Annual Report
Annual Report
2018
2018
Dear Fellow Shareholders,
We had a very successful year in 2018:
•
•
•
We grew our Funds from Operations by 12.7% and our
Adjusted Funds from Operations by 7.4%, raised our
dividend by 4% and still have one of the best dividend
coverage ratios in our peer group.
We signed 800 office leases, with straight line rents
averaging 31% higher than the prior lease for the same
space.
With the exception of a loan on a residential development project, we have no term loans due until 2022.
Our leverage remains low, and we have plenty of dry powder for external growth.
• Our development platform has matured to the point where it’s making meaningful additions to FFO:
• We’ve completed construction of 491 new units at our Moanalua Apartment community in Honolulu,
which now has almost 1,200 units. With the upgrades to our existing buildings and new amenities,
this is now one of the most modern and desirable workforce housing communities in Hawaii.
•
In Brentwood, construction of our 376 unit, 34 story luxury apartment tower is in full swing. This will be
the first new high rise residential property west of the 405 freeway in more than 40 years, and represents
one of the most exceptional residential development opportunities in all of West Los Angeles.
• We are already seeing accelerated rent growth from our efforts to reposition several office buildings where
we felt targeted investment could significantly increase rental rates.
•
Sustainability efforts remained a major priority as we continued to reduce our carbon footprint and deliver
meaningful savings. We reduced our electrical usage per square foot by another 2.1%, an impressive eleventh
consecutive year of lower consumption. The EPA certified over 95% of our eligible office space as ENERGY
STAR compliant, placing almost all of our buildings in the top 25 percent of office buildings nationwide in
energy efficiency.
Looking forward, 2019 promises to be another strong year:
•
•
•
The fundamentals in our markets remain solid. We see significant demand and strong rent growth. Tenant demand
remains diverse and includes the fastest growing industries in the United States. Our markets remain some of the
most supply constrained in the nation, and the current construction pipeline for new office is de minimis.
We are moving forward with exciting plans to add approximately 500 new workforce apartments in downtown
Honolulu by converting a 25-story, 490,000 square foot office tower to for-rent housing. This project will address
the severe rental housing shortage in Honolulu, and support the City’s efforts to transform downtown into a vibrant
24-hour community.
A number of office property redevelopments that were started in 2018 will soon be complete, and the early returns
are very promising. We plan to pursue more repositioning opportunities during 2019 and beyond, which will provide
significant incremental revenue growth and a very high return on our invested capital. We are also tracking potential
acquisitions that could continue the strong external growth we have achieved in recent years.
As I do every year, I promise that the Douglas Emmett team will continue to be committed to the high standards that
have been our hallmark for over 45 years.
Sincerely,
Jordan L. Kaplan, President & CEO
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
Jordan L. Kaplan
President & Chief Executive Officer
President & Chief Executive Officer
LEGAL COUNSEL
Kenneth M. Panzer
Chief Operating Officer
Christopher H. Anderson
Retired Real Estate Executive
and Investor
Leslie E. Bider
Vice Chairman - PinnacleCare
Dr. David T. Feinberg
Vice President – Google Health
Virginia A. McFerran
Partner - Optum Ventures
Thomas E. O’Hern
Chief Executive Officer -
Macerich Company
William E. Simon, Jr.
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
1299 Ocean Avenue
Suite 1000
Partner - Massey Quick Simon & Co., LLC
Santa Monica, CA 90401
May 30, 2019 9:00 a.m. (PDT)
Kenneth M. Panzer
Chief Operating Officer
Peter D. Seymour
Chief Financial Officer
Kevin A. Crummy
Chief Investment Officer
CORPORATE HEADQUARTERS
1299 Ocean Avenue
Suite 1000
Santa Monica, CA 90401
310.255.7700
INVESTOR INFORMATION
For additional information,
please contact:
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
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.
DOUGLAS EMMETT, INC.
2018 ANNUAL REPORT
Table of Contents
Glossary
Forward Looking Statements
Business Description
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
Page
2
4
5
7
9
10
27
28
1
Abbreviations used in this Report:
Glossary
ADA
AOCI
ASC
ASU
ATM
BOMA
CEO
CFO
Code
DEI
EPS
FASB
FDIC
FFO
Fund X
Funds
GAAP
IPO
JV
LIBOR
LTIP Units
NAREIT
NYSE
OCI
OP Units
Americans with Disabilities Act of 1990
Accumulated Other Comprehensive Income (Loss)
Accounting Standards Codification
Accounting Standards Update
At-the-Market
Building Owners and Managers Association
Chief Executive Officer
Chief Financial Officer
Internal Revenue Code of 1986, as amended
Douglas Emmett, Inc.
Earnings Per Share
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Funds from Operations
Douglas Emmett Fund X, LLC
Unconsolidated institutional real estate funds (Fund X, Partnership X and Opportunity Fund)
Generally Accepted Accounting Principles (United States)
Initial Public Offering
Joint Venture
London Interbank Offered Rate
Long-Term Incentive Plan Units
National Association of Real Estate Investment Trusts
New York Stock Exchange
Other Comprehensive Income (Loss)
Operating Partnership Units
Operating Partnership Douglas Emmett Properties, LP
Opportunity Fund
Fund X Opportunity Fund, LLC
Partnership X
Douglas Emmett Partnership X, LP
PCAOB
QRS
REIT
Report
SEC
Public Company Accounting Oversight Board (United States)
Qualified REIT subsidiary(ies)
Real Estate Investment Trust
Annual Report on Form 10-K
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
S&P 500
Standard & Poor's 500 Index
TRS
US
USD
VIE
Taxable REIT subsidiary(ies)
United States
United States Dollar
Variable Interest Entity(ies)
2
Glossary
Defined terms used in this Report:
Annualized Rent
Consolidated Portfolio
Funds From
Operations (FFO)
Net Operating Income
(NOI)
Occupancy Rate
Recurring Capital
Expenditures
Rentable Square Feet
Same Properties
Annualized cash base rent (excluding tenant reimbursements, parking and other income)
before abatements under leases commenced as of the reporting date. Annualized rent for our
triple net office leases is calculated by adding expense reimbursements and estimates of normal
building expenses paid by tenants to base rent. Annualized rent does not include lost rent
recovered from insurance and rent for building management use.
Includes the properties in our consolidated results, which includes the properties owned by
our consolidated JVs.
We calculate FFO in accordance with the standards established by NAREIT by excluding
gains (or losses) on sales of investments in real estate, excluding gains (or losses) from changes
in control of investments in real estate, real estate depreciation and amortization (other than
amortization of right-of-use assets for which we are the lessee and amortization of deferred
loan costs) from our net income (including adjusting for the effect of such items attributable
to consolidated joint ventures and unconsolidated real estate funds, but not for noncontrolling
interests included in our Operating Partnership). FFO is a non-GAAP supplemental financial
measure that we report because it is useful to our investors. See Management’s Discussion and
Analysis of Financial Condition and Results of Operations for a discussion of FFO.
We calculate NOI, a Non-GAAP measure, as revenue less operating expenses attributable to
the properties that we own and operate. NOI is calculated by excluding the following from our
net income: general and administrative expense, depreciation and amortization expense, other
income, other expense, income, including depreciation, from unconsolidated real estate funds,
interest expense, gains (or losses) on sales of investments in real estate and net income
attributable to noncontrolling interests. NOI is a non-GAAP supplemental financial measure
that we report because it is useful to our investors. See Management’s Discussion and Analysis
of Financial Condition and Results of Operations for a discussion of our Same Property NOI.
The percentage leased, excluding signed leases not yet commenced, as of the reporting date.
Management space is considered leased and occupied, while space taken out of service during
a repositioning is excluded from both the numerator and denominator for calculating percentage
leased and occupied.
Building improvements required to maintain revenues once a property has been stabilized,
and excludes capital expenditures for (i) acquired buildings being stabilized, (ii) newly
developed space, (iii) upgrades to improve revenues or operating expenses, (iv) casualty damage
or (v) bringing the property into compliance with governmental requirements.
Based on the BOMA remeasurement and consists of leased square feet (including square feet
with respect to signed leases not commenced as of the reporting date), available square feet,
building management use square feet and square feet of the BOMA adjustment on leased space.
Our wholly-owned properties that have been owned and operated by us in a consistent manner,
and reported in our consolidated results during the entire span of both periods being compared.
We exclude from our same property subset any properties (i) acquired during the comparative
periods; (ii) sold, held for sale, contributed or otherwise removed from our consolidated financial
statements during the comparative periods; or (iii) that underwent a major repositioning project
that we believed significantly affected its results during the comparative periods.
Short-Term Leases
Represents leases that expired on or before the reporting date or had a term of less than one
year, including hold over tenancies, month to month leases and other short term occupancies.
Total Portfolio
Includes our Consolidated Portfolio plus the properties owned by our Funds.
3
Forward Looking Statements
This Report contains forward-looking statements within the meaning of the Section 27A of the Securities Act and Section
21E of the Exchange Act. You can find many (but not all) of these statements by looking for words such as “believe”, “expect”,
“anticipate”, “estimate”, “approximate”, “intend”, “plan”, “would”, “could”, “may”, “future” 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 used in this Report, or those that we make orally or in writing from time to time,
are based on our beliefs and assumptions, as well as information currently available to us. Actual outcomes will be affected by
known and unknown risks, trends, uncertainties and factors 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 future results can be expected to differ from our expectations, and those differences may be material. Accordingly,
investors should use caution when relying on previously reported forward-looking statements, which were based on results and
trends at the time they were made, to anticipate future results or trends. Some of the risks and uncertainties that could cause our
actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements
include the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
adverse economic or real estate developments affecting Southern California or Honolulu, Hawaii;
competition from other real estate investors in our markets;
decreasing rental rates or increasing tenant incentive and vacancy rates;
defaults on, early terminations of, or non-renewal of leases by tenants;
increases in interest rates or operating costs;
insufficient cash flows to service our outstanding debt or pay rent on ground leases;
difficulties in raising capital;
inability to liquidate real estate or other investments quickly;
adverse changes to rent control laws and regulations;
environmental uncertainties;
natural disasters;
insufficient insurance, or increases in insurance costs;
inability to successfully expand into new markets and submarkets;
difficulties in identifying properties to acquire and failure to complete acquisitions successfully;
failure to successfully operate acquired properties;
risks associated with property development;
risks associated with JVs;
conflicts of interest with our officers and reliance on key personnel;
changes in zoning and other land use laws;
adverse results of litigation or governmental proceedings;
failure to comply with laws, regulations and covenants that are applicable to our properties;
possible terrorist attacks or wars;
possible cyber attacks or intrusions;
adverse changes to accounting rules;
•
•
•
•
• weaknesses in our internal controls over financial reporting;
•
•
failure to maintain our REIT status under federal tax laws; and
adverse changes to tax laws, including those related to property taxes.
For further discussion of these and other risk factors see Item 1A. "Risk Factors” in our 2018 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.
4
Business description
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 located in premier coastal submarkets in Los Angeles and Honolulu.
Through our interest in our Operating Partnership and its subsidiaries, our consolidated JVs, and our unconsolidated Funds, we
focus on owning, acquiring, developing and managing a significant market share of top-tier office properties and premier
multifamily communities in neighborhoods with significant supply constraints, high-end executive housing and key lifestyle
amenities. Our properties are located in the Beverly Hills, Brentwood, Burbank, Century City, Olympic Corridor, Santa Monica,
Sherman Oaks/Encino, Warner Center/Woodland Hills and Westwood submarkets of Los Angeles County, California, and in
Honolulu, Hawaii. We intend to increase our market share in our existing submarkets and may enter into other submarkets with
similar characteristics where we believe we can gain significant market share. The terms "us," "we" and "our" as used in this
Report refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis.
At December 31, 2018, we owned a Consolidated Portfolio consisting of (i) a 16.6 million square foot office portfolio, (ii)
3,595 multifamily apartment units and (iii) fee interests in two parcels of land from which we receive rent under ground leases.
We also manage and own equity interests in our unconsolidated Funds which, at December 31, 2018, owned an additional 1.8 million
square feet of office space. We manage our unconsolidated Funds alongside our Consolidated Portfolio, and we therefore present
the statistics for our office portfolio on a Total Portfolio basis. For more information, see Item 2 “Properties” in our 2018 Annual
Report on Form 10-K. As of December 31, 2018, our portfolio consisted of the following (not including the two parcels of land
from which we receive rent under ground leases):
Office (includes ancillary retail space)
Wholly-owned properties
Consolidated JV properties
Unconsolidated Fund properties
Consolidated
Portfolio
Total
Portfolio
53
10
—
63
53
10
8
71
Rentable square feet (in thousands)
16,617
18,455
Multifamily
Wholly-owned properties
Units
10
3,595
10
3,595
Business Strategy
We employ a focused business strategy that we have developed and implemented over the past four decades:
• Concentration of High Quality Office and Multifamily Properties 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
rents are very small relative to their revenues and often not the paramount factor in their leasing decisions. At December 31,
2018, our office portfolio median size tenant was approximately 2,600 square feet. Our office tenants operate in diverse
industries, including among others legal, financial services, entertainment, real estate, accounting and consulting, health
services, retail, technology and insurance, reducing our dependence on any one industry. In 2016, 2017 and 2018, no
tenant accounted for more than 10% of our total revenues.
5
• 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 39% share of the Class A
office space in our submarkets based on the square feet of exposure in our total portfolio to each submarket.
• Proactive Asset and Property Management.
Our fully integrated and 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,
which we believe provides us with a competitive advantage in managing our property portfolio. Our in-house leasing
agents and legal specialists allow us to lease a large property portfolio with a diverse group of smaller tenants, closing
an average of approximately three office leases each business day, and our in-house construction company allows us to
compress the time required for building out many smaller spaces, resulting in reduced vacancy periods. 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.
Available Information
All reports that we file with the SEC will be available on the SEC website at www.sec.gov. We make available 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, free of charge, as soon as reasonably practicable after we file such reports with, or furnish them to, the
SEC. None of the information on or hyperlinked from our website is incorporated into this Report. Our Annual Report on Form
10-K may also be obtained free of charge by written request to:
Stuart McElhinney
Vice President, Investor Relations
310-255-7751
smcelhinney@douglasemmett.com
6
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 NYSE under the symbol “DEI”. On December 31, 2018, the closing price of our common
stock was $34.13. The table below presents the dividends declared for our common stock as reported by the NYSE:
2018
Dividend declared
2017
Dividend declared
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
0.25
$
0.25
$
0.25
$
0.26
0.23
$
0.23
$
0.23
$
0.25
Holders of Record
We had 15 holders of record of our common stock on February 8, 2019. Many of the shares of our common stock are held
in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Sales of Unregistered Securities
On December 20, 2017, in connection with the purchase of an office property located at 9401 Wilshire Boulevard, Beverly
Hills, California, our Operating Partnership issued $2.6 million OP Units valued at $105.7 million to the seller of the office property,
as partial consideration for the purchase. Each OP Unit can be exchanged into one share of our common stock (or its cash equivalent
at our option). This issuance did not involve underwriters, underwriter discounts or commissions or any public offering. We
believe that the issuance of OP Units is exempt from the registration requirements of the Securities Act under Rule 506 of Regulation
D promulgated under the Securities Act and Section 4(2) of the Securities Act as a transaction by an issuer not involving any public
offering. There was no advertising, general promotion or other marketing undertaken in connection with the issuance. The investor
represented and warranted that (i) it acquired the OP Units for investment purposes only and not for the purpose of further
distribution; (ii) it had sufficient knowledge and experience in financial and business matters and the ability to bear the economic
risk of its investment, and (iii) that the OP Units were taken for investment purposes and not with a view to resale in violation of
applicable securities laws.
Repurchases of Equity Securities
None.
7
Performance Graph
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC 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 graph below compares the cumulative total return on our common stock from December 31, 2013 to December 31, 2018
to the cumulative total return of the S&P 500, NAREIT Equity and an appropriate “peer group” index (assuming a $100 investment
in our common stock and in each of the indexes on December 31, 2013, 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.
Period Ending
Index
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
DEI
S&P 500
NAREIT Equity(1)
Peer group(2)
100.00
100.00
100.00
100.00
125.59
113.69
130.14
135.67
141.97
115.26
134.30
133.05
170.85
129.05
145.74
140.31
196.54
157.22
153.36
140.49
167.91
150.33
146.27
120.04
(1)
(2)
FTSE NAREIT Equity REITs index.
Consists of Boston Properties, Inc. (BXP), Kilroy Realty Corporation (KRC), SL Green Realty Corp. (SLG), Vornado Trust
(VNO) and Hudson Pacific Properties, Inc (HPP).
8
Selected Financial Data
The table below presents selected consolidated financial and operating data and should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements included
on pages 10 and 28 of this Report, respectively.
