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Section 1: 10-Q (10-Q)

Document
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 March 31, 2018
 
Commission file number 001-33106
393418639_deiblacklogoaa01.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.)
 
808 Wilshire Boulevard, Suite 200, 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)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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  x     
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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 x

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
May 4, 2018
Common Stock, $0.01 par value per share
 
169,917,966
shares

1


DOUGLAS EMMETT, INC.
FORM 10-Q

Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents
Glossary

Abbreviations used in this Report:

AOCI
Accumulated Other Comprehensive Income (Loss)
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
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, real estate depreciation and amortization (other than 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
in Item 2 for a discussion of FFO.
Net Operating Income
(NOI)

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 in Item 2 for a discussion of our Same Properties 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 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 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 Lease
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.

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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 2017 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.


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Table of Contents


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Douglas Emmett, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
 
 
 
 
Unaudited
 
 
Assets
 

 
 

Investment in real estate:
 

 
 

Land
$
1,062,326

 
$
1,062,345

Buildings and improvements
7,914,592

 
7,886,201

Tenant improvements and lease intangibles
773,065

 
756,190

Property under development
96,920

 
124,472

Investment in real estate, gross
9,846,903

 
9,829,208

Less: accumulated depreciation and amortization
(2,067,299
)
 
(2,012,752
)
Investment in real estate, net
7,779,604

 
7,816,456

Property held for sale, net
17,576

 

Cash and cash equivalents
183,556

 
176,645

Tenant receivables, net
2,871

 
2,980

Deferred rent receivables, net
111,005

 
106,021

Acquired lease intangible assets, net
3,998

 
4,293

Interest rate contract assets
98,909

 
60,069

Investment in unconsolidated real estate funds
110,117

 
107,735

Other assets
16,264

 
18,442

Total Assets
$
8,323,900

 
$
8,292,641

 
 
 
 
Liabilities
 

 
 

Secured notes payable and revolving credit facility, net
$
4,098,900

 
$
4,117,390

Interest payable, accounts payable and deferred revenue
136,874

 
103,947

Security deposits
49,943

 
50,414

Acquired lease intangible liabilities, net
69,187

 
75,635

Interest rate contract liabilities
46

 
807

Dividends payable
42,483

 
42,399

Total liabilities
4,397,433

 
4,390,592

 
 
 
 
Equity
 

 
 

Douglas Emmett, Inc. stockholders' equity:
 

 
 

Common Stock, $0.01 par value, 750,000,000 authorized, 169,900,749 and 169,564,927 outstanding at March 31, 2018 and December 31, 2017, respectively
1,699

 
1,696

Additional paid-in capital
3,277,421

 
3,272,539

Accumulated other comprehensive income
74,021

 
43,099

Accumulated deficit
(894,289
)
 
(879,810
)
Total Douglas Emmett, Inc. stockholders' equity
2,458,852

 
2,437,524

Noncontrolling interests
1,467,615

 
1,464,525

Total equity
3,926,467

 
3,902,049

Total Liabilities and Equity
$
8,323,900

 
$
8,292,641

See accompanying notes to the consolidated financial statements.

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



 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
Revenues
 

 
 

Office rental
 

 
 

Rental revenues
$
147,771

 
$
133,016

Tenant recoveries
11,053

 
11,050

Parking and other income
28,509

 
26,282

Total office revenues
187,333

 
170,348

 
 
 
 
Multifamily rental
 

 
 

Rental revenues
23,061

 
22,241

Parking and other income
1,853

 
1,892

Total multifamily revenues
24,914

 
24,133

 
 
 
 
Total revenues
212,247

 
194,481

 
 
 
 
Operating Expenses
 

 
 

Office expenses
60,356

 
54,885

Multifamily expenses
6,698

 
5,947

General and administrative
9,567

 
10,156

Depreciation and amortization
72,498

 
67,374

Total operating expenses
149,119

 
138,362

 
 
 
 
Operating income
63,128

 
56,119

 
 
 
 
Other income
2,630

 
2,162

Other expenses
(1,733
)
 
(1,724
)
Income, including depreciation, from unconsolidated real estate funds
1,506

 
2,177

Interest expense
(32,900
)
 
(36,954
)
Net income
32,631

 
21,780

Less:  Net income attributable to noncontrolling interests
(4,425
)
 
(2,731
)
Net income attributable to common stockholders
$
28,206

 
$
19,049

 
 
 
 
Net income attributable to common stockholders per share – basic
$
0.17

 
$
0.12

Net income attributable to common stockholders per share – diluted
$
0.17

 
$
0.12

 
 
 
 
Dividends declared per common share
$
0.25

 
$
0.23

 
See accompanying notes to the consolidated financial statements.

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



 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
Net income
$
32,631

 
$
21,780

Other comprehensive income: cash flow hedges
44,369

 
9,829

Comprehensive income
77,000

 
31,609

Less: Comprehensive income attributable to noncontrolling interests
(17,872
)
 
(4,858
)
Comprehensive income attributable to common stockholders
$
59,128

 
$
26,751

 
See accompanying notes to the consolidated financial statements.



