt and interest rate contracts.
Acquisition Expenses: Acquisition expenses, which include the costs of both the acquisitions that we close and those we
do not close, were $786,000 in 2014 and $607,000 in 2013. See Note 3 to our consolidated financial statements included in this
Report for more information regarding our acquisitions.
Comparison of 2013 to 2012
Revenues
Office Rental Revenue: Total office rental revenue increased by $3.3 million, or 0.8%, to $394.7 million for 2013 compared
to $391.4 million for 2012. The increase was primarily due to rental revenue of $6.4 million from properties that we acquired in
the second and third quarters of 2013, partly offset by lower revenues from net accretion of above- and below-market leases which
declined by $3.0 million in 2013 as the result of the ongoing expiration of leases that were in place at the time of our initial public
offering (IPO).
11
Office Tenant Recoveries: Total office tenant recoveries increased by $1.1 million, or 2.4%, to $45.1 million for 2013,
compared to $44.1 million for 2012. The increase was primarily due to an increase of $847 thousand in recoveries from the
properties that we owned during both comparable periods, as well as recoveries of $203 thousand from properties that we acquired
in the second and third quarters of 2013. The increase in recoveries for our comparable properties primarily reflects higher
recoverable operating expenses, as well as an increase in recoveries related to prior year reconciliations.
Office Parking and Other Income: Total office parking and other income increased by $5.0 million, or 7.1%, to
$74.7 million for 2013 compared to $69.7 million for 2012. The increase was primarily due to an increase of $4.0 million in
parking and other income from properties that we owned during both comparable periods, as well as revenue of $1.0 million from
properties that we acquired in the second and third quarters of 2013. The increase in parking and other income for our comparable
properties reflects higher parking cash revenue primarily due to increases in rates as well as higher utilization.
Multifamily Revenue: Total multifamily revenue increased by $3.2 million, or 4.4%, to $76.9 million for 2013 compared
to $73.7 million for 2012. The increase was primarily due to increases in rental rates.
Operating Expenses
Office Rental Expenses: Total office rental expense increased by $4.2 million, or 2.5%, to $175.0 million for 2013
compared to $170.7 million for 2012. The increase was primarily due to office rental expenses of $3.1 million from properties
that we acquired in the second and in the third quarters of 2013, as well as an increase in office rental expenses of $1.1 million
from properties that we owned during both comparable periods. The increase in office rental expenses for our comparable properties
primarily reflects higher property taxes, utilities expense and scheduled services.
Multifamily Rental Expenses: Total multifamily rental expense increased by $0.3 million, or 1.3%, to $19.9 million for
2013 compared to $19.7 million for 2012. The increase was primarily due to higher property taxes and utilities expense.
General and Administrative Expenses: General and administrative expenses decreased by $1.3 million, or 4.8%, to
$26.6 million for 2013, compared to $27.9 million for 2012. The decrease was primarily due to a decrease in employee equity
compensation expense as well as the reversal of accruals which reduced expenses in 2013.
Depreciation and Amortization: Depreciation and amortization expense increased by $6.5 million, or 3.5%, to
$191.4 million for 2013 compared to $184.8 million for 2012. The increase was primarily due to depreciation and amortization
of $4.0 million from properties that we owned during both comparable periods, as well as depreciation and amortization of
$2.5 million from properties that we acquired in the second and third quarters of 2013. The increase in depreciation and amortization
for our comparable properties reflects accelerated depreciation of tenant improvements as a result of a tenant bankruptcy at one
of our office properties in Honolulu, as well as accelerated depreciation with respect to a former supermarket that we expect to
demolish in connection with our residential development project in Los Angeles.
Non-Operating Income and Expenses
Other Income and Other Expenses: Other income increased by $3.6 million, or 126.9%, to $6.4 million for 2013, compared
to $2.8 million for 2012, and other expenses increased by $2.3 million, or 123.0% to $4.2 million for 2013, compared to $1.9 million
for 2012. These changes primarily reflect the inclusion of the revenues and expenses of a health club at one of our office properties
in Honolulu, which we commenced operating in the second quarter of 2013, in other income and other expenses, respectively.
The club was previously operated by a third party tenant which paid us rent which was included in office revenues. Since that
tenant rejected the lease after going bankrupt, a subsidiary of our consolidated joint venture has been operating the club while the
building is being repositioned. In 2013, other income also included $431,000 of insurance proceeds that we received related to a
fire at one of our residential properties.
Income (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 income (loss), including depreciation, from our Funds increased by $4.8 million to income of $3.1 million
for 2013 compared to a loss of $1.7 million for 2012. The increase was primarily due to lower interest expense of one of our
Funds, as a result of the refinancing of debt with lower principal and a lower effective interest rate, at the beginning of the second
quarter of 2013. See Note 18 to our consolidated financial statements included in this Report for more information regarding our
Funds.
12
Interest Expense: Interest expense decreased by $16.1 million, or 11.0%, to $130.5 million for 2013, compared to
$146.7 million for 2012. The decrease was primarily due to lower cash interest expense of $8.3 million as a result of the expiration
of certain interest rate swaps in the first quarter of 2013, as well as a decrease in non-cash amortization of $8.8 million related to
interest rate swaps that were terminated in 2012, partially offset by reduced non-cash amortization of loan premium of $1.1 million.
See Notes 6 and 8 to our consolidated financial statements included in this Report for more information regarding our debt and
interest rate contracts.
Acquisition Expenses: Our 2013 results included $607,000 of acquisition expenses related to both completed and
terminated acquisitions. For 2013, the acquired properties included a 225,000 square foot office property in Beverly Hills acquired
in May 2013 and a 191,000 square foot office property in Encino acquired in August 2013. We did not acquire any properties in
2012. See Note 3 to our consolidated financial statements included in this Report for more information regarding our acquisitions.
Liquidity and Capital Resources
General
We have typically financed our capital needs through lines of credit and long-term secured mortgages. We had total
indebtedness of $3.44 billion at December 31, 2014. See Note 6 to our consolidated financial statements included in this Report
for more information regarding our debt.
To mitigate the impact of fluctuations in interest rates on our cash flows from operations, some of our long-term secured
mortgages carry fixed interest rates, and we generally enter into interest rate swap or interest rate cap agreements with respect to
our mortgages with floating interest rates. These swaps generally expire between one and two years before the maturity date of
the related loan, during which time we can refinance the loan without any interest penalty. See Note 8 to our consolidated financial
statements included in this Report for more information regarding our derivatives.
As of December 31, 2014, approximately $2.97 billion, or 86.5%, of our debt had an annual interest rate that was effectively
fixed, with an average rate of 4.1% per annum (on an actual / 360-day basis). The weighted average remaining period during which
the interest rate was fixed was 2.4 years. For more information regarding the estimated impact of changes in market interest rates
on our annual earnings, please see "Quantitative and Qualitative Disclosures about Market Risk".
At December 31, 2014, our net consolidated debt (consisting of our $3.44 billion of borrowings under secured loans less
our cash and cash equivalents of $18.8 million) represented 40.4% of our total enterprise value of $8.45 billion. Our total enterprise
value includes our net consolidated debt and the value of our common stock, the noncontrolling units in our operating partnership
and other convertible equity instruments, each based on our common stock closing price on December 31, 2014 (the last business
day of the year) on the New York Stock Exchange of $28.40 per share.
Activity for 2014
For a description of our financing transactions during the year ended December 31, 2014, please see "Financings,
Acquisitions, Dispositions, Development and Repositionings" above.
On February 28, 2014, we loaned $27.5 million to the owner of the fee interest under one of our buildings. The loan
carried interest of 4.9% and was secured by that land. In February 2015, the loan was partly repaid and contributed to our operating
partnership. See Notes 5, 13 and 19 to our consolidated financial statements included in this Report.
Short term liquidity
We expect to meet our operating liquidity requirements through cash on hand, cash generated by operations, and if
necessary, our revolving credit facility. At December 31, 2014, our revolving credit facility had an unused balance
of $118.0 million. See Note 6 to our consolidated financial statements included in this Report for more information regarding our
revolving credit facility.
On December 29, 2014, we entered into an agreement to purchase a 224 thousand square foot Class “A” multi-tenant
office property in Encino for $89.0 million, or approximately $397 per square foot. Subject to typical closing conditions, the
purchase is scheduled to close in the first quarter of 2015. See "Financings, Acquisitions, Dispositions, Development and
Repositionings" above.
13
We are currently developing two multifamily projects, one in Brentwood, Los Angeles, and one in Honolulu, Hawaii,
please see "Financings, Acquisitions, Dispositions, Development and Repositionings" above. We intend to finance the costs of
these development projects through cash provided by operations and our revolving credit facility.
Excluding any other potential acquisitions and debt refinancings, we anticipate that our cash on hand, cash generated by
operations, and our revolving credit facility will be sufficient to meet our liquidity requirements for at least the next 12 months.
Long term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development and repositioning
of properties, non-recurring capital expenditures and refinancing of indebtedness. 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. We will seek to satisfy our additional long-term liquidity needs through 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 an At-the-Market, or ATM, program which would allow us to sell up to an additional
$300.0 million of common stock, none of which has been sold as of December 31, 2014.
Commitments and other future expected transactions
We have no material debt maturities in 2015, however, during 2015, we expect to refinance $100.0 million of residential
loans due in 2016 and 2017, a $400.0 million loan due in 2017, and to obtain permanent financing for our recent and announced
acquisitions to pay off our floating rate credit line.
Contractual obligations
The table below presents (in thousands) our principal obligations and commitments, excluding periodic interest payments,
as of December 31, 2014:
Contractual Obligations
Debt obligations(1)
Ground lease payments(2)
Purchase commitments related to in progress capital
expenditures and tenant improvements
Total
Payment due by period
2-3
years
Less than
1 year
4-5
years
Total
Thereafter
$
3,435,290
$
22,267
$ 728,749
$ 2,296,194
$
388,080
52,775
733
1,466
1,466
49,110
5,964
5,964
—
—
—
$
3,494,029
$
28,964
$ 730,215
$ 2,297,660
$
437,190
____________________________________________________
(1) Represents the future principal payments due on our secured notes payable and revolving credit facility. For detail of the interest
rates that determine our periodic interest payments related to our debt obligations, see Note 6 to our consolidated financial statements
included in this Report.