Consolidated Statements of Operations Data
(In thousands):
Total office revenues
Total multifamily revenues
Total revenues
Operating income
Net income attributable to common stockholders
Per Share Data:
Net income attributable to common stockholders per
share - basic
Net income attributable to common stockholders per
share - diluted
Weighted average common shares outstanding (in
thousands):
2018
777,931
103,385
881,316
251,944
116,086
0.68
0.68
$
$
$
$
$
$
$
Year Ended December 31,
2016
2015
2017
$
$
$
$
$
$
$
715,546
96,506
812,052
241,023
94,443
0.58
0.58
$
$
$
$
$
$
$
645,633
96,918
742,551
220,817
85,397
0.57
0.55
$
$
$
$
$
$
$
540,975
94,799
635,774
189,527
58,384
0.40
0.39
$
$
$
$
$
$
$
2014
519,405
80,117
599,522
167,854
44,621
0.31
0.30
Basic
Diluted
169,893
169,902
160,905
161,230
149,299
153,190
146,089
150,604
144,013
148,121
Dividends declared per common share
$
1.01
$
0.94
$
0.89
$
0.85
$
0.81
As of December 31,
2018
2017
2016
2015
2014
Balance Sheet Data (In thousands):
Total assets
$ 8,261,709
$ 8,292,641
$ 7,613,705
$ 6,066,161
$ 5,938,973
Secured notes payable and revolving credit facility, net $ 4,134,030
Property Data:
Number of consolidated properties(1)
73
$ 4,117,390
$ 4,369,537
$ 3,611,276
$ 3,419,667
73
69
64
63
_________________________________________________________
(1) All properties are wholly-owned by our Operating Partnership, except for ten office properties owned by our consolidated
JVs. The consolidated properties do not include the eight properties owned by our unconsolidated Funds.
9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes on page
28 of this Report. Our results of operations for the years ended December 31, 2018, 2017 and 2016 were affected by property
acquisitions and dispositions - see Note 3 to our consolidated financial statements in this Report for more information.
Business Description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. Through our interest in our Operating
Partnership and its subsidiaries, our consolidated JVs and our unconsolidated Funds, 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,
acquiring, developing and managing 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. As of
December 31, 2018, our portfolio consisted of the following:
Office
Class A Properties(3)
Rentable Square Feet (in thousands)
Multifamily
Leased rate
Occupied rate
Properties(3)
Units
Leased rate
Occupied rate
Consolidated
Portfolio(1)
Total
Portfolio(2)
63
16,617
91.9%
90.4%
10
3,595
99.0%
97.0%
71
18,455
91.7%
90.3%
10
3,595
99.0%
97.0%
__________________________________________________
(1) Our Consolidated Portfolio includes the properties in our consolidated results. Through our subsidiaries, we own 100% of these
properties except for ten office properties totaling 2.8 million square feet, which we own through three consolidated JVs. Our
Consolidated Portfolio also includes two parcels of land from which we receive ground rent from ground leases to the owners of a
Class A office building and a hotel.
(2) Our Total Portfolio includes our Consolidated Portfolio as well as eight properties totaling 1.8 million square feet owned by
our unconsolidated Funds. See Note 5 to our consolidated financial statements in this Report for more information about our
unconsolidated Funds.
(3) Our office and multifamily portfolios include ancillary retail space.
Annualized rent
As of December 31, 2018, annualized rent from our Consolidated Portfolio was derived as follows:
______
10
Financings, Developments and Repositionings
Financings
In February 2018, we borrowed 335 million under a secured, non-recourse interest-only loan maturing in March 2025. The
loan bears interest at LIBOR + 1.30%, which was effectively fixed at 3.84% for five years through interest rate swaps. The loan
is secured by a wholly-owned office property. We used the proceeds from the loan and our credit line to pay off two loans totaling
$426 million which were scheduled to mature in 2019. See Note 7 to our consolidated financial statements in this Report for more
information regarding our debt.
Developments
•
In West Los Angeles, we are building a 34 story high-rise apartment building with 376 apartments. The tower is being
built on a site that is directly adjacent to our existing office building and a 712 unit residential property that we own. We
expect the cost of the development to be approximately $180.0 million to $200.0 million, which does not include the cost
of the land which we have owned since 1997. As part of the project, we are investing additional capital to build a one acre
park on Wilshire Boulevard that will be available to the public and provide a valuable amenity to our surrounding properties
and community. We expect construction to take about 3 years.
• At our Moanalua Hillside Apartments in Honolulu, as of the date of this Report, we completed the construction of an
additional 491 new apartments in addition to our existing 680 apartments. We also invested additional capital to upgrade
the existing buildings, improve the parking and landscaping, built a new leasing and management office, and constructed
a new fitness center and two pools.
•
In downtown Honolulu, we are converting a 25 story, 490 thousand square foot office tower into approximately 500 rental
apartments. We expect the conversion to occur in phases over a number of years as the office space is vacated. We currently
estimate the construction costs to be approximately $80.0 million to $110.0 million, although the inherent uncertainties of
development are compounded by the multi-year and phased nature of the conversion. Assuming timely approvals, we
expect the first units to be delivered in 2020. This project will help address the severe shortage of rental housing in Honolulu
and revitalize the central business district.
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.
11
Rental Rate Trends - Total Portfolio
Office Rental Rates
The table below presents the average annual rental rate per leased square foot and the annualized lease transaction costs per
leased square foot for leases executed in our total office portfolio:
Average straight-line rental rate(1)(2)
Annualized lease transaction costs(3)
Year Ended December 31,
2018
$48.77
$5.80
2017
$44.48
$5.68
2016
$43.21
$5.74
2015
$42.65
$4.77
2014
$35.93
$4.66
___________________________________________________
(1) Because straight-line rent takes into account the full economic value of each lease, including rent concessions and
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, and types
of space and terms involved in the leases executed during the respective reporting period.
(2) Reflects the weighted average straight-line Annualized Rent.
(3) Reflects the weighted average leasing commissions and tenant improvement allowances divided by the weighted
average number of years for the leases. Excludes leases substantially negotiated by the seller in the case of acquired
properties and leases for tenants relocated due to repositioning projects.
Office Rent Roll
The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio
during the year ended December 31, 2018:
Rent Roll (1)(2)
Starting Cash Rent
Straight-line Rent
Expiring Cash Rent
Leases signed during the period
Prior leases for the same space
Percentage change
$46.44
$35.19
32.0%
$48.77
$37.11
31.4%
N/A
$40.87
13.6%
(3)
___________________________________________________
(1) Represents the average initial stabilized cash and straight-line rents on new and renewal leases signed during the
quarter compared to the prior lease on the same space, excluding Short-Term Leases, leases where the prior lease
was terminated more than a year before signing of the new lease, and leases in acquired buildings where we believe
the information about the prior agreement is incomplete or where we believe base rent reflects other off-market
inducements to the tenant that are not reflected in the prior lease document.
(2) Our office rent roll can fluctuate from period to period as a result of changes in our submarkets, buildings and term
of the expiring leases, making these metrics difficult to predict.
(3) The percentage change for expiring cash rent represents the comparison between the starting cash rent on leases
executed during the respective period and the expiring cash rent on the prior leases for the same space.
12
Multifamily Rental Rates
The table below presents the average annual rental rate per leased unit for new tenants:
2018
Year Ended December 31,
2016
2017
2015
2014
Average annual rental rate - new tenants(1)
$
27,542
$
28,501
$
28,435
$
27,936
$
28,870
_____________________________________________________
(1) These average rental rates are not directly comparable from year to year because of changes in the properties and units
included. In particular, in each of 2018 and 2016, we significantly expanded the number of units in our portfolio in
Honolulu, where the rental rates are lower than the average in our portfolio.
Multifamily Rent Roll
During 2018, average rent on leases to new tenants was 0.5% lower for the same unit at the time it became vacant.
Occupancy Rates - Total Portfolio
The tables below present the occupancy rates for our total office portfolio and multifamily portfolio:
Occupancy Rates(1) as of:
2018
2017
2016
2015
2014
Office portfolio
Multifamily portfolio(2)
90.3%
97.0%
89.8%
96.4%
90.4%
97.9%
91.2%
98.0%
90.5%
98.2%
December 31,
Average Occupancy Rates(1)(3):
2018
2017
2016
2015
2014
Office portfolio
Multifamily portfolio(2)
89.4%
96.6%
89.5%
97.2%
90.6%
97.6%
90.9%
98.2%
90.0%
98.5%
Year Ended December 31,
___________________________________________________
(1) Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were
below that of our existing portfolio.
(2) The occupancy rate for our multifamily portfolio was impacted during 2018 by the new units that we are leasing at our
Moanalua Hillside Apartments development in Honolulu - see "Financings, Developments and Repositionings".
(3) Average occupancy rates are calculated 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.
13
Office Lease Expirations
As of December 31, 2018, assuming non-exercise of renewal options and early termination rights, we expect to see expiring
square footage in our total office portfolio as follows:
______________________________________________________
(1) Average of the percentage of leases at December 31, 2015, 2016, and 2017 with the same remaining duration as
the leases for the labeled year had at December 31, 2018. Acquisitions are included in the prior year average
commencing in the quarter after the acquisition.
14
Results of Operations
Comparison of 2018 to 2017
2018
2017
(Unfavorable) Percentage
Commentary
Favorable
(In thousands)
Revenues
Office rental
revenue and
tenant
recoveries
Office parking
and other
income
$ 661,147
$ 606,852
$
54,295
8.9 %
$ 116,784
$ 108,694
$
8,090
7.4 %
Multifamily
revenue
$ 103,385
$ 96,506
$
6,879
7.1 %
Operating expenses
Office rental
expenses
$ 252,751
$ 233,633
$
(19,118)
(8.2)%
Multifamily
rental
expenses
$ 28,116
$ 24,401
$
(3,715)
(15.2)%
The increase was due to increase in rental revenues
and tenant recoveries of $27.2 million from
properties that we acquired in 2017 and an increase
in rental revenues and tenant recoveries of $27.1
million from properties that we owned throughout
both periods. The increase from properties that we
owned throughout both periods was primarily due
to (i) an increase in rental rates, partially offset by
a decrease in occupancy and (ii) an increase in tenant
recoveries due to an increase in recoverable
operating costs.
The increase was due to parking and other income
of $5.8 million from properties that we owned
throughout both periods and an increase of $2.3
million from properties that we acquired in 2017.
The increase in parking and other income from
properties that we owned throughout both periods
primarily reflects an increase in parking rates,
partially offset by a decrease in occupancy and an
increase in ground rent income.
The increase was primarily due to an increase in
rental revenues of $6.4 million, of which $3.4
million was due to an increase in revenues from new
apartments at our Moanalua development and $3.0
million was due to increases in revenues from
properties that we owned throughout both periods.
The increase from the properties that we owned
throughout both periods was due to an increase in
rental rates for in-place leases, partially offset by a
decrease in occupancy.
The increase was due to rental expenses of $10.9
million from properties that we owned throughout
both periods and an increase of $8.2 million from
properties that we acquired during 2017. The
increase from properties that we owned throughout
both periods was primarily due to an increase in
scheduled services expenses, utility expenses,
personnel expenses, repairs and maintenance and
real estate taxes.
The increase was primarily due to an increase of
$2.9 million from properties that we owned
throughout both periods and an increase of $0.8
million from new apartments at our Moanalua
development. The increase from the properties that
we owned throughout both periods was primarily
due to personnel expenses, utility expenses, real
estate taxes and scheduled services expenses.
15
Other
expenses
Income,
including
depreciation,
from
unconsolidated
real estate
funds
Interest
expense
Demolition
expenses
2018
2017
Favorable
(Unfavorable) Percentage
Commentary
(In thousands)
General and
administrative
$ 38,641
$ 36,234
$
(2,407)
(6.6)%
Depreciation
and
amortization
$ 309,864
$ 276,761
$
(33,103)
(12.0)%
Non-Operating Income and Expenses
Other income
$ 11,414
$
9,712
$
1,702
17.5 %
$ (7,472) $ (7,037) $
(435)
(6.2)%
The increase was primarily due to an increase in
personnel expenses, partially offset by a decrease in
payroll tax expense due to options that were
exercised in the comparable period.
The increase was due to an increase in depreciation
and amortization of $18.4 million from properties
that we acquired during 2017, an increase of $1.2
million from new apartments at our Moanalua
development, and an increase of $13.5 million from
properties that we owned throughout both periods.
The increase from properties that we owned
throughout both periods was primarily due to
accelerated depreciation related to our office
property repositionings.
The increase was primarily due to an increase in
interest income due to higher money market interest
rates.
The increase was primarily due an increase in
expenses from the health club that we own and
operate, and an increase in acquisition-related
expenses related to properties that we did not
acquire.
8.4 %
The increase was primarily due to an increase in net
income for our unconsolidated Funds, which was
primarily due to (i) an increase in revenues due to
an increase in rental rates and (ii) higher interest
income due to higher money market interest rates,
partially offset by an increase in interest expense
due to higher debt balances and higher interest rates.
8.1 % The decrease was primarily due to lower debt
balances.
The increase reflects expenses to demolish an
existing structure to allow our high-rise apartment
development in Brentwood, California.
$
6,400
$
5,905
$
495
$(133,402) $(145,176) $
11,774
$
(272) $
— $
(272)
100.0 %
16
Comparison of 2017 to 2016
2017
2016
Favorable
(Unfavorable) Percentage
Commentary
(In thousands)
Revenues
Office rental
revenues and
tenant
recoveries.
$ 606,852
$ 545,061
$
61,791
11.3 %
Office parking
and other
income
$ 108,694
$ 100,572
$
8,122
8.1 %
Multifamily
revenue
$ 96,506
$ 96,918
$
(412)
(0.4)%
Operating expenses
Office rental
expenses
$ 233,633
$ 214,546
$
(19,087)
(8.9)%
Multifamily
rental
expenses
$ 24,401
$ 23,317
$
(1,084)
(4.6)%
The increase was due to rental revenues and tenant
recoveries of $49.0 million from properties that we
acquired in 2016 and 2017 and an increase in rental
revenues and tenant recoveries of $15.9 million
from the properties that we owned throughout both
periods, partially offset by a decrease of $3.1 million
in rental revenues from a property that we sold
during 2016. The increase from properties that we
owned throughout both periods was primarily due
to (i) an increase in rental rates, partially offset by
a decrease in occupancy and a decrease of $1.5
million in the accretion from below-market leases
and (ii) an increase in tenant recoveries due to an
increase in recoverable operating costs .
The increase was due to parking and other income
of $5.1 million from properties that we acquired in
2016 and 2017 and an increase of $3.5 million in
parking and other income from properties that we
owned throughout both periods, partially offset by
a decrease of $0.5 million in parking and other
income from a property that we sold during 2016.
The increase in parking and other income from
properties that we owned throughout both periods
primarily reflects increases in rates, partially offset
by a decrease in occupancy.
The decrease was due to a decrease of $2.8 million
in the accretion from below-market leases, partially
offset by an increase of $2.4 million in rental
revenues and parking income. The decrease in the
accretion from below-market leases was due to the
completion in the fourth quarter 2016 of the
amortization of below-market lease intangibles
recorded at the time of our IPO. The increase in
rental revenues and parking income was primarily
due to an increase in rental rates.
The increase was due to rental expenses of $17.3
million from properties that we acquired during
2016 and 2017 and an increase of $3.2 million from
properties that we owned throughout both periods,
partially offset by a decrease of $1.4 million from a
property that we sold during 2016. The increase
from properties that we owned throughout both
periods was primarily due to an increase in
personnel expenses, utilities and real estate taxes,
partially offset by a decrease in parking expenses.
The increase was due to a prior year excise tax refund
of $0.5 million in 2016 which offset expenses in that
year and increases in scheduled services, personnel
expenses and utilities in 2017.
17
2017
2016
Favorable
(Unfavorable) Percentage
Commentary
(In thousands)
$ 36,234
$ 34,957
$
(1,277)
(3.7)%
$ 276,761
$ 248,914
$
(27,847)
(11.2)%
General and
administrative
Depreciation
and
amortization
Non-Operating Income and Expenses
Other income
$
9,712
$
8,759
$
953
10.9 %
Other
expenses
Income,
including
depreciation,
from
unconsolidated
real estate
funds
Interest
expense
Gains on sales
of investments
in real estate
$ (7,037) $ (9,477) $
2,440
25.7 %
$
5,905
$
7,812
$
(1,907)
(24.4)%
$(145,176) $(146,148) $
972
0.7 %
$
— $ 14,327
$
(14,327)
(100.0)%
The increase was primarily due to an increase in
personnel expenses.
The increase was primarily due to depreciation and
amortization of $24.6 million from properties that
we acquired during 2016 and 2017 and an increase
of $3.7 million from properties that we owned
throughout both periods, partially offset by a
decrease of $0.5 million from a property that we sold
during 2016. The increase from the properties that
we owned throughout both periods was primarily
due to an increase in building improvements, tenant
improvements and leasing commissions.
The increase was primarily due to an increase in
interest income and revenue from the health club
that we own and operate.
The decrease was primarily due to $2.8 million of
acquisition-related expenses incurred in connection
the acquisition of properties by our
with
consolidated JVs
in 2016. We commenced
capitalizing acquisition-related expenses in 2017 as
a result of a change in accounting policy - see Note
2 to our consolidated financial statements in this
Report.
The decrease was primarily due to an increase in
interest expense and loan costs for one of our
unconsolidated Funds related to a 2017 loan
refinancing.
