March 31, 2008
001-33106
| MARYLAND | 20-3073047 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
code)
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
(Check one):
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Class | Outstanding at | |
Common Shares of beneficial interest, | 121,281,401 shares | |
| $0.01 par value per share |
| PAGE NO. | ||||||||
| PART I. | FINANCIAL INFORMATION | 3 | ||||||
| ||||||||
| Item 1. | Financial Statements | 3 | ||||||
| Consolidated Balance Sheets as of | 3 | |||||||
| Consolidated Statements of Operations for the three | 4 | |||||||
| Consolidated Statements of Cash Flows for the | 5 | |||||||
| Notes to Consolidated Financial Statements | 6 | |||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 24 | ||||||
| Item 4. | Controls and Procedures | 24 | ||||||
| ||||||||
| PART II. | OTHER INFORMATION | 25 | ||||||
| Item 1. | Legal Proceedings | 25 | ||||||
| Item 1A. | Risk Factors | 25 | ||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 25 | ||||||
| Item 3. | Defaults Upon Senior Securities | 25 | ||||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 25 | ||||||
| Item 5. | Other Information | 25 | ||||||
| Item 6. | Exhibits | 26 | ||||||
| SIGNATURES | 27 | |||||||
| September 30, 2007 | December 31, 2006 | |||||||
| (unaudited) | ||||||||
Assets | ||||||||
Investment in real estate | ||||||||
Land | $ | 817,249 | $ | 813,599 | ||||
Buildings and improvements | 4,898,278 | 4,863,955 | ||||||
Tenant improvements and leasing costs | 442,426 | 411,063 | ||||||
| 6,157,953 | 6,088,617 | |||||||
Less: accumulated depreciation | (184,765 | ) | (32,521 | ) | ||||
Net investment in real estate | 5,973,188 | 6,056,096 | ||||||
Cash and cash equivalents | 2,049 | 4,536 | ||||||
Tenant receivables, net | 794 | 4,160 | ||||||
Deferred rent receivables, net | 16,669 | 3,587 | ||||||
Interest rate contracts | 76,156 | 76,915 | ||||||
Acquired lease intangible assets, net | 26,936 | 34,137 | ||||||
Other assets | 26,531 | 20,687 | ||||||
Total assets | $ | 6,122,323 | $ | 6,200,118 | ||||
Liabilities | ||||||||
Secured notes payable, including loan premium | $ | 2,965,471 | $ | 2,789,702 | ||||
Accounts payable and accrued expenses | 64,514 | 51,736 | ||||||
Security deposits | 30,566 | 28,670 | ||||||
Acquired lease intangible liabilities, net | 226,513 | 263,649 | ||||||
Interest rate contracts | 49,725 | 6,278 | ||||||
Dividends payable | 19,221 | 13,801 | ||||||
Total liabilities | 3,356,010 | 3,153,836 | ||||||
Minority interests | 857,407 | 934,509 | ||||||
Stockholders’ equity | ||||||||
Common stock, $.01 par value 750 million shares authorized, 109,833,903 and 115,005,860 shares outstanding at September 30, 2007 and December 31, 2006, respectively. | 1,098 | 1,150 | ||||||
Additional paid-in capital | 2,144,786 | 2,144,600 | ||||||
Accumulated other comprehensive income | (33,903 | ) | 415 | |||||
Accumulated deficit | (203,075 | ) | (34,392 | ) | ||||
Total stockholders’ equity | 1,908,906 | 2,111,773 | ||||||
Total liabilities and stockholders’ equity | $ | 6,122,323 | $ | 6,200,118 | ||||
The accompanying
| March 31, 2008 | December 31, 2007 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Investment in real estate | ||||||||
| Land | $ | 887,453 | $ | 825,560 | ||||
| Buildings and improvements | 5,475,767 | 4,978,124 | ||||||
| Tenant improvements and lease intangibles | 531,315 | 460,486 | ||||||
| 6,894,535 | 6,264,170 | |||||||
| Less: accumulated depreciation | (298,863 | ) | (242,114 | ) | ||||
| Net investment in real estate | 6,595,672 | 6,022,056 | ||||||
| Cash and cash equivalents | 4,493 | 5,843 | ||||||
| Tenant receivables, net | 252 | 955 | ||||||
| Deferred rent receivables, net | 25,076 | 20,805 | ||||||
| Interest rate contracts | 149,633 | 84,600 | ||||||
| Acquired lease intangible assets, net | 22,210 | 24,313 | ||||||
| Other assets | 27,037 | 31,396 | ||||||
| Total assets | $ | 6,824,373 | $ | 6,189,968 | ||||
| Liabilities | ||||||||
| Secured notes payable, including loan premium | $ | 3,729,368 | $ | 3,105,677 | ||||
| Accounts payable and accrued expenses | 66,882 | 62,704 | ||||||
| Security deposits | 34,278 | 31,309 | ||||||
| Acquired lease intangible liabilities, net | 206,070 | 218,371 | ||||||
| Interest rate contracts | 286,762 | 129,083 | ||||||
| Dividends payable | 22,737 | 19,221 | ||||||
| Total liabilities | 4,346,097 | 3,566,365 | ||||||