(2) Represents the future minimum ground lease payments. For more detail, see Note 14 to our consolidated financial statements
included in this Report.
Cash Flows
Our cash and cash equivalents were $18.8 million and $44.2 million at December 31, 2014 and 2013, respectively.
Comparison of 2014 to 2013
Our cash flows from operating activities are 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 $3.2 million to $246.7 million for 2014
compared to $243.5 million for 2013. The increase was primarily due to an increase in cash operating income from our multifamily
portfolio, an increase in the cash operating income from our office portfolio, a decrease in cash general and administrative expense
and lower cash interest expense.
14
Our net cash used in investing activities is generally used to fund property acquisitions, development and redevelopment
projects, and recurring and non-recurring capital expenditures. Net cash used in investing activities increased by $73.4 million to
$320.0 million for 2014 compared to $246.6 million for 2013. The increase was primarily due to an increase in cash used to fund
property acquisitions in 2014. See Note 3 to our consolidated financial statements included in this Report.
Our net cash related to financing activities is generally impacted by our borrowings and capital activities, net of dividends
and distributions paid to common stockholders and noncontrolling interests, respectively. Our financing activities provided net
cash of $47.9 million for 2014, compared to net cash used of $326.0 million for 2013. The increase in net cash provided was
primarily due to increased net borrowings in 2014.
Off-Balance Sheet Arrangements
We manage our Funds through which we and other institutional investors acquired a total of eight office properties. The
capital that we invested in our Funds was invested on a pari passu basis with the other investors. In addition, we also receive
certain additional distributions based on invested capital and on any profits that exceed certain specified cash returns to the investors.
See Note 18 to our consolidated financial statements included in this Report for more information regarding our Funds.
Other than operating cash flows, we do not expect to receive additional significant liquidity from our investments in our
Funds until the disposition of their properties, 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 for our costs.
We do not have any debt outstanding in connection with our interest in our Funds, however each of our Funds has their
own debt secured by the properties that they own. The table below summarizes the debt of our Funds. The amounts represent
100% (not our pro-rata share) of amounts related to the Funds at December 31, 2014:
Type of Debt
Fixed rate term loan (1)
Variable rate term loan (2)
Principal Balance
(in millions)
$
$
52.0
325.0
377.0
Maturity Date
Interest Rate
4/1/2016
5/1/2018
5.67%
2.35%
_____________________________________________________
(1) This loan was assumed by one of our Funds upon acquisition of the property securing the loan, and requires monthly payments
of principal and interest. Interest on the loan is fixed.
(2) This loan is secured by six properties in a collateralized pool, requires monthly payments of interest only, and the outstanding
principal is due upon maturity. The interest on this loan is effectively fixed by an interest rate swap which matures on May 1,
2017. We made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve
outs under this loan, and also guaranteed the related swap, although we have an indemnity from that Fund for any amounts that
we would be required to pay under these agreements. As of December 31, 2014, the maximum future payments under the swap
agreement were $4.6 million. As of December 31, 2014, all obligations under the loan and swap agreements have been performed
by the Fund in accordance with the terms of those agreements.
Critical Accounting Policies
Our discussion and analysis of our historical financial condition and results of operations is based upon our 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 and improvements, tenant improvements and lease intangibles, and above and below market leases). These
determinations, which are 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 upon reasonable assumptions and judgments at the time that 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 estimates, and those differences—positive or negative—could be material. Some of our estimates 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 included in this Report.
15
Investment in Real Estate
We determine the fair values of our tangible assets on an ‘‘as-if-vacant’’ basis. We use our estimates of future cash flows
and other valuation techniques to allocate the purchase price of each acquired property among land, buildings and improvements,
tenant improvements and identifiable intangible assets such as amounts related to in-place at-market leases, and acquired above-
and below-market ground and tenant leases. The estimated fair value of acquired in-place at-market leases are the estimated costs
to lease the property to the occupancy level of the property at the date of acquisition, including the fair value of leasing commissions
and legal costs. 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. Above
and below-market ground and tenant 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 paid or
received pursuant to the in-place ground or tenant 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. 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, for example, there would be less depreciation if we allocate more value
to land. Similarly, if we allocate more value to the buildings as opposed to allocating the value to 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.
In accordance with GAAP, we may change our initial purchase price allocation up to 12 months from the acquisition date.
Interest, insurance, property taxes and other costs incurred during the period of construction of real estate facilities are
capitalized. Cost capitalization of development and redevelopment activities begins during the predevelopment period, which we
define as activities that are necessary to the development of the property. We cease capitalization upon substantial completion of
the project, but no later than one year from cessation of major construction activity. We also cease capitalization when activities
necessary to prepare the property for its intended use have been suspended.
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 that 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 in one of our Funds, we record an impairment loss 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 would
reduce our net income. We record assets that we have determined to dispose at the lower of the carrying amount or our estimate
of fair value, less costs to sell. The evaluation of anticipated cash flows and other values 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, we may recognize an impairment
loss, which 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 real property 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 are included in rental revenues and are recognized when the related lease is canceled and we have no continuing
obligation to provide the leased space to the former tenant.
16
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. 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.
We also maintain an allowance for deferred rent to account for the possibility that some tenants may not complete their lease terms.
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 employees and members of our Board of Directors in the form of
stock options and LTIP units. We recognize the estimated fair value of the awards 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.
Interest Rate Agreements
We manage our interest rate risk associated with our floating-rate borrowings by entering into interest rate swap and
interest rate cap contracts. When we enter into a floating-rate term loan, we generally enter into an interest rate swap agreement
for the equivalent principal amount, for a period covering the majority of the loan term, which effectively converts our floating-
rate debt to a fixed-rate basis during that time. In limited instances, we make use of interest rate caps to limit our exposure to
interest rate increases on our underlying floating-rate debt. We use derivative instruments for the sole purpose of hedging our
interest rate risk associated with our floating-rate borrowings, we do not use derivative instruments for speculative purposes. We
do not use any other derivative instruments.
For derivative instruments designated as cash flow hedges for accounting purposes, gain or loss recognition are generally
matched to the earnings effect of the related hedged item or transaction, with any resulting hedge ineffectiveness recorded as
interest expense. Hedge ineffectiveness is determined by comparing the changes in the fair value or cash flows of the derivative
to the changes in the fair value or cash flows of the related hedged item or transaction. All other changes in the fair value of these
derivatives are recorded in accumulated other comprehensive income (loss) (AOCI), which is a component of equity outside of
earnings. Amounts reported in AOCI related to our derivatives are then reclassified to interest expense as interest payments are
made on the hedged item or transaction. Amounts reported in AOCI related to our Funds' derivatives are reclassified to income
(loss), including depreciation, from unconsolidated real estate funds, as interest payments are made by our Funds on their hedged
items or transactions. Changes in fair value of derivatives not designated as hedges for accounting purposes are recognized as
interest expense.
17
Quantitative and Qualitative Disclosures about Market Risk
Our future income, cash flows and fair values relevant to financial instruments depend in part on prevailing 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 risk related to our floating rate borrowings. However, our use of these instruments
to hedge exposure to changes in interest rates does expose us to credit risk from 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 financial
counterparties. For a description of our debt and derivative contracts see Notes 6 and 8 to our consolidated financial statements
included in this Report.
At December 31, 2014, $1.14 billion (33.3%) of our debt was fixed rate debt, $1.83 billion (53.2%) of our debt was
floating rate debt hedged with derivative instruments that swapped to fixed interest rates and $463.1 million (13.5%) was unhedged
floating rate debt. Based on the level of unhedged floating rate debt outstanding at December 31, 2014, including the balance on
our revolving credit line, a 50 basis point change in the one month USD London Interbank Offered Rate (LIBOR) would result in
an annual impact to our earnings (through interest expense) of approximately $2.3 million. We calculate interest sensitivity by
multiplying the amount of unhedged floating rate debt by the assumed change in rate. The sensitivity analysis does not take into
consideration the possible changes in the balances of our unhedged floating rate debt or the inability of our counterparties to
perform under the interest rate hedge agreements.
18
Consolidated Financial Statements of Douglas Emmett, Inc.
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, 2014. In conducting its assessment, management
used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control—
Integrated Framework (2013 Framework). Based on this assessment, management concluded that, as of December 31, 2014, 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, 2014, 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 22, which expresses an unqualified opinion on the effectiveness of our
internal control over financial reporting as of December 31, 2014.
/s/ JORDAN L. KAPLAN
Jordan L. Kaplan
Chief Executive Officer
/s/ THEODORE E. GUTH
Theodore E. Guth
Chief Financial Officer
February 27, 2015
19
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Douglas Emmett, Inc.
We have audited the accompanying consolidated balance sheets of Douglas Emmett, Inc. (the “Company”) as of
December 31, 2014 and 2013, 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, 2014. These financial statements are the responsibility of the Company'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. 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, 2014 and 2013, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted
accounting principles.
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, 2014, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 Framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
February 27, 2015
20
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Douglas Emmett, Inc.
We have audited Douglas Emmett, Inc.’s internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 Framework) (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, 2014, 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, 2014 and 2013, 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, 2014, and our report dated February 27, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
February 27, 2015
21
Douglas Emmett, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
December 31, 2014
December 31, 2013
Assets
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Investment in real estate, gross
Less: accumulated depreciation and amortization
Investment in real estate, net
Cash and cash equivalents
Tenant receivables, net
Deferred rent receivables, net
Acquired lease intangible assets, net
Investment in unconsolidated real estate funds
Other assets
Total assets
Liabilities
Secured notes payable and revolving credit facility
Interest payable, accounts payable and deferred revenue
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,
144,869,101 and 142,605,390 outstanding at December 31, 2014
and December 31, 2013, 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
$
$
$
$
900,813
5,590,118
666,672
7,157,603
(1,531,157)
5,626,446
18,823
2,143
74,997
3,527
171,390
57,270
5,954,596
3,435,290
54,364
37,450
45,959
37,386
30,423
3,640,872
1,449
2,678,798
(30,089)
(706,700)
1,943,458
370,266
2,313,724
5,954,596
$
$
$
$
867,284
5,386,446
759,003
7,012,733
(1,495,819)
5,516,914
44,206
1,760
69,662
3,744
182,896
28,607
5,847,789
3,241,140
52,763
35,470
59,543
63,144
28,521
3,480,581
1,426
2,653,905
(50,554)
(634,380)
1,970,397
396,811
2,367,208
5,847,789
See notes to consolidated financial statements.
