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Section 1: 10-Q (10-Q)

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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number: 001-33106
399117310_deiblacklogoaa06.jpg

Douglas Emmett, Inc.
(Exact name of registrant as specified in its charter)
Maryland
20-3073047
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1299 Ocean Avenue, Suite 1000
,
Santa Monica
,
California
90401
(Address of principal executive offices)
(Zip Code)

(310) 255-7700
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share
 
DEI
 
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at
August 1, 2019
Common Stock, $0.01 par value per share
 
175,250,468
shares

1


DOUGLAS EMMETT, INC.
FORM 10-Q

Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Overview
 
 
 
Ground Lease
 
 
 
     Other Assets
 
 
 
 
     Equity
 
     EPS
 
 
 
 
 
     Subsequent Events
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents
Glossary

Abbreviations used in this Report:

AOCI
Accumulated Other Comprehensive Income (Loss)
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM
At-the-Market
BOMA
Building Owners and Managers Association
CEO
Chief Executive Officer
CFO
Chief Financial Officer
Code
Internal Revenue Code of 1986, as amended
DEI
Douglas Emmett, Inc.
EPS
Earnings Per Share
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFO
Funds from Operations
Fund X
Douglas Emmett Fund X, LLC
Funds
Unconsolidated institutional real estate funds (Fund X, Partnership X and Opportunity Fund)
GAAP
Generally Accepted Accounting Principles (United States)
JV
Joint Venture
LIBOR
London Interbank Offered Rate
LTIP Units
Long-Term Incentive Plan Units
NAREIT
National Association of Real Estate Investment Trusts
OCI
Other Comprehensive Income (Loss)
OP Units
Operating Partnership Units
Operating Partnership
Douglas Emmett Properties, LP
Opportunity Fund
Fund X Opportunity Fund, LLC
Partnership X
Douglas Emmett Partnership X, LP
PCAOB
Public Company Accounting Oversight Board (United States)
REIT
Real Estate Investment Trust
Report
Quarterly Report on Form 10-Q
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
TRS
Taxable REIT subsidiary(ies)
US
United States
USD
United States Dollar
VIE
Variable Interest Entity(ies)


3

Table of Contents
Glossary

Defined terms used in this Report:

Annualized Rent
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.
Consolidated Portfolio
Includes the properties in our consolidated results, which includes the properties owned by our consolidated JVs.
Funds From
Operations (FFO)

We calculate FFO in accordance with the standards established by NAREIT by excluding gains (or losses) on sales of investments in real estate, 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 we believe it is useful to our investors. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Report for a discussion of FFO.
Net Operating Income
(NOI)

We calculate NOI 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 we believe it is useful to our investors. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Report for a discussion of our Same Property NOI.
Occupancy Rate
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.
Recurring Capital
Expenditures
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 or lender requirements.
Rentable Square Feet

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.
Same Properties
Our consolidated 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.

4

Table of Contents
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 for the fiscal year ended December 31, 2018. 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.


5

Table of Contents


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Douglas Emmett, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
Unaudited
 
 
Assets
 

 
 

Investment in real estate:
 

 
 

Land
$
1,100,412

 
$
1,065,099

Buildings and improvements
8,436,246

 
7,995,203

Tenant improvements and lease intangibles
859,618

 
840,653

Property under development
70,834

 
129,753

Investment in real estate, gross
10,467,110

 
10,030,708

Less: accumulated depreciation and amortization
(2,374,596
)
 
(2,246,887
)
Investment in real estate, net
8,092,514

 
7,783,821

Ground lease right-of-use asset
7,481

 

Cash and cash equivalents
303,962

 
146,227

Tenant receivables, net
5,199

 
4,371

Deferred rent receivables, net
131,518

 
124,834

Acquired lease intangible assets, net
2,993

 
3,251

Interest rate contract assets
16,788

 
73,414

Investment in unconsolidated real estate funds
106,017

 
111,032

Other assets
11,239

 
14,759

Total Assets
$
8,677,711

 
$
8,261,709

 
 
 
 
Liabilities
 

 
 

Secured notes payable and revolving credit facility, net
$
4,304,913

 
$
4,134,030

Ground lease liability
10,885

 

Interest payable, accounts payable and deferred revenue
117,672

 
130,154

Security deposits
52,141

 
50,733

Acquired lease intangible liabilities, net
42,503

 
52,569

Interest rate contract liabilities
51,672

 
1,530

Dividends payable
45,565

 
44,263

Total liabilities
4,625,351

 
4,413,279

 
 