| Minority interests | 556,125 | 793,764 | ||||||
| Stockholders’ Equity | ||||||||
| Common stock, $0.01 par value 750,000,000 authorized, 121,263,847 | ||||||||
| and 109,833,903 outstanding at March 31, 2008 and December 31, 2007, respectively. | 1,213 | 1,098 | ||||||
| Additional paid-in capital | 2,272,234 | 2,019,716 | ||||||
| Accumulated other comprehensive income | (192,009 | ) | (101,163 | ) | ||||
| Accumulated deficit | (159,287 | ) | (89,812 | ) | ||||
| Total stockholders’ equity | 1,922,151 | 1,829,839 | ||||||
| Total liabilities and stockholders’ equity | $ | 6,824,373 | $ | 6,189,968 | ||||
| Three Months Ended September 30, | Nine months Ended September 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Douglas Emmett, Inc. | The Predecessor | Douglas Emmett, Inc. | The Predecessor | |||||||||||||
Revenues | ||||||||||||||||
Office rental | ||||||||||||||||
Rental revenues | $ | 94,592 | $ | 76,922 | $ | 279,088 | $ | 227,441 | ||||||||
Tenant recoveries | 6,704 | 4,364 | 19,924 | 13,267 | ||||||||||||
Parking and other income | 12,137 | 8,967 | 34,335 | 28,998 | ||||||||||||
Total office revenues | 113,433 | 90,253 | 333,347 | 269,706 | ||||||||||||
Multifamily rental | ||||||||||||||||
Rental revenues | 16,994 | 14,126 | 50,387 | 40,026 | ||||||||||||
Parking and other income | 505 | 485 | 1,522 | 1,309 | ||||||||||||
Total multifamily revenues | 17,499 | 14,611 | 51,909 | 41,335 | ||||||||||||
Total revenues | 130,932 | 104,864 | 385,256 | 311,041 | ||||||||||||
Operating Expenses | ||||||||||||||||
Office expense | 32,817 | 34,490 | 96,907 | 95,622 | ||||||||||||
Multifamily expense | 4,332 | 4,763 | 13,127 | 13,459 | ||||||||||||
General and administrative | 5,862 | 10,415 | 16,024 | 13,551 | ||||||||||||
Depreciation and amortization | 50,629 | 31,604 | 152,244 | 85,220 | ||||||||||||
Total operating expenses | 93,640 | 81,272 | 278,302 | 207,852 | ||||||||||||
Operating income | 37,292 | 23,592 | 106,954 | 103,189 | ||||||||||||
(Loss) gain on investments in interest contracts, net | — | (53,975 | ) | — | 5,992 | |||||||||||
Interest and other income | 205 | 1,426 | 659 | 3,974 | ||||||||||||
Interest expense | (41,504 | ) | (28,508 | ) | (118,119 | ) | (86,563 | ) | ||||||||
Deficit distributions to minority partners, net | — | (11,554 | ) | — | (5,306 | ) | ||||||||||
(Loss) income before minority interests | (4,007 | ) | (69,019 | ) | (10,506 | ) | 21,286 | |||||||||
Minority Interests | ||||||||||||||||
Minority interests | 1,222 | 47,338 | 3,188 | (17,096 | ) | |||||||||||
Preferred minority investor | — | (4,025 | ) | — | (12,075 | ) | ||||||||||
Net loss | $ | (2,785 | ) | (25,706 | ) | $ | (7,318 | ) | $ | (7,885 | ) | |||||
Net loss per common share – basic and diluted | $ | (0.03 | ) | (395 | ) | $ | (0.06 | ) | $ | (121 | ) | |||||
Dividends declared per common share | $ | 0.175 | — | $ | 0.525 | $ | — | |||||||||
Weighted average shares of common stock outstanding – basic and diluted | 110,956,113 | 65 | 113,593,114 | 65 | ||||||||||||
The accompanying
| Three Months Ended March 31, | ||||||||
| 2008 | 2007 | |||||||
| Revenues | ||||||||
| Office rental | ||||||||
| Rental revenues | $ | 99,016 | $ | 91,612 | ||||
| Tenant recoveries | 5,368 | 8,186 | ||||||
| Parking and other income | 12,660 | 11,100 | ||||||
| Total office revenues | 117,044 | 110,898 | ||||||
| Multifamily rental | ||||||||
| Rental revenues | 17,224 | 16,514 | ||||||
| Parking and other income | 560 | 491 | ||||||
| Total multifamily revenues | 17,784 | 17,005 | ||||||
| Total revenues | 134,828 | 127,903 | ||||||
| Operating expenses | ||||||||
| Office expense | 31,364 | 33,294 | ||||||
| Multifamily expense | 3,877 | 4,923 | ||||||
| General and administrative | 5,285 | 5,042 | ||||||
| Depreciation and amortization | 56,749 | 51,121 | ||||||
| Total operating expenses | 97,275 | 94,380 | ||||||
| Operating income | 37,553 | 33,523 | ||||||
| Interest and other income | 409 | 82 | ||||||
| Interest expense | (41,203 | ) | (38,302 | ) | ||||
| Loss before minority interests | (3,241 | ) | (4,697 | ) | ||||
| Minority interests | 741 | 1,424 | ||||||
| Net loss | $ | (2,500 | ) | $ | (3,273 | ) | ||
| Net loss per common share – basic and diluted | $ | (0.02 | ) | $ | (0.03 | ) | ||
| Dividends declared per common share | $ | 0.1875 | $ | 0.175 | ||||
| Weighted average shares of common stock outstanding -basic and diluted | 118,283,579 | 115,005,860 | ||||||