22
Douglas Emmett, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended December 31,
2014
2013
2012
$
396,524
$
394,739
$
391,447
44,461
78,437
519,422
74,289
5,828
80,117
45,144
74,717
514,600
71,209
5,727
76,936
44,093
69,736
505,276
68,262
5,461
73,723
599,539
591,536
578,999
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
Other income
Other expenses
181,177
20,664
27,332
202,512
431,685
174,952
19,928
26,614
191,351
412,845
170,725
19,672
27,943
184,849
403,189
167,854
178,691
175,810
17,675
(7,095)
3,713
(128,507)
(786)
52,854
(8,233)
44,621
0.31
0.30
$
$
$
6,402
(4,199)
3,098
(130,548)
(607)
52,837
(7,526)
45,311
0.32
0.31
$
$
$
2,821
(1,883)
(1,710)
(146,693)
—
28,345
(5,403)
22,942
0.16
0.16
Income (loss), including depreciation, from unconsolidated real
estate funds
Interest expense
Acquisition-related expenses
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to common stockholders
Net income attributable to common stockholders per share – basic
Net income attributable to common stockholders per share – diluted
$
$
$
See notes to consolidated financial statements.
23
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
Net income
Other comprehensive income: cash flow hedges
Comprehensive income
Less: comprehensive income attributable to noncontrolling
interests
Comprehensive income attributable to common stockholders
Year Ended December 31,
2014
2013
2012
$
$
52,854
$
52,837
$
25,045
77,899
39,562
92,399
(12,813)
65,086
$
(14,651)
77,748
$
28,345
10,491
38,836
(9,705)
29,131
See notes to consolidated financial statements.
24
Shares of Common Stock
Balance at beginning of period
Conversion of operating partnership units
Issuance of common stock
Exercise of stock options
Balance at end of period
Common Stock
Balance at beginning of period
Conversion of operating partnership units
Issuance of common stock
Exercise of stock options
Balance at end of period
Additional Paid-in Capital
Balance at beginning of period
Conversion of operating partnership units
Repurchase of operating partnership units
Repurchase of stock options
Issuance of common stock
Equity compensation
Exercise of stock options
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 attributable to common stockholders
Dividends
Balance at end of period
Noncontrolling Interests
Balance at beginning of period
Net income attributable to noncontrolling interests
Cash flow hedge adjustment
Contributions
Distributions
Conversion of operating partnership units
Repurchase of operating partnership units
Equity compensation
Balance at end of period
Total Equity
Balance at beginning of period
Net income
Cash flow hedge adjustment
Issuance of common stock
Repurchase of operating partnership units
Repurchase of stock options
Exercise of stock options
Dividends
Contributions
Distributions
Equity compensation
Balance at end of period
Dividends declared per common share
Douglas Emmett, Inc.
Consolidated Statements of Equity
(in thousands, except per share data)
2014
Year Ended December 31,
2013
2012
142,605
2,224
—
40
144,869
141,246
1,359
—
—
142,605
131,070
3,239
6,937
—
141,246
1,426
$
1,412
$
1,311
22
—
1
1,449
2,653,905
30,013
(1,197)
(4,524)
—
—
601
2,678,798
(50,554)
20,465
(30,089)
(634,380)
44,621
(116,941)
(706,700)
396,811
8,233
4,580
290
(22,813)
(30,035)
(1,629)
14,829
370,266
2,367,208
52,854
25,045
—
(2,826)
(4,524)
602
(116,941)
290
(22,813)
14,829
2,313,724
0.81
$
$
$
$
$
$
$
$
$
$
$
$
$
$
14
—
— $
$
$
1,426
2,635,408
18,670
(173)
—
—
—
— $
2,653,905
(82,991)
32,437
(50,554)
(574,173)
45,311
(105,518)
(634,380)
410,803
7,526
7,125
653
(21,237)
(18,684)
(180)
10,805
396,811
2,390,459
52,837
39,562
—
(352)
—
—
(105,519)
653
(21,237)
10,805
2,367,208
0.74
$
$
$
$
$
$
$
$
$
$
32
69
—
1,412
2,461,649
44,876
—
—
128,188
695
—
2,635,408
(89,180)
6,189
(82,991)
(508,674)
22,942
(88,441)
(574,173)
450,849
5,403
4,302
(10)
(18,315)
(44,908)
—
13,482
410,803
2,315,955
28,345
10,491
128,257
—
—
—
(88,441)
(10)
(18,315)
14,177
2,390,459
0.63
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
See notes to consolidated financial statements.
25
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2013
2012
2014
$
52,854
$
52,837
$
28,345
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss, including depreciation, from unconsolidated real estate funds
Gain from insurance recoveries for damage to real estate
Depreciation and amortization
Net accretion of acquired lease intangibles
Decrease in the allowance for doubtful accounts
Amortization of deferred loan costs
Amortization of loan premium
Non-cash market value adjustments on interest rate contracts
Non-cash amortization of equity compensation
Operating distributions from unconsolidated real estate funds
Change in working capital components:
Tenant receivables
Deferred rent receivables
Interest payable, accounts payable and deferred revenue
Security deposits
Other assets
Net cash provided by operating activities
Investing Activities
Capital expenditures for improvements to real estate
Capital expenditures for developments
Insurance recoveries for damage to real estate
Property acquisitions
Deposits for property acquisitions
Note receivable
Loan to related party
Loan payments received from related party
Contributions to unconsolidated real estate funds
Acquisitions of additional interests in unconsolidated real estate funds
Capital distributions from unconsolidated real estate funds
Net cash used in investing activities
Financing Activities
Proceeds from borrowings
Deferred loan cost payments
Repayment of borrowings
Refund of refundable loan deposit
Contributions by noncontrolling interests
Distributions to noncontrolling interests
Distributions of capital to noncontrolling interests
Repurchase of stock options
Repurchase of operating partnership units
Cash dividends to common stockholders
Issuance of common stock, net
Exercise of stock options
Net cash provided by (used in) financing activities
Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
(3,713)
(6,621)
202,512
(16,084)
(2,865)
4,097
—
50
13,722
909
78
(2,931)
2,668
1,980
59
246,715
(84,444)
(4,259)
6,506
(220,469)
(2,500)
(27,500)
—
1,187
—
—
11,514
(319,965)
307,000
(1,974)
(112,850)
—
290
(22,813)
—
(4,524)
(2,826)
(115,039)
—
603
47,867
(3,098)
(431)
191,351
(15,693)
(3,988)
4,214
—
88
10,005
783
(331)
(2,580)
8,816
1,186
383
243,542
(66,907)
(549)
431
(150,000)
—
—
(2,882)
213
(26,405)
(8,004)
7,518
(246,585)
40,000
(2,596)
(240,000)
—
653
(21,237)
—
—
(352)
(102,422)
—
—
(325,954)
1,710
—
184,849
(18,094)
(4,392)
4,211
(1,060)
8,956
10,581
752
4,113
(3,841)
(6,873)
330
786
210,373
(60,158)
—
—
—
—
—
—
—
(2,604)
(33,454)
4,699
(91,517)
440,000
(2,125)
(621,956)
1,575
—
(18,315)
(10)
—
—
(80,056)
128,257
—
(152,630)
(33,774)
406,977
373,203
(25,383)
44,206
18,823
$
(328,997)
373,203
44,206
$
$
26
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows - (Continued)
(in thousands)
Year Ended December 31,
2014
2013
2012
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest (net of capitalized interest of $294 and $75 for 2014 and 2013,
respectively)
NONCASH INVESTING TRANSACTIONS:
Accrual for capital expenditures for improvements to real estate and developments
Write-off of fully depreciated and amortized tenant improvements and lease intangibles
Write-off of fully amortized above-market acquired lease intangible assets
Write-off of fully accreted below-market acquired lease intangible liabilities
NONCASH FINANCING TRANSACTIONS:
Accrual for dividends payable to common stockholders
Operating Partnership units redeemed with shares of the Company's common stock
$
$
$
$
$
$
$
123,673
1,504
161,828
32,230
137,313
30,423
30,035
$
$
$
$
$
$
$
127,110
2,455
$
$
— $
— $
— $
134,830
2,233
—
—
—
28,521
18,685
$
$
25,424
44,908
See notes to consolidated financial statements for additional non-cash items.
27
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements
1. Overview
Organization and Description of Business
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed Real Estate Investment Trust (REIT). We
are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California
and Honolulu, Hawaii. We focus on owning and acquiring a substantial share of top-tier office properties and premier multifamily
communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities.
Through our interest in Douglas Emmett Properties, LP (our operating partnership) and its subsidiaries, as well as our
investment in our two institutional unconsolidated real estate funds (Funds), we own or partially own, manage, lease, acquire and
develop real estate, consisting primarily of office and multifamily properties in Los Angeles County, California and Honolulu,
Hawaii. As of December 31, 2014, we owned a consolidated portfolio of fifty-three office properties (including ancillary retail
space) and ten multifamily properties, as well as the fee interests in two parcels of land subject to ground leases. Alongside our
consolidated portfolio, we also manage and own equity interests in our Funds which, at December 31, 2014, owned eight additional
office properties, for a combined sixty-one office properties in our total portfolio.
The terms "us," "we" and "our" as used in these financial statements refer to Douglas Emmett, Inc. and its subsidiaries.