 
 
Equity
 

 
 

Douglas Emmett, Inc. stockholders' equity:
 

 
 

Common Stock, $0.01 par value, 750,000,000 authorized, 175,222,968 and 170,214,809 outstanding at June 30, 2019 and December 31, 2018, respectively
1,752

 
1,702

Additional paid-in capital
3,484,180

 
3,282,316

Accumulated other comprehensive (loss) income
(25,853
)
 
53,944

Accumulated deficit
(964,927
)
 
(935,630
)
Total Douglas Emmett, Inc. stockholders' equity
2,495,152

 
2,402,332

Noncontrolling interests
1,557,208

 
1,446,098

Total equity
4,052,360

 
3,848,430

Total Liabilities and Equity
$
8,677,711

 
$
8,261,709

See accompanying notes to the consolidated financial statements.

6

Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Operations
(Unaudited; in thousands, except per share data)



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Revenues
 

 
 

 
 

 
 

Office rental
 

 
 

 
 

 
 

Rental revenues and tenant recoveries
$
171,674

 
$
164,815

 
$
338,909

 
$
323,639

Parking and other income
30,515

 
28,946

 
60,570

 
57,455

Total office revenues
202,189

 
193,761

 
399,479

 
381,094

 
 
 
 
 
 
 
 
Multifamily rental
 

 
 

 
 

 
 

Rental revenues
26,308

 
23,655

 
51,201

 
46,716

Parking and other income
2,037

 
2,053

 
4,040

 
3,906

Total multifamily revenues
28,345

 
25,708

 
55,241

 
50,622

 
 
 
 
 
 
 
 
Total revenues
230,534

 
219,469

 
454,720

 
431,716

 
 
 
 
 
 
 
 
Operating Expenses
 

 
 

 
 

 
 

Office expenses
64,308

 
61,818

 
127,757

 
122,174

Multifamily expenses
7,712

 
6,908

 
15,267

 
13,606

General and administrative expenses
9,159

 
9,437

 
18,991

 
19,004

Depreciation and amortization
78,724

 
73,379

 
158,597

 
145,877

Total operating expenses
159,903

 
151,542

 
320,612

 
300,661

 
 
 
 
 
 
 
 
Operating income
70,631

 
67,927

 
134,108

 
131,055

 
 
 
 
 
 
 
 
Other income
2,892

 
2,792

 
5,790

 
5,422

Other expenses
(1,807
)
 
(2,086
)
 
(3,652
)
 
(3,819
)
Income, including depreciation, from unconsolidated real estate funds
2,207

 
1,668

 
3,758

 
3,174

Interest expense
(34,063
)
 
(33,268
)
 
(67,356
)
 
(66,168
)
Net income
39,860

 
37,033

 
72,648

 
69,664

Less:  Net income attributable to noncontrolling interests
(5,894
)
 
(5,349
)
 
(9,981
)
 
(9,774
)
Net income attributable to common stockholders
$
33,966

 
$
31,684

 
$
62,667

 
$
59,890

 
 
 
 
 
 
 
 
Net income attributable to common stockholders per share – basic
$
0.20

 
$
0.19

 
$
0.36

 
$
0.35

Net income attributable to common stockholders per share – diluted
$
0.20

 
$
0.19

 
$
0.36

 
$
0.35

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.26

 
$
0.25

 
$
0.52

 
$
0.50

 
See accompanying notes to the consolidated financial statements.

7

Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited and in thousands)



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income
$
39,860

 
$
37,033

 
$
72,648

 
$
69,664

Other comprehensive (loss) income: cash flow hedges
(81,613
)
 
18,994

 
(114,921
)
 
63,363

Comprehensive (loss) income
(41,753
)
 
56,027

 
(42,273
)
 
133,027

Less: Comprehensive loss (income) attributable to noncontrolling interests
18,923

 
(10,878
)
 
25,143

 
(28,750
)
Comprehensive (loss) income attributable to common stockholders
$
(22,830
)
 
$
45,149

 
$
(17,130
)
 
$
104,277

 
See accompanying notes to the consolidated financial statements.