| Douglas Emmett, Inc. | The Predecessor | |||||||
Nine months Ended | Nine months Ended September 30, 2006 | |||||||
Operating Activities | ||||||||
Net loss | $ | (7,318 | ) | $ | (7,885 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Minority interests in consolidated real estate partnerships | (3,188 | ) | 29,171 | |||||
Deficit distributions to minority partners | — | 5,306 | ||||||
Depreciation and amortization | 152,244 | 85,220 | ||||||
Net accretion of acquired lease intangibles | (29,933 | ) | (1,446 | ) | ||||
Amortization of deferred loan costs | 782 | 2,304 | ||||||
Amortization of loan premium | (3,331 | ) | — | |||||
Non-cash market value adjustment on interest rate contracts | 9,466 | (5,992 | ) | |||||
Non-cash amortization of stock-based compensation | 1,884 | — | ||||||
Change in working capital components: | ||||||||
Tenant receivables | 3,366 | 287 | ||||||
Deferred rent receivables | (13,082 | ) | (6,518 | ) | ||||
Accounts payable, accrued expenses and security deposits | 18,337 | 14,287 | ||||||
Other | (4,955 | ) | (6,696 | ) | ||||
Net cash provided by operating activities | 124,272 | 108,038 | ||||||
Investing Activities | ||||||||
Capital expenditures and property acquisitions | (72,578 | ) | (153,303 | ) | ||||
Net cash used in investing activities | (72,578 | ) | (153,303 | ) | ||||
Financing Activities | ||||||||
Proceeds from borrowings | 249,800 | 82,000 | ||||||
Deferred loan costs | (1,672 | ) | (1,253 | ) | ||||
Repayment of borrowings | (73,000 | ) | — | |||||
Net change in short-term borrowings | 2,300 | — | ||||||
Contributions by minority interests | — | 33,264 | ||||||
Distributions to minority interests | (23,304 | ) | (50,621 | ) | ||||
Redemption of minority interests | (29,211 | ) | — | |||||
Distributions to stockholders | — | (7,096 | ) | |||||
Repurchase of common stock | (125,185 | ) | — | |||||
Cash dividends | (53,909 | ) | — | |||||
Net cash (used in) provided by financing activities | (54,181 | ) | 56,294 | |||||
(Decrease) increase in cash and cash equivalents | (2,487 | ) | 11,029 | |||||
Cash and cash equivalents at beginning of period | 4,536 | 108,282 | ||||||
Cash and cash equivalents at end of period | $ | 2,049 | $ | 119,311 | ||||
Supplemental disclosure of non-cash financing information | ||||||||
Notes receivable from stockholders | $ | — | $ | (60,000 | ) | |||
Contribution of notes receivable from stockholders | — | 60,000 | ||||||
The accompanying
| Three Months Ended March 31, | ||||||||
| 2008 | 2007 | |||||||
| Operating Activities | ||||||||
| Net loss | $ | (2,500 | ) | $ | (3,273 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Minority interests | (741 | ) | (1,424 | ) | ||||
Depreciation and amortization | 56,749 | 51,121 | ||||||
Net accretion of acquired lease intangibles | (10,198 | ) | (9,863 | ) | ||||
Amortization of deferred loan costs | 362 | 249 | ||||||
Amortization of loan premium | (1,160 | ) | (1,095 | ) | ||||
Non-cash market value adjustments on interest rate contracts | 1,800 | 3,768 | ||||||
Non-cash amortization of stock-based compensation | 3,291 | 670 | ||||||
| Change in working capital components | ||||||||
Tenant receivables | 703 | 245 | ||||||
Deferred rent receivables | (4,271 | ) | (4,505 | ) | ||||
Accounts payable, accrued expenses and security deposits | 3,282 | 6,427 | ||||||
Other | 6,726 | 269 | ||||||
| Net cash provided by operating activities | 54,043 | 42,589 | ||||||
| Investing Activities | ||||||||
| Capital expenditures and property acquisitions | (627,103 | ) | (13,471 | ) | ||||
| Net cash used in investing activities | (627,103 | ) | (13,471 | ) | ||||
| Financing Activities | ||||||||
Proceeds from borrowings | 833,850 | 31,500 | ||||||
Deferred loan costs | (2,010 | ) | - | |||||
Repayment of borrowings | (205,000 | ) | (41,500 | ) | ||||
Net change in short-term borrowings | (4,000 | ) | - | |||||
Issuance of minority interest in consolidated joint venture | 100 | - | ||||||
Distributions to minority interests | (8,251 | ) | (6,003 | ) | ||||
Redemption of minority interests | (23,758 | ) | - | |||||
Cash dividends | (19,221 | ) | (13,801 | ) | ||||
| Net cash provided by (used in) financing activities | 571,710 | (29,804 | ) | |||||
| Decrease in cash and cash equivalents | (1,350 | ) | (686 | ) | ||||
| Cash and cash equivalents at beginning of period | 5,843 | 4,536 | ||||||
| Cash and cash equivalents at end of period | $ | 4,493 | $ | 3,850 | ||||
Inc.