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


 
Three Months Ended March 31,
 
2018
 
2017
Operating Activities
 

 
 

Net income
$
32,631

 
$
21,780

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

 
 

Income, including depreciation, from unconsolidated real estate funds
(1,506
)
 
(2,177
)
Depreciation and amortization
72,498

 
67,374

Net accretion of acquired lease intangibles
(6,152
)
 
(4,192
)
Straight-line rent
(5,172
)
 
(3,588
)
Increase (decrease) in the allowance for doubtful accounts
1,691

 
(6
)
Deferred loan costs amortized and written off
2,309

 
2,098

Amortization of loan premium
(51
)
 

Non-cash market value adjustments on interest rate contracts

 
13

Amortization of stock-based compensation
3,051

 
2,708

Operating distributions from unconsolidated real estate funds
1,506

 
2,177

Change in working capital components:
 

 
 

Tenant receivables
(1,582
)
 
(1,220
)
Interest payable, accounts payable and deferred revenue
16,944

 
22,641

Security deposits
(471
)
 
163

Other assets
1,921

 
(219
)
Net cash provided by operating activities
117,617

 
107,552

 
 
 
 
Investing Activities
 

 
 

Capital expenditures for improvements to real estate
(25,259
)
 
(25,280
)
Capital expenditures for developments
(11,018
)
 
(9,905
)
Deposits for property acquisitions

 
(24,000
)
Capital distributions from unconsolidated real estate funds
1,953

 
1,407

Net cash used in investing activities
(34,324
)
 
(57,778
)
 
 
 
 
Financing Activities
 

 
 

Proceeds from borrowings
485,000

 
88,000

Repayment of borrowings
(502,808
)
 
(68,145
)
Loan cost payments
(2,785
)
 
(85
)
Contributions from noncontrolling interests in consolidated JVs

 
250

Distributions paid to noncontrolling interests
(13,085
)
 
(9,632
)
Dividends paid to common stockholders
(42,391
)
 
(34,852
)
Taxes paid on exercise of stock options
(313
)
 
(52,704
)
Net cash used in financing activities
(76,382
)
 
(77,168
)
 
 
 
 
Increase (decrease) in cash and cash equivalents and restricted cash
6,911

 
(27,394
)
Cash and cash equivalents and restricted cash - beginning balance
176,766

 
113,048

Cash and cash equivalents and restricted cash - ending balance
$
183,677

 
$
85,654

    

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



Supplemental Cash Flows Information

 
Three Months Ended March 31,
 
2018
 
2017
Operating Activities
 
 
 
Cash paid for interest, net of capitalized interest
$
29,937

 
$
33,400

Capitalized interest paid
$
773

 
$
521

 
 
 
 
Non-cash Investing Transactions
 
 
 
Accrual increase (decrease) for additions to real estate and developments
$
15,995

 
$
(554
)
Capitalized stock-based compensation for improvements to real estate and developments
$
452

 
$
228

Removal of fully depreciated and amortized tenant improvements and lease intangibles
$
10,630

 
$
13,044

Removal of fully amortized acquired lease intangible assets
$
206

 
$
65

Removal of fully accreted acquired lease intangible liabilities
$
6,038

 
$
2,073

 
 
 
 
Non-cash Financing Transactions
 
 
 
Gain recorded in AOCI - Adoption of ASU 2017-12 - consolidated derivatives
$
211

 
$

Gain recorded in AOCI - consolidated derivatives
$
39,731

 
$
4,722

Gain recorded in AOCI - unconsolidated Funds' derivatives (our share)
$
4,475

 
$
99

Accrual for dividends declared
$
42,483

 
$
35,223

Common stock issued in exchange for OP Units
$
5,199

 
$
4,523


See accompanying notes to the consolidated financial statements.



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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, 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 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 March 31, 2018, we owned a Consolidated Portfolio consisting of (i) a 16.6 million square foot office portfolio, (ii) 3,448 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 March 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 March 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
53
 
53
Consolidated JV properties
10
 
10
Unconsolidated Fund properties
 
8
 
63
 
71
 
 
 
 
Multifamily
 
 
 
Wholly-owned properties
10
 
10
 
 
 
 
Total
73
 
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 March 31, 2018, the total consolidated assets, liabilities and equity of the VIEs was $8.32 billion  (of which $7.78 billion related to investment in real estate), $4.40 billion and $3.93 billion (of which $1.47 billion related to noncontrolling interests), respectively.

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 accordance with 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, 2018. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2017 Annual Report on Form 10-K and the notes thereto. References in this Report to the number 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.


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

2. Summary of Significant Accounting Policies

We adopted ASUs during the three months ended March 31, 2018 that changed our accounting policies for revenue recognition and hedge accounting disclosed in our 2017 Annual Report on Form 10-K - see "New Accounting Pronouncements" below. The adoption of these ASUs did not have a material impact on our financial statements. We have not made any other changes to our significant accounting policies disclosed in our 2017 Annual Report on Form 10-K.

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.

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 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 the three months ended March 31, 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 are effective this quarter and are required to be applied on a retrospective basis.