Basis of Presentation
The financial statements presented are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries,
including our operating partnership. All significant intercompany balances and transactions have been eliminated in our
consolidated financial statements, and certain prior period amounts have been reclassified to conform with the current period
presentation. Substantially all of our business is conducted through our consolidated operating partnership, in which other investors
own a noncontrolling interest. See Note 9. 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, square footage and geography, 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.
2. Summary of Significant Accounting Policies
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.
Investments in Real Estate
We account for acquisitions of properties utilizing the purchase method, and include the results of operations of the
acquired properties in our results of operations from their respective dates of acquisition. We expense transaction costs related to
acquisitions when they are incurred.
When we acquire a property, we determine the fair values of the tangible assets on an ‘‘as-if-vacant’’ basis. We use
estimates of future cash flows, comparable sales, other relevant information obtained in connection with the acquisition of the
property, and other valuation techniques to allocate the purchase price of each acquired property between land, buildings and
improvements, tenant improvements and leasing costs, and identifiable intangible assets and liabilities such as amounts related to
in-place at-market leases, acquired above- and below-market tenant leases, and acquired above- and below-market ground leases.
28
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
The estimated fair value of acquired in-place at-market tenant leases represents the estimated costs that we would have
incurred to lease the property to the occupancy level of the property at the date of acquisition, including the fair value of leasing
commissions and legal costs. 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. We record above-market and below-market in-place lease intangibles 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. Our initial
valuations and allocations are subject to change until the allocation is finalized within 12 months after the acquisition date. See
Note 3 for our property acquisition disclosures.
Buildings and site improvements are depreciated on a straight-line basis using an estimated life of forty years for buildings
and fifteen years for site improvements. We carry buildings and site improvements, offset by the related accumulated depreciation,
on our balance sheet until they are either sold or impaired.
Tenant improvements are depreciated over the life of the related lease, with any remaining balance depreciated in the
period of any early termination of that lease. During 2014, we removed the cost and accumulated depreciation of $79.2 million of
fully depreciated tenant improvements determined to be no longer in use from our balance sheet.
Acquired in-place leases are amortized on a straight line basis over the weighted average remaining term of the acquired
in-place leases. We carry acquired in-place leases, offset by the related accumulated amortization, on our balance sheet until the
related building is either sold or impaired.
Leasing intangibles are amortized on a straight-line basis over the related lease term, with any remaining balance amortized
in the period of any early termination of that lease. During 2014, we removed the cost and accumulated amortization of $82.6 million
of fully amortized leasing intangibles from our balance sheet.
Acquired 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. 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 revenue. During 2014, we removed the cost and accumulated amortization/accretion of $32.2 million of
fully amortized above-market tenant leases and $137.3 million of fully accreted below-market tenant leases from our balance sheet.
When assets are sold or retired, their cost and related accumulated depreciation or amortization are removed from our
balance sheet with the resulting gains or losses, if any, reflected in discontinued operations for the respective period. Repairs and
maintenance are recorded as expense when incurred.
Interest, insurance, property taxes and other costs incurred during the period of construction of real estate are capitalized.
Cost capitalization of development and redevelopment activities begins during the predevelopment period, which we define as
activities that are necessary for the development of the property. We cease capitalization upon substantial completion of the project,
but no later than one year from cessation of major construction activity. We also cease capitalization when activities necessary to
prepare the property for its intended use have been suspended. During 2014 and 2013, we capitalized $4.3 million and $549 thousand
of costs related to our multifamily developments in Honolulu and Brentwood, respectively, which includes $294 thousand and
$75 thousand of capitalized interest expense, respectively. We did not capitalize any costs during 2012 related to development or
redevelopment activities.
Investment in Unconsolidated Real Estate Funds
At December 31, 2014, we managed and held equity interests in two Funds: Fund X and Partnership X. We held a 68.61%
interest in Fund X, and an aggregate 24.25% interest in the properties held by Partnership X and its subsidiaries. We account for
our investments in the Funds using the equity method because we have significant influence but not control over the entities and
our Funds do not qualify as variable interest entities. Our investment balance represents our share of the net assets of the combined
Funds, additional basis of approximately $2.9 million (primarily due to the inclusion of the cost of raising capital that is accounted
for as part of our investment basis), and a note receivable with an outstanding balance of $1.5 million. See Note 18.
29
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
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 fair 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 2014, 2013 or 2012.
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 2014, 2013 or 2012.
An asset is classified as an asset held for sale 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, we cease to depreciate the asset, and the operating results of the asset are included in
discontinued operations for all periods presented. As of December 31, 2014, we did not have any assets classified as held for
sale.
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 $2.6 million for 2014, $576 thousand for 2013 and $985 thousand for 2012.
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 tenant
improvement and deferred revenue for leasehold improvements constructed by us that are reimbursed by tenants. The deferred
revenue is amortized as additional rental revenue over the related lease term. 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.
30
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2014 and 2013, we had an
allowance for doubtful accounts of $7.8 million and $10.7 million, respectively.
We generally do not require collateral or other security from our tenants other than letters of credit or cash security
deposits. As of December 31, 2014 and 2013, we had a total of approximately $14.7 million and $17.0 million, respectively, of
letters of credit held for security, as well as $37.5 million and $35.5 million, respectively, of cash security deposits.
Insurance Recoveries
The amount by which insurance recoveries related to property damage exceed any losses recognized from that damage
are recorded as other income when payment is either received or receipt is determined to be probable.
Interest Income
Interest income on our notes receivable is recognized over the life of the respective notes using the effective interest
method and recognized on the accrual basis. Interest income is included in other income in the consolidated statements of operations.
See Notes 5 and 18.
Deferred Loan Costs
Costs incurred directly with the issuance of secured notes payable are capitalized and amortized to interest expense over
the respective loan term. Any unamortized amounts are fully amortized upon early repayment of secured notes payable, and the
related cost and accumulated amortization are removed from our balance sheet. Deferred loan costs are included in other assets
in the consolidated balance sheets. See Note 5.
Interest Rate Agreements
We generally manage our interest rate risk associated with floating rate borrowings by entering into interest rate swap
and interest rate cap contracts. The interest rate swap agreements that 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 on a gross basis. 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 exposure to
changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, are considered to be fair value
hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions,
are considered to be 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. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative
are initially reported in other comprehensive income (a component of equity 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 are
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 directly in earnings. The fair value of
these hedges is obtained through independent third-party valuation sources that use conventional valuation algorithms. See Note
8.
31
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
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. See Note 11.
Earnings Per Share
Basic earnings per share is calculated by dividing the net income attributable to common stockholders for the period by
the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing
the net income attributable to common stockholders and noncontrolling interests in our consolidated operating partnership for the
period by the weighted average number of common shares and dilutive instruments outstanding during the period using the treasury
stock method. See Note 10.
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, development, ownership and management of office real
estate, and the acquisition, development, 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 primarily rental of apartments and other tenant services,
including parking and storage space rental. See Note 16.
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 that 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. 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 taxable REIT 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.
We have elected to treat two of our subsidiaries as taxable REIT subsidiaries (TRS) 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 2014, 2013 or 2012.
New Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of Accounting
Standard Updates (ASUs). We consider the applicability and impact of all ASUs.
In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (Topic 405), which provides guidance
for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which
the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed
within existing guidance in GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2013, which for us was the first quarter of 2014. We adopted ASU No. 2013-04 during the first quarter of 2014,
and it did not have a material impact on our financial position or results of operations, as we do not currently have any obligations
within the scope of this ASU.
32
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity (Topics 205 and 360), which provides guidance for reporting discontinued operations. The amendments
in this Update change the requirements for reporting discontinued operations in Subtopic 205-20, Presentation of Financial
Statements. The ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15,
2014, which for us is the first quarter of 2015. Early adoption is permitted, but only for disposals (or classifications as held for
sale) that have not been reported in financial statements previously issued or available for issuance. We do not expect this ASU
to have a material impact on our financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides
guidance for the accounting of revenue from contracts with customers. The guidance supersedes the revenue recognition
requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the
Codification. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016,
which for us is the first quarter of 2017. Early adoption is not permitted. We do not expect this ASU to have a material impact
on our financial position or results of operations, as lease contracts are not within the scope of this ASU.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic
205-40), which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's
ability to continue as a going concern and to provide related footnote disclosures if necessary. The ASU is effective for the annual
period ending after December 15, 2016, and for annual and interim periods thereafter, which for us is the fiscal year ended December
31, 2016. Early application is permitted. We do not expect this ASU to have a material impact on our disclosures.
In November 2014, the FASB issued ASU No. 2014-17, Pushdown Accounting (Topic 805), which provides guidance
regarding pushdown accounting for acquired entities when an acquirer obtains control of the acquired entity. The objective of this
ASU is to provide guidance on whether and at what threshold an acquired entity can apply pushdown accounting in its separate
financial statements. The ASU was effective on November 18, 2014. We do not expect this ASU to have a material impact on
our financial position or results of operations.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic
225-20), which eliminates from GAAP the concept of extraordinary items. The Board is issuing this Update as part of its initiative
to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to
identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be
reduced while maintaining or improving the usefulness of the information provided to the users of financial statements. The
amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2015, which for us is the first quarter of 2016. A reporting entity may apply the amendments prospectively or retrospectively
to all prior periods presented in the financial statements, and early adoption is permitted. We do not expect this ASU to have a
material impact on our disclosures.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (Consolidation - Topic
810), which provides guidance regarding the consolidation of certain legal entities. All legal entities are subject to reevaluation
under the revised consolidation model. The amendments in this Update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015, which for us is the first quarter of 2016. Early adoption is permitted,
including adoption in an interim period. We are currently evaluating the impact of this ASU.
The FASB has not issued any other ASUs during 2014 or 2015 that we expect to be applicable and have a material impact
on our future financial position or results of operations.