Business
The historical financial results for the three and nine months ended September 30, 2006 in these financial statements relate to our accounting predecessor only. Our predecessor includes Douglas Emmett Realty Advisors, Inc. (DERA) as the accounting acquirer, and nine consolidated real estate limited partnerships that owned, directly or indirectly, office and multifamily properties and fee interests in land subject to ground leases, which we refer to collectively as the “institutional funds.” For the period prior to our IPO presented herein, DERA was the general partner and was responsible for the asset management of the institutional funds.
Our predecessor did not include certain other entities we acquired at the time of our IPO, including Douglas, Emmett and Company (DECO), P.L.E. Builders, Inc., subsequently renamed Douglas Emmett Builders (DEB), and seven California limited partnerships and one California limited liability company, which we refer to collectively as the eight “single-asset entities.” DECO provided property management and leasing services to all of the properties acquired in our formation transactions and DEB provided construction services in connection with improvements to tenant suites and common areas in the properties. Each of the eight single-asset entities owned, directly or indirectly, one multifamily or office property (or, in one case, a fee interest in land subject to a ground lease).
In March 2005, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on Issue No. 04-5,Investor’s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights. EITF 04-5 clarifies certain aspects of Statement of Positions 78-9Accounting for Investments in Real Estate Ventures, and provides guidance on determining whether a sole general partner in a limited partnership should consolidate its investment in a limited partnership. DERA was the sole general partner of the institutional funds and the limited partners of the institutional funds did not have substantive “kick-out” or participation rights as defined by EITF 04-5. DERA adopted the guidance of EITF 04-5 and consolidated the institutional funds.
Douglas Emmett, Inc
Notes Certain prior period amounts have been reclassified to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
conform with current period presentation.
Any reference to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Acquisitions
Acquisitions of properties are accounted for utilizing the purchase method. Accordingly, the results of operations of acquired properties are included in our results of operations from the respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment and identifiable intangible assets and liabilities such as amounts related to in-place at-market leases, acquired above/below-market ground leases, acquired above/below-market tenant leases and tenant relationships. Initial valuations, including the valuation of assets as part of our IPO, are subject to change until such information is finalized, but no later than 12 months from the acquisition date.
equivalents.
were used.
Douglas Emmett, Inc
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
8 for the accounting of our interest rate hedges.
Minority Interests
Our predecessor reflected unaffiliated partners’ interests in the institutional funds as minority interest in consolidated real estate partnerships, which represented the minority partners’ share of the underlying net assets of our predecessor’s consolidated real estate partnerships. When these consolidated real estate partnerships made cash distributions to partners in excess of the carrying amount of the minority interest, our predecessor recorded a charge equal to the amount of such excess distributions, even though there was no economic effect or cost.
If the excess distributions previously absorbed by our predecessor were recovered through the future earnings of the consolidated real estate partnership, our predecessor would record income in the period of recovery. Our predecessor reported this charge and any subsequent recovery in the consolidated statements of operations as deficit distribution to/recovery from minority partners, net.
After the completion of our IPO and formation transactions, the continuing investors (including our predecessor principals and our executive officers) that elected to own units in our operating partnership, as well as persons receiving such units in subsequent transactions, comprise the minority interests in our operating partnership
impact that FAS 141R will have on our financial statements.
Inc.
In June 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 onOn January 1, 2007. Based on our evaluation,2008, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements at September 30, 2007.