8

Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Equity
(Unaudited and in thousands)


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Shares of Common Stock
Beginning balance
170,237

 
169,901

 
170,215

 
169,565

Exchange of OP units for common stock
54

 
20

 
76

 
342

Issuance of common stock
4,932

 

 
4,932

 

Exercise of stock options

 

 

 
14

Ending balance
175,223

 
169,921

 
175,223

 
169,921

 
 
 
 
 

 
 
 
 

Common Stock
Beginning balance
$
1,702

 
$
1,699

 
$
1,702

 
$
1,696

Exchange of OP units for common stock
1

 

 
1

 
3

Issuance of common stock
49

 

 
49

 

Ending balance
$
1,752

 
$
1,699

 
$
1,752

 
$
1,699

 
 
 
 
 

 
 
 
 

Additional Paid-in Capital
Beginning balance
$
3,282,388

 
$
3,277,421

 
$
3,282,316

 
$
3,272,539

Exchange of OP units for common stock
859

 
281

 
1,222

 
5,477

Repurchase of OP Units with cash

 
(59
)
 
(291
)
 
(59
)
Issuance of common stock
200,933

 

 
200,933

 

Taxes paid on exercise of stock options

 

 

 
(314
)
Ending balance
$
3,484,180

 
$
3,277,643

 
$
3,484,180

 
$
3,277,643

 
 
 
 
 

 
 
 
 

AOCI
Beginning balance
$
30,943

 
$
74,021

 
$
53,944

 
$
43,099

ASU 2017-12 adoption

 

 

 
211

Cash flow hedge fair value adjustments
(56,796
)
 
13,465

 
(79,797
)
 
44,176

Ending balance
$
(25,853
)
 
$
87,486

 
$
(25,853
)
 
$
87,486

 
 
 
 
 

 
 
 
 

Accumulated Deficit
Beginning balance
$
(953,335
)
 
$
(894,289
)
 
$
(935,630
)
 
$
(879,810
)
ASU 2016-02 adoption

 

 
(2,144
)
 

ASU 2017-12 adoption

 

 

 
(211
)
Net income attributable to common stockholders
33,966

 
31,684

 
62,667

 
59,890

Dividends
(45,558
)
 
(42,480
)
 
(89,820
)
 
(84,954
)
Ending balance
$
(964,927
)
 
$
(905,085
)
 
$
(964,927
)
 
$
(905,085
)
 
 
 
 
 
 
 
 
 
Noncontrolling Interests
Beginning balance
$
1,426,484

 
$
1,467,615

 
$
1,446,098

 
$
1,464,525

ASU 2016-02 adoption

 

 
(355
)
 

Net income attributable to noncontrolling interests
5,894

 
5,349

 
9,981

 
9,774

Cash flow hedge fair value adjustments
(24,817
)
 
5,529

 
(35,124
)
 
18,976

Contributions
176,000

 

 
176,000

 

Distributions
(28,214
)
 
(13,029
)
 
(43,974
)
 
(26,115
)
Exchange of OP units for common stock
(860
)
 
(281
)
 
(1,223
)
 
(5,480
)
Repurchase of OP Units with cash

 
(49
)
 
(216
)
 
(49
)
Stock-based compensation
2,721

 
3,409

 
6,021

 
6,912

Ending balance
$
1,557,208

 
$
1,468,543

 
$
1,557,208

 
$
1,468,543

 
 
 
 
 

 
 
 
 


9

Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Equity
(Unaudited and in thousands)

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Total Equity
Beginning balance
$
3,788,182

 
$
3,926,467

 
$
3,848,430

 
$
3,902,049

ASU 2016-02 adoption

 

 
(2,499
)
 

Net income
39,860

 
37,033

 
72,648

 
69,664

Cash flow hedge fair value adjustments
(81,613
)
 
18,994

 
(114,921
)
 
63,152

Issuance of common stock, net
200,982

 

 
200,982

 

Repurchase of OP Units with cash

 
(108
)
 
(507
)
 
(108
)
Taxes paid on exercise of stock options

 

 

 
(314
)
Contributions
176,000

 

 
176,000

 

Dividends
(45,558
)
 
(42,480
)
 
(89,820
)
 
(84,954
)
Distributions
(28,214
)
 
(13,029
)
 
(43,974
)
 
(26,115
)
Stock-based compensation
2,721

 
3,409

 
6,021

 
6,912

Ending balance
$
4,052,360

 
$
3,930,286

 
$
4,052,360

 
$
3,930,286


See accompanying notes to the consolidated financial statements.