3. Investment in Real Estate
2014 Acquisitions
During 2014, we made two acquisitions: on October 16, 2014, we purchased a 216 thousand square foot Class A multi-
tenant office property located adjacent to Beverly Hills (Carthay Campus) for $74.5 million, or approximately $345 per square
foot, and on December 30, 2014, we purchased a 468 unit multifamily property in Honolulu, Hawaii (Waena) for $146.0 million,
or approximately $312 thousand per unit. The results of operations for these acquired properties are included in our consolidated
statements of operations after the respective date of their acquisitions.
33
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
The table below (in thousands) summarizes our preliminary purchase price allocations for the acquired properties (these
allocations are subject to adjustment within twelve months of the acquisition date):
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Acquired above and below-market leases, net
Net assets and liabilities acquired
2013 Acquisitions
Carthay
Campus
Waena
$
$
6,595
$
64,511
5,943
(2,580)
74,469
$
26,864
117,541
1,732
(137)
146,000
During 2013, we made two acquisitions: on May 15, 2013, we purchased a 225 thousand square foot Class A multi-tenant
office property located in Beverly Hills (8484 Wilshire) for $89.0 million, or approximately $395 per square foot, and on August
15, 2013, we purchased a 191 thousand square foot Class A multi-tenant office property located in Encino (16501 Ventura) for
$61.0 million, or approximately $319 per square foot. The results of operations for these acquired properties are included in our
consolidated statements of operations after the respective date of their acquisitions.
The table below (in thousands) summarizes our purchase price allocations for the acquired properties:
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Acquired above and below-market leases, net
Net assets and liabilities acquired
2012 Acquisitions
We did not acquire any properties during 2012.
8484 Wilshire
16501 Ventura
$
$
8,847
$
77,158
6,485
(3,490)
89,000
$
6,759
55,179
4,736
(5,674)
61,000
34
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
4. Acquired Lease Intangibles
The following summarizes (in thousands) our acquired lease intangibles related to above and below-market leases as
of December 31:
Above-market tenant leases(1)
Accumulated amortization(1)
Below-market ground leases
Accumulated amortization
Acquired lease intangible assets, net
Below-market tenant leases(2)
Accumulated accretion(2)
Above-market ground leases
Accumulated accretion
Acquired lease intangible liabilities, net
________________________________________
2014
2013
3,040
$
(2,082)
3,198
(629)
3,527
138,088
(102,335)
16,200
(5,994)
45,959
$
$
$
34,997
(33,899)
3,198
(552)
3,744
272,413
(225,425)
16,200
(3,645)
59,543
$
$
$
$
(1) During 2014, we removed the cost and accumulated amortization of $32.2 million of fully amortized above-market tenant leases
from our balance sheet. December 31, 2013 balances include $31.1 million of fully amortized above-market tenant leases.
(2) During 2014, we removed the cost and accumulated accretion of $137.3 million of fully accreted below-market tenant leases
from our balance sheet. December 31, 2013 balances include $131.1 million of fully accreted below-market tenant leases.
Net accretion of above- and below-market tenant leases recorded as an increase to rental income totaled $13.9 million in
2014, $15.7 million in 2013 and $18.1 million in 2012. Net accretion of above- and below-market ground leases recorded as an
increased to other income totaled $2.2 million in 2014, and decreased office rental operating expense by $122 thousand for 2014,
2013 and 2012.
The accretion of an above-market ground lease of $2.2 million that we recognized in other income in 2014 resulted from
a change in estimate regarding the acquisition of the related fee interest. We expect that an additional $6.6 million of accretion
will be recognized in other income in the first quarter of 2015. The impact on our basic and diluted EPS for 2014 was 2 cents per
share and 1 cent per share respectively. See Note 19.
The table below presents (in thousands) the estimated net accretion of above- and below-market tenant leases and
ground leases (excluding the impact of any acquisitions or dispositions) at December 31, 2014 for the next five years:
Year
2015
2016
2017
2018
2019
Thereafter
Total
$
18,448
(1)
8,626
3,825
3,402
2,803
5,328
$
42,432
__________________________________________
(1)
Includes $6.6 million of accretion of an above-market ground lease as a result of our acquisition of the related fee interest
in February 2015. See Note 19.
35
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
5. Other Assets
Other assets consisted of the following (in thousands) at December 31:
Deferred loan costs, net of accumulated amortization of $13,042 and $9,395 at
December 31, 2014 and December 31, 2013, respectively(1)
Note receivable(2)
$
Restricted cash
Prepaid expenses
Other indefinite-lived intangible
Deposits in escrow
Other
Total other assets
2014
2013
15,623
$
27,500
194
6,108
1,988
2,500
3,357
17,745
—
194
5,747
1,988
—
2,933
28,607
$
57,270
$
___________________________________________________
(1) We recognized deferred loan cost amortization expense of $4.1 million in 2014 and $4.2 million in 2013 and 2012. Deferred loan
cost amortization is included as a component of interest expense in the consolidated statements of operations.
(2) On February 28, 2014, we loaned $27.5 million to the owner of a fee interest related to one of our office buildings. The loan carried
interest of 4.9% and was repaid in February 2015. See Note 19. The interest recognized on this note is included in other income in
the consolidated statements of operations.
36
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
6. Secured Notes Payable and Revolving Credit Facility
The following table summarizes (in thousands) our secured notes payable and revolving credit facility:
Outstanding
Principal
Balance as of
December 31,
2014
Outstanding
Principal
Balance as of
December 31,
2013
Variable
Interest Rate
Description (1)
Fannie Mae Loan
Term Loan
Term Loan (3)
Fannie Mae Loan
Fannie Mae Loan
Term Loan
Term Loan
Term Loan
Term Loan (4)
Term Loan (5)
Term Loan (6)
Fannie Mae Loan
Term Loan (7)
Fannie Mae Loans
Maturity
Date
2/1/2015
12/24/2015
3/1/2016
3/1/2016
6/1/2017
10/2/2017
4/2/2018
8/1/2018
8/5/2018
2/1/2019
6/5/2019
10/1/2019
3/1/2020
11/2/2020
Aggregate loan principal
Revolving credit line (9)
12/11/2017
Total (10)
Aggregate effectively fixed rate loans
Aggregate fixed rate loans
Aggregate variable rate loans
Total (10)
—
20,000
16,140
82,000
18,000
400,000
510,000
530,000
355,000
155,000
285,000
145,000
349,070
388,080
3,253,290
182,000
3,435,290
1,828,080
1,144,070
463,140
3,435,290
(8)
$
$
$
Effective
Annual
Fixed
Interest
Rate (2)
N/A
N/A
N/A
N/A
N/A
4.45%
4.12%
3.74%
4.14%
4.00%
3.85%
N/A
4.46%
Swap
Maturity
Date
--
--
--
--
--
7/1/2015
4/1/2016
8/1/2016
--
--
--
--
--
111,920 DMBS + 0.707%
— LIBOR + 1.45%
16,140 LIBOR + 1.60%
82,000 LIBOR + 0.62%
18,000 LIBOR + 0.62%
400,000 LIBOR + 2.00%
510,000 LIBOR + 2.00%
530,000 LIBOR + 1.70%
355,000
N/A
155,000
285,000
N/A
N/A
— LIBOR + 1.25%
350,000
N/A
388,080 LIBOR + 1.65%
3.65% 11/1/2017
3,201,140
40,000 LIBOR + 1.40%
N/A
--
$
$
$
3,241,140
1,828,080
1,145,000
268,060
3,241,140
3.98%
4.15%
N/A
__________________________________________________
(1) As of December 31, 2014, (i) the weighted average remaining life of our outstanding term debt (excluding our revolving credit line)
was 3.9 years ; (ii) of the $2.97 billion of term debt on which the interest rate was fixed under the terms of the loan or a swap, (a)
the weighted average remaining life was 4.0 years, the weighted average remaining period during which the interest rate was fixed
was 2.4 years and the weighted average annual interest rate was 4.05%; and (b) including the non-cash amortization of prepaid loan
fees, the effective weighted average interest rate was 4.15%. Except as otherwise noted below, each loan is secured by a separate
collateral pool consisting of one or more properties, requiring monthly payments of interest only, with the outstanding principal due
upon maturity.
(2) Includes the effect of interest rate contracts as of December 31, 2014, and excludes amortization of prepaid loan fees, all shown on
an actual/360-day basis. See Note 8 for the details of our interest rate contracts.
(3) The borrower is a consolidated entity in which our operating partnership owns a two-thirds interest.
(4) Interest-only until February 2016, with principal amortization thereafter based upon a thirty years amortization table.
(5) Interest-only until February 2015, with principal amortization thereafter based upon a thirty years amortization table.
(6) Interest only until February 2017, with principal amortization thereafter based upon a thirty years amortization table.
(7) Interest at a fixed interest rate until March 2018 and a floating rate thereafter, with interest-only payments until May 2016 and
payments thereafter based upon a thirty years amortization table.
(8) We have two one-year extension options, which would extend the maturity to March 1, 2020 from March 1, 2018, subject to meeting
certain conditions.
(9) Revolving credit facility under which we can borrow up to $300.0 million, and which is secured by 3 separate collateral pools
consisting of a total of 6 properties. We are charged unused fees on the unused balance ranging from 0.15% to 0.20%.
(10) See Note 12 for our fair value disclosures.
37
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2014, the minimum future principal payments due on our secured notes payable and revolving credit
facility, excluding any maturity extension options, were as follows (in thousands):
Twelve months ending December 31:
2015
2016
2017
2018
2019
Thereafter
Total future principal payments
$
22,267
109,339
619,410
1,731,874
564,320
388,080
$
3,435,290
7. Interest Payable, Accounts Payable and Deferred Revenue
Interest payable, accounts payable and deferred revenue consist of the following (in thousands) as of December 31:
Interest payable
Accounts payable and accrued liabilities
Deferred revenue
Total interest payable, accounts payable and deferred revenue
8. Interest Rate Contracts
Cash Flow Hedges of Interest Rate Risk
2014
2013
$
$
9,656
22,195
22,513
54,364
$
$
9,263
20,761
22,739
52,763
We make use of interest rate swap and interest rate cap contracts to manage the risk associated with changes in the interest
rates on our floating-rate borrowings. When we enter into a floating-rate term loan, we generally enter into an interest rate swap
agreement for the equivalent principal amount, for a period covering the majority of the loan term, which effectively converts our
floating-rate debt to a fixed-rate basis during that time. In limited instances, we make use of interest rate caps to limit our exposure
to interest rate increases on underlying floating-rate debt.