In September 2006, the FASB issued Statementadopted FAS No. 157,Fair Value Measurements(FAS 157). FAS 157 provides guidance for usingdefines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FAS 157 applies to measure assets and liabilities. This statement clarifiesreported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the principlestandard does not require any new fair value measurements of reported balances. FAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use whenin pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, FAS 157 establishes a fair value hierarchy givingthat distinguishes between market participant assumptions based on market data obtained from sources independent of the highest priority toreporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) in active markets and the lowest priority to unobservable data. FAS 157 applies whenever other standards requirefor identical assets or liabilities that we have the ability to beaccess. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
3. Acquisitions
In May 2007, we acquired an approximate 50,000 rentable square foot Class A office building located in our Century City submarket for a contract price of $32 million. We obtained the ground leaseholdlevel in the property and the option to acquire fee title to the land for a fixed price of $800,000 in conjunction with the acquisition. We intend to exercise this option by the end of 2007. The building is currently 100% leased through December 2019. In March 2006, the predecessor acquired a multifamily property in Honolulu, Hawaii. The aggregate acquisition costs of this property approximated $113.7 million. The following table summarizes the allocations of estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| 2007 Acquisition | 2006 Acquisition | |||||||
Investment in real estate: | ||||||||
Land | $ | 3,650 | $ | 42,887 | ||||
Buildings and improvements | 26,274 | 68,394 | ||||||
Tenant improvements and other in-place lease assets | 3,024 | 2,982 | ||||||
Tenant receivables and other assets | 24 | 579 | ||||||
Accounts payable, accrued expenses and tenant security deposits | (988 | ) | (849 | ) | ||||
Acquired lease intangible liabilities | — | (263 | ) | |||||
Net acquisition cost | $ | 31,984 | $ | 113,730 | ||||
Our acquired lease intangibles related to above/below-market leases is summarized as of: |
| |||||||
| September 30, 2007 | December 31, 2006 | |||||||
Above-market tenant leases | $ | 32,770 | $ | 32,770 | ||||
Accumulated amortization | (8,960 | ) | (1,817 | ) | ||||
Below-market ground leases | 3,198 | 3,198 | ||||||
Accumulated amortization | (72 | ) | (14 | ) | ||||
Acquired lease intangible assets, net | $ | 26,936 | $ | 34,137 | ||||
Below-market tenant leases | $ | 256,151 | $ | 256,151 | ||||
Accumulated accretion | (44,268 | ) | (8,353 | ) | ||||
Above-market ground leases | 16,200 | 16,200 | ||||||
Accumulated accretion | (1,570 | ) | (349 | ) | ||||
Acquired lease intangible liabilities, net | $ | 226,513 | $ | 263,649 | ||||
value hierarchy within which those measurements fall.
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at March 31, 2008 | |||||
| Assets | ||||||||
Interest Rate Contracts | $ - | $149,633 | $ - | $149,633 | ||||
| Liabilities | ||||||||
Interest Rate Contracts | $ - | $286,762 | $ - | $286,762 |
Inc.
| 2008 Acquisitions | ||
| Investment in real estate: | ||
| Land | $ | 61,870 |
| Buildings and improvements | 494,958 | |
| Tenant improvements and other in-place lease assets | 61,870 | |
| Tenant receivables and other assets | 2,386 | |
| Accounts payable, accrued expenses and tenant security deposits | (6,190) | |
| Acquired intangible assets other than leases | 658 | |
| Net acquisition cost | $ | 615,552 |
| March 31, 2008 | December 31, 2007 | |||||||
| Above-market tenant leases | $ | 32,770 | $ | 32,770 | ||||
| Accumulated amortization | (13,648 | ) | (11,564 | ) | ||||
| Below-market ground leases | 3,198 | 3,198 | ||||||
| Accumulated amortization | (110 | ) | (91 | ) | ||||
| Acquired lease intangible assets, net | $ | 22,210 | $ | 24,313 | ||||
| Below-market tenant leases | $ | 261,260 | $ | 261,260 | ||||
| Accumulated accretion | (69,006 | ) | (57,112 | ) | ||||
| Above-market ground leases | 16,200 | 16,200 | ||||||
| Accumulated accretion | (2,384 | ) | (1,977 | ) | ||||
| Acquired lease intangible liabilities, net | $ | 206,070 | $ | 218,371 | ||||
| September 30, 2007 | December 31, 2006 | |||||
Deferred loan costs, net of accumulated amortization of $950 and $168 at September 30, 2007 and December 31, 2006, respectively | $ | 5,246 | $ | 4,356 | ||
Restricted cash | 2,841 | 2,827 | ||||