The decrease was due to a decrease in our Operating
Partnership interest expense of $13.3 million as a
result of lower debt balances, partially offset by
interest expense of $12.3 million from debt related
to our consolidated JV property acquisitions in 2016
and 2017.
In 2016 we sold (i) a thirty-percent ownership
interest in one of our consolidated JVs to a third
party investor and recognized a gain of $1.1 million,
(ii) a thirty-five percent ownership interest in one of
our consolidated JVs to a third party investor and
recognized a gain of $0.6 million and (iii) a wholly-
owned office property and recognized a gain of
$12.7 million.
18
Non-GAAP Supplemental Financial Measure: FFO
Usefulness to Investors
We report FFO because it is a widely reported measure of the performance of equity REITs, and is also used by some investors
to identify trends in occupancy rates, rental rates and operating costs from year to year, and to compare our performance with other
REITs. FFO is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP
financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real
estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of
capital expenditures, tenant improvements 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. FFO should be considered
only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash
flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not
calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other
REITs. See "Results of Operations" above for a discussion of the items that impacted our net income.
Comparison of 2018 to 2017
Our FFO increased by 45.0 million, or 12.7%, to $399.7 million for 2018 compared to $354.7 million for 2017, which was
primarily due to (i) an increase in operating income from our office portfolio due to acquisitions in 2017 and higher rental rates,
(ii) an increase in operating income from our multifamily portfolio due to rent from new apartments at our Moanalua development
and higher rental rates in existing units in our portfolio, and (iii) a decrease in interest expense due to lower debt balances, partially
offset by an increase in general and administrative expenses due to an increase in personnel costs.
Comparison of 2017 to 2016
Our FFO increased by $29.0 million, or 8.9%, to $354.7 million for 2017 compared to $325.7 million for 2016, which was
primarily due to (i) an increase in operating income from our office portfolio due to property acquisitions in 2016 and 2017 and
increasing rental rates, (ii) a decrease in other expenses as a result of acquisition-related costs we expensed in 2016, while similar
costs were capitalized in 2017 as a result of the adoption of an ASU in 2017, and (iii) a decrease in interest expense due to lower
debt balances, partially offset by (a) a decrease in the operating income from our multifamily portfolio due to a decrease in the
accretion from below-market leases due to the completion in 2016 of the amortization of below-market lease intangibles recorded
at the time of our IPO, and an excise tax refund of $0.5 million that reduced our multifamily operating expenses in 2016, (b) an
increase in general and administrative expenses due an increase in personnel costs, and (c) a decrease in the FFO of our Funds
due to an increase in interest expense and loan costs related to the refinancing of a loan for one of our Funds during 2017.
Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in our
Operating Partnership - which includes our share of our consolidated JVs and our unconsolidated Funds FFO) to net income
attributable to common stockholders computed in accordance with GAAP:
(In thousands)
Net income attributable to common stockholders
Depreciation and amortization of real estate assets
Net income attributable to noncontrolling interests
Adjustments attributable to unconsolidated funds (1)
Adjustments attributable to consolidated JVs (2)
Gain on sale of investment in real estate
FFO
Year Ended December 31,
2017
2016
2018
$
$
116,086
309,864
12,526
16,702
(55,448)
—
399,730
$
$
94,443
276,761
9,984
16,220
(42,674)
—
354,734
$
$
85,397
248,914
10,693
16,016
(20,961)
(14,327)
325,732
___________________________________________________
(1) Adjusts for our share of our unconsolidated Funds depreciation and amortization of real estate assets.
(2) Adjusts for the net income and depreciation and amortization of real estate assets that is attributable to the
noncontrolling interests in our consolidated JVs.
19
Non-GAAP Supplemental Financial Measure: Same Property NOI
Usefulness to Investors
We report Same Property NOI to facilitate a comparison of our operations between reported periods. Many investors use
Same Property NOI to evaluate our operating performance and to compare our operating performance with other REITs, because
it can reduce the impact of investing transactions on operating trends. NOI is a non-GAAP financial measure for which we believe
that net income is the most directly comparable GAAP financial measure. We report NOI because it is a widely recognized measure
of the performance of equity REITs, and is used by some investors to identify trends in occupancy rates, rental rates and operating
costs and to compare our operating performance with that of other REITs. NOI has limitations as a measure of our performance
because it excludes depreciation and amortization expense, and captures neither the changes in the value of our properties that
result from use or market conditions, nor the level of capital expenditures, tenant improvements 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 Same Property NOI in the same manner. As a result, our Same Property
NOI may not be comparable to the Same Property NOI of other REITs. Same Property NOI should be considered only as a
supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor
is it indicative of funds available to fund our cash needs, including our ability to pay dividends.
Comparison of 2018 to 2017:
Our 2018 same properties included 47 office properties, aggregating 11.8 million Rentable Square Feet, and 9 multifamily
properties with an aggregate 2,640 units:
(In thousands)
2018
2017
Favorable
(Unfavorable)
Percentage
Commentary
Office revenues
$ 502,912
$ 480,101
$
22,811
4.8 %
Office expenses
(166,541)
(158,262)
(8,279)
(5.2)%
Office NOI
336,371
321,839
14,532
4.5 %
Multifamily revenues
84,587
81,927
2,660
3.2 %
Multifamily expenses
Multifamily NOI
(21,508)
63,079
(19,969)
61,958
(1,539)
1,121
(7.7)%
1.8 %
Total NOI
$ 399,450
$ 383,797
$
15,653
4.1 %
The increase was primarily due to an
increase in rental and parking rates, an
increase in tenant recovery revenues
reflecting an increase in recoverable
operating costs and an increase in ground
rent income.
The increase was primarily due to an
increase in scheduled services expenses,
utility expenses, personnel expenses,
repairs and maintenance and real estate
taxes.
The increase was primarily due to an
increase in rental revenues due to an
increase in occupancy and rental rates.
The increase was primarily due to an
increase in personnel expenses, scheduled
services expenses, utility expenses,
repairs and maintenance and real estate
taxes.
20
Reconciliation to GAAP
The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders:
(In thousands)
2018
2017
Same Property NOI
$
Non-comparable office revenues
Non-comparable office expenses
Non-comparable multifamily revenues
Non-comparable multifamily expenses
NOI
General and administrative
Depreciation and amortization
Operating income
Other income
Other expenses
Income, including depreciation, from unconsolidated real estate funds
Interest expense
Demolition expenses
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to common stockholders
$
399,450
275,019
(86,210)
18,770
(6,580)
600,449
(38,641)
(309,864)
251,944
11,414
(7,472)
6,400
(133,402)
(272)
128,612
(12,526)
116,086
$
$
383,797
235,445
(75,371)
14,579
(4,432)
554,018
(36,234)
(276,761)
241,023
9,712
(7,037)
5,905
(145,176)
—
104,427
(9,984)
94,443
21
Comparison of 2017 to 2016
Our 2017 same properties included 51 office properties, aggregating 13.0 million rentable square feet, and 9 multifamily
properties with an aggregate 2,640 units:
(In thousands)
2017
2016
(Unfavorable) Percentage
Commentary
Favorable
Office revenues
$ 551,651
$ 531,734
$
19,917
3.7 %
Office expenses
(176,916)
(173,977)
(2,939)
(1.7)%
Office NOI
374,735
357,757
16,978
4.7 %
Multifamily revenues
81,927
82,328
(401)
(0.5)%
Multifamily expenses
(19,969)
(19,229)
(740)
(3.8)%
Multifamily NOI
61,958
63,099
(1,141)
(1.8)%
Total NOI
$ 436,693
$ 420,856
$
15,837
3.8 %
The increase was primarily due to an
increase in rental and parking rates, as
well as higher tenant recovery revenues
reflecting
recoverable
increased
operating costs.
The increase was primarily due to an
increase in personnel expenses, utilities
and real estate taxes, partially offset by
a decrease in parking expenses.
The decrease was primarily due to a
decrease of $2.8 million in the accretion
from below-market
leases, partially
offset by an increase in rental revenues
and parking and other income. The
decrease in the accretion from below-
market leases was due to the completion
in 2016 of the amortization of below-
market lease intangibles recorded at the
time of our IPO. The increase in rental
revenues and parking and other income
was primarily due to an increase in rental
rates.
The increase was primarily due to an
excise tax refund of $0.5 million in 2016
which offset other operating expenses.
22
Reconciliation to GAAP
The table below presents a reconciliation of our Same Property NOI to net income attributable to common stockholders:
(In thousands)
2017
2016
Same Property NOI
$
Non-comparable office revenues
Non-comparable office expenses
Non-comparable multifamily revenues
Non-comparable multifamily expenses
NOI
General and administrative
Depreciation and amortization
Operating income
Other income
Other expenses
Income, including depreciation, from unconsolidated real estate funds
Interest expense
Income before gains
Gains on sales of investments in real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to common stockholders
$
436,693
163,895
(56,717)
14,579
(4,432)
554,018
(36,234)
(276,761)
241,023
9,712
(7,037)
5,905
(145,176)
104,427
—
104,427
(9,984)
94,443
$
$
420,856
113,899
(40,569)
14,590
(4,088)
504,688
(34,957)
(248,914)
220,817
8,759
(9,477)
7,812
(146,148)
81,763
14,327
96,090
(10,693)
85,397
Liquidity and Capital Resources
Short-term liquidity
Excluding acquisitions, development projects and debt refinancings, we expect to meet our short-term liquidity requirements
through cash on hand, cash generated by operations, and our revolving credit facility. See Note 7 to our consolidated financial
statements of this Report for more information regarding our revolving credit facility.
Long-term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development projects and debt
refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to the requirement
to distribute a substantial majority of our income on an annual basis imposed by REIT federal tax rules. We plan to meet our long-
term liquidity needs through long-term secured non-recourse indebtedness, the issuance of equity securities, including common
stock and OP Units, as well as property dispositions and JV transactions. We have an ATM program which would allow us, subject
to market conditions, to sell up to $400 million of shares of common stock as of the date of this Report.
To mitigate the impact of changing interest rates on our cash flows from operations, most of our long-term secured loans carry
fixed interest rates, and we generally enter into interest rate swap agreements with respect to our loans with floating interest
rates. These swap agreements generally expire between one to two years before the maturity date of the related loan, during which
time we can refinance the loan without any interest penalty. See Notes 7 and 9 to our consolidated financial statements in this
Report for more information regarding our debt and derivative contracts, respectively.
23
Contractual obligations as of December 31, 2018
(In thousands)
Total
Payment due by period
2-3
years
Less than
1 year
4-5
years
Thereafter
Term loan principal payments(1)
Ground lease payments(2)
Development commitments(3)
Capital expenditures and tenant
improvements commitments(4)
Total
$ 4,163,982
$
145,718
$
401,539
$ 2,536,685
$ 1,080,040
49,843
202,865
733
89,381
1,466
113,484
1,466
—
46,178
—
55,340
$ 4,472,030
$
55,340
291,172
$
—
516,489
—
$ 2,538,151
—
$ 1,126,218
____________________________________________________
(1) Reflects the future principal payments due on our secured notes payable and revolving credit facility, excluding any
maturity extension options. For more information regarding our debt and the interest rates that determine our periodic
interest payments see Note 7 to our consolidated financial statements in this Report.
(2) Reflects the future minimum ground lease payments. See Note 16 to our consolidated financial statements in this Report.
(3) See "Financings, Developments and Repositionings" for a discussion of our developments.
(4) Reflects the aggregate remaining contractual commitment for capital expenditure projects and repositionings, as well
as tenant improvements. See "Financings, Developments and Repositionings" for a discussion of our repositionings.
Off-Balance Sheet Arrangements
Unconsolidated Funds Debt
Our unconsolidated Funds have their own secured non-recourse debt, and we have made certain environmental and other
limited indemnities and guarantees covering customary non-recourse carve-outs related to those loans. We have also guaranteed
the related swaps. Our Funds have agreed to indemnify us for any amounts that we would be required to pay under these agreements.
As of December 31, 2018, all of the obligations under the respective loans and swap agreements have been performed in accordance
with the terms of those agreements. For information regarding our Funds and Funds' debt, see Notes 5 and 17, respectively, to our
consolidated financial statements in this Report.
24
Cash Flows
Comparison of 2018 to 2017
2018
2017
(In thousands)
Increase
(Decrease)
Percentage
Cash flows provided by operating activities(1)
Cash flows used in investing activities(2)
Cash flows (used in) provided by financing activities(3)
$
$
$
432,982
$
402,697
$
30,285
7.5 %
(249,551) $
(669,595) $
(420,044)
(62.7)%
(213,849) $
330,616
$
(544,465)
(164.7)%
___________________________________________________
(1) Our cash flows provided by operating activities are primarily dependent upon the occupancy and rental rates of our
portfolio, the collectability of rent and recoveries from our tenants, and the level of our operating expenses and general
and administrative costs, and interest expense. The increase was primarily due to (i) an increase in operating income
from our office portfolio due to acquisitions in 2017 and higher rental rates, (ii) an increase in operating income from
our multifamily portfolio due to rents from new apartments at our Moanalua development and higher rental rates from
existing units, and (iii) a decrease in interest expense due to lower debt balances.
(2) Our cash flows used in investing activities is generally used to fund property acquisitions, developments and
redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The decrease is primarily due to $537.7
million paid for properties acquired in 2017, partially offset by (i) an increase of $70.7 million for capital expenditures
for improvements to real estate and (ii) a decrease of $36.2 million in capital distributions received from our Funds.
(3) Our cash flows used in financing activities are generally impacted by our borrowings and capital activities, as well as
dividends and distributions paid to common stockholders and noncontrolling interests, respectively. The decrease is
primarily due to (i) $593.2 million in proceeds from the issuance of common stock in 2017, (ii) $284.2 million in
contributions from non-controlling interests in 2017, partially offset by (a) an increase of $299.7 million in net borrowings
and (b) a decrease of $52.6 million in payroll taxes paid related to the exercise of stock options.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with GAAP, which requires us to make estimates of certain items which 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 estimates could prove to be incorrect, and those differences
could be material. Below is a discussion of our critical accounting policies, which are the policies we believe require the most
estimate and judgment. See Note 2 to our consolidated financial statements included in this Report for the summary of our significant
accounting policies.
Investment in Real Estate
Acquisitions
We allocate the purchase price, which includes the capitalized transaction costs, of acquired properties to: (i) land, (ii) buildings
and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place at-market leases, (iv) acquired
above- and below-market ground and tenant leases, and if applicable (v) assumed debt, based upon our estimates of expected
future cash flows and other valuation techniques. We estimate the relative fair values of the tangible assets on an ‘‘as-if-vacant’’
basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the property to the
occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We evaluate the time
period over which we expect such occupancy level to 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 leases
are recorded as an asset or liability based upon 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 rental rates for the corresponding in-place leases, over the remaining non-
cancelable term of the leases. Assumed debt is recorded at fair value based upon the present value of the expected future payments.
25
These estimates require judgment, involve complex calculations, and the allocations have a direct and material impact on our
results of operations because, for example, (i) there would be less depreciation if we allocate more value to land (which is not
depreciated), or (ii) if we allocate more value to buildings than to tenant improvements, the depreciation would be recognized over
a much longer time period, because buildings are depreciated over a longer time period than tenant improvements.
Cost capitalization
We capitalize development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly
related to the development of real estate. Indirect development costs, including salaries and benefits, office rent, and associated
costs for those individuals directly responsible for and who spend their time on development activities are also capitalized and
allocated to the projects to which they relate. Development costs are capitalized while substantial activities are ongoing to prepare
an asset for its intended use. We consider a development project to be substantially complete when the residential units or office
space is available for occupancy but no later than one year after cessation of major construction activity. Costs incurred after a
project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as
incurred. Costs previously capitalized related to abandoned developments are charged to earnings. Expenditures for repairs and
maintenance are expensed as incurred. The capitalization of development costs requires judgment, and can directly and materially
impact our results of operations because, for example, (i) if we don't capitalize costs that should be capitalized, then our operating
expenses would be overstated during the development period, and the subsequent depreciation of the developed real estate would
be understated, or (ii) if we capitalize costs that should not be capitalized, then our operating expenses would be understated during
the development period, and the subsequent depreciation of the real estate would be overstated. We capitalized development costs
of $78.7 million, $66.0 million and $31.6 million during 2018, 2017 or 2016, respectively.
Impairment of Long-Lived Assets
We assess our investment in real estate and our investment in our Funds for impairment on a periodic basis, and whenever
events or changes in circumstances indicate that the carrying value of our investments may not be recoverable. If the undiscounted
future cash flows expected to be generated by the asset are less than the carrying value of the asset, and our evaluation indicates
that we may be unable to recover the carrying value, then we would record an impairment loss to the extent that the carrying value
exceeds the estimated fair value of the asset. Our estimates of future cash flows are based in part upon assumptions regarding
future occupancy, rental rates and operating costs, and could differ materially from actual results. We record real estate held for
sale at the lower of carrying value or estimated fair value, less costs to sell, and similarly recognize impairment losses if we believe
that we cannot recover the carrying value. Our evaluation of market conditions for assets held for sale requires judgment, and our
expectations could differ materially from actual results. Impairment losses would reduce our net income and could be material.