We may enter into derivative contracts that are intended to hedge certain economic risks, even though hedge accounting
does not apply or we elect to not apply hedge accounting. We do not make use of any other derivative instruments, and we do not
speculate in derivatives. See note 6 for the details of our floating-rate debt that we have hedged.
Designated Hedges
As of December 31, 2014, the totals of our existing swaps that qualified as highly effective cash flow hedges were as
follows:
Interest Rate Derivative
Number of Instruments
Notional (in thousands)
Interest Rate Swaps
7
$1,828,080
As of December 31, 2014, the totals of our Funds' existing swaps that qualified as highly effective cash flow hedges were
as follows:
Interest Rate Derivative
Number of Instruments
Notional (in thousands)
Interest Rate Swap
1
38
$325,000
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Non-designated Hedges
Derivatives not designated as hedges are not speculative. As of December 31, 2014, we had the following outstanding
interest rate derivatives that were not designated for accounting purposes as hedging instruments, but were used to hedge our
economic exposure to interest rate risk:
Interest Rate Derivative
Number of Instruments
Notional (in thousands)
Purchased Caps
4
$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 the underlying indebtedness that we are hedging. As of
December 31, 2014, there have been no events of default with respect to any of our derivatives.
As of December 31, 2014 and 2013, the fair value of our derivatives in a net liability position, when aggregated by
counterparty, was $41.0 million and $67.2 million, respectively, which includes accrued interest but excludes any adjustment for
nonperformance risk related to these agreements. As of December 31, 2014 and 2013, our Funds did not have any derivatives in
a net liability position.
Accounting for Interest Rate Contracts
For hedging instruments designated as cash flow hedges, gain or loss recognition are generally matched to the earnings
effect of the related hedged item or transaction, with any resulting hedge ineffectiveness recorded as interest expense. Hedge
ineffectiveness is determined by comparing the changes in the fair value or cash flows of the hedge to the changes in the fair value
or cash flows of the related hedged item or transaction. All other changes in the fair value of these hedges are recorded in accumulated
other comprehensive income (loss) (AOCI), which is a component of equity outside of earnings. Amounts reported in AOCI
related to our hedges are then reclassified to interest expense as interest payments are made on the hedged item or transaction.
Amounts reported in AOCI related to our Funds' hedges are reclassified to income (loss), including depreciation, from
unconsolidated real estate funds as interest payments are made by our Funds on their hedged items or transactions. Changes in
fair value of derivatives not designated as hedges are recorded as interest expense.
We estimate that $29.2 million of our AOCI related to our derivatives designated as cash flow hedges will be reclassified
as an increase to interest expense during the next twelve months, and $584 thousand of our AOCI related to our Funds derivatives
designated as cash flow hedges will be reclassified as a decrease to income (increase to loss), including depreciation, from
unconsolidated real estate funds during the next twelve months.
We terminated cash flow swaps in December 2011 that had an AOCI balance of $10.1 million at the time they were
terminated. Amortization of $1.3 million of this balance was included as part of the reclassification from AOCI to interest expense
in 2011, and the remaining $8.8 million was reclassified from AOCI to interest expense in 2012.
39
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
The table below presents (in thousands) the effect of our derivative instruments on our AOCI and consolidated statements
of operations for the year ended December 31:
Derivatives Designated as Cash Flow Hedges:
Gain (loss) recognized in AOCI (effective portion)1
Gain (loss) recognized in AOCI (effective portion)1 related to our investment in
unconsolidated real estate funds
Loss reclassified from AOCI into interest expense (effective portion)
Loss reclassified from AOCI into income (loss), including depreciation, from
unconsolidated real estate funds (effective portion)
Gain (loss) reclassified from AOCI into interest expense (ineffective portion and
amount excluded from effectiveness testing)
Loss on derivatives recognized as interest expense (ineffective portion and amount
excluded from effectiveness testing)
Derivatives Not Designated as Cash Flow Hedges:
Realized and unrealized loss recognized as interest expense
__________________________________________________
2014
2013
2012
$ (11,116) $
903
$ (49,432)
(1,767) $
(1,356)
$
$ (36,874) $ (36,247) $ (55,748)
1,779
$
$
$
$
$
(1,005) $
(549) $
(5,535)
(50) $
(85) $
4
— $
—
(64)
— $
(4) $
(42)
(1) Gains and losses recognized in AOCI do not impact the income statement. Refer to the reconciliation of our AOCI in Note 9.
Fair Value Measurement
We record all derivatives on the balance sheet at fair value, on a gross basis, excluding accrued interest. See Note 12 for
our fair value disclosures. The table below presents (in thousands) the fair values of derivative instruments:
Derivative liabilities disclosed as "Interest Rate Contracts" (1):
Derivatives designated as cash flow hedges
Derivatives not designated as cash flow hedges
Total derivative liabilities
_________________________________________________________
(1) We did not have any derivative assets as of December 31, 2014 and December 31, 2013.
2014
2013
$
$
37,386
—
37,386
$
$
63,144
—
63,144
9. Equity
Equity Transactions
During 2014, we exchanged 2.2 million units in our operating partnership for shares of our common stock, and we
redeemed 120 thousand units for cash, for a total purchase price of $2.8 million, for an average price of $23.56 per unit. We also
cash settled options covering 691 thousand shares of our common stock for a total cost of $4.5 million, for an average price
of $6.55 per option. We issued 40 thousand shares of our common stock on the exercise of options for net proceeds of $603 thousand,
for an average price of $15.05 per share.
During 2013, we exchanged 1.4 million units in our operating partnership for shares of our common stock, and we
redeemed 13 thousand units for cash, for a total purchase price of $352 thousand, for an average price of $26.68 per unit. We did
not sell any shares of our common stock during 2013.
During 2012, we exchanged 3.2 million units in our operating partnership for shares of our common stock, and we sold
6.9 million shares of our common stock in open market transactions under our ATM program for net proceeds of $128.3 million
after commissions and other expenses.
40
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Noncontrolling Interests
As of December 31, 2014, we had 144.9 million shares of common stock and 27.6 million operating partnership units
and fully-vested LTIP units outstanding. Noncontrolling interests in our operating partnership relate to interests in our operating
partnership that are not owned by us. As of December 31, 2014, noncontrolling interests represented approximately 16% of our
operating partnership. 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 an amount of cash per unit 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 include a one-third interest of a minority partner
in a consolidated joint venture which owns an office building in Honolulu, Hawaii.
The table below presents (in thousands) the net income attributable to common stockholders and transfers from the
noncontrolling interests for the year ended December 31:
Net income attributable to common stockholders
$
44,621
$
45,311
$
22,942
2014
2013
2012
Transfers from the noncontrolling interests:
Increase in common stockholders paid-in capital for redemption of
operating partnership units
Change from net income attributable to common stockholders and
transfers from noncontrolling interests
30,013
18,670
44,876
$
74,634
$
63,981
$
67,818
AOCI Reconciliation
The table below presents (in thousands) a reconciliation of our AOCI, which consists solely of adjustments related to our
cash flow hedges and the cash flow hedges of our unconsolidated Funds for the year ended December 31:
Balance at beginning of period
Other comprehensive income (loss) before reclassifications 1
Reclassifications from AOCI 2
Net current period other comprehensive income
Less other comprehensive income attributable to noncontrolling
interests
Other comprehensive income attributable to common stockholders
Balance at end of period
__________________________________________________
2014
2013
2012
$
$
(50,554) $
(12,884)
37,929
25,045
(4,580)
20,465
(30,089) $
(82,991) $
2,681
36,881
39,562
(7,125)
32,437
(50,554) $
(89,180)
(50,788)
61,279
10,491
(4,302)
6,189
(82,991)
(1) Includes (i) the fair value adjustments to our derivatives designated as cash flow hedges of $(11.1) million, $0.9 million and
$(49.4) million in 2014 , 2013 and 2012, respectively, as well as (ii) our share of the fair value adjustments to the derivatives
designated as cash flow hedges of our unconsolidated Funds of $(1.8) million, $1.8 million and $(1.4) million in 2014, 2013
and 2012, respectively.
(2) Includes (i) a reclassification from AOCI to interest expense of $36.9 million, $36.3 million and $55.7 million in 2014, 2013
and 2012, respectively, of our derivatives designated as cash flow hedges, as well as (ii) a reclassification from AOCI to income
(loss), including depreciation, of our unconsolidated real estate funds of $1 million, $0.5 million and $5.5 million in 2014, 2013
and 2012, respectively, related to derivatives designated as cash flow hedges of our unconsolidated Funds.
(3) See Note 8 for the details of our derivatives that qualified and were designated as cash flow hedges.
(4) See Note 12 for our fair value disclosures.