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. However, the scoping of our revenues could be impacted by ASU No. 2016-02, "Leases" (Topic 842), which we plan to adopt in the first quarter of 2019 - see "Recently Issued Accounting Pronouncements" further below.

Our office parking revenues are mostly derived from lease contracts with our office tenants. 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 $25.2 million and $23.2 million for the three months ended March 31, 2018 and 2017, respectively, and are included in Office parking and other income in the consolidated statements of operations. Office parking receivables were $1.4 million and $1.0 million as of March 31, 2018 and December 31, 2017, respectively. Office parking receivables are included in Tenant receivables in the consolidated balance sheets.


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

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 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 an adjustment to AOCI and accumulated deficit of $211 thousand. See Note 10.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". The ASU provides guidance regarding the presentation of certain types of transactions in the statement of cash flows. The amendments are required to be applied on a retrospective basis.

In November 2016, the FASB issued ASU No. 2016-18, "Restricted Cash". The ASU provides guidance regarding the presentation of restricted cash in the statement of cash flows. The amendments in this ASU are effective this quarter and are required to be applied retrospectively. The adoption of the ASU did not have a material impact on our financial statements.

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" which amends "Financial Instruments - Overall" (Subtopic 825-10). The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this ASU are effective this quarter. The adoption of the ASU did not have a material impact on our financial statements.

Stock Based Compensation

In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting" which amends "Compensation-Stock Compensation" (Topic 718). The ASU provides guidance regarding the application of modification accounting in Topic 718 when there are changes to the terms or conditions of a share-based payment award. The amendments in this ASU are effective this quarter and are required to be applied on a prospective basis. The adoption of the ASU did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements

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 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 an entity to separate 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 must 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 price basis for lessees, or in accordance with the allocation guidance in Topic 606 ("Revenue from Contracts with Customers") for lessors. However, in March 2018, the FASB approved an optional practical expedient that would allow lessors to elect, by class of underlying asset, to not separate the lease from the non-lease components. The practical expedient would be limited to circumstances in which both (i) the timing and pattern of revenue recognition are the same for the lease and non-lease components and (ii) the combined single lease component would be classified as an operating lease.
  


13

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

Topic 842 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 fixed employee salaries, are not considered to be initial direct costs, and may not be capitalized.

We pay rent under a ground lease which expires on December 31, 2086. See Note 15 for more information regarding this ground lease. We currently account for the lease as an operating lease. We are currently evaluating the ASU to determine if this ground lease should be accounted for as a finance lease with a corresponding right-of-use asset.
  
The ASU is effective in the first quarter of 2019 and early adoption is permitted. The ASU is required to be adopted using a modified retrospective approach which includes optional practical expedients related to leases that commenced before the effective date. We are currently evaluating the impact of this ASU on our financial statements and we plan to adopt the ASU in the first quarter of 2019.


3. Investment in Real Estate

Property held for sale

We are currently marketing for sale an 80,000 square foot Class A office property and a health club located in Honolulu, Hawaii. We partially own the assets through a consolidated joint venture in which we own a two-thirds interest. As of March 31, 2018, the carrying value of the assets and liabilities classified as held for sale in our consolidated balance sheets were as follows:

 (In thousands)
March 31, 2018
 
 
Land
$
1,863

Buildings and improvements
17,442

Tenant improvements and lease intangibles
5,150

Accumulated depreciation and amortization
(7,375
)
Deferred rent receivables, net
187

Other assets
476

Interest payable, accounts payable, and deferred revenue
(167
)
Property held for sale, net
$
17,576



14

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

4. Acquired Lease Intangibles

Summary of our Acquired Lease Intangibles

The table below summarizes our above- and below-market tenant lease assets and liabilities for which we are the lessor, an above-market ground lease asset for which we are the lessor, and an above-market ground lease liability for which we are the lessee:
 (In thousands)
March 31, 2018
 
December 31, 2017
 
 
 
 
Above-market tenant leases
$
6,972

 
$
7,177

Above-market tenant leases - accumulated amortization
(3,931
)
 
(3,846
)
Above-market ground lease
1,152

 
1,152

Above-market ground lease - accumulated amortization
(195
)
 
(190
)
Acquired lease intangible assets, net
$
3,998

 
$
4,293

 
 
 
 
Below-market tenant leases
$
121,568

 
$
127,606

Below-market tenant leases - accumulated accretion
(55,826
)
 
(55,428
)
Above-market ground lease
4,017

 
4,017

Above-market ground lease - accumulated accretion
(572
)
 
(560
)
Acquired lease intangible liabilities, net
$
69,187

 
$
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:

 
Three Months Ended March 31,
 (In thousands)
2018
 
2017
 
 
 
 
Net accretion of above- and below-market tenant lease assets and liabilities(1)
$
6,144

 
$
4,184

Amortization of an above-market ground lease asset(2)
(4
)
 
(4
)
Accretion of an above-market ground lease liability(3)
12

 
12

Total
$
6,152

 
$
4,192

______________________________________________
(1)
Recorded as a net increase to office and multifamily rental revenues (we are the lessor).
(2)
Recorded as a decrease to office parking and other income (we are the lessor).
(3)
Recorded as a decrease to office expense (we are the lessee).