Prepaid interest | 6,621 | 4,953 | ||||
Prepaid expenses | 5,113 | 3,291 | ||||
Interest receivable | 3,368 | 3,015 | ||||
Other indefinite-lived intangible | 1,988 | 1,988 | ||||
Other | 1,354 | 257 | ||||
| $ | 26,531 | $ | 20,687 | |||
at:
| March 31, | December 31, | |||||||
| 2008 | 2007 | |||||||
Deferred loan costs, net of accumulated amortization of $1,666 and $1,304 at March 31, 2008 and December 31, 2007, respectively | $ | 6,635 | $ | 4,987 | ||||
| Deposits in escrow | - | 4,000 | ||||||
| Restricted cash | 2,833 | 2,848 | ||||||
| Prepaid interest | 3,997 | 7,944 | ||||||
| Prepaid expenses | 2,873 | 3,095 | ||||||
| Interest receivable | 3,818 | 3,229 | ||||||
| Other indefinite-lived intangible | 1,988 | 1,988 | ||||||
| Other | 4,893 | 3,305 | ||||||
| $ | 27,037 | $ | 31,396 | |||||
October 1, 2007 to December 31, 2007 | $ | 81,634 | |
2008 | 315,551 | ||
2009 | 281,857 | ||
2010 | 240,663 | ||
2011 | 194,845 | ||
Thereafter | 625,818 | ||
Total future minimum base rentals | $ | 1,740,368 | |
| April 1, 2008 to December 31, 2008 | $ | 383,171 |
| 2009 | 355,705 | |
| 2010 | 305,977 | |
| 2011 | 252,424 | |
| 2012 | 202,993 | |
| Thereafter | 529,343 | |
| Total future minimum base rentals | $ | 2,029,613 |
| September 30, 2007 | December 31, 2006 | |||||
Accounts payable | $ | 46,595 | $ | 32,978 | ||
Accrued interest payable | 12,611 | 12,701 | ||||
Deferred revenue | 5,308 | 6,057 | ||||
| $ | 64,514 | $ | 51,736 | |||
| March 31, 2008 | December 31, 2007 | |||||
| Accounts payable | $ | 45,298 | $ | 43,449 | ||
| Accrued interest payable | 15,290 | 13,963 | ||||
| Deferred revenue | 6,294 | 5,292 | ||||
| $ | 66,882 | $ | 62,704 | |||
| · | We obtained a $380 million bridge loan from an affiliate of the seller in the March 2008 acquisitions described in Note 3. This loan has an interest rate of LIBOR plus 200 basis points and a nine-month term. |
| · | We obtained a non-recourse $340 million term loan secured by four of our previously unencumbered office properties. This loan bears interest at a floating rate equal to LIBOR plus 150 basis points, but we have entered into interest rate swap contracts that effectively fix the interest rate at 4.84%, effective in the second quarter of 2008 until January 2, 2013. This loan facility matures on April 1, 2015. Proceeds from this loan were utilized to repay our secured revolving credit facility and for general corporate purposes. At March 31, 2008, $225 million was outstanding, leaving $115 million available to us under this loan. See Note 13. |
| · | The joint venture, in which we have a two-thirds interest, obtained an $18 million loan that financed the February 2008 acquisition described in Note 3. This loan has an interest rate of LIBOR plus 125 basis points and a two-year term with a one-year extension. |
Inc.
7. Secured Notes Payable
In June 2007, we borrowed an additional $150 million of long term variable rate debt. This included an increase of $132 million in our existing loan facilities with Fannie Mae, plus additional loan facilities with Fannie Mae totaling $18 million. These loans are secured by our residential properties with maturity dates ranging from June 1, 2012 to June 1, 2017. Concurrent with the incremental borrowings, we entered into interest rate contracts to swap the underlying variable rates to fixed rates. These contracts are designated as hedges and result in a weighted average fixed interest rate of approximately 5.87%.
Type of Debt | September 30, 2007 | December 31, 2006 | Fixed/Floating Rate | Effective Annual Interest Rate(1) | Maturity Date | Swap Maturity Date | |||||||||||
Variable Rate Swapped to Fixed Rate: | |||||||||||||||||
Modified Term Loan(2)(3) | $ | 2,300,000 | (3) | $ | 2,300,000 | LIBOR + 0.85% | 5.20 | % | 09/01/12 | 08/01/10-08/01/12 | |||||||
Fannie Mae Loan I(4) | 293,000 | 293,000 | DMBS + 0.60% | 4.76 | 06/01/12 | (5) | 08/01/11 | ||||||||||
Fannie Mae Loan II(4) | 75,000 | 75,000 | DMBS + 0.76% | 4.93 | 02/01/15 | 08/01/11 | |||||||||||
Fannie Mae Loan III(4) | 82,000 | 82,000 | LIBOR + 0.62% | 5.70 | 02/01/16 | 03/01/12 | |||||||||||
Fannie Mae Loan IV(4) | 95,080 | (6) | — | DMBS + 0.60% | 5.86 | 06/01/12 | 08/01/11 | ||||||||||
Fannie Mae Loan V(4) | 36,920 | (6) | — | DMBS + 0.60% | 5.86 | 02/01/15 | 08/01/11 | ||||||||||
Fannie Mae Loan VI(4) | 18,000 | (6) | — | LIBOR + 0.62% | 5.90 | 06/01/17 | 06/01/12 | ||||||||||
Subtotal | 2,900,000 | (7) | 2,750,000 | 5.20 | % | ||||||||||||
Variable Rate: | |||||||||||||||||
Senior Secured Revolving Credit Facility(8) | 39,100 | 10,000 | LIBOR /Fed Funds +(9) | — | 10/30/09 | — | |||||||||||