We did not record any impairment losses for our long-lived assets during 2018, 2017 or 2016.
Revenue Recognition for Tenant Recoveries
Our tenant recovery revenues for recoverable operating expenses are recognized as revenue in the period that the recoverable
expenses are incurred. Subsequent to year-end, we perform reconciliations on a lease-by-lease basis and bill or credit each tenant
for any differences between the estimated expenses we billed to the tenant and the actual expenses incurred. Estimating tenant
recovery revenues requires an in-depth analysis of the complex terms of each underlying lease. Examples of estimates and
judgments made when determining the amounts recoverable include:
•
•
•
•
•
estimating the recoverable expenses;
estimating the impact of changes to expense and occupancy during the year;
estimating the fixed and variable components of operating expenses for each building;
conforming recoverable expense pools to those used in the base year for the underlying lease; and
judging whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease.
These estimates require judgment and involve complex calculations. If our estimates prove to be incorrect, then our tenant
recovery revenues and net income could be materially and adversely affected in future periods when we perform our reconciliations.
The impact of changing our current year tenant recovery billings by 5% would result in a change to our tenant recovery revenues
and net income of $2.4 million, $2.1 million and $2.0 million during 2018, 2017 and 2016, respectively.
26
Allowances for Tenant and Deferred Rent Receivables
Our estimates regarding the adequacy of our allowances for uncollectible tenant and deferred rent receivables requires
judgment, including the creditworthiness of specific tenants and general economic trends and conditions. For most of our tenants,
our only security is their security deposits or letters of credit, and in some cases we do not require any security deposit or letter of
credit. If our allowances are not sufficient to cover the unsecured losses from our tenants who fail to make contractual payments,
our revenues and net income could be materially and adversely affected in future periods. As of December 31, 2018, 2017 and
2016, the total of our allowances was $8.1 million, $6.5 million and $7.8 million, respectively. The impact of changing the
allowances by 5% would result in a change to our revenues and net income of $403 thousand, $323 thousand and $390 thousand
during 2018, 2017 and 2016, respectively.
Stock-Based Compensation
We award stock-based compensation to certain employees and non-employee directors in the form of LTIP Units. We recognize
the fair value of the awards over the requisite vesting period, which is based upon service. The fair value of the awards is based
upon the market value of our common stock on the grant date and a discount for post-vesting restrictions. Our estimate of the
discount for post-vesting restrictions requires judgment. If our estimate of the discount is too high or too low it would result in
the fair value of the awards that we make being too low or too high, respectively, which would result in an under- or over-expense
of stock-based compensation, respectively, and this under- or over-expensing of stock-based compensation could be material to
our net income. Stock-based compensation expense was $22.3 million, $18.5 million and $17.4 million for 2018, 2017 and 2016,
respectively. The impact of changing the discount rate by 5% would result in a change to our stock-based compensation expense
and net income of $1.1 million, $0.9 million and $0.9 million during 2018, 2017 and 2016, respectively.
Quantitative and Qualitative Disclosures about Market Risk
We use derivative instruments to hedge interest rate risk related to our floating rate borrowings. However, our use of these
instruments exposes us to credit risk from the potential inability of our counterparties to perform under the terms of those agreements.
We attempt to minimize this credit risk by contracting with a variety of high-quality financial counterparties. See Notes 7 and 9
to our consolidated financial statements in this Report for more information regarding our debt and derivatives. At December 31,
2018, 6.0% of our debt was unhedged floating rate debt. A fifty-basis point change in the one month USD LIBOR interest rate
would result in an annual impact to our earnings (through interest expense) of $1.3 million. We calculate interest sensitivity by
multiplying the amount of unhedged floating rate debt by fifty-basis points.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling
banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed
that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for
use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market
transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific
transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. Our floating rate borrowings and derivative
instruments are indexed to USD-LIBOR and we are monitoring this activity and evaluating the related risks.
27
Consolidated Financial Statements
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 US GAAP. Our management, including
the undersigned CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2018.
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, 2018, our internal control over financial reporting was effective based on those criteria.
Management, including our CEO and CFO, 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, 2018, 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 30, which expresses an unqualified opinion on the effectiveness of our internal
control over financial reporting as of December 31, 2018.
/s/ JORDAN L. KAPLAN
Jordan L. Kaplan
President and CEO
/s/ MONA M. GISLER
Mona M. Gisler
CFO
February 15, 2019
28
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Douglas Emmett, Inc. (the “Company”) as of December 31,
2018 and 2017, 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, 2018 and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, 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 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1995.
Los Angeles, California
February 15, 2019
29
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Douglas Emmett, Inc.’s internal control over financial reporting as of December 31, 2018, 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). In our opinion, Douglas Emmett, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of Douglas Emmett, Inc. as of December 31, 2018 and 2017 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,
2018, and the related notes and our report dated February 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Los Angeles, California
February 15, 2019
30
Douglas Emmett, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31, 2018
December 31, 2017
Assets
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Property under development
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
Interest rate contract assets
Investment in unconsolidated real estate funds
Other assets
Total Assets
Liabilities
Secured notes payable and revolving credit facility, net
Interest payable, accounts payable and deferred revenue
Security deposits
Acquired lease intangible liabilities, net
Interest rate contract liabilities
Dividends payable
Total liabilities
$
$
$
Douglas Emmett, Inc. stockholders' equity:
Equity
Common Stock, $0.01 par value, 750,000,000
authorized, 170,214,809 and 169,564,927 outstanding at
December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total Douglas Emmett, Inc. stockholders' equity
Noncontrolling interests
Total equity
Total Liabilities and Equity
$
1,065,099
7,995,203
840,653
129,753
10,030,708
(2,246,887)
7,783,821
146,227
4,371
124,834
3,251
73,414
111,032
14,759
8,261,709
4,134,030
130,154
50,733
52,569
1,530
44,263
4,413,279
1,702
3,282,316
53,944
(935,630)
2,402,332
1,446,098
3,848,430
8,261,709
$
$
$
$
1,062,345
7,886,201
756,190
124,472
9,829,208
(2,012,752)
7,816,456
176,645
2,980
106,021
4,293
60,069
107,735
18,442
8,292,641
4,117,390
103,947
50,414
75,635
807
42,399
4,390,592
1,696
3,272,539
43,099
(879,810)
2,437,524
1,464,525
3,902,049
8,292,641
See accompanying notes to the consolidated financial statements.
31
Douglas Emmett, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
2017
2016
2018
Revenues
Office rental
Rental revenues and 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 expenses
Multifamily expenses
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Other income
Other expenses
Income, including depreciation, from unconsolidated real estate funds
Interest expense
Demolition expenses
Income before gains
Gains on sales of investments in real estate
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
$
661,147
116,784
777,931
$
606,852
108,694
715,546
$
545,061
100,572
645,633
95,423
7,962
103,385
881,316
252,751
28,116
38,641
309,864
629,372
251,944
11,414
(7,472)
6,400
(133,402)
(272)
128,612
—
128,612
(12,526)
116,086
0.68
0.68
89,039
7,467
96,506
89,996
6,922
96,918
812,052
742,551
233,633
24,401
36,234
276,761
571,029
241,023
9,712
(7,037)
5,905
(145,176)
—
104,427
—
104,427
(9,984)
94,443
0.58
0.58
214,546
23,317
34,957
248,914
521,734
220,817
8,759
(9,477)
7,812
(146,148)
—
81,763
14,327
96,090
(10,693)
85,397
0.57
0.55
$
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
32
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Year Ended December 31,
2017
2016
2018
Net income
$
128,612
$
104,427
$
96,090
Other comprehensive income: cash flow hedges
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to common stockholders
$
15,070
143,682
(16,751)
126,931
$
34,290
138,717
(16,331)
122,386
$
40,474
136,564
(26,726)
109,838
See accompanying notes to the consolidated financial statements.
33
Douglas Emmett, Inc.
Consolidated Statements of Equity
(In thousands, except per share data)
Year Ended December 31,
2017
2016
2018
Shares of Common Stock
Beginning balance
Conversion of OP Units
Issuance of common stock
Exercise of stock options
Ending balance
Common Stock
Beginning balance
Conversion of OP Units
Issuance of common stock
Exercise of stock options
Ending balance
Additional Paid-in Capital Beginning balance
AOCI
Conversion of OP Units
Repurchase of OP Units
Issuance of common stock
Taxes paid on exercise of stock options
Ending balance
Beginning balance
Beginning balance adjustment - ASU 2017-12
adoption
Cash flow hedge fair value adjustments
Ending balance
Accumulated Deficit
Beginning balance
Beginning balance adjustment - ASU 2017-12
adoption
Net income attributable to common stockholders
Dividends
Ending balance
Noncontrolling Interests
Beginning balance
Net income attributable to noncontrolling interests
Cash flow hedge fair value adjustments
Contributions
Sales of equity interests in consolidated JVs
Distributions
Issuance of OP Units for acquisition of real estate
Conversion of OP Units
Repurchase of OP Units with cash
Stock-based compensation
Total Equity
Ending balance
Beginning balance
Net income
Cash flow hedge fair value adjustments
Issuance of common stock, net
Issuance of OP Units for acquisition of real estate
Repurchase of OP Units with cash
Taxes paid on exercise of stock options
Contributions
Sales of equity interests in consolidated JVs
Dividends
Distributions
Stock-based compensation
Ending balance
169,565
629
—
21
170,215
151,530
1,059
15,687
1,289
169,565
$
$
1,696
6
—
—
1,702
$
$
1,515
11
157
13
1,696
$
$
146,919
1,753
1,400
1,458
151,530
1,469
17
14
15
1,515
$ 3,272,539
10,286
(59)
—
(450)
$ 3,282,316
$ 2,725,157
14,231
(6,763)
593,011
(53,097)
$ 3,272,539
$ 2,706,753
23,043
(498)
49,365
(53,506)
$ 2,725,157
$
43,099
$
15,156
$
(9,285)
211
—
10,634
53,944
$
27,943
43,099
$
—
24,441
15,156
(879,810) $
(820,685) $
(772,726)
(211)
—
—
116,086
(171,695)
(935,630) $
94,443
(153,568)
(879,810) $
85,397
(133,356)
(820,685)
$
$
$
$ 1,464,525
12,526
4,225
—
—
(52,142)
—
(10,292)
(49)
27,305
$ 1,446,098
$ 3,902,049
128,612
14,859
—
—
(108)
(450)
—
—
(171,695)
(52,142)
27,305
$ 3,848,430
$ 1,092,928
9,984
6,347
284,248
—
(38,101)
105,687
(14,242)
(3,341)
21,015
$ 1,464,525
$ 3,014,071
104,427
34,290
593,168
105,687
(10,104)
(53,084)
284,248
—
(153,568)
(38,101)
21,015
$ 3,902,049
$
355,337
10,693
16,033
459,752
291,028
(35,478)
(23,060)
(328)
18,951
$ 1,092,928
$ 2,281,548
96,090
40,474
49,379
—
(826)
(53,491)
459,752
291,028
(133,356)
(35,478)
18,951
$ 3,014,071
Dividends declared per common share
$
1.01
$
0.94
$
0.89
34
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
128,612
$
104,427
$
96,090
Year Ended December 31,
2017
2016
2018
Income, including depreciation, from unconsolidated real estate funds
Gains on sales of investments in real estate
Depreciation and amortization
Net accretion of acquired lease intangibles
Straight-line rent
Increase in the allowance for doubtful accounts
Deferred loan costs amortized and written off
Amortization of loan premium
Non-cash market value adjustments on interest rate contracts
Amortization of stock-based compensation
Operating distributions from unconsolidated real estate funds
Change in working capital components:
Tenant 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
Property acquisitions
Proceeds from sale of investments in real estate, net
Loan payments received from related parties
Acquisition 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
Repayment of borrowings
Loan cost payments
Contributions from noncontrolling interests in consolidated JVs
Distributions paid to noncontrolling interests
Dividends paid to common stockholders
Taxes paid on exercise of stock options
Repurchase of OP Units
Proceeds from issuance of common stock, net
Net cash (used in) provided by financing activities and restricted cash
(6,400)
—
309,864
(22,025)
(18,813)
2,154
8,292
(205)
—
22,299
6,400
(3,545)
1,376
319
4,654
432,982
(179,062)
(68,459)
—
—
—
(9,379)
7,349
(249,551)
667,000
(655,326)
(2,992)
—
(52,142)
(169,831)
(450)
(108)
—
(213,849)
(5,905)
—
276,761
(18,006)
(12,855)
406
10,834
—
51
18,478
5,905
(1,221)
24,942
4,424
(5,544)
402,697
(108,326)
(63,018)
(537,669)
—
—
(4,142)
43,560
(669,595)
1,410,500
(1,698,544)
(11,442)
284,248
(38,101)
(146,026)
(53,084)
(10,104)
593,169
330,616
(7,812)
(14,327)
248,914
(18,198)
(13,599)
422
8,927
—
(196)
17,448
2,668
(680)
10,712
7,307
1,773
339,449
(91,826)
(27,720)
(1,619,759)
348,203
763
—
24,170
(1,366,169)
2,109,500
(1,335,580)
(24,586)
459,752
(35,478)
(130,821)
(53,491)
(826)
49,379
1,037,849
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents and restricted cash - beginning balance
Cash and cash equivalents and restricted cash - ending balance
(30,418)
176,766
146,348
$
63,718
113,048
176,766
$
11,129
101,919
113,048
$
35
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Supplemental Cash Flows Information
Year Ended December 31,
2017
2016
2018
Operating Activities
Cash paid for interest, net of capitalized interest
Capitalized interest paid
Non-cash Investing Transactions
Accrual for real estate and development capital expenditures
Capitalized stock-based compensation for improvements to real estate and
developments
Removal of fully depreciated and amortized tenant improvements and lease
intangibles
Removal of fully amortized acquired lease intangible assets
Removal of fully accreted acquired lease intangible liabilities
Issuance of OP Units for acquisition of real estate
Application of deposit to acquisition of real estate
Non-cash Financing Transactions
Gain recorded in AOCI - Adoption of ASU 2017-12 - consolidated derivatives
Gain recorded in AOCI - consolidated derivatives
Gain recorded in AOCI - unconsolidated Funds' derivatives (our share)
Assumption of term loan for acquisition of real estate
Dividends declared
Common stock issued in exchange for OP Units
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
124,487
3,520
24,702
5,006
$
$
$
$
75,729
1,582
15,431
$
$
$
— $
— $
211
22,723
3,052
$
$
$
— $
$
$
171,695
10,292
135,824
2,745
3,776
2,537
$
$
$
$
53,687
414
5,057
105,687
$
$
$
$
— $
— $
$
$
$
$
$
16,512
3,275
36,460
153,568
14,242
137,884
1,193
7,182
1,503
146,739
1,306
56,278
—
75,000
—
14,192
8
—
133,356
23,060
See accompanying notes to the consolidated financial statements.
36
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements
1. Overview
Organization and Business Description
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 Honolulu, Hawaii. Through
our interest in our Operating Partnership and its subsidiaries, consolidated JVs and unconsolidated Funds, we focus on owning,
acquiring, developing and managing a significant market 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. The terms
"us," "we" and "our" as used in the financial statements refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis.
At December 31, 2018, our Consolidated Portfolio consisted of (i) a 16.6 million square foot office portfolio, (ii) 3,595
multifamily apartment units and (iii) fee interests in two parcels of land from which we receive rent under ground leases. We also
manage and own equity interests in unconsolidated Funds which, at December 31, 2018, owned an additional 1.8 million square
feet of office space. We manage our unconsolidated Funds alongside our Consolidated Portfolio, and we therefore present the
statistics for our office portfolio on a Total Portfolio basis. As of December 31, 2018, our portfolio (not including two parcels of
land from which we receive rent under ground leases), consisted of the following office and multifamily properties (both of which
include ancillary retail space):
Consolidated
Portfolio
Total
Portfolio
Office
Wholly-owned properties
Consolidated JV properties
Unconsolidated Fund properties
Multifamily
Wholly-owned properties
Total
53
10
—
63
10
73
53
10
8
71
10
81
Basis of Presentation
The accompanying financial statements are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries,
including our Operating Partnership and our consolidated JVs. All significant intercompany balances and transactions have been
eliminated in our consolidated financial statements. Our Operating Partnership and consolidated JVs are VIEs of which we are
the primary beneficiary. As of December 31, 2018, the total consolidated assets, liabilities and equity of the VIEs was $8.26 billion
(of which $7.78 billion related to investment in real estate), $4.41 billion and $3.85 billion (of which $1.45 billion related to
noncontrolling interests), respectively.
During the current reporting period, we reported our office rental revenues and tenant recoveries on a combined basis as Rental
revenues and tenant recoveries in our consolidated statements of operations and we reclassified the comparable periods to conform
to the current period presentation.
The accompanying financial statements have been prepared pursuant to the rules and regulations of the SEC in conformity
with US GAAP as established by the FASB in the ASC. 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 or class of properties, square footage, per square footage amounts, apartment units 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 PCAOB.
37
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates that affect
the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from
those estimates.