15

Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (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. At March 31, 2018, we held direct and indirect equity interests of 6.2% of the Opportunity Fund, 69.4% of Fund X and 24.3% 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:
 
Three Months Ended March 31,
 (In thousands)
2018
 
2017
 
 
 
 
Operating distributions received
$
1,506

 
$
2,177

Capital distributions received
1,953

 
1,407

Total distributions received
$
3,459

 
$
3,584



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)
March 31, 2018
 
December 31, 2017
 
 
 
 
Total assets
$
709,102

 
$
704,186

Total liabilities
$
525,179

 
$
523,767

Total equity
$
183,923

 
$
180,419


 
Three Months Ended March 31,
 (In thousands)
2018
 
2017
 
 
 
 
Total revenues
$
19,147

 
$
18,625

Operating income
$
5,566

 
$
4,908

Net income
$
1,434

 
$
2,144


6. Other Assets

Other assets consisted of the following:

 (In thousands)
March 31, 2018
 
December 31, 2017
 
 
 
 
Restricted cash
$
121

 
$
121

Prepaid expenses
7,860

 
9,235

Other indefinite-lived intangibles
1,988

 
1,988

Furniture, fixtures and equipment, net
860

 
1,155

Other
5,435

 
5,943

Total other assets
$
16,264

 
$
18,442



16

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

7. Secured Notes Payable and Revolving Credit Facility, Net



The following table summarizes our secured notes payable and revolving credit facility:

Description
 
Maturity
Date(1)
 
Principal Balance as of March 31, 2018
(In thousands)
 
Principal Balance as of December 31, 2017
(In thousands)
 
Variable Interest Rate
 
Fixed Interest
Rate(2)
 
Swap Maturity Date
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholly Owned Subsidiaries
Term loan(3)
 
 
$

 
$
146,974

 
 
 
Term loan(3)
 
 

 
280,721

 
 
 
Fannie Mae loan
 
10/1/2019
 
145,000

 
145,000

 
LIBOR + 1.25%
 
N/A
 
N/A
Term loan(4) 
 
4/15/2022
 
340,000

 
340,000

 
LIBOR + 1.40%
 
2.77%
 
4/1/2020
Term loan(4) 
 
7/27/2022
 
180,000

 
180,000

 
LIBOR + 1.45%
 
3.06%
 
7/1/2020
Term loan(4) 
 
11/1/2022
 
400,000

 
400,000

 
LIBOR + 1.35%
 
2.64%
 
11/1/2020
Term loan(4) 
 
6/23/2023
 
360,000

 
360,000

 
LIBOR + 1.55%
 
2.57%
 
7/1/2021
Term loan(4) 
 
12/23/2023
 
220,000

 
220,000

 
LIBOR + 1.70%
 
3.62%
 
12/23/2021
Term loan(4) 
 
1/1/2024
 
300,000

 
300,000

 
LIBOR + 1.55%
 
3.46%
 
1/1/2022
Term loan(4)
 
3/3/2025
 
335,000

 

 
LIBOR + 1.30%
 
3.84%
 
3/1/2023
Fannie Mae loan(4)
 
4/1/2025
 
102,400

 
102,400

 
LIBOR + 1.25%
 
2.84%
 
3/1/2020
Fannie Mae loans(4)
 
12/1/2025
 
115,000

 
115,000

 
LIBOR + 1.25%
 
2.76%
 
12/1/2020
Fannie Mae loans(4)
 
6/1/2027
 
550,000

 
550,000

 
LIBOR + 1.37%
 
3.16%
 
6/1/2022
Term loan(5)
 
6/1/2038
 
32,100

 
32,213

 
N/A
 
4.55%
 
N/A
Revolving credit facility(6)
 
8/21/2020
 
75,000

 

 
LIBOR + 1.40%
 
N/A
 
N/A
Total Wholly Owned Subsidiary Debt
3,154,500

 
3,172,308

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated JVs
Term loan(4) 
 
2/28/2023
 
580,000

 
580,000

 
LIBOR + 1.40%
 
2.37%
 
3/1/2021
Term loan(4)
 
12/19/2024
 
400,000

 
400,000

 
LIBOR + 1.30%
 
3.47%
 
1/1/2023
Total Consolidated Debt(7)
4,134,500

 
4,152,308

 
 
 
 
 
 
Unamortized loan premium, net
 
4,140

 
4,191

 
 
 
 
 
 
Deferred loan costs, net
 
(39,740
)
 
(39,109
)
 
 
 
 
 
 
Total Consolidated Debt, net
$
4,098,900

 
$
4,117,390

 
 
 
 
 
 
___________________________________________________
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.
(3)
At March 31, 2018, this loan had 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 12 for our fair value disclosures.