Subtotal | 2,939,100 | 2,760,000 | |||||||||||||||
Unamortized Loan Premium(10) | 26,371 | 29,702 | |||||||||||||||
Total | $ | 2,965,471 | $ | 2,789,702 | |||||||||||||
| Type of Debt | March 31, 2008 | December 31, 2007 | Fixed/Floating Rate | Effective Annual Interest Rate(1) | Maturity Date | Swap Maturity Date | |||||
| Variable Rate Swapped to Fixed Rate: | |||||||||||
Modified Term Loan I(2)(3) | $2,300,000 | $2,300,000 | LIBOR + 0.85% | 5.20% | 08/31/12 | 08/01/10-08/01/12 | |||||
Term Loan II(4)(5) | 225,000 | - | LIBOR + 1.50% | --(5) | 04/01/15 | -- | |||||
Fannie Mae Loan I (6) | 293,000 | 293,000 | DMBS + 0.60% | 4.76 | 06/01/12 | 08/01/11 | |||||
Fannie Mae Loan II(6) | 95,080 | 95,080 | DMBS + 0.60% | 5.86 | 06/01/12 | 08/01/11 | |||||
Fannie Mae Loan III(6) | 36,920 | 36,920 | DMBS + 0.60% | 5.86 | 02/01/15 | 08/01/11 | |||||
Fannie Mae Loan IV(6) | 75,000 | 75,000 | DMBS + 0.76% | 4.93 | 02/01/15 | 08/01/11 | |||||
Fannie Mae Loan V(6) | 82,000 | 82,000 | LIBOR + 0.62% | 5.70 | 02/01/16 | 03/01/12 | |||||
Fannie Mae Loan VI(6) | 18,000 | 18,000 | LIBOR + 0.62% | 5.90 | 06/01/17 | 06/01/12 | |||||
| Subtotal | 3,125,000 | (7) | 2,900,000 | 5.20% | |||||||
| Variable Rate: | |||||||||||
| General Electric Bridge Loan | 380,000 | -- | LIBOR + 2.00% | 01/02/09 | -- | ||||||
Wells Fargo Loan(8) | 18,000 | -- | LIBOR + 1.25% | 03/01/10 | -- | ||||||
$370 Million Senior Secured Revolving Credit Facility(9) | 182,300 | 180,450 | LIBOR / Fed Funds+(10) | 10/30/09 | -- | ||||||
| Subtotal | 3,705,300 | 3,080,450 | |||||||||
Unamortized Loan Premium(11) | 24,068 | 25,227 | |||||||||
| Total | $3,729,368 | $3,105,677 |
| (1) | Includes the effect of interest rate contracts. Based on actual/365-day basis and excludes amortization of loan fees and unused fees on credit line. |
| (2) | Secured by seven separate cross collateralized pools. Requires monthly payments of interest only, with outstanding principal due upon maturity. |
| (3) | Includes $1.11 billion swapped to 4.89% until August 1, 2010; $545.0 million swapped to 5.75% until December 1, 2010; $322.5 million swapped to 4.98% until August 1, 2011; and $322.5 million swapped to 5.02% until August 1, 2012. |
| (4) | Represents a $340 million loan facility, of which $225 million was funded on March 18, 2008. The remaining $115 million will be funded on May 1, 2008. Secured by four properties in a separate cross-collateralized pool. Requires monthly payments of interest only, with outstanding principal due upon maturity. |
| (5) | During the first quarter, we entered into interest rate swap contracts that effectively fix the interest rate on this $340 million facility at 4.84% (or 4.77% on an actual/360-day basis) effective in the second quarter of 2008. |
| (6) | Secured by four separate collateralized pools. Fannie Mae Discount Mortgage-Backed Security (DMBS) generally tracks 90-day LIBOR. |
| (7) |
| (8) |
| (9) | This credit facility is secured by nine properties and has |
| This revolver bears interest at either LIBOR +0.70% or Fed Funds |
| Represents non-cash mark-to-market adjustment on variable rate debt associated with office properties. |
Inc.
October 1, 2007 to December 31, 2007 | $ | — | |
2008 | — | ||
2009 | 39,100 | ||
2010 | — | ||
2011 | — | ||
Thereafter | 2,900,000 | ||
Total future principal | $ | 2,939,100 | |
| April 1, 2008 to December 31, 2008 | $ | - |
| 2009 | 562,300 | |
| 2010 | 18,000 | |
| 2011 | - | |
| 2012 | 2,688,080 | |
| Thereafter | 436,920 | |
| Total future principal | $ | 3,705,300 |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Douglas Emmett, Inc. | The Predecessor | Douglas Emmett, Inc. | The Predecessor | |||||||||||||
Net loss | $ | (2,785 | ) | $ | (25,706 | ) | $ | (7,318 | ) | $ | (7,885 | ) | ||||
Cash flow hedge adjustment | (65,103 | ) | — | (34,318 | ) | — | ||||||||||
Comprehensive income | $ | (67,888 | ) | $ | (25,706 | ) | $ | (41,636 | ) | $ | (7,885 | ) | ||||
| Three Months Ended March 31, | ||||||||
| 2008 | 2007 | |||||||
| Net loss | $ | (2,500 | ) | $ | (3,273 | ) | ||
| Cash flow hedge adjustment | (90,846 | ) | (11,888 | ) | ||||
| Comprehensive income | $ | (93,346 | ) | $ | (15,161 | ) | ||
Douglas Emmett, Inc
Notes
(in thousands, except shares and per share data)
9. Equity Repurchases
During the nine months ended September 30, 2007, we repurchased approximately 6.41.1 million share equivalents in private transactions for a total consideration of approximately $154.4$23.8 million. We may make additional purchases of our share equivalents from time to time in private transactions or in the public markets, but do not have any commitments to do so.