Investment in Real Estate
Acquisitions
We account for property acquisitions as asset acquisitions, and include the acquired properties results of operations in our
results of operations from the respective acquisition date. We allocate the purchase price, which includes the capitalized transaction
costs, to: (i) land, (ii) buildings and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place
at-market leases, (iv) acquired above- and below-market ground and tenant leases (including for renewal options), and if applicable
(v) assumed debt, based upon our estimates of expected future cash flows and other valuation techniques. Our estimates are based
upon expected future cash flows and other valuation techniques. We estimate the relative fair values of the tangible assets on an
‘‘as-if-vacant’’ basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the
property to the occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We
evaluate the time period over which we expect such occupancy level to 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 leases 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 the fair market rental rates for the corresponding in-place leases,
over the remaining non-cancelable term of the lease. Assumed debt is recorded at fair value based upon the present value of the
expected future payments. See Note 3 for our property acquisition disclosures.
Depreciation
Buildings and improvements are depreciated on a straight-line basis using an estimated life of forty years for buildings and
fifteen years for improvements, and are carried on our balance sheet, offset by the related accumulated depreciation and any
impairment charges, until they are sold. Tenant improvements are depreciated on a straight-line basis over the life of the related
lease, with any remaining balance depreciated in the period of any early lease termination. Acquired in-place leases are amortized
on a straight line basis over the weighted average remaining term of the acquired in-place leases, and are carried on our balance
sheet, offset by the related accumulated amortization, until the related building is either sold or impaired. Lease intangibles are
amortized on a straight-line basis over the related lease term, with any remaining balance amortized in the period of any early
lease termination. Acquired above- and below-market tenant leases are amortized/accreted on a straight line basis 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
revenue. Acquired above- and below-market ground leases, from which we earn ground rent income, are amortized/accreted on
a straight line basis over the life of the related lease and recorded either as an increase (for below-market leases) or a decrease (for
above-market leases) to rental revenue. Acquired above- and below-market ground leases, for which we incur ground rent expense,
are accreted/ amortized over the life of the related lease and recorded either as an increase (for below-market leases) or a decrease
(for above-market leases) to expense. We accelerate depreciation for affected assets when we renovate our buildings or existing
buildings are impacted by new developments. 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 our results of operations
for the respective period.
Real Estate Held for Sale
Properties are classified as held for sale in our consolidated balance sheets when they meet certain requirements, including
the approval of the sale of the property, the marketing of the property for sale, and our expectation that the sale will likely occur
within the next 12 months. Properties classified as held for sale are carried at the lower of their carrying value or fair value less
costs to sell, and we also cease to depreciate the property. As of December 31, 2018 and 2017, we did not have any properties
held for sale.
38
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Dispositions
Recognition of gains or losses from sales of investments in real estate requires that we meet certain revenue recognition criteria
and transfer control of the real estate to the buyer. The gain or loss recorded is measured as the difference between the sales price,
less costs to sell, and the carrying value of the real estate when we sell it. See Note 3 for our property disposition disclosures.
Cost capitalization
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 the activities that are necessary to begin
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. Capitalized costs are included in Property under development in our consolidated balance
sheets. Once major construction activity has ceased and the development or redevelopment property is in the lease-up phase, the
capitalized costs are transferred to (i) Land, (ii) Building and improvements and (iii) Tenant improvements and lease intangibles
on our consolidated balance sheets as the historical cost of the property. Demolition expenses and repairs and maintenance are
recorded as expense when incurred. During 2018, 2017 and 2016, we capitalized $78.7 million, $66.0 million and $31.6 million
of costs related to our developments, respectively, which included $3.5 million, $2.7 million and $1.2 million of capitalized interest,
respectively.
Investment in Unconsolidated Real Estate Funds
We manage and hold equity interests in three Funds: Fund X, Partnership X and the Opportunity Fund. As of December 31,
2018, we held direct and indirect equity interests of 71.3% of Fund X, 24.5% of Partnership X and 6.2% of the Opportunity Fund.
We account for our investments in the Funds using the equity method because we have significant influence but not control over
the Funds, and our Funds do not qualify as VIEs. Our investment balance includes our share of the net assets of the combined
Funds, acquisition basis difference, additional basis for capital raising costs, our share of our Funds' accumulated other
comprehensive income (loss) related to our Funds' derivatives, and notes receivable from our Funds. As of December 31, 2018
and 2017, the total basis difference was $2.2 million and $2.9 million, respectively. See Note 5 for our Fund disclosures.
Impairment of Long-Lived Assets
We periodically assess whether there has been any impairment in the carrying value of our properties and whenever events
or changes in circumstances indicate that the carrying value of a property may not be recoverable. An impairment charge would
be recorded if events or changes in circumstances indicate that a decline in the fair value below the carrying value has occurred
and the decline is other-than-temporary. Recoverability of the carrying value of our properties is measured by a comparison of
the carrying value to the undiscounted future cash flows expected to be generated by the property. If the carrying value exceeds
the estimated undiscounted future cash flows, an impairment loss is recorded equal to the difference between the property's carrying
value and its fair value based on the estimated discounted future cash flows. We also perform a similar periodic assessment for
our investments in our Funds. Based upon such periodic assessments, no impairments occurred during 2018, 2017 or 2016.
Cash and Cash Equivalents
We consider short-term investments with maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Rental revenues and tenant recoveries from tenant leases are included in Rental revenues and tenant recoveries in the
consolidated statements of operations. All of our tenant leases are classified as operating leases. For lease terms exceeding one
year, rental income is recognized on a straight-line basis over the lease term. Deferred rent receivables represent rental revenue
recognized on a straight-line basis in excess of billed rents. If a lease is canceled then the deferred rent is recognized over the new
remaining lease term. We recognized straight line rent of $18.8 million, $12.9 million and $13.6 million during 2018, 2017 and
2016, respectively. Rental revenue from month-to-month leases or leases with no scheduled rent increases or other adjustments
is recognized on a monthly basis when earned.
Lease termination fees, which are included in Rental revenues and tenant recoveries in the consolidated statements of operations,
are recognized on a straight line basis over the new remaining lease term when the related lease is canceled. We recognized lease
termination revenue of $1.6 million, $2.1 million and $2.4 million during 2018, 2017 and 2016, respectively.
39
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Tenant improvements constructed, and owned by us, and reimbursed by tenants are recorded as our assets, and the related
revenue, which are included in Rental revenues and tenant recoveries in the consolidated statements of operations, is recognized
over the related lease term. We recognized revenue for leasehold improvements of $3.5 million, $2.6 million and $2.6 million
during 2018, 2017 and 2016, respectively.
Estimated tenant recoveries for real estate taxes, common area maintenance and other recoverable operating expenses, which
are included in Rental revenues and tenant recoveries in the consolidated statements of operations, are recognized as revenue on
a gross basis in the period that the recoverable expenses are incurred. Subsequent to year-end, we perform reconciliations on a
lease-by-lease basis and bill or credit each tenant for any differences between the estimated expenses we billed to the tenant and
the actual expenses incurred.
Office parking revenues, which are included in office Parking and other income in our consolidated statements of operations,
are within the scope of Topic 606 (Revenue from Contracts with Customers), which we adopted in the first quarter of 2018 on a
prospective basis. See "Adopted ASUs" further below. The lease contracts generally make a specified number of parking spaces
available to the tenant, and we bill and recognize parking revenues on a monthly basis in accordance with the lease agreements
generally using the monthly parking rates in effect at the time of billing. Office parking revenues were $102.5 million, $96.2 million
and $88.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. Office parking receivables were $1.1 million
and $1.0 million as of December 31, 2018 and 2017, respectively, and are included in Tenant receivables in our consolidated
balance sheets.
Allowances for Tenant Receivables and Deferred Rent Receivables
We present our tenant receivables and deferred rent receivables net of allowances on our consolidated balance sheets. Tenant
receivables consist primarily of amounts due for contractual lease payments and reimbursements of common area maintenance
expenses, property taxes, and other costs recoverable from tenants. Deferred rent receivables represent the amount by which the
cumulative straight-line rental revenue recorded to date exceeds the cumulative cash rents billed to date under the lease agreement.
We consider many factors when evaluating the level of allowances necessary, including evaluations of individual tenant receivables,
historical loss activity, current economic conditions and other relevant factors. We generally obtain letters of credit or security
deposits from our tenants. The table below presents our allowances and security obtained from our tenants:
(In thousands)
December 31, 2018 December 31, 2017
Allowance for tenant receivables
Allowance for deferred rent receivables
Letters of credit from our tenants
Cash security deposits from our tenants
$
$
$
$
5,215
2,849
27,749
50,733
$
$
$
$
3,062
3,405
25,212
50,414
The table below presents the impact of the changes in our allowances on our results of operations:
(In thousands)
Year Ended December 31,
2017
2016
2018
Tenant receivables allowance - decrease in net income
Deferred rent receivables allowance - increase in net income
$
$
(2,154) $
$
556
(406) $
$
1,739
(422)
898
Insurance Recoveries
Insurance recoveries related to property damage are recorded as other income when payment is either received or receipt is
determined to be probable.
40
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Interest Income
Interest income from our short-term money market fund investments is recognized on an accrual basis. Interest income is
included in other income in the consolidated statements of operations.
Loan Costs
Loan costs incurred directly with the issuance of secured notes payable and revolving credit facilities are deferred and amortized
to interest expense over the respective loan or credit facility term. Any unamortized amounts are written off upon early repayment
of the secured notes payable, and the related cost and accumulated amortization are removed from our balance sheet.
To the extent that a refinancing is considered an exchange of debt with the same lender, we account for loan costs based upon
whether the old debt is determined to be modified or extinguished for accounting purposes. If the old debt is determined to be
modified then we (i) continue to defer and amortize any unamortized deferred loan costs associated with the old debt at the time
of the modification over the new term of the modified debt, (ii) defer and amortize the lender costs incurred in connection with
the modification over the new term of the modified debt, and (iii) expense all other costs associated with the modification. If the
old debt is determined to be extinguished then we (i) write off any unamortized deferred loan costs associated with the extinguished
debt at the time of the extinguishment and remove the related cost and accumulated amortization from our balance sheet, (ii)
expense all lender costs associated with the extinguishment, and (iii) defer and amortize all other costs incurred directly in connection
with the extinguishment over the term of the new debt.
In circumstances where we modify or exchange our revolving credit facility with the same lender, we account for the loan
costs based upon whether the borrowing capacity of the new arrangement is (a) equal to or greater than the borrowing capacity of
the old arrangement, or (b) less than the borrowing capacity of the old arrangement (borrowing capacity is defined as the product
of the remaining term and the maximum available credit). If the borrowing capacity of the new arrangement is greater than or
equal to the borrowing capacity of the old arrangement, then we (i) continue to defer and amortize the unamortized deferred loan
costs from the old arrangement over the term of the new arrangement and (ii) defer all lender and other costs incurred directly in
connection with the new arrangement over the term of the new arrangement. If the borrowing capacity of the new arrangement
is less than the borrowing capacity of the old arrangement, then we (i) write off any unamortized deferred loan costs at the time
of the transaction related to the old arrangement in proportion to the decrease in the borrowing capacity of the old arrangement
and (ii) defer all lender and other costs incurred directly in connection with the new arrangement over the term of the new
arrangement.
Deferred loan costs are presented on the balance sheet as a deduction from the carrying amount of our secured notes payable
and revolving credit facility. All loan costs expensed and deferred loan costs amortized are included in interest expense in our
consolidated statements of operations. See Note 7 for our loan cost disclosures.
Debt Discounts and Premiums
Debt discounts and premiums related to recording debt assumed in connection with property acquisitions at fair value are
generally amortized and accreted, respectively, on a straight-line basis over the remaining term of the related loan, which
approximates the effective interest method. The amortization/accretion is included in interest expense in our consolidated statements
of operations.
Derivative Contracts
We make use of interest rate swap and cap contracts to manage the risk associated with changes in interest rates on our floating-
rate debt. 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 also make use of interest rate caps to limit our exposure to interest rate increases
on our floating-rate debt. We do not speculate in derivatives and we do not make use of any other derivative instruments.
41
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
We adopted ASU No. 2017-12 on a prospective basis in the first quarter of 2018 - see "Adopted ASUs" further below. When
entering into derivative agreements, we generally elect to designate them as cash flow hedges for accounting purposes. Changes
in fair value of hedging instruments designated as cash flow hedges are recorded in accumulated other comprehensive income
(loss) (AOCI), which is a component of equity outside of earnings. For our Funds' hedging instruments designated as cash flow
hedges, we record our share of the changes in fair value of the hedging instrument in AOCI. Amounts recorded in AOCI related
to our designated hedges are reclassified to interest expense as interest payments are made on the hedged floating rate debt. Amounts
reported in AOCI related to our Funds' hedges are reclassified to income, including depreciation, from unconsolidated real estate
funds, as interest payments are made by our Funds on their hedged floating rate debt. Changes in fair value of hedging instruments
not designated as cash flow hedges are recorded as interest expense.
We present our derivatives on the balance sheet at fair value on a gross basis. Our share of the fair value of our Funds'
derivatives is included in our investment in unconsolidated real estate funds on our consolidated balance sheet. See Note 9 for our
derivative disclosures.
Stock-Based Compensation
We account for stock-based compensation, including stock options and LTIP Units, using the fair value method of accounting.
The estimated fair value of stock options and LTIP Units is amortized over the vesting period, which is based upon service. See
Note 12 for our stock-based compensation disclosures.
EPS
We calculate basic EPS by dividing the net income attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the respective period. We calculate diluted EPS by dividing the net income attributable
to common stockholders for the period by the weighted average number of common shares and dilutive instruments outstanding
during the respective period using the treasury stock method. Unvested LTIP Units contain non-forfeitable rights to dividends and
we account for them as participating securities and include them in the computation of basic and diluted EPS using the two-class
method. See Note 11 for our EPS disclosures.
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 services for our office segment include
primarily rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily
segment include primarily rental of apartments and other tenant services, including parking and storage space rental. See Note
14 for our segment disclosures.
Income Taxes
We have elected to be taxed as a REIT under the Code, commencing with our initial taxable year ended 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 various other requirements imposed by the Code 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 are unable to avail ourselves of certain savings provisions set forth in the
Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative
minimum tax for taxable years prior to 2018. We have elected to treat several of our subsidiaries as TRSs, which generally may
engage in any business, including the provision of customary or non-customary services to 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 TRSs did not have significant tax provisions or deferred income tax items for 2018, 2017 or 2016. Our subsidiaries
(other than our TRS), including our Operating Partnership, are partnerships, disregarded entities, QRSs or REITs, as applicable,
for federal income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss
from disregarded entities or flow-through entities is reportable in the income tax returns of the respective owners. Accordingly,
no income tax provision is included in our consolidated financial statements for these entities.
42
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
New Accounting Pronouncements
Changes to GAAP are implemented by the FASB in the form of ASUs. We consider the applicability and impact of all ASUs.
Other than the ASUs discussed below, the FASB has not issued any other ASUs during 2018 that we expect to be applicable and
have a material impact on our financial statements.
Adopted ASUs
During 2018 we adopted the ASUs listed below:
Revenue from Contracts with Customers
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, and supersedes Topic 605, "Revenue Recognition", and
most industry-specific guidance throughout the industry topics of the Codification. In March 2016, the FASB issued ASU No.
2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)", which amends Topic 606 and clarifies
the guidance for principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance
Obligations and Licensing" which amends Topic 606 and provides guidance for identifying performance obligations and licensing.
In May 2016, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients" which amends Topic
606 and provides guidance for a variety of revenue recognition related topics. In February 2017, the FASB issued ASU No.
2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" (Subtopic 610-20), which provides
guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. Sales of real
estate are now accounted for under Subtopic 610-20 which focuses on a transfer of control. The amendments in these ASUs were
effective in the first quarter of 2018 and were required to be applied on a retrospective basis. We adopted the ASU in the first
quarter of 2018 and it did not have a material impact on our financial statements. Most of our revenues are derived from lease
contracts with tenants and are not within the scope of the respective ASUs. Although our office parking revenues are within the
scope of the respective ASUs, the timing and pattern of revenue recognition was not impacted.
Derivatives and Hedging
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities". The ASU requires the entire change in the fair value of the hedging instrument included in
the assessment of hedge effectiveness be recorded in other comprehensive income. GAAP historically provided special hedge
accounting only for the portion of the hedge deemed to be “highly effective” and requires an entity to separately reflect the amount
by which the hedging instrument does not offset the hedged item, which is referred to as the “ineffective” amount. The amendments
are effective in the first quarter of 2019 and are required to be applied on a prospective basis. We early adopted the ASU in the
first quarter of 2018 and it did not have a material impact on our financial statements. The ASU requires the cumulative effect of
initially applying the ASU as an adjustment to AOCI with a corresponding adjustment to the opening balance of retained earnings
as of the beginning of the fiscal year in which the ASU is adopted. On January 1, 2018, we recorded such an adjustment to AOCI
and accumulated deficit of $211 thousand. See Note 10.