10

Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)


    
 
Six Months Ended June 30,
 
2019
 
2018
Operating Activities
 

 
 

Net income
$
72,648

 
$
69,664

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Income, including depreciation, from unconsolidated real estate funds
(3,758
)
 
(3,174
)
Depreciation and amortization
158,597

 
145,877

Net accretion of acquired lease intangibles
(8,516
)
 
(12,295
)
Straight-line rent
(6,684
)
 
(9,191
)
Increase in the allowance for doubtful accounts
9

 
1,335

Deferred loan costs amortized and written off
4,380

 
4,279

Amortization of loan premium
(102
)
 
(102
)
Derivative non-cash market value adjustments
(7
)
 

Amortization of stock-based compensation
5,013

 
5,964

Operating distributions from unconsolidated real estate funds
3,756

 
3,174

Change in working capital components:
 

 
 

Tenant receivables
(837
)
 
(1,616
)
Interest payable, accounts payable and deferred revenue
(2,222
)
 
4,974

Security deposits
501

 
95

Other assets
5,398

 
6,896

Net cash provided by operating activities
228,176

 
215,880

 
 
 
 
Investing Activities
 

 
 

Capital expenditures for improvements to real estate
(83,944
)
 
(73,127
)
Capital expenditures for developments
(30,327
)
 
(26,474
)
Property acquisition
(364,524
)
 

Acquisition of additional interests in unconsolidated real estate funds
(7,518
)
 

Capital distributions from unconsolidated real estate funds
3,869

 
3,774

Net cash used in investing activities
(482,444
)
 
(95,827
)
 
 
 
 
Financing Activities
 

 
 

Proceeds from borrowings
832,318

 
535,000

Repayment of borrowings
(657,673
)
 
(546,979
)
Loan cost payments
(6,625
)
 
(2,924
)
Contributions from noncontrolling interests in consolidated JVs
163,556

 

Distributions paid to noncontrolling interests
(31,530
)
 
(26,114
)
Dividends paid to common stockholders
(88,518
)
 
(84,868
)
Taxes paid on exercise of stock options

 
(314
)
Repurchase of OP Units
(507
)
 
(108
)
Proceeds from issuance of common stock, net
200,982

 

Net cash provided by (used in) financing activities
412,003

 
(126,307
)
 
 
 
 
Increase (decrease) in cash and cash equivalents and restricted cash
157,735

 
(6,254
)
Cash and cash equivalents and restricted cash - beginning balance
146,348

 
176,766

Cash and cash equivalents and restricted cash - ending balance
$
304,083

 
$
170,512


11

Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)



Supplemental Cash Flows Information

 
Six Months Ended June 30,
 
2019
 
2018
Operating Activities
 
 
 
Cash paid for interest, net of capitalized interest
$
62,985

 
$
61,228

Capitalized interest paid
$
1,897

 
$
1,558

 
 
 
 
Non-cash Investing Transactions
 
 
 
Accrual for additions to real estate and developments
$
16,687

 
$
16,329

Capitalized stock-based compensation for improvements to real estate and developments
$
1,008

 
$
948

Removal of fully depreciated and amortized tenant improvements and lease intangibles
$
30,586

 
$
22,157

Removal of fully amortized acquired lease intangible assets
$
1,859

 
$
1,180

Removal of fully accreted acquired lease intangible liabilities
$
4,212

 
$
8,899

Property acquisition accrual
$
1,361

 
$

Recognition of ground lease right-of-use asset - Adoption of ASU 2016-02
$
10,885

 
$

Above-market ground lease intangible liability offset against right-of-use asset - Adoption of ASU 2016-02
$
3,408

 
$

Recognition of ground lease liability - Adoption of ASU 2016-02
$
10,885

 
$

 
 
 
 
Non-cash Financing Transactions
 
 
 
Gain recorded in AOCI - Adoption of ASU 2017-12 - consolidated derivatives
$

 
$
211

(Loss) gain recorded in AOCI - consolidated derivatives
$
(89,483
)
 
$
58,890

(Loss) gain recorded in AOCI - unconsolidated Funds' derivatives (our share)
$
(6,928
)
 
$
6,404

Non-cash contributions from noncontrolling interests in consolidated JVs
$
12,444

 
$

Non-cash distributions to noncontrolling interests
$
12,444

 
$

Dividends declared
$
89,820

 
$
84,954

Exchange of OP units for common stock
$
1,223

 
$
5,480


See accompanying notes to the consolidated financial statements.