17

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

Debt Statistics

The following table summarizes our fixed and floating rate debt:
(In thousands)
 
Principal Balance as of March 31, 2018
(In thousands)
 
Principal Balance as of December 31, 2017
(In thousands)
 
 
 
 
 
Aggregate swapped to fixed rate loans
 
$
3,882,400

 
$
3,547,400

Aggregate fixed rate loans
 
32,100

 
459,908

Aggregate floating rate loans
 
220,000

 
145,000

Total Debt
 
$
4,134,500

 
$
4,152,308


The following table summarizes certain debt statistics at March 31, 2018:
Statistics for consolidated loans with interest fixed under the terms of the loan or a swap
 
 
Principal balance (in billions)
$3.91
Weighted average remaining life (including extension options)
6.1 years
Weighted average remaining fixed interest period
3.4 years
Weighted average annual interest rate
3.07%

Future Principal Payments

At March 31, 2018, the minimum future principal payments due on our secured notes payable and revolving credit facility were as follows:
Twelve months ending March 31:
 
Excluding Maturity Extension Options
 
Including Maturity Extension Options(1)
 
 
 
 
 
 
 
(In thousands)
2019
 
$
694

 
$
694

2020
 
145,727

 
145,727

2021
 
370,760

 
75,760

2022
 
300,796

 
796

2023
 
1,655,833

 
1,500,833

Thereafter
 
1,660,690

 
2,410,690

Total future principal payments
 
$
4,134,500

 
$
4,134,500

____________________________________________
(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 $18.2 million and $18.0 million at March 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:

 
Three Months Ended March 31,
(In thousands)
2018
 
2017
 
 
 
 
Loan costs expensed
$
404

 
$

Deferred loan cost amortization
1,905

 
2,098

Total
$
2,309

 
$
2,098


18

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

8. Interest Payable, Accounts Payable and Deferred Revenue

Interest payable, accounts payable and deferred revenue consisted of the following:
(In thousands)
March 31, 2018
 
December 31, 2017
 
 
 
 
Interest payable
$
10,887

 
$
9,829

Accounts payable and accrued liabilities
90,940

 
62,741

Deferred revenue
35,047

 
31,377

Total interest payable, accounts payable and deferred revenue
$
136,874

 
$
103,947


9. 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. See Note 7 regarding our debt, and our consolidated JVs debt, that is hedged. See Note 16 regarding our unconsolidated Funds debt that is hedged.

Derivative Summary

As of March 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)
27
 
$
3,882,400

Unconsolidated Funds' derivatives(2)(3)
4
 
$
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 12 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 March 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)
March 31, 2018
 
December 31, 2017
 
 
 
 
Consolidated derivatives(1)
$
339

 
$
915

Unconsolidated Funds' derivatives(2)
$

 
$

___________________________________________________
(1)
The amounts reflect 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(2)
Our unconsolidated Funds did not have any derivatives in a liability position.
 

19

Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (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)
March 31, 2018
 
December 31, 2017
 
 
 
 
Consolidated derivatives(1)
$
99,908

 
$
60,093

Unconsolidated Funds' derivatives(2)
$
16,737

 
$
9,350

___________________________________________________
(1)
The amounts reflect 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)
Three Months Ended March 31,
 
2018
 
2017
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
Consolidated derivatives:
 
 
 
Gain recorded in AOCI - adoption of ASU 2017-12(1)(2)
$
211

 
$

Gain recorded in AOCI(1)(2)
$
39,731

 
$
4,722

Gain (loss) reclassified from AOCI to Interest Expense(1)
$
131

 
$
(5,100
)
Total Interest Expense presented in the consolidated statements of operations
$
32,900

 
$
36,954

Gain related to ineffectiveness recorded in Interest Expense
$

 
$
13

Unconsolidated Funds' derivatives (our share)(3):
 
 
 
Gain recorded in AOCI(1)
$
4,475

 
$
99

Gain (loss) reclassified from AOCI to Income, including depreciation, from unconsolidated real estate funds(1)
$
(83
)
 
$
92

Total Income, including depreciation, from unconsolidated real estate funds presented in the consolidated statements of operations
$
1,506

 
$
2,177

___________________________________________________
(1)
See Note 10 for our AOCI reconciliation.
(2)
See Note 2 regarding the ASU adoption.
(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 March 31, 2018, our estimate of the AOCI related to derivatives designated as cash flow hedges, that will be reclassified to earnings during the next twelve months as interest rate swap payments are made is as follows:
 
(In thousands)
 
 
Consolidated derivatives:
 
Gains to be reclassified from AOCI to Interest Expense
$
20,574

Unconsolidated Funds' derivatives (our share):
 
Gains to be reclassified from AOCI to Income, including depreciation, from unconsolidated real estate funds
$
1,282


20

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

10.  Equity

Transactions
    
During the three months ended March 31, 2018, we (i) acquired 322 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, and (ii) issued 14 thousand shares of our common stock for the exercise of 32 thousand stock options on a net settlement basis (net of the exercise price and related taxes).

During the three months ended March 31, 2017, we (i) acquired 337 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, and (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).