ASUs Not Yet Adopted
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The primary difference between Topic 842 and
current GAAP is the recognition of lease assets and liabilities on the balance sheet by lessees for leases classified as operating
leases under current GAAP. The accounting applied by lessors is largely unchanged from current GAAP, for example, the vast
majority of operating leases will remain classified as operating leases, and lessors will continue to recognize lease income for
those leases on a straight-line basis over the lease term. Topic 842 requires separation of the lease from the non-lease components
(for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Only the lease
components should be accounted for in accordance with Topic 842. The consideration in the contract is allocated to the lease and
non-lease components on a relative standalone selling price basis and the non-lease component would be accounted for in accordance
with ASC 606 ("Revenue from Contracts with Customers"). In July 2018, the FASB issued ASU No. 2018-11 which includes an
optional practical expedient for lessors to elect, by class of underlying asset, to not separate the lease from the non-lease components
if certain criteria are met. Based on our preliminary assessment, we expect that operating leases for which we are the lessor will
qualify for the single component presentation, and we therefore expect to elect adoption of this practical expedient.
43
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Topic 842 defines initial direct costs of a lease (which we have historically capitalized) as costs that would not have been
incurred had the lease not been executed. Costs to negotiate a lease that would have been incurred regardless of whether the lease
was executed, such as employee salaries, are not considered to be initial direct costs, and may not be capitalized. We capitalized
$7.9 million of leasing costs during the year ended December 31, 2018 that would not qualify as initial direct costs and would be
expensed under Topic 842. The expensing of those costs, adjusted for amortization expense, would have reduced net income
attributable to common stockholders by $6.0 million for the year ended December 31, 2018.
We pay rent under a ground lease which expires on December 31, 2086. See Note 16 for more information regarding this
ground lease. We currently account for the lease as an operating lease. We expect to recognize a right-of-use asset and lease
liability for this ground lease in the first quarter of 2019 when we adopt the ASU. We do not expect the change in accounting for
the ground lease to have a material impact on our financial position or results of operations.
The treatment of our revenues could be impacted by Topic 842, however, we do not expect any impact to be material to our
financial statements.
In December 2018, the FASB issued ASU 2018-20, an update to ASC Topic 842, Leases, which provides guidance on
accounting for sales and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for
contracts with lease and nonlease components. We do not expect the ASU to have a material impact on our financial statements.
The ASUs are effective in the first quarter of 2019 and are required to be adopted using either a) a modified retrospective
approach which results in a cumulative adjustment to the opening balance of retained earnings (accumulated deficit) on January
1, 2017, and restatement of the amounts presented prior to January 1, 2019 for leases that existed or were entered into after January
1, 2017, the beginning of the earliest comparative period presented in the 2019 consolidated financial statements, or b) a modified
retrospective transition method which results in a cumulative adjustment to the opening balance of retained earnings (accumulated
deficit) on January 1, 2019 for leases that existed or were entered into prior to January 1, 2019, the effective date of the ASU. All
leases entered into on or after January 1, 2019 would be accounted for as prescribed by ASC 842. ASC 842 provides a practical
expedient package that allows entities to not (a) reassess whether any expired or existing contracts are considered or contain leases;
(b) reassess the lease classification for any expired or existing leases; and (c) reassess initial direct costs for any existing leases.
The Company plans to elect the modified retrospective transition method for adoption on January 1, 2019 and expects to elect the
use of the practical expedient package described above. We plan to adopt the ASUs in the first quarter of 2019.
44
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
3. Investment in Real Estate
We account for our property acquisitions as asset acquisitions. Prior to January 1, 2017, we accounted for our property
acquisitions as business combinations. The acquired properties results of operations are included in our results of operations from
the respective acquisition dates.
2018 Acquisitions
During 2018, we did not purchase any properties.
2017 Acquisitions
During 2017, (i) a consolidated JV that we manage and in which we own an equity interest acquired three Class A office
properties (1299 Ocean Avenue, 429 Santa Monica Boulevard and 9665 Wilshire Boulevard), for which investors contributed
$284.0 million directly to the JV, and (ii) we acquired one wholly-owned Class A office property (9401 Wilshire Boulevard). The
table below summarizes the purchase price allocations for the acquisitions. The contract and purchase prices differ due to prorations
and similar matters.
(In thousands)
1299 Ocean
429 Santa
Monica
9665 Wilshire
9401
Wilshire(1)
Submarket
Acquisition date
Contract price
Building square footage
Investment in real estate:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Acquired above- and below-market leases, net
Assumed debt(2)
$
$
Santa Monica
Santa Monica
Beverly Hills
Beverly Hills
April 25
April 25
July 20
December 20
275,800
$
77,000
$
177,000
$
143,647
206
87
171
146
22,748
$
4,949
$
5,568
$
260,188
5,010
(10,683)
—
69,286
3,248
(722)
—
175,960
1,112
(4,339)
—
6,740
144,467
7,843
(11,559)
(36,460)
111,031
Net assets and liabilities acquired
$
277,263
$
76,761
$
178,301
$
_____________________________________________________
(1) We issued OP Units to the seller in connection with the acquisition of 9401 Wilshire. See Note 10 for more information.
(2) We assumed a loan from the seller in connection with the acquisition of 9401 Wilshire. At the date of acquisition, the loan
had a fair value of $36.5 million and a principal balance of $32.3 million. See Note 7 for more information.
45
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
2016 Acquisitions
Westwood Portfolio Acquisition
On February 29, 2016 (Acquisition Date), a consolidated JV which we manage and in which we own an equity interest
acquired four Class A office properties located in Westwood, California (Westwood Portfolio) for a contract price of $1.34 billion.
As of the Acquisition Date, we had contributed sixty-percent of the equity to the JV, which was subsequently reduced to thirty-
percent on May 31, 2016 (Sell Down Date) when we sold half of our ownership interest to a third party investor. The table below
summarizes our purchase accounting and funding sources for the acquisition. The contract and purchase price differ due to
prorations and similar matters.
(in thousands)
Actual at
Closing(1)
Pro Forma Sell
Down
Adjustments (2)
Pro Forma
Building square footage
1,725
1,725
Use of funds:
Land
Buildings and improvements
Tenant improvements and lease intangibles
Acquired above- and below-market leases, net(3)
Net assets and liabilities acquired
Source of funds:
Cash on hand(4)
Credit facility(5)
Non-recourse term loan, net(6)
Noncontrolling interests
Total source of funds
$
$
$
94,996
1,236,786
50,439
(49,708)
1,332,513
$
$
94,996
1,236,786
50,439
(49,708)
1,332,513
153,745
$
— $
153,745
290,000
568,768
320,000
(240,000)
—
240,000
50,000
568,768
560,000
$
1,332,513
$
— $
1,332,513
________________________________________________
(1) Reflects the purchase of the Westwood Portfolio on the Acquisition Date when we contributed sixty-percent of the
equity to the consolidated JV.
(2) Reflects our sale of thirty-percent of the equity in the JV on the Sell Down Date, presented as of the Acquisition
Date, treated as in-substance real estate, which reduced our ownership interest in the JV to thirty-percent. We sold
the interest for the $240.0 million we contributed plus an additional $1.1 million to compensate us for the cost of
holding the investment. We recognized a gain on the sale of $1.1 million. We used the proceeds from the sale to
pay down the balance owed on our revolving credit facility.
(3) As of the Acquisition Date, the weighted average remaining life of the acquired above- and below-market leases
was approximately 4.4 years.
(4) Cash paid included a $75.0 million deposit, $67.5 million paid at closing, and $11.2 million spent on loan costs in
connection with securing the $580.0 million term loan.
(5) Reflects borrowings using our credit facility, which bears interest at LIBOR + 1.40%. See Note 7 for information
regarding our credit facility.
(6) Reflects 100% (not our pro rata share) of a $580.0 million interest-only non-recourse loan, net of deferred loan
costs of $11.2 million incurred to secure the loan. The loan has a seven-year term and is secured by the Westwood
Portfolio. Interest on the loan is floating at LIBOR + 1.40%, which has been effectively fixed at 2.37% per annum
for five years through interest rate swaps. See Note 7 for information regarding this loan.
46
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
The table below presents the revenues and net income attributable to common stockholders from the Westwood Portfolio
included in the consolidated statement of operations from the Acquisition Date:
(in thousands)
Year Ended December 31,
2017
2016
2018
Total office revenues
Net income attributable to common stockholders(1)
$
$
102,398
6,163
$
$
96,106
6,346
$
$
80,464
2,998
______________________________________________________
(1) Excluding transaction costs, net income attributable to common stockholders was $6.2 million, $6.3 million and
$5.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The table below presents the historical results of Douglas Emmett, Inc. and the Westwood Portfolio on a combined basis as
if the acquisition was completed on January 1, 2016, based on our thirty-percent ownership interest and includes adjustments that
give effect to events that are (i) directly attributable to the acquisition, (ii) expected to have a continuing impact on us, and (iii)
are factually supportable. The pro forma reflects the hypothetical impact of the acquisition on us and does not purport to represent
what our results of operations would have been had the acquisition occurred on January 1, 2016, or project the results of operations
for any future period. The information does not reflect cost savings or operating synergies that may result from the acquisition or
the costs to achieve any such potential cost savings or operating synergies. Transaction costs related to the acquisition have been
excluded.
(in thousands, except per share information)
Year Ended
December 31,
2016
Pro forma revenues
Pro forma net income attributable to common stockholders
Pro forma net income attributable to common stockholders per share – basic
Pro forma net income attributable to common stockholders per share – diluted
$
$
$
$
755,878
84,319
0.56
0.55
47
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Other 2016 Acquisitions
During 2016, a consolidated JV which we manage and in which we own an equity interest acquired two Class A office
properties. As of July 21, 2016, we had contributed fifty-five percent of the equity to the JV, which was reduced to twenty-percent
when we sold thirty-five percent to a third party investor for $51.6 million, which included $194 thousand to compensate us for
the cost of holding the investment. We recognized a gain of $587 thousand on the sale, which is included in Gains on sales of
investments in real estate in our consolidated statements of operations. In addition to purchasing a thirty-five percent interest from
us, investors contributed $139.8 million to the JV. Including the effect of the sale of our interest, investors now hold an aggregate
of eighty-percent of the capital interests in the JV. As part of the acquisitions, the JV borrowed a $146.0 million under a three
year, interest only, non-recourse loan bearing interest at LIBOR + 1.55%. The loan was secured by the acquired properties. The
loan was refinanced in 2017. See Note 7. The table below summarizes the purchase accounting for the acquisitions. The contract
and purchase prices differ due to prorations and similar matters.
(in thousands)
12100 Wilshire
233 Wilshire
Submarket
Acquisition date
Contract price
Building square footage
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
Brentwood
Santa Monica
July 21
September 27
$
225,000
365
139,500
129
20,164
$
199,698
9,057
(4,523)
224,396
$
9,263
126,938
3,488
(1,838)
137,851
$
$
$
2016 Disposition
During 2016, we sold a 168,000 square foot Class A office property located in Sherman Oaks, California with a carrying value
of $42.8 million for a contract price of $56.7 million, and we incurred transaction costs of $1.2 million resulting in a net gain of
$12.7 million. The gain is included in Gains on sales of investments in real estate in our consolidated statements of operations.
48
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
4. Acquired Lease Intangibles
Summary of our Acquired Lease Intangibles
(In thousands)
December 31, 2018 December 31, 2017
Above-market tenant leases
Above-market tenant leases - accumulated amortization
Above-market ground lease where we are the lessor
Above-market ground lease - accumulated amortization
Acquired lease intangible assets, net
Below-market tenant leases
Below-market tenant leases - accumulated accretion
Above-market ground lease where we are the tenant
Above-market ground lease - accumulated accretion
Acquired lease intangible liabilities, net
$
$
$
$
5,595
(3,289)
1,152
(207)
3,251
112,175
(63,013)
4,017
(610)
52,569
$
$
$
$
7,177
(3,846)
1,152
(190)
4,293
127,606
(55,428)
4,017
(560)
75,635
Impact on the Consolidated Statements of Operations
The table below summarizes the net amortization/accretion related to our above- and below-market leases:
(In thousands)
Year Ended December 31,
2017
2016
2018
Net accretion of above- and below-market tenant lease assets
and liabilities(1)
Amortization of an above-market ground lease(2)
Accretion of an above-market ground lease liability(3)
Total
$
$
21,992
$
17,973
$
18,165
(17)
50
(17)
50
(17)
50
22,025
$
18,006
$
18,198
_______________________________________________________________________________________
(1) Recorded as a net increase to office and multifamily rental revenues.
(2) Recorded as a decrease to office parking and other income.
(3) Recorded as a decrease to office expense.
The table below presents the future net accretion related to our above- and below-market leases at December 31, 2018. The
above-market ground lease liability presented in the tables above will be offset against a right of use ground lease asset on January
1, 2019 when we adopt ASU No. 2016-02 - see Note 2, and there is therefore no future accretion for that lease reflected in the
table below.
Year ending December 31:
2019
2020
2021
2022
2023
Thereafter
Total
49
Net increase to
revenues
(In thousands)
15,521
$
12,516
6,813
4,157
2,542
4,362
45,911
$
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
5. Investments in Unconsolidated Real Estate Funds
Description of our Funds
We manage and own equity interests in three unconsolidated Funds, the Opportunity Fund, Fund X and Partnership X, through
which we and investors own eight office properties totaling 1.8 million square feet. During the third quarter of 2018 we purchased
an additional 1.9% interest in Fund X. We purchased a 3.7% interest in the Opportunity Fund during the second quarter of 2017
and 2.5% during the fourth quarter of 2017. The Opportunity Fund's only investment is a 13.1% interest in Fund X. At December 31,
2018, we held direct and indirect equity interests of 6.2% in the Opportunity Fund, 71.3% of Fund X and 24.5% of Partnership
X. Our Funds pay us fees and reimburse us for certain expenses related to property management and other services we provide.
We also receive distributions based on invested capital and on any profits that exceed certain specified cash returns to the investors.
The table below presents cash distributions received from our Funds:
(In thousands)
2018
2017
2016
Year Ended December 31,
Operating distributions received
Capital distributions received
Total distributions received
$
$
6,400
7,349
13,749
$
$
5,905
43,560
49,465
$
$
2,668
24,170
26,838
Summarized Financial Information for our Funds
The tables below present selected financial information for the Funds on a combined basis. The amounts presented reflect
100% (not our pro-rata share) of amounts related to the Funds, and are based upon historical acquired book value:
(In thousands)
December 31, 2018 December 31, 2017
Total assets
Total liabilities
Total equity
$
$
$
694,713
525,483
169,230
$
$
$
704,186
523,767
180,419
(In thousands)
2018
2017
2016
Year Ended December 31,
Total revenues
Operating income
Net income
$
$
$
79,590
22,959
6,260
$
$
$
75,896
20,640
5,085
$
$
$
73,171
19,477
8,213
6. Other Assets
(In thousands)
December 31, 2018 December 31, 2017
Restricted cash
Prepaid expenses
Other indefinite-lived intangibles
Furniture, fixtures and equipment, net
Other
Total other assets
$
$
50
121
$
7,830
1,988
1,101
3,719
121
9,235
1,988
1,155
5,943
14,759
$
18,442
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
7. Secured Notes Payable and Revolving Credit Facility, Net
Description
Principal
Balance as of
December 31,
2018
Principal
Balance as of
December 31,
2017
Maturity
Date (1)
Variable
Interest Rate
Fixed
Interest
Rate (2)
Swap
Maturity
Date
(In thousands)
$
—
—
— $
—
146,974
280,721
—
—
Wholly Owned Subsidiaries
Term loan(3)
Term loan(3)
Fannie Mae loan
Term loan(4)
Term loan(4)
Term loan(4)
Term loan(4)
Term loan(4)
Term loan(4)
Term loan(4)
Fannie Mae loan(4)
Fannie Mae loan(4)
Fannie Mae loan(4)
Term loan(5)
Revolving credit facility(6)
10/1/2019
4/15/2022
7/27/2022
11/1/2022
6/23/2023
12/23/2023
1/1/2024
3/3/2025
4/1/2025
12/1/2025
6/1/2027
6/1/2038
8/21/2020
Total Wholly Owned Subsidiary Debt
Consolidated JVs
Term loan(4)
Term loan(4)
Total Consolidated Debt(7)
Unamortized loan premium, net
2/28/2023
12/19/2024
145,000
340,000
180,000
400,000
360,000
220,000
300,000
335,000
102,400
115,000
550,000
31,582
105,000
3,183,982
580,000
400,000
4,163,982
3,986
—
—
N/A
2.77%
3.06%
2.64%
2.57%
3.62%
3.46%
3.84%
2.84%
2.76%
3.16%
4.55%
N/A
—
—
N/A
4/1/2020
7/1/2020
11/1/2020
7/1/2021
12/23/2021
1/1/2022
3/1/2023
3/1/2020
12/1/2020
6/1/2022
N/A
N/A
3/1/2021
1/1/2023
145,000 LIBOR + 1.25%
340,000 LIBOR + 1.40%
180,000 LIBOR + 1.45%
400,000 LIBOR + 1.35%
360,000 LIBOR + 1.55%
220,000 LIBOR + 1.70%
300,000 LIBOR + 1.55%
— LIBOR + 1.30%
102,400 LIBOR + 1.25%
115,000 LIBOR + 1.25%
550,000 LIBOR + 1.37%
32,213
N/A
— LIBOR + 1.40%
3,172,308
580,000
LIBOR + 1.40% 2.37%
LIBOR + 1.30% 3.47%
400,000
4,152,308
4,191
(39,109)
4,117,390
Unamortized deferred loan costs, net
Total Consolidated Debt, net
(33,938)
4,134,030
$
$
_____________________________________________________
Except as noted below, each loan (including our revolving credit facility) is non-recourse and secured by one or more separate collateral
pools consisting of one or more properties, and requires monthly payments of interest only with the outstanding principal due upon
maturity.