12

Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited)




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 June 30, 2019, our Consolidated Portfolio consisted of (i) a 16.6 million square foot office portfolio, (ii) 4,069 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 June 30, 2019, 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 June 30, 2019, our portfolio (not including two parcels of land from which we receive rent under ground leases), consisted of the following properties (both of which include ancillary retail space):
 
Consolidated Portfolio
 
Total
Portfolio
Office
 
 
 
Wholly-owned properties
53
 
53
Consolidated JV properties
11
 
11
Unconsolidated Fund properties
 
8
 
64
 
72
 
 
 
 
Multifamily
 
 
 
Wholly-owned properties
10
 
10
Consolidated JV properties
1
 
1
 
11
 
11
 
 
 
 
Total
75
 
83

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 June 30, 2019, the total consolidated assets, liabilities and equity of the VIEs was $8.68 billion (of which $8.09 billion related to investment in real estate), $4.63 billion and $4.05 billion (of which $1.56 billion related to noncontrolling interests), respectively.

We report our office rental revenues and tenant recoveries on a combined basis as Rental revenues and tenant recoveries under Office rental in our consolidated statements of operations, and we reclassified the comparable periods to conform to the current period presentation.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the financial statements prepared in conformity with US GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited interim financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2018 Annual Report on Form 10-K and the notes thereto. Any references to the number or class of properties, square footage, per square footage amounts, apartment units and geography, are outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the PCAOB.

13

Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

2. Summary of Significant Accounting Policies

On January 1, 2019, we adopted ASUs that changed our accounting policy for leases. See "New Accounting Pronouncements" below. We have not made any other changes to our significant accounting policies disclosed in our 2018 Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with US 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.

Revenue Recognition

Office parking revenues, which are included in Parking and other income under Office rental in our consolidated statements of operations, are within the scope of Topic 606 (Revenue from Contracts with Customers). Our 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 $26.9 million and $25.7 million for the three months ended June 30, 2019 and 2018, and $53.3 million and $50.8 million for the six months ended June 30, 2019 and 2018, respectively. Office parking receivables were $1.1 million as of June 30, 2019 and December 31, 2018, and are included in Tenant receivables in our consolidated balance sheets.

Income Taxes

We have elected to be taxed as a REIT under the Code. 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. We are subject to corporate-level tax on the earnings that we derive through our TRS.

New Accounting Pronouncements 

Changes to US 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 that we expect to be applicable and have a material impact on our financial statements.

ASUs Adopted

ASU 2016-02 (Topic 842 - "Leases")

In February 2016, the FASB issued ASU No. 2016-02, (Topic 842 - "Leases"). The primary impact of the ASU is the recognition of lease assets and liabilities on the balance sheet by lessees for leases classified as operating leases. The accounting applied by lessors is largely unchanged. For example, the vast majority of operating leases remain classified as operating leases, and lessors continue to recognize lease payments for those leases on a straight-line basis over the lease term.

We adopted the ASU on January 1, 2019 using the modified retrospective transition method. We recorded cumulative adjustments of $2.1 million and $0.4 million to the opening balances of accumulated deficit and noncontrolling interests, respectively, for leasing expenses related to leases that were entered into before the adoption date but commenced after the adoption date. The ASU provides a practical expedient package, which we elected to use, that allows entities (a) not to reassess whether any expired or existing contracts as of the adoption date are considered or contain leases; (b) not to reassess the lease classification for any expired or existing leases as of the adoption date; and (c) not to reassess initial direct costs for any existing leases as of the adoption date. All leases entered into on or after the adoption date were accounted for under the ASU.


14

Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

We lease space to tenants at our office and multifamily properties. Under the ASU, all of our tenant leases continue to be classified as operating leases. The ASU continues to require that lease payments for operating leases be recognized over the lease term on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which benefit is expected to be derived from the use of the underlying asset. If collectibility of the lease payments is not probable at the commencement date, then the lease income should be limited to the lesser of the income recognized on a straight-line basis or cash basis. If the assessment of collectibility changes after the commencement date, any difference between the lease income that would have been recognized on a straight-line basis and cash basis must be recognized as a current-period adjustment to lease income.

The ASU 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 are accounted for in accordance with the ASU. 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. Our office tenant leases include a lease component for the rental income and a non-lease component for the related tenant recoveries. We determined that our office tenant leases qualify for the single component presentation and we adopted the practical expedient. We account for the combined components under the ASU.

Rental revenues and tenant recoveries from our office tenant leases is included in Rental revenues and tenant recoveries under Office rental in our consolidated statements of operations. Rental revenues from our multifamily tenant leases is included in multifamily Rental revenues in our consolidated statements of operations. Rental revenue recognized on a straight-line basis in excess of billed rents is included in Deferred rent receivables in our consolidated balance sheets. See Note 15 for more information regarding the future lease rental receipts from our operating leases.