Condensed Consolidated Statements of Equity

The tables below present our condensed consolidated statements of equity:
(In thousands)
DEI Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
Balance as of January 1, 2018
$
2,437,524

 
$
1,464,525

 
$
3,902,049

Adjustment to opening balance of accumulated deficit(1)
(211
)
 

 
(211
)
Net income
28,206

 
4,425

 
32,631

Cash flow hedge fair value adjustments
30,922

 
13,447

 
44,369

Dividends and distributions
(42,475
)
 
(13,085
)
 
(55,560
)
Exchange of OP units for common stock
5,199

 
(5,199
)
 

Exercise of stock options(2)
(313
)
 

 
(313
)
Stock-based compensation

 
3,502

 
3,502

Balance as of March 31, 2018
$
2,458,852

 
$
1,467,615

 
$
3,926,467

__________________________________________________
(1) Reflects the adoption of ASU No. 2017-12. See Note 2 for the details.
(2) Reflects withholding taxes. We issued shares of our common stock for the exercise of stock options on a net settlement basis (net of the exercise price and related taxes).

(In thousands)
DEI Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
Balance as of January 1, 2017
$
1,921,143

 
$
1,092,928

 
$
3,014,071

Net income
19,049

 
2,731

 
21,780

Cash flow hedge fair value adjustments
7,702

 
2,127

 
9,829

Contributions to consolidated JV

 
250

 
250

Dividends and distributions
(35,223
)
 
(9,632
)
 
(44,855
)
Exchange of OP units for common stock
4,523

 
(4,523
)
 

Exercise of stock options(1)
(52,704
)
 

 
(52,704
)
Stock-based compensation

 
2,936

 
2,936

Balance as of March 31, 2017
$
1,864,490

 
$
1,086,817

 
$
2,951,307

__________________________________________________
(1) Reflects withholding taxes. We issued shares of our common stock for the exercise of stock options on a net settlement basis (net of the exercise price and related taxes).

21

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

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 March 31, 2018 when we and our Operating Partnership had 169.9 million shares of common stock and 27.5 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. These awards generally vest over the service period and once vested can generally be converted to OP Units.

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:
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
 
 
 
 
Net income attributable to common stockholders
$
28,206

 
$
19,049

 
 
 
 
Transfers from noncontrolling interests:
 
 
 
Exchange of OP Units with noncontrolling interests
5,199

 
4,523

Net transfers from noncontrolling interests
5,199

 
4,523

 
 
 
 
Change from net income attributable to common stockholders and transfers from noncontrolling interests
$
33,405

 
$
23,572


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:
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
 
 
 
 
Beginning balance
$
43,099

 
$
15,156

Adoption of ASU 2017-12 - cumulative opening balance adjustment(2)
211

 

Consolidated derivatives:
 
 
 
Other comprehensive income before reclassifications
39,731

 
4,722

Reclassification of (gains) losses from AOCI to Interest Expense
(131
)
 
5,100

Unconsolidated Funds' derivatives (our share):
 
 
 
Other comprehensive income before reclassifications
4,475

 
99

Reclassification of (gains) losses from AOCI to Income, including depreciation, from unconsolidated real estate funds
83

 
(92
)
Net current period OCI
44,369

 
9,829

OCI attributable to noncontrolling interests
(13,447
)
 
(2,127
)
OCI attributable to common stockholders
30,922

 
7,702

 
 
 
 
Ending balance
$
74,021

 
$
22,858

___________________________________________________
(1)
See Note 9 for the details of our derivatives and Note 12 for our derivative fair value disclosures.
(2)
See Note 2 regarding our adoption of the ASU on January 1, 2018.

22

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

Equity Compensation

On June 2, 2016, the Douglas Emmett 2016 Omnibus Stock Incentive Plan ("2016 Plan") became effective after receiving stockholder approval, superseding our prior plan, the Douglas Emmett 2006 Omnibus Stock Incentive Plan ("2006 Plan"), both of which allow for awards to our directors, officers, employees and consultants. The key terms of the two plans are substantially identical, except for the date of expiration, the number of shares authorized for grants and various technical provisions. Grants after June 2, 2016 were awarded under the 2016 Plan, while grants prior to that date were awarded under the 2006 Plan (grants under the 2006 Plan remain outstanding according to their terms). Both plans are administered by the compensation committee of our board of directors.  

Total net stock-based compensation expense was $3.1 million and $2.7 million for the three months ended March 31, 2018 and 2017 respectively. These amounts are net of capitalized stock-based compensation of $452 thousand and $228 thousand for the three months ended March 31, 2018 and 2017 respectively. The intrinsic value of options exercised was $803 thousand and $102.1 million for the three months ended March 31, 2018 and 2017 respectively.