(1) Maturity dates include the effect of extension options.
(2) Includes the effect of interest rate swaps and excludes the effect of prepaid loan fees. See Note 9 for details of our interest rate
swaps. See below for details of our loan costs.
(3) At December 31, 2018, these loans have been paid off.
(4) Loan agreement includes a zero-percent LIBOR floor. The corresponding swaps do not include such a floor.
(5) Requires monthly payments of principal and interest. Principal amortization is based upon a 30-year amortization schedule.
(6) $400.0 million revolving credit facility. Unused commitment fees range from 0.15% to 0.20%.
(7) See Note 13 for our fair value disclosures.
51
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Debt Statistics
The following table summarizes our fixed and floating rate debt:
(In thousands)
Principal Balance as
of December 31, 2018
Principal Balance as
of December 31, 2017
Aggregate swapped to fixed rate loans
Aggregate fixed rate loans
Aggregate floating rate loans
Total Debt
$
$
3,882,400
$
31,582
250,000
4,163,982
$
3,547,400
459,908
145,000
4,152,308
The following table summarizes certain debt statistics:
Statistics for consolidated loans with interest fixed under the terms of the loan or a swap
Principal balance (in billions)
Weighted average remaining life (including extension options)
Weighted average remaining fixed interest period
Weighted average annual interest rate
$3.91
5.4 years
2.6 years
3.07%
Future Principal Payments
At December 31, 2018, the minimum future principal payments due on our secured notes payable and revolving credit facility
were as follows:
Year ending December 31:
Excluding Maturity
Extension Options
Including Maturity
Extension Options(1)
2019
2020
2021
2022
2023
Thereafter
(In thousands)
$
145,718
$
400,752
787
1,040,823
1,495,862
1,080,040
Total future principal payments
$
4,163,982
$
____________________________________________
145,718
105,752
787
920,823
1,160,862
1,830,040
4,163,982
(1) Our loan agreements generally require that we meet certain minimum financial thresholds to be able to
extend the loan maturity.
Loan Costs
Deferred loan costs are net of accumulated amortization of $24.2 million and $18.0 million at December 31, 2018 and
December 31, 2017, respectively. The table below presents loan costs, which are included in interest expense in our consolidated
statements of operations:
(In thousands)
Loan costs expensed
Deferred loan cost amortization
Total
Year Ended December 31,
2017
2016
2018
418
7,874
8,292
$
$
2,359
9,033
11,392
$
$
1,441
7,608
9,049
$
$
52
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
8. Interest Payable, Accounts Payable and Deferred Revenue
(In thousands)
December 31, 2018 December 31, 2017
Interest payable
Accounts payable and accrued liabilities
Deferred revenue
Total interest payable, accounts payable and deferred revenue
$
$
10,657
75,111
44,386
130,154
$
$
9,829
62,741
31,377
103,947
9. Derivative Contracts
Derivative Summary
As of December 31, 2018, all of our interest rate swaps, which include the interest rate swaps of our consolidated JVs and
our unconsolidated Funds, were designated as cash flow hedges:
Number of Interest
Rate Swaps
Notional
(In thousands)
Consolidated derivatives(1)(3)
Unconsolidated Funds' derivatives(2)(3)
27
4
$
$
3,882,400
510,000
___________________________________________________
(1) The notional amount reflects 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(2) The notional amount reflects 100%, not our pro-rata share, of our unconsolidated Funds' derivatives.
(3) See Note 13 for our derivative fair value disclosures.
Credit-risk-related Contingent Features
We have agreements with each of our interest rate swap 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, 2018, there have been no events of default with respect to our interest rate swaps or our consolidated JVs' or
unconsolidated Funds' interest rate swaps. We do not post collateral for our interest rate swap contract liabilities. The fair value
of our interest rate swap contract liabilities, including accrued interest and excluding credit risk adjustments, were as follows:
(In thousands)
December 31, 2018 December 31, 2017
Consolidated derivatives(1)
Unconsolidated Funds' derivatives(2)
$
$
1,681
$
— $
915
—
___________________________________________________
(1) Includes 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(2) Our unconsolidated Funds' did not have any derivatives in a liability position.
53
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Counterparty Credit Risk
We are subject to credit risk from the counterparties on our interest rate swap contract assets because we do not receive
collateral. We seek to minimize that risk by entering into agreements with a variety of high quality counterparties with investment
grade ratings. The fair value of our interest rate swap contract assets, including accrued interest and excluding credit risk adjustments ,
were as follows:
(In thousands)
December 31, 2018 December 31, 2017
Consolidated derivatives(1)
Unconsolidated Funds' derivatives(2)
$
$
76,021
12,576
$
$
60,093
9,350
___________________________________________________
(1) Includes 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(2) The amounts reflect 100%, not our pro-rata share, of our unconsolidated Funds' derivatives.
Impact of Hedges on AOCI and the Consolidated Statements of Operations
The table below presents the effect of our derivatives on our AOCI and the consolidated statements of operations:
(In thousands)
Year Ended December 31,
2018
2017
2016
Derivatives Designated as Cash Flow Hedges:
Consolidated derivatives:
Gain recorded in AOCI - adoption of ASU 2017-12(1)(2)
Gain recorded in AOCI before reclassifications(1)(2)
(Gain) loss reclassified from AOCI to Interest Expense(1)
Interest Expense presented in the consolidated statements of operations
(Gain) loss related to ineffectiveness recorded in Interest Expense
Unconsolidated Funds' derivatives (our share)(3):
Gain recorded in AOCI before reclassifications(1)
(Gain) loss reclassified from AOCI to Income, including depreciation, from
unconsolidated real estate funds(1)
Income, including depreciation, from unconsolidated real estate funds
presented in the consolidated statements of operations
__________________________________________________
$
$
$
$
$
$
$
$
(1) See Note 10 for our AOCI reconciliation.
(2) See Note 2 regarding the ASU adoption.
211
$
— $
—
22,723
$
(10,103) $
(133,402) $
— $
16,512
$
14,192
$
13,976
(145,176) $
$
51
25,917
(146,148)
(196)
3,052
$
3,275
(813) $
527
6,400
$
5,905
$
$
$
8
357
7,812
(3) We calculate our share by multiplying the total amount for each Fund by our equity interest in the respective Fund.
Future Reclassifications from AOCI
At December 31, 2018, our estimate of the AOCI related to derivatives designated as cash flow hedges, that will be reclassified
to earnings during the next year as interest rate swap payments are made, is as follows:
Consolidated derivatives:
Gains to be reclassified from AOCI to Interest Expense
Unconsolidated Funds' derivatives (our share):
Gains to be reclassified from AOCI to Income, including depreciation, from
unconsolidated real estate funds
$
$
36,161
2,565
(In thousands)
54
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
10. Equity
Transactions
2018 Transactions
During 2018, we (i) acquired 629 thousand OP Units in exchange for issuing an equal number of shares of our common
stock to the holders of the OP Units, (ii) acquired 3 thousand OP Units for $108 thousand in cash and (iii) issued 21 thousand
shares of our common stock for the exercise of 49 thousand stock options on a net settlement basis (net of the exercise price
and related taxes).
2017 Transactions
During 2017, we or our Operating Partnership, (i) acquired 1.1 million OP Units in exchange for issuing an equal number
of shares of our common stock to the holders of the OP Units, (ii) issued 1.3 million shares of our common stock for the
exercise of 3.9 million stock options on a net settlement basis (net of the exercise price and related taxes), (iii) issued
15.7 million shares of our common stock under our ATM program for net proceeds of $593.3 million, and (iv) issued 2.6
million OP Units valued at $105.7 million in connection with the acquisition of the 9401 Wilshire office property, of which
we subsequently acquired 248 thousand OP Units for $10.1 million in cash. One of our JVs acquired three office properties,
1299 Ocean Avenue, 429 Santa Monica and 9665 Wilshire, for which investors contributed $284.0 million directly to the JV.
2016 Transactions
During 2016 we (i) acquired 1.8 million OP Units in exchange for issuing an equal number of shares of our common
stock to the holders of OP Units, (ii) acquired 25 thousand OP Units for $826 thousand in cash, (iii) issued 1.5 million shares
of our common stock for the exercise of 7.6 million stock options on a net settlement basis (net of the exercise price and
related taxes), (iv) issued 1.4 million shares of our common stock under our ATM program for net proceeds of 49.4 million.
We also created two JVs to acquire various properties: (i) in the JV which acquired the Westwood Portfolio, investors
acquired an aggregate of seventy-percent of the capital interests, as a result of contributing $320 million directly to the JV for
a forty-percent interest and acquiring a thirty-percent interest from us for $241.1 million, (resulting in a gain of $1.1 million),
and (ii) in the second JV, which acquired two office properties, 12100 Wilshire and 233 Wilshire, investors acquired an
aggregate of eighty-percent of the capital interests, as a result of contributing $139.8 million directly to the JV and acquiring
a thirty-five-percent interest from us for $51.6 million (resulting in a gain of $587 thousand).
Noncontrolling Interests
Our noncontrolling interests consist of interests in our Operating Partnership and consolidated JVs which are not owned by
us. Noncontrolling interests in our Operating Partnership consist of OP Units and fully-vested LTIP Units, and represented
approximately 14% of our Operating Partnership's total interests as of December 31, 2018 when we and our Operating Partnership
had 170.2 million shares of common stock and 28.2 million OP Units and fully-vested LTIP Units outstanding. A share of our
common stock, an OP Unit and an LTIP Unit (once vested and booked up) have essentially the same economic characteristics,
sharing equally in the distributions from our Operating Partnership. Investors who own OP Units have the right to cause our
Operating Partnership to acquire their OP Units for an amount of cash per unit equal to the market value of one share of our
common stock at the date of acquisition, or, at our election, exchange their OP Units for shares of our common stock on a one-
for-one basis. LTIP Units have been granted to our key employees and non-employee directors as part of their compensation, see
Note 12.
55
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Changes in our Ownership Interest in our Operating Partnership
The table below presents the effect on our equity from net income attributable to common stockholders and changes in our
ownership interest in our Operating Partnership:
(In thousands)
Year Ended December 31,
2018
2017
2016
Net income attributable to common stockholders
$
116,086
$
94,443
$
85,397
Transfers from noncontrolling interests:
Exchange of OP Units with noncontrolling interests
Repurchase of OP Units from noncontrolling interests
Net transfers from noncontrolling interests
10,292
(59)
10,233
14,242
(6,764)
7,478
23,060
(498)
22,562
Change from net income attributable to common
stockholders and transfers from noncontrolling interests
$
126,319
$
101,921
$
107,959
AOCI Reconciliation(1)
The table below presents a reconciliation of our AOCI, which consists solely of adjustments related to derivatives designated
as cash flow hedges:
(In thousands)
Year Ended December 31,
2018
2017
2016
Beginning balance
Adoption of ASU 2017-12 - cumulative opening balance adjustment(2)
$
43,099
$
15,156
$
(9,285)
211
—
—
Consolidated derivatives:
Other comprehensive income before reclassifications
Reclassification of (gains) losses from AOCI to Interest Expense
22,723
(10,103)
16,512
13,976
Unconsolidated Funds' derivatives (our share):
Other comprehensive income before reclassifications
Reclassification of (gains) losses from AOCI to Income, including
depreciation, from unconsolidated real estate funds
Net current period OCI
OCI attributable to noncontrolling interests
OCI attributable to common stockholders
3,052
3,275
(813)
15,070
(4,225)
10,845
527
34,290
(6,347)
27,943
14,192
25,917
8
357
40,474
(16,033)
24,441
Ending balance
$
53,944
$
43,099
$
15,156
__________________________________________________
(1)
(2)
See Note 9 for the details of our derivatives and Note 13 for our derivative fair value disclosures.
See Note 2 regarding our adoption of the ASU on January 1, 2018.
56
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Dividends (unaudited)
Our common stock dividends paid during 2018 are classified for federal income tax purposes as follows:
Record Date
Paid Date
12/29/2017
3/29/2018
6/29/2018
1/15/2018
4/17/2018
7/13/2018
9/28/2018
Total / Weighted Average
10/16/2018
$
$
Dividend
Per Share
Ordinary
Income
Percentage
Capital
Gain
Percentage
Return of
Capital
Percentage
Amount
Qualifying
as a Section
199A
Dividend
0.25
0.25
0.25
0.25
1.00
24.7%
24.7%
24.7%
24.7%
24.7%
—%
—%
—%
—%
—%
75.3%
75.3%
75.3%
75.3%
75.3%
24.7%
24.7%
24.7%
24.7%
24.7%
11. EPS
The table below presents the calculation of basic and diluted EPS:
Numerator (In thousands):
Net income attributable to common stockholders
Allocation to participating securities: Unvested LTIP Units
Numerator for basic and diluted net income attributable to
common stockholders
Denominator (In thousands):
Weighted average shares of common stock outstanding - basic
Effect of dilutive securities: Stock options(1)
Weighted average shares of common stock and common stock
equivalents outstanding - diluted
Basic EPS:
Net income attributable to common stockholders per share
Diluted EPS:
Net income attributable to common stockholders per share
____________________________________________________
$
$
$
$
Year Ended December 31,
2018
2017
2016
$
116,086
(546)
$
94,443
(626)
85,397
(468)
115,540
$
93,817
$
84,929
169,893
160,905
9
325
149,299
3,891
169,902
161,230
153,190
0.68
$
0.58
$
0.57
0.68
$
0.58
$
0.55
(1) The following securities were excluded from the calculation of diluted EPS because including them would be anti-
dilutive to the calculation:
Year Ended December 31,
2017
2016
2018
26,661
813
24,810
274
25,110
578
(In thousands)
OP Units
Vested LTIP Units
57
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
12. Stock-Based Compensation
2016 Omnibus Stock Incentive Plan
The Douglas Emmett, Inc. 2016 Omnibus Stock Incentive Plan, our stock incentive plan (our "2016 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 3.4 million shares available for
grant as of December 31, 2018. Awards such as LTIP Units, deferred stock and restricted stock, which deliver the full value of
the underlying shares, are counted against the Plan limits as two shares. Awards such as stock options and stock appreciation rights
are counted as one share. The number of shares reserved under our 2016 Plan is also subject to adjustment in the event of a stock
split, stock dividend or other change in our capitalization. Shares of stock underlying any awards that are forfeited, canceled or
otherwise terminated (other than by exercise) are added back to the shares of stock available for future issuance under the 2016
Plan. For options exercised, our policy is to issue common stock on a net settlement basis - net of the exercise price and related
taxes.
Until it expired in 2016, we made grants under our 2006 Omnibus Stock Incentive Plan (our "2006 Plan"), which was
substantially similar to our 2016 Plan. No further awards may be granted under our 2006 Plan, although awards granted under
the 2006 Plan in the past and which are still outstanding will continue to be governed by the terms of our 2006 Plan.
Our 2016 and 2006 Plans (the "Plans") are administered by the compensation committee of our board of directors. The
compensation committee may interpret our Plans and make all determinations necessary or desirable for the administration of our
Plans. 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 2016 Plan. All officers, employees, directors and other key personnel
(including consultants and prospective employees) are eligible to participate in our 2016 Plan.
We have made certain awards in the form of a separate series of units of limited partnership interests in our Operating Partnership
called LTIP Units, which can be granted either as free-standing awards or in tandem with other awards under our 2016 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, and/or achievement of
pre-established performance goals, financial metrics and other objectives. Once vested, LTIP Units can generally be converted to
OP Units on a one for one basis, provided our stock price increases by more than a specified hurdle.
Employee Awards
We grant stock-based compensation in the form of LTIP Units as a part of our annual incentive compensation to various
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 date. 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. We
have also made long-term grants in the form of LTIP Units to certain employees, which generally vest in equal annual installments
over four to five calendar years following the grant date, and some of these grants include a portion which vests at the date of
grant. In aggregate, we granted 898 thousand, 800 thousand and 704 thousand LTIP Units to employees during 2018, 2017 and
2016, respectively.
Non-Employee Director Awards
As annual fees for their services, each of our non-employee directors receives a grant of LTIP Units that vests on a quarterly
basis during the year the services are rendered, which is the calendar year following the grant date. We granted 37 thousand,
28 thousand and 35 thousand LTIP Units to our non-employee directors during 2018, 2017 and 2016, respectively.