Dividends
During the fourth quarter of 2013, we increased our quarterly dividend from $0.18 per share to $0.20 per share, so that
we paid aggregate dividends of $0.80 per share during 2014. 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
41
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
purposes in the treatment of loss on extinguishment of debt, revenue recognition, and 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 Ordinary Income
Capital Gain
Return of Capital
12/30/2013
3/31/2014
6/30/2014
9/30/2014
1/15/2014
4/15/2014
7/15/2014
10/15/2014
Total:
$0.20
0.20
0.20
0.20
$0.80
$0.0740
0.0740
0.0740
0.0740
$0.2960
$—
—
—
—
$—
$0.1260
0.1260
0.1260
0.1260
$0.5040
10. Earnings Per Share
We calculate basic EPS by dividing the net income attributable to common stockholders for the year by the weighted
average number of common shares outstanding during the year. We calculate diluted EPS by dividing the net income attributable
to common stockholders and noncontrolling interests in our consolidated operating partnership for the year by the weighted average
number of common shares and dilutive instruments outstanding during the year using the treasury stock method. The table below
presents the calculation of basic and diluted EPS:
Numerator (in thousands):
Net income attributable to common stockholders
Add back: Net income attributable to noncontrolling interests in our
Operating Partnership
Numerator for diluted net income attributable to all equity holders
Denominator (in thousands):
Weighted average shares of common stock outstanding - basic
Effect of dilutive securities(1):
Operating partnership units and vested long term incentive plan (LTIP)
units
Stock options
Unvested LTIP units
Weighted average shares of common stock and common stock equivalents
outstanding - diluted
Basic earnings per share:
Net income attributable to common stockholders per share
Diluted earnings per share:
Net income attributable to common stockholders per share
____________________________________________________
Year Ended December 31,
2014
2013
2012
44,621
$
45,311
$
22,942
8,543
9,021
53,164
$
54,332
$
4,965
27,907
144,013
142,556
139,791
27,574
4,108
526
28,381
3,288
577
30,251
2,487
591
176,221
174,802
173,120
0.31
$
0.32
$
0.16
0.30
$
0.31
$
0.16
$
$
$
$
(1) Diluted shares are calculated in accordance with GAAP, and represent ownership in our company through shares of common
stock, units in our operating partnership and other convertible equity instruments.
42
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
11. Stock-Based Compensation
2006 Omnibus Stock Incentive Plan
The Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan, as amended, 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 16.7 million shares available for grant
as of December 31, 2014, 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. Shares that are forfeited or canceled from awards under our stock incentive plan
also will generally 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 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.
Other stock-based awards under our stock incentive plan include awards that are valued in whole or in part by reference
to shares of our common stock, including convertible preferred stock, convertible debentures and other convertible or exchangeable
securities, partnership interests in a subsidiary or our operating partnership, awards valued by reference to book value, fair value
or performance of a subsidiary and any class of profits interest or limited liability company membership interest. We have made
certain awards in the form of a separate series of units of limited partnership interests in our operating partnership called long term
incentive plan units ("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 are 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.
We grant equity compensation in the form of LTIP Units as a part of the annual incentive compensation to our key
employees each year, a portion which vests at the date of grant, and the remainder which vests in three equal annual installments
over the three calendar years following the grant. We accrue compensation expense during each year for the portion of the annual
bonuses which we expect to pay out in the form of immediately vested equity grants. Grants with respect to years prior to 2012
were awarded shortly after the respective year end, but commencing in 2012, we awarded the grants before the end of the year for
which they were awarded. Compensation expense for LTIP Units which are not vested at the grant date is recognized on a straight-
line basis over the requisite service period for each separately vesting portion of the award. In addition to our annual incentive
compensation, we also make long-term grants in the form of LTIP Units to our executives and certain key employees. The grants
generally vest in equal annual installments over four to five calendar years following the grant, and some of these grants include
a portion which vests at the date of grant. Compensation expense for options which are not vested at the grant date 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.
We granted LTIP Units to employees totaling 1.1 million in 2014, 0.6 million in 2013 and 1.2 million in 2012. We did
not grant any options in 2014, 2013, and 2012.
Each year, we grant LTIP Units to our non-employee directors which vest ratably over the year of grant in lieu of cash
retainers. These awards totaled 15 thousand in 2014, 19 thousand in 2013 and 46 thousand in 2012. In addition, every three years
we have also made long-term grants of LTIP Units to our non-employee directors which vest over the following three years. These
awards totaled 54 thousand at the end of 2012. When a new director joins our board, we have made pro rata grants vesting over
the remainder of the respective three year vesting period. Those grants totaled 1 thousand in 2012.
Total equity compensation expense during 2014, 2013 and 2012 was $13.7 million, $10.0 million, and $10.6 million,
respectively. These amounts do not include capitalized equity compensation totaling $1.1 million, $800 thousand, and
$561 thousand during 2014, 2013 and 2012, respectively. Total equity compensation expense is included in general and
administrative expenses in the consolidated statements of operations.
43
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We calculate the fair value of the LTIP Units granted using the market value of our common stock on the date of grant
with a discount estimated by a third-party consultant for post-vesting restrictions. The total grant date fair value of LTIP Units
which were granted in 2014, 2013 and 2012 was $21.4 million, $10.1 million and $19.2 million, respectively. The total grant date
fair value of LTIP Units which vested in 2014, 2013 and 2012 was $14.9 million, $10.9 million and $13.5 million, respectively.
Equity grants fully vested at the time of grant to satisfy a portion of the annual bonuses that were accrued during the prior year
were $4.1 million for 2012. The total intrinsic value of options exercised and repurchased in 2014 was $5.0 million. Our policy
is to issue new shares of common stock for stock options exercised on a one for one basis. Total unrecognized compensation cost
related to nonvested option and LTIP Unit awards was $15.4 million at December 31, 2014. This expense will be recognized over
a weighted-average term of twenty-six months.
The table below presents the activity of our outstanding stock options 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, 2011
12,540
$
18.10
72
$
26,051
Granted
Outstanding at December 31, 2012
Granted
Outstanding at December 31, 2013
Granted
Exercised
Outstanding at December 31, 2014
Exercisable at December 31, 2014
—
12,540
—
12,540
—
(731)
11,809
11,809
18.10
18.10
20.03
17.98
17.98
59
47
65,177
65,051
36
36
$
123,017
123,017
The table below presents the activity of our outstanding unvested LTIP Units granted under our stock incentive plan:
Unvested LTIP Units:
Outstanding at December 31, 2011
Granted
Vested
Forfeited
Outstanding at December 31, 2012
Granted
Vested
Forfeited
Outstanding at December 31, 2013
Granted
Vested
Forfeited
Outstanding at December 31, 2014
12. Fair Value of Financial Instruments
Number of
Units
(thousands)
603
$
1,255
(965)
(2)
891
663
(785)
(15)
754
1,106
(854)
(8)
998
Weighted
Average
Grant Date
Fair Value
12.64
15.26
13.76
17.43
15.12
15.26
14.15
21.52
15.63
19.31
17.44
22.48
18.48
Our estimates of the fair value of financial instruments were determined using available market information and appropriate
valuation methods. Considerable judgment is necessary to interpret market data and develop an estimated fair value. The use of
different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The FASB
44
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
fair value framework hierarchy 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. The hierarchy is as follows:
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.
As of December 31, 2014, we did not have any fair value measurements using Level 3 inputs.
Short term financial instruments (disclosure of fair value)
The carrying amounts for cash and cash equivalents, tenant receivables, revolving credit lines, interest payable, accounts
payable, security deposits and dividends payable approximate fair value because of the short-term nature of these instruments.
Secured notes receivable (disclosure of fair value)
See Notes 5 and 18 for the details of our secured notes receivable. The fair value of our secured notes receivable is
determined using Level 2 inputs based on current market interest rates. The carrying value of our secured notes receivable
approximated their fair values at December 31, 2014.
Secured notes payable (disclosure of fair value)
See Note 6 for the details of our secured notes payable. We calculate the fair value of our secured notes payable by
calculating the credit-adjusted present value of the principal and interest payments using current market interest rates, assuming
that the loans will be outstanding through maturity, and excluding any maturity extension options. We determined that the fair
value of our secured notes payable is calculated using Level 2 inputs. The table below presents (in thousands) the estimated fair
value of our secured notes payable:
Secured Notes Payable:
Fair value
Carrying value
Derivative instruments (measured at fair value)
December 31, 2014 December 31, 2013
$
$
3,293,351 $
3,253,290 $
3,233,555
3,201,140
See Note 8 for the details of our derivatives. We present our derivatives on the balance sheet at fair value, on a gross
basis, excluding accrued interest, without reflecting any net settlement positions with the same counterparty, using the framework
for measuring fair value established by the FASB. The valuation of our interest rate swaps and caps is determined using widely
accepted valuation methods, including discounted cash flow analysis of the expected future cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, and uses observable market-based inputs, including forward interest rate
curves. 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. We determined that the fair value of our derivatives are
calculated using Level 2 inputs. The table below presents (in thousands) the estimated fair value of our derivative liabilities:
Derivative Instruments in a liability position:(1)
Level 1
Level 2
Level 3
Fair Value of Derivative Instruments
_________________________________________________________
December 31, 2014
December 31, 2013
$
$
— $
37,386
—
37,386
$
—
63,144
—
63,144
(1) We did not have any derivative assets as of December 31, 2014 and December 31, 2013.
13. Future Minimum Lease Receipts
We lease space to tenants primarily under non-cancelable 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.
45
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We also lease space to certain tenants under non-cancelable leases that provide for percentage rents based upon tenant
revenues. Percentage rental income totaled $548 thousand for 2014, $576 thousand for 2013 and $658 thousand for 2012.
The table below presents (in thousands) the future minimum base rentals on our non-cancelable office and ground operating
leases at December 31, 2014:
Twelve months ending December 31:
2015
2016
2017
2018
2019
Thereafter
Total future minimum base rentals
$
376,141
335,928
284,546
226,177
182,292
444,007
$
1,849,091
The above future minimum lease receipts exclude residential leases, which typically have a term of one year or less, as
well as tenant reimbursements, amortization of deferred rent receivables, and amortization of acquired above/below-market lease
intangibles. Some leases are subject to termination options, generally upon payment of a termination fee. The preceding table
assumes that these termination options are not exercised.
14. Future Minimum Lease Payments
We leased portions of the land underlying two of our office buildings. We expensed ground lease payments of $2.6 million
for 2014 and $2.2 million for both 2013 and 2012. We acquired the fee interest related to one of these two leases in February
2015. See Note 19. Because we had the ability to acquire the respective fee interest, we excluded payments under this lease from
the future minimum ground rent payments in the table below.
The table below presents (in thousands) our future minimum ground lease payments as of December 31, 2014:
Twelve months ending December 31:
2015
2016
2017
2018
2019
Thereafter
Total future minimum lease payments
___________________________________________________
$
$
733
733
733
733
733
49,110
52,775 (1)
(1)
Lease term ends on December 31, 2086, and requires ground rent payments totaling $733 thousand per year that will
continue until February 28, 2019, rental payments for successive rental periods thereafter shall be determined by mutual
agreement with the lessor. The future minimum ground lease payments in the table above assume that the rental will
continue to be $733 thousand per year after February 28, 2019.