The ASU defines initial direct costs of a lease, which may be 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 historically capitalized most of our leasing costs. We expensed $1.1 million and $2.1 million during the three and six months ended June 30, 2019, respectively, of leasing costs related to our tenant leases that did not qualify as initial direct costs of a lease, which are included in General and administrative expenses in our consolidated statements of operations.

We pay rent under a ground lease which expires on December 31, 2086. Upon adoption of the ASU, we continued to classify the lease as an operating lease, and we recognized a right-of-use asset for the land and a lease liability for the future lease payments of $10.9 million. We calculated the carrying value of the right-of-use asset and lease liability by discounting the future lease payments using our incremental borrowing rate. We adjusted the right-of-use asset carrying value for a related above-market ground lease liability of $3.4 million, which reduced the carrying value of the asset to $7.5 million. We continued to recognize the lease payments as expense, which is included in Office expenses in our Consolidated Statements of Operations. See Note 4 for more information regarding this ground lease. See Note 13 for the fair value disclosures related to the ground lease liability.

In December 2018, the FASB issued ASU 2018-20, an update to ASU 2016-02, 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 adopted the ASU and it did not have a material impact on our financial statements.

In March 2019, the FASB issued ASU 2019-01, an update to ASU 2016-02, which provides guidance on transition disclosures related to Topic 250 "Accounting Changes and Error Corrections" and other technical updates. We adopted the ASU and it did not have a material impact on our financial statements.

15

Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

3. Investment in Real Estate

We account for our property acquisitions as asset acquisitions. The acquired property's results of operations are included in our results of operations from the respective acquisition date. On June 7, 2019, we acquired The Glendon, a residential community in Westwood, and on June 28, 2019, we contributed the property to a consolidated JV that we manage and in which we own a twenty percent capital interest. The table below summarizes the purchase price allocation for the acquisition. The contract and purchase prices differ due to prorations and similar adjustments:

(In thousands, except number of units)
The Glendon
 
 
Submarket
West Los Angeles
Acquisition date
June 7
Contract price
$
365,100

Number of multifamily units
350
Retail square footage
50

 
 
Investment in real estate:
 
Land
$
32,773

Buildings and improvements
333,624

Tenant improvements and lease intangibles
2,301

Acquired above- and below-market leases, net
(2,114
)
Net assets and liabilities acquired
$
366,584




4. Ground Lease

We pay rent under a ground lease located in Honolulu, Hawaii, which expires on December 31, 2086. The rent is fixed at $733 thousand per year until February 28, 2029, after which it will reset to the greater of the existing ground rent or market. As of June 30, 2019, the right-of-use asset carrying value of this ground lease was $7.5 million and the ground lease liability was $10.9 million. We incurred ground rent expense of $183 thousand for the three months ended June 30, 2019 and 2018, and $363 thousand and $366 thousand for the six months ended June 30, 2019 and 2018, respectively, which is included in Office expenses in our Consolidated Statements of Operations. 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 June 30, 2019:
Twelve months ending June 30:
(In thousands)
 
 
2020
$
733

2021
733

2022
733

2023
733

2024
733

Thereafter
45,811

Total future minimum lease payments
$
49,476




16

Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

5. Acquired Lease Intangibles

Summary of our Acquired Lease Intangibles

 (In thousands)
June 30, 2019
 
December 31, 2018
 
 
 
 
Above-market tenant leases
$
3,759

 
$
5,595

Above-market tenant leases - accumulated amortization
(1,702
)
 
(3,289
)
Above-market ground lease where we are the lessor
1,152

 
1,152

Above-market ground lease - accumulated amortization
(216
)
 
(207
)
Acquired lease intangible assets, net
$
2,993

 
$
3,251

 
 
 
 
Below-market tenant leases
$
110,100

 
$
112,175

Below-market tenant leases - accumulated accretion
(67,597
)
 
(63,013
)
Above-market ground lease where we are the tenant(1)

 
4,017

Above-market ground lease - accumulated accretion(1)

 
(610
)
Acquired lease intangible liabilities, net
$
42,503

 
$
52,569


______________________________________________
(1) Upon adoption of ASU 2016-02 on January 1, 2019 we adjusted the ground lease right-of-use asset carrying value for the carrying value of the above-market ground lease - see Notes 2 and 4.


Impact on the Consolidated Statements of Operations

The table below summarizes the net amortization/accretion related to our above- and below-market leases:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 (In thousands)
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net accretion of above- and below-market tenant lease assets and liabilities(1)
$
4,400

 
$
6,134

 
$