Compensation Expense
Total stock-based compensation expense, net of capitalized amounts, was $22.3 million, $18.5 million and $17.4 million
during 2018, 2017 and 2016, respectively. Certain amounts of stock-based compensation expense are capitalized for employees
who provide leasing and construction services. We capitalized $5.0 million, $2.5 million, and $1.5 million during 2018, 2017 and
2016, respectively. At December 31, 2018, the total unrecognized stock-based compensation expense for unvested LTIP Unit
awards was $19.4 million, which will be recognized over a weighted-average term of two years.
58
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Stock-Based Award Activity
The table below presents our outstanding stock options activity:
Fully Vested Stock Options:
Outstanding at December 31, 2015
Exercised
Outstanding at December 31, 2016
Exercised
Outstanding at December 31, 2017
Exercised
Outstanding at December 31, 2018
Number of
Stock
Options
(Thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
(Months)
Total
Intrinsic
Value
(Thousands)
Intrinsic
Value of
Options
Exercised
(Thousands)
11,535
$
(7,566) $
$
3,969
(3,920) $
$
49
(49) $
—
18.04
20.98
12.43
12.43
12.66
12.66
23
27
16
$
$
$
151,569
95,770
1,375
$
$
$
104,108
102,963
1,196
The table below presents our unvested LTIP Units activity:
Unvested LTIP Units:
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Granted
Vested
Forfeited
Outstanding at December 31, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2018
Number of
Units
(Thousands)
Weighted
Average
Grant Date
Fair Value
Grant Date
Fair Value
(Thousands)
1,096
739
$
$
(778) $
(17) $
1,040
828
$
$
(807) $
(5) $
1,056
935
$
$
(1,036) $
(10) $
$
945
19.85
27.62
22.23
27.77
23.46
29.89
25.40
31.36
26.98
27.01
25.82
34.18
28.20
$
$
$
$
$
$
$
$
$
20,420
17,293
473
24,745
20,497
172
25,247
26,740
333
59
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
13. Fair Value of Financial Instruments
Our estimates of the fair value of financial instruments were determined using available market information and widely used
valuation methods. Considerable judgment is necessary to interpret market data and determine an estimated fair value. The use
of different market assumptions or valuation methods may have a material effect on the estimated fair values. The FASB 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, 2018, we did not have any fair value estimates of financial instruments using Level 3 inputs.
Financial instruments disclosed at fair value
Short term financial instruments: The carrying amounts for cash and cash equivalents, tenant receivables, revolving credit line,
interest payable, accounts payable, security deposits and dividends payable approximate fair value because of the short-term nature
of these instruments.
Secured notes payable: See Note 7 for the details of our secured notes payable. We estimate the fair value of our consolidated
secured notes payable by calculating the credit-adjusted present value of the principal and interest payments for each secured note
payable. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs, assumes that the
loans will be outstanding through maturity, and excludes any maturity extension options. The table below presents the estimated
fair value and carrying value of our secured notes payable (excluding our, revolving credit facility), the carrying value includes
unamortized loan premium and excludes unamortized deferred loan fees:
(In thousands)
December 31, 2018 December 31, 2017
Fair value
Carrying value
$
$
4,087,979
4,062,968
$
$
4,195,489
4,156,499
Financial instruments measured at fair value
Derivative instruments: See Note 9 for the details of our derivatives. We present our derivatives on the balance sheet at fair value,
on a gross basis, excluding accrued interest. We estimate the fair value of our derivative instruments by calculating the credit-
adjusted present value of the expected future cash flows of each derivative. The calculation incorporates the contractual terms of
the derivatives, observable market interest rates which we consider to be Level 2 inputs, and credit risk adjustments to reflect the
counterparty's as well as our own nonperformance risk. Our derivatives are not subject to master netting arrangements. The table
below presents the estimated fair value of our derivatives:
(In thousands)
December 31, 2018
December 31, 2017
Derivative Assets:
Fair value - consolidated derivatives(1)
Fair value - unconsolidated Funds' derivatives(2)
Derivative Liabilities:
Fair value - consolidated derivatives(1)
Fair value - unconsolidated Funds' derivatives(2)
$
$
$
$
___________________________________________________________________________________
73,414
12,228
$
$
1,530
$
— $
60,069
9,437
807
—
(1) Consolidated derivatives, which include 100%, not our pro-rata share, of our consolidated JVs' derivatives, are included
in interest rate contracts in our consolidated balance sheets. The fair values exclude accrued interest which is included
in interest payable in the consolidated balance sheet.
(2) Reflects 100%, not our pro-rata share, of our unconsolidated Funds' derivatives. Our pro-rata share of the amounts
related to the unconsolidated Funds' derivatives is included in our Investment in unconsolidated real estate funds in
our consolidated balance sheets. See Note 17 regarding our unconsolidated Funds debt and derivatives.
60
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
14. Segment Reporting
Segment information is prepared on the same basis that our management reviews information for operational decision-making
purposes. We operate in two business segments: (i) the acquisition, 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. The
table below presents the operating activity of our reportable segments:
(In thousands)
Office Segment
Total office revenues
Office expenses
Office segment profit
Multifamily Segment
Total multifamily revenues
Multifamily expenses
Multifamily segment profit
Year Ended December 31,
2017
2016
2018
$
$
777,931
(252,751)
525,180
$
715,546
(233,633)
481,913
645,633
(214,546)
431,087
103,385
(28,116)
75,269
96,506
(24,401)
72,105
96,918
(23,317)
73,601
Total profit from all segments
$
600,449
$
554,018
$
504,688
The table below presents a reconciliation of the total profit from all segments to net income attributable to common stockholders:
(In thousands)
Total profit from all segments
General and administrative
Depreciation and amortization
Other income
Other expenses
Income, including depreciation, from unconsolidated real
estate funds
Interest expense
Demolition expenses
Income before gains
Gains on sales of investments in real estate
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to common stockholders
Year Ended December 31,
2018
2017
2016
$
$
600,449
(38,641)
(309,864)
11,414
(7,472)
6,400
(133,402)
(272)
128,612
—
128,612
(12,526)
116,086
$
$
554,018
(36,234)
(276,761)
9,712
(7,037)
5,905
(145,176)
—
104,427
—
104,427
(9,984)
94,443
$
$
504,688
(34,957)
(248,914)
8,759
(9,477)
7,812
(146,148)
—
81,763
14,327
96,090
(10,693)
85,397
61
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
15. Future Minimum Lease Rental Receipts
We lease space to tenants primarily under non-cancelable operating leases that generally contain provisions for a base rent
plus reimbursement of certain operating expenses, and we own fee interests in two parcels of land from which we receive rent
under ground leases. The table below presents the future minimum base rentals on our non-cancelable office tenant and ground
leases at December 31, 2018:
Year Ending December 31,
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total future minimum base rentals(1)
$
$
578,162
531,875
437,528
353,395
269,535
656,926
2,827,421
_____________________________________________________
(1) Does not include (i) residential leases, which typically have a term of one year or less, (ii) holdover
rent, (ii) other types of rent such as storage and antenna rent, (iv) tenant reimbursements, (v) straight
line rent, (vi) amortization/accretion of acquired above/below-market lease intangibles and (vii)
percentage rents. The amounts assume that early termination options held by tenants are not
exercised.
16. Future Minimum Lease Rental Payments
We pay rent under a ground lease which expires on December 31, 2086. The rent is fixed at $733 thousand per year until
February 28, 2029, and will then reset to the greater of the existing ground rent or market. We incurred ground rent expense of
$733 thousand during 2018, 2017 and 2016, respectively. The table below, which assumes that the ground rent payments will
continue to be $733 thousand per year after February 28, 2029, presents the future minimum ground lease payments as of
December 31, 2018:
Year ending December 31:
(In thousands)
$
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
$
733
733
733
733
733
46,178
49,843
62
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
17. Commitments, Contingencies and Guarantees
Legal Proceedings
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of
our business. Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings
that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results
of operations.
Concentration of Risk
We are subject to credit risk with respect to our tenant receivables and deferred rent receivables related to our tenant leases.
Our tenants' ability to honor the terms of their respective leases remains dependent upon economic, regulatory and social factors.
We seek to minimize our credit risk from our tenant leases by (i) targeting smaller, more affluent tenants, from a diverse mix of
industries, (ii) performing credit evaluations of prospective tenants, and (iii) obtaining security deposits or letters of credit from
our tenants. In 2018, 2017 and 2016, no tenant accounted for more than 10% of our total revenues. See Note 2 for the details of
our allowances for tenant receivables and deferred rent receivables.
All of our properties, including the properties of our consolidated JVs and unconsolidated Funds, are located in Los Angeles
County, California and Honolulu, Hawaii, and we are therefore susceptible to adverse economic and regulatory developments, as
well as natural disasters, in those markets.
We are subject to credit risk with respect to our interest rate swap counterparties that we use to manage the risk associated
with our floating rate debt. We do not post or receive collateral with respect to our swap transactions. See Note 9 for the details
of our interest rate contracts. We seek to minimize our credit risk by entering into agreements with a variety of high quality
counterparties with investment grade ratings.
We have significant cash balances invested in a variety of short-term money market funds that are intended to preserve principal
value and maintain a high degree of liquidity while providing current income. These investments are not insured against loss of
principal and there is no guarantee that our investments in these funds will be redeemable at par value. We also have significant
cash balances in bank accounts with high quality financial institutions with investment grade ratings. Interest bearing bank accounts
at each U.S. banking institution are insured by the FDIC up to $250 thousand.
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 have identified twenty-eight buildings in our Consolidated Portfolio, and four buildings owned by our unconsolidated
Funds which contain asbestos, and would have to be removed in compliance with applicable environmental regulations if these
properties are demolished or undergo major renovations. As of December 31, 2018, the obligations to remove the asbestos from
these properties if they were demolished or undergo major renovations have indeterminable settlement dates, and we are unable
to reasonably estimate the fair value of the associated conditional asset retirement obligation. As of December 31, 2018, the
obligations to remove the asbestos from properties that are currently undergoing major renovations, or that we plan to renovate in
the future, are not material to our financial statements.
Development and Other Contracts
During 2016, we commenced building an additional 491 new apartments at our Moanalua Hillside Apartments in Honolulu,
Hawaii. We also invested additional capital to upgrade the existing buildings, improve the parking and landscaping, built a new
leasing and management office, and constructed a new fitness facility and two pools. In West Los Angeles, we are building a high-
rise apartment building with 376 apartments. As of December 31, 2018, we had an aggregate remaining contractual commitment
for these development projects of approximately $202.9 million. As of December 31, 2018, we had an aggregate remaining
contractual commitment for repositionings, capital expenditure projects and tenant improvements of approximately $55.3 million.
63
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Guarantees
We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-
outs for our unconsolidated Funds' debt. We have also guaranteed the related swaps. Our Funds have agreed to indemnify us for
any amounts that we would be required to pay under these agreements. As of December 31, 2018, all of the obligations under the
related debt and swap agreements have been performed in accordance with the terms of those agreements. The table below
summarizes our Funds' debt as of December 31, 2018. The amounts represent 100% (not our pro-rata share) of the amounts related
to our Funds:
Fund(1)
Partnership X(2)(4)
Fund X(3)(4)
Loan
Maturity
Date
3/1/2023
7/1/2024
Principal
Balance
(In millions)
$
$
110.0
400.0
510.0
Variable Interest
Rate
Swap Fixed
Interest Rate
LIBOR + 1.40%
LIBOR + 1.65%
2.30%
3.44%
Swap
Maturity
Date
3/1/2021
7/1/2022
___________________________________________________
(1) See Note 5 for more information regarding our unconsolidated Funds.
(2) Floating rate term loan, swapped to fixed, which is secured by two properties and requires monthly payments of
interest only, with the outstanding principal due upon maturity. As of December 31, 2018, assuming a zero-percent
LIBOR interest rate during the remaining life of the swap, the maximum future payments under the swap agreement
were $2.2 million.
(3) Floating rate term loan, swapped to fixed, which is secured by six properties and requires monthly payments of
interest only, with the outstanding principal due upon maturity. As of December 31, 2018, assuming a zero-percent
LIBOR interest rate during the remaining life of the swap, the maximum future payments under the swap agreement
were $25.4 million. Loan agreement includes the requirement to purchase an interest rate cap if one month LIBOR
equals or exceeds 3.56% for fourteen consecutive days after the related swap matures.
(4) Loan agreement includes a zero-percent LIBOR floor. The corresponding swaps do not include such a floor.
64
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
18. Quarterly Financial Information (unaudited)
The tables below present selected quarterly information for 2018 and 2017:
(In thousands, except per share amounts)
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 and
common stock equivalents outstanding - diluted
(In thousands, except per share amounts)
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 and
common stock equivalents outstanding - diluted
$
$
$
$
$
$
$
$
$
$
Three Months Ended
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
212,247
32,631
28,206
0.17
0.17
$
$
$
$
$
219,469
37,033
31,684
0.19
0.19
$
$
$
$
$
223,308
35,416
30,561
0.18
0.18
$
$
$
$
$
226,292
23,532
25,635
0.15
0.15
169,601
169,916
169,926
170,121
169,625
169,926
169,931
170,121
Three Months Ended
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
194,481
21,780
19,049
0.12
0.12
$
$
$
$
$
199,632
22,153
20,244
0.13
0.13
$
$
$
$
$
208,749
28,508
25,614
0.15
0.15
$
$
$
$
$
209,190
31,986
29,536
0.17
0.17
152,490
155,898
165,471
169,521
153,655
155,952
165,520
169,562
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Dear Fellow Shareholders,
We had a very successful year in 2018:
•
We grew our Funds from Operations by 12.7% and our
Adjusted Funds from Operations by 7.4%, raised our
dividend by 4% and still have one of the best dividend
coverage ratios in our peer group.
•
We signed 800 office leases, with straight line rents
averaging 31% higher than the prior lease for the same
space.
•
With the exception of a loan on a residential development project, we have no term loans due until 2022.
Our leverage remains low, and we have plenty of dry powder for external growth.
• Our development platform has matured to the point where it’s making meaningful additions to FFO:
• We’ve completed construction of 491 new units at our Moanalua Apartment community in Honolulu,
which now has almost 1,200 units. With the upgrades to our existing buildings and new amenities,
this is now one of the most modern and desirable workforce housing communities in Hawaii.
•
In Brentwood, construction of our 376 unit, 34 story luxury apartment tower is in full swing. This will be
the first new high rise residential property west of the 405 freeway in more than 40 years, and represents
one of the most exceptional residential development opportunities in all of West Los Angeles.
• We are already seeing accelerated rent growth from our efforts to reposition several office buildings where
we felt targeted investment could significantly increase rental rates.
•
Sustainability efforts remained a major priority as we continued to reduce our carbon footprint and deliver
meaningful savings. We reduced our electrical usage per square foot by another 2.1%, an impressive eleventh
consecutive year of lower consumption. The EPA certified over 95% of our eligible office space as ENERGY
STAR compliant, placing almost all of our buildings in the top 25 percent of office buildings nationwide in
energy efficiency.
Looking forward, 2019 promises to be another strong year:
•
The fundamentals in our markets remain solid. We see significant demand and strong rent growth. Tenant demand
remains diverse and includes the fastest growing industries in the United States. Our markets remain some of the
most supply constrained in the nation, and the current construction pipeline for new office is de minimis.
•
We are moving forward with exciting plans to add approximately 500 new workforce apartments in downtown
Honolulu by converting a 25-story, 490,000 square foot office tower to for-rent housing. This project will address
the severe rental housing shortage in Honolulu, and support the City’s efforts to transform downtown into a vibrant
24-hour community.
•
A number of office property redevelopments that were started in 2018 will soon be complete, and the early returns
are very promising. We plan to pursue more repositioning opportunities during 2019 and beyond, which will provide
significant incremental revenue growth and a very high return on our invested capital. We are also tracking potential
acquisitions that could continue the strong external growth we have achieved in recent years.
As I do every year, I promise that the Douglas Emmett team will continue to be committed to the high standards that
have been our hallmark for over 45 years.
Sincerely,
Jordan L. Kaplan, President & CEO
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
LEGAL COUNSEL
Kenneth M. Panzer
Chief Operating Officer
Christopher H. Anderson
Retired Real Estate Executive
and Investor
Leslie E. Bider
Vice Chairman - PinnacleCare
Dr. David T. Feinberg
Vice President – Google Health
Virginia A. McFerran
Partner - Optum Ventures
Thomas E. O’Hern
Chief Executive Officer -
Macerich Company
William E. Simon, Jr.
Partner - Massey Quick Simon & Co., LLC
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
1299 Ocean Avenue
Suite 1000
Santa Monica, CA 90401
May 30, 2019 9:00 a.m. (PDT)
Kenneth M. Panzer
Chief Operating Officer
Peter D. Seymour
Chief Financial Officer
Kevin A. Crummy
Chief Investment Officer
CORPORATE HEADQUARTERS
1299 Ocean Avenue
Suite 1000
Santa Monica, CA 90401
310.255.7700
INVESTOR INFORMATION
For additional information,
please contact:
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
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 Office and Residential Properties
Los Angeles Submarkets
Warner Center/Woodland Hills
Santa Monica
Westwood
Brentwood
Burbank
Beverly Hills
Century City
Encino/Sherman Oaks
Olympic Corridor
Honolulu Submarket
www.douglasemmett.com
Annual Report
2018