15. Commitments, Contingencies and Guarantees
Legal Proceedings
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 materially adverse effect on our business, financial condition or results of operations.
Concentration of Credit Risk
46
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Our properties are located in Los Angeles County, California and Honolulu, Hawaii. The ability of our 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.
To date, we have not experienced any losses 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 twenty-three properties in our consolidated portfolio,
and four properties owned by our Funds, 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, 2014, 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.
Guarantees
We made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve
outs for a $325.0 million loan of one of our Funds. The loan matures on May 1, 2018, and carries interest that is effectively fixed
by an interest rate swap which matures on May 1, 2017. We have also guaranteed the related swap. We have an indemnity from
the Fund for any amounts that we would be required to pay under these agreements. As of December 31, 2014, the maximum
future payments under the swap agreement were approximately $4.6 million. As of December 31, 2014, all of the obligations
under the loan and swap agreements have been performed by the Fund in accordance with the terms of those agreements.
Tenant Concentrations
In 2014, 2013 and 2012, no tenant accounted for more than 10% of our total rental revenue and tenant recoveries.
16. Segment Reporting
Segment information is prepared on the same basis that we review information for operational decision-making
purposes. We operate in two business segments: (i) the acquisition, development, ownership and management of office real estate
and (ii) the acquisition, development, ownership and management of multifamily real estate. The services for our office segment
primarily include rental of office space and other tenant services, including parking and storage space rental. The services 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 or make decisions
to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and
administrative expenses and interest expense 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, 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 can assist both investors and management in understanding the core operations of
our properties.
47
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
The table below presents (in thousands) the operating activity of our reportable segments:
Office Segment
Total office revenues
Office expenses
Segment profit
Multifamily Segment
Total multifamily revenues
Multifamily expenses
Segment profit
Year Ended December 31,
2014
2013
2012
$
$
519,422
(181,177)
338,245
$
514,600
(174,952)
339,648
505,276
(170,725)
334,551
80,117
(20,664)
59,453
76,936
(19,928)
57,008
73,723
(19,672)
54,051
Total profit from all segments
$
397,698
$
396,656
$
388,602
The table below (in thousands) is a reconciliation of the total profit from all segments to net income attributable to common
stockholders:
Total profit from all segments
General and administrative expenses
Depreciation and amortization
Other income
Other expenses
Income (loss), including depreciation, from unconsolidated real estate funds
Interest expense
Acquisition-related expenses
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to common stockholders
Year Ended December 31,
2014
2013
2012
$
$
397,698
(27,332)
(202,512)
17,675
(7,095)
3,713
(128,507)
(786)
52,854
(8,233)
44,621
$
$
396,656
(26,614)
(191,351)
6,402
(4,199)
3,098
(130,548)
(607)
52,837
(7,526)
45,311
$
$
388,602
(27,943)
(184,849)
2,821
(1,883)
(1,710)
(146,693)
—
28,345
(5,403)
22,942
48
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
17. Quarterly Financial Information (unaudited)
The tables below present (in thousands, except per share amounts) selected quarterly information for 2014 and 2013:
Total revenue
Net income before noncontrolling interests
Net income attributable to common stockholders
Net income per common share - basic
Net income per common share - diluted
Weighted average shares of common stock
outstanding - basic
Weighted average shares of common stock
outstanding - diluted
Total revenue
Net income before noncontrolling interests
Net income attributable to common stockholders
Net income per common share - basic
Net income per common share - diluted
Weighted average shares of common stock
outstanding - basic
Weighted average shares of common stock
outstanding - diluted
$
$
$
$
$
$
Three Months Ended
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
148,876
$
151,426
$
148,146
$
151,091
15,458
12,976
15,917
13,363
0.09
0.09
$
$
0.09
0.09
$
$
8,681
7,389
0.05
0.05
$
$
12,798
10,893
0.08
0.07
143,140
143,717
144,361
144,823
175,751
176,310
176,413
176,436
Three Months Ended
March 31,
2013
June 30,
2013
September 30,
2013
December 31,
2013
145,458
$
148,716
$
149,686
$
147,676
14,612
12,082
14,978
13,635
0.08
0.08
$
$
0.10
0.09
$
$
12,743
10,751
0.08
0.07
$
$
10,504
8,843
0.06
0.06
142,440
142,581
142,598
142,603
174,579
175,252
174,756
174,600
49
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
18. Investments in Unconsolidated Real Estate Funds
We manage and own an equity interest in two Funds, Fund X and Partnership X, through which we and institutional
investors own 8 office properties totaling 1.8 million square feet in our core markets. At December 31, 2014, we held equity
interests of 68.61% of Fund X and 24.25% of Partnership X. We received cash distributions from our Funds totaling $12.4 million
for 2014, $8.3 million for 2013 and $5.5 million for 2012.
We did not acquire any additional interests in our Funds in 2014. During the first quarter of 2013, we acquired an additional
3.3% interest in Fund X and an additional 0.9% interest in Partnership X from an existing investor for an aggregate of approximately
$8.0 million in cash. During the first quarter of 2012, we acquired an additional 16.3% interest in Fund X from existing investors
for approximately $33.4 million in cash.
Our investment in the Funds includes a note receivable. On April 3, 2013, we loaned $2.9 million to a related party
investor in connection with a capital call made by Fund X. The loan carries interest at one month LIBOR plus 2.5%, and is due
and payable no later than April 1, 2017, with mandatory prepayments equal to any distributions with respect to the related party's
interest in Fund X. As of December 31, 2014, and 2013 the balance outstanding on the loan was $1.5 million and $2.7 million,
respectively. The interest recognized on this note is included in other income in the consolidated statements of operations.
The tables below present (in thousands) selected financial information for the Funds on a combined basis. The accounting
policies of the Funds are consistent with those of the Company. The amounts presented represent 100% (not our pro-rata share)
of amounts related to the Funds and are based upon historical acquired book value:
Total revenues
Operating income
Net income (loss)
Total assets
Total liabilities
Total equity
19. Subsequent events
Year Ended December 31,
2014
2013
$
66,234
$
11,738
254
63,976
10,151
(829)
December 31,
2014
December 31,
2013
$
703,130
$
389,413
313,717
722,983
391,892
331,091
On December 29, 2014, we entered into an agreement to purchase a 224 thousand square foot Class “A” multi-tenant
office property in Encino for $89.0 million, or approximately $397 per square foot. Subject to typical closing conditions, the
purchase is scheduled to close during the first quarter of 2015.
On February 12, 2015, the owner of a fee interest related to one of our office buildings, to whom we previously loaned
$27.5 million, repaid $1.0 million of the loan and then contributed the fee interest, subject to the remaining balance of that loan of
$26.5 million, in exchange for 34,412 units in our operating partnership valued at $1.0 million. We expect that an additional
$6.6 million of accretion of an above-market ground lease related to the fee interest will be recognized in other income in the first
quarter of 2015 as a result of this transaction. See Note 4.
50
OUR SENIOR MANAGEMENT
OUR BOARD OF DIRECTORS
STOCK EXCHANGE
Dan a. EmmEtt
Executive Chairman
Dan a. EmmEtt
Chairman of the Board
The New York Stock Exchange – NYSE
Ticker Symbol – DEI
JorDan L. KapLan
President & Chief Executive Officer
JorDan L. KapLan
President & Chief Executive Officer
KEnnEth m. panzEr
Chief Operating Officer
thEoDorE E. Guth
Chief Financial Officer
KEvin a. Crummy
Chief Investment Officer
CORPORATE HEADQUARTERS
808 Wilshire Boulevard
2nd Floor
Santa Monica, CA 90401
310.255.7700
INVESTOR INFORMATION
KEnnEth m. panzEr
Chief Operating Officer
ChristophEr h. anDErson
Real Estate Executive and Investor
LEsLiE E. BiDEr
Chief Executive Officer - PinnacleCare
Dr. DaviD t. FEinBErG
President & Chief Executive Officer –
Geisinger Health System
thomas E. o’hErn
Senior Executive Vice President, Chief
Financial Officer & Treasurer – Macerich
Company
For additional information, please
contact:
WiLLiam E. simon, Jr.
Co-chairman, William E. Simon & Sons, LLC
Stuart McElhinney
Vice President – Investor Relations
smcelhinney@douglasemmett.com
310.255.7751
Our SEC Filings, including
our latest 10-K and proxy statement, are
available on our website at
www.douglasemmett.com
LEGAL COUNSEL
Manatt I Phelps I Phillips LLP
Los Angeles, CA
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Los Angeles, CA
SHAREHOLDER
ACCOUNT ASSISTANCE
Shareholder records are maintained by
Douglas Emmett’s Transfer Agent:
Computershare Investor Services, LLC
312.588.4990
ANNUAL MEETING
Le Meridien Delfina
530 Pico Boulevard
Santa Monica, CA 90405
May 28, 2015 9:00 a.m. (PDT)
At Douglas Emmett concern for the environment is ingrained in our corporate culture. We are committed to implementing
and maintaining financially responsible sustainability programs in our properties. Through the years we have proactively introduced
conservation and sustainability measures across our portfolio that have significantly reduced our energy consumption, increased our
operational efficiencies 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.
At Douglas Emmett we know that sustainability is a yard stick for both social responsibility and fiscal management. Simply
put, thoughtful implementation of sustainable initiatives is good business.
Map of Offi ce and Residential Properties
Los Angeles Submarkets
Los Angeles Submarkets
Warner Center/Woodland Hills
WARNER CENTER/WOODLAND HILLS
SANTA MONICA
BURBANK
WESTWOOD
BRENTWOOD
BEVERLY HILLS
CENTURY CITY
ENCINO/SHERMAN OAKS
OLYMPIC CORRIDOR
Warner Center/Woodland Hills
Honolulu Submarket
www.douglasemmett.com