11. 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 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 period using the treasury stock method. We account for unvested LTIP awards that contain nonforfeitable rights to dividends as participating securities and include these securities in the computation of basic and diluted EPS using the two-class method. The table below presents the calculation of basic and diluted EPS:

 
Three Months Ended March 31,
 
2018

2017
Numerator (In thousands):
 

 
 

Net income attributable to common stockholders
$
28,206

 
$
19,049

Allocation to participating securities: Unvested LTIP Units
(117
)
 
(98
)
Numerator for basic and diluted net income attributable to common stock holders
$
28,089

 
$
18,951

 
 
 
 
Denominator (In thousands):
 
 
 
Weighted average shares of common stock outstanding - basic
169,601

 
152,490

Effect of dilutive securities: Stock options(1)
24

 
1,165

Weighted average shares of common stock and common stock equivalents outstanding - diluted
169,625

 
153,655

 
 
 
 
Basic EPS:
 
 
 

Net income attributable to common stockholders per share
$
0.17

 
$
0.12

 
 
 
 
Diluted EPS:
 

 
 

Net income attributable to common stockholders per share
$
0.17

 
$
0.12

____________________________________________________
(1)
The following securities were excluded from the calculation of diluted EPS because including them would be anti-dilutive to the calculation:
 
Three Months Ended March 31,
 (In thousands)
2018
 
2017
 
 
 
 
OP Units
26,943

 
24,661

Vested LTIP Units
800

 
762


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

12. 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 March 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 (excluding our revolving credit facility) 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 of our secured notes payable:

(In thousands)
March 31, 2018
 
December 31, 2017
 
 
 
 
Fair value
$
4,092,680

 
$
4,195,489

Carrying value
$
4,063,640

 
$
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)
March 31, 2018
 
December 31, 2017
Derivative Assets:
 
 
 
Fair value - consolidated derivatives(1)
$
98,909

 
$
60,069

Fair value - unconsolidated Funds' derivatives(2)
$
16,611

 
$
9,437

 
 
 
 
Derivative Liabilities:
 
 
 
Fair value - consolidated derivatives(1)
$
46

 
$
807

Fair value - unconsolidated Funds' derivatives(2)
$

 
$

____________________________________________________
(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 sheets.
(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 16 regarding our unconsolidated Funds debt and derivatives.

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

13. 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)
Three Months Ended March 31,
 
2018
 
2017
Office Segment
 
 
 
Total office revenues
$
187,333

 
$
170,348

Office expenses
(60,356
)
 
(54,885
)
Office segment profit
126,977

 
115,463

 
 
 
 
Multifamily Segment
 
 
 
Total multifamily revenues
24,914

 
24,133

Multifamily expenses
(6,698
)
 
(5,947
)
Multifamily segment profit
18,216

 
18,186

 
 
 
 
Total profit from all segments
$
145,193

 
$
133,649



The table below presents a reconciliation of the total profit from all segments to net income attributable to common stockholders:

(In thousands)
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
Total profit from all segments
$
145,193

 
$
133,649

General and administrative
(9,567
)
 
(10,156
)
Depreciation and amortization
(72,498
)
 
(67,374
)
Other income
2,630

 
2,162

Other expenses
(1,733
)
 
(1,724
)
Income, including depreciation, from unconsolidated real estate funds
1,506

 
2,177

Interest expense
(32,900
)
 
(36,954
)
Net income
32,631

 
21,780

Less: Net income attributable to noncontrolling interests
(4,425
)
 
(2,731
)
Net income attributable to common stockholders
$
28,206

 
$
19,049


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

14. 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 March 31, 2018:

Twelve months ending March 31:
 (In thousands)
 
 
2019
$
541,977

2020
496,874

2021
429,106

2022
337,392

2023
261,907

Thereafter
652,889

Total future minimum base rentals(1)
$
2,720,145

_____________________________________________________
(1)
Does not include (i) residential leases, which typically have a term of one year or less, (ii) holdover rent, (iii) 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.

15. 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, 2019, and will then reset to the greater of the existing ground rent or market. We incurred ground rent expense of $183 thousand for the three months ended March 31, 2018 and 2017. The table below, which assumes that the ground rent payments will continue to be $733 thousand per year after February 28, 2019, presents the future minimum ground lease payments as of March 31, 2018:
  
Twelve months ending March 31:
(In thousands)
 
 
2019
$
733

2020
733

2021
733

2022
733

2023
733

Thereafter
46,728

Total future minimum lease payments
$
50,393



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

16. 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.  For the three months ended March 31, 2018 and 2017, no tenant accounted for more than 10% of our total revenues.  

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 March 31, 2018, the obligations to remove the asbestos from these properties have indeterminable settlement dates, and we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation.

Development and Other Contracts

During 2016, we commenced building an additional 475 apartments (net of existing apartments removed) at our Moanalua Hillside Apartments in Honolulu, Hawaii. We are also investing additional capital to upgrade the existing apartments, improve the parking and landscaping, building a new leasing and management office, and construct a new recreation and fitness facility with a new pool. As of March 31, 2018, we had leased 104 apartments. In West Los Angeles, we plan to build a high-rise apartment building with 376 apartments. As of March 31, 2018, we had an aggregate remaining contractual commitment for these development projects of approximately $244.8 million. As of March 31, 2018, we had an aggregate remaining contractual commitment for capital expenditure projects, repositionings and tenant improvements of approximately $29.0 million.





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Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (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 March 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 March 31, 2018. The amounts represent 100% (not our pro-rata share) of the amounts related to our Funds:

Fund(1)
 
Loan Maturity Date
 
Principal Balance
(In Millions)
 
Variable Interest Rate
 
Swap Fixed Interest Rate
 
Swap Maturity Date
 
 
 
 
 
 
 
 
 
 
 
Partnership X(2)(4)
 
3/1/2023
 
$
110.0

 
LIBOR + 1.40%
 
2.30%
 
3/1/2021
Fund X(3)(4)(5)
 
7/1/2024
 
400.0

 
LIBOR + 1.65%
 
3.44%
 
7/1/2022
 
 
 
 
$
510.0

 
 
 
 
 
 
___________________________________________________
(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 March 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 $2.9 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 March 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 $30.9 million.
(4)
Loan agreement includes a zero-percent LIBOR floor. The corresponding swaps do not include such a floor.
(5)
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.


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Item 2.  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 in Part I, Item 1 of this Report, and our Forward Looking Statements disclaimer.

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 in Honolulu, Hawaii. 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 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 March 31, 2018, our portfolio consisted of the following:

 
 
 
 
 
 
 
 
Consolidated Portfolio(1)
 
Total Portfolio(2)
 
 
Office
 
 
 
 
 
Class A Properties(3) 
63
 
71
 
 
Rentable square feet (in thousands)
16,578
 
18,409
 
 
Leased rate
90.7%
 
90.5%
 
 
Occupied rate
88.7%
 
88.6%
 
 
 
 
 
 
 
 
Multifamily
 
 
 
 
 
Properties(3)
10
 
10
 
 
Units
3,448
 
3,448
 
 
Leased rate
98.9%
 
98.9%
 
 
Occupied rate
96.2%
 
96.2%
 
 
 
 
 
 
 
__________________________________________________
(1)
Our Consolidated Portfolio includes the properties in our consolidated results. 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 Item 1 of this Report for more information about our unconsolidated Funds.
(3) Our office and multifamily portfolios include ancillary retail space.

Annualized rent

As of March 31, 2018, annualized rent from our Consolidated Portfolio was derived as follows:

393418639_chart-ff1d92214d8253f49aa.jpg______393418639_chart-99da3b36e48b595295b.jpg

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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 Item 1 of this Report for more information regarding our debt.

Developments
    
We are developing two multifamily projects, one in our Brentwood submarket in Los Angeles, California, and one in Honolulu, Hawaii. Each development is on land which we already own:

In West Los Angeles, we are building a high-rise apartment building with 376 apartments. 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 or the existing underground parking garage, both of which we owned before beginning the project.
At our Moanalua Hillside Apartments in Honolulu, we are building an additional 475 apartments (net of existing apartments removed), which we expect will cost approximately $120.0 million excluding the cost of the land which we already owned before beginning the project. We also plan to invest additional capital to upgrade the existing apartments, improve the parking and landscaping, build a new leasing and management office, and construct a new recreation and fitness facility with a new pool. As of March 31, 2018, we had leased 104 apartments.

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. In addition to our Moanalua Hillside Apartments in Honolulu, described above under "Developments", as of March 31, 2018, we were repositioning four wholly-owned office properties aggregating 1.5 million square feet and one 583 thousand square foot office property held in a consolidated joint venture.

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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:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Year Ended December 31,
 
 
 
 
March 31, 2018
 
2017
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average straight-line rental rate(1)(2)
 
$50.68
 
$44.48
 
$43.21
 
$42.65
 
$35.93
 
 
Annualized lease transaction costs(3)
 
$5.06
 
$5.68
 
$5.74
 
$4.77
 
$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.

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 three months ended March 31, 2018:

 
 
 
 
 
 
 
 
 
 
Rent Roll (1)(2)
 
Starting Cash Rent
 
Straight-line Rent
 
Expiring Cash Rent
 
 
 
 
 
 
 
 
 
 
 
Leases signed during the period
 
$47.00
 
$50.68
 
N/A
 
 
Prior leases for the same space
 
$33.39
 
$36.10
 
$40.20
 
 
Percentage change
 
40.8%
 
40.4%
 
16.9%
(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 and leases on space where the prior lease was terminated more than a year before signing of the new lease.
(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.


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Multifamily Rental Rates

The table below presents the average annual rental rate per leased unit for new tenants.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Year Ended December 31,
 
 
 
 
March 31, 2018
 
2017
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average annual rental rate - new tenants(1)
 
$28,103
 
$28,613
 
$28,435
 
$27,936
 
$28,870
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_____________________________________________________
(1)
2016 and 2015 include the impact of a property acquisition in Honolulu at the end of 2014.
 

Multifamily Rent Roll

During the three months ended March 31, 2018, average rent on leases to new tenants was 1.0% 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
Occupancy Rates(1) as of:
 
March 31, 2018
 
2017
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office portfolio
 
88.6%
 
89.8%
 
90.4%
 
91.2%
 
90.5%
 
 
Multifamily portfolio
 
96.2%
 
96.4%
 
97.9%
 
98.0%
 
98.2%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Year Ended December 31,
 
 
Average Occupancy Rates(1)(2):
 
March 31, 2018
 
2017
 
2016
 
2015
 
2014