10. Related-Party Transactions
During
Our predecessor paid $1.7 milliondebt, revenue recognition, compensation expense and $5.6 million in real estate commissions to DECO for the three and nine months ended September 30, 2006, respectively. The commissions paid to DECO were accounted for as leasing costs and were included in our predecessor’s investment in real estate in the consolidated balance sheets for the period prior to our IPO.
Our predecessor expensed $2.6 million and $7.4 million in property management fees related to management services by DECO for the three and nine months ended September 30, 2006, respectively. These management fees were based upon percentages, ranging from 1.75% to 4.00%, of the rental cash receipts collected by the properties.
Our predecessor contributed its share of discretionary profit-sharing contributions (subject to statutory limitations), totaling $192 during the nine months ended September 30, 2006 for services rendered by employees of DECO. No amounts were contributed during the three months ended September 30, 2006.
Our predecessor contracted with DEB, an operating company owned by the stockholders of DERA and acquired by us in the formation transactions, to provide building and tenant improvement work. For the three and nine months ended September 30, 2006, $5.6 million and $10.4 million, respectively, was paid to DEB for contracting work performed. This amount was included in the cost basis of buildingsdepreciable assets and tenant improvements in the consolidated balance sheet of our predecessor.
Our predecessor leased approximately 26,785 square feet of office spaceestimated useful lives used to DECO and DEB. The rents from these leases totaled $200 and $599 for the three and nine months ended September 30, 2006, respectively.
On Marchcompute depreciation.
- -
Inc.
(FAS 123R), which is a revision of FAS 123, Accounting for Stock-Based Compensation. Generally, the approach in FAS 123R is similar to the approach described in FAS 123. However, FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
Litigation
October 1, 2007 to December 31, 2007 | $ | 795 | |
2008 | 3,178 | ||
2009 | 3,309 | ||
2010 | 3,335 | ||
2011 | 3,335 | ||
Thereafter | 112,004 | ||
Total future minimum ground lease payments | $ | 125,956 | |
March 31, 2008:
| April 1, 2008 to December 31, 2008 | $ | 633 | |
| 2009 | 707 | ||
| 2010 | 733 | ||
| 2011 | 733 | ||
| 2012 | 733 | ||
| Thereafter | 4,520 | ||
| $ | 8,059 |
Douglas Emmett, Inc
Notes to Consolidated Financial Statements (continued)
(in thousands, except sharesrental revenue and per share data)tenant reimbursements.
| Douglas Emmett, Inc. | Predecessor | |||||||||||||||||||||||
| Three Months Ended September 30, 2007 | Three Months Ended September 30, 2006 | |||||||||||||||||||||||
| Office | Multifamily | Total | Office | Multifamily | Total | |||||||||||||||||||
Rental revenues | $ | 113,433 | $ | 17,499 | $ | 130,932 | $ | 90,253 | $ | 14,611 | $ | 104,864 | ||||||||||||
Percentage of total | 87 | % | 13 | % | 100 | % | 86 | % | 14 | % | 100 | % | ||||||||||||
Rental expenses | $ | 32,817 | $ | 4,332 | $ | 37,149 | $ | 34,490 | $ | 4,763 | $ | 39,253 | ||||||||||||
Percentage of total | 88 | % | 12 | % | 100 | % | 88 | % | 12 | % | 100 | % | ||||||||||||
Rental revenues less rental expenses | $ | 80,616 | $ | 13,167 | $ | 93,783 | $ | 55,763 | $ | 9,848 | $ | 65,611 | ||||||||||||
Percentage of total | 86 | % | 14 | % | 100 | % | 85 | % | 15 | % | 100 | % | ||||||||||||
| Douglas Emmett, Inc. | Predecessor | |||||||||||||||||||||||
| Nine months Ended September 30, 2007 | Nine months Ended September 30, 2006 | |||||||||||||||||||||||
| Office | Multifamily | Total | Office | Multifamily | Total | |||||||||||||||||||
Rental revenues | $ | 333,347 | $ | 51,909 | $ | 385,256 | $ | 269,706 | $ | 41,335 | $ | 311,041 | ||||||||||||
Percentage of total | 87 | % | 13 | % | 100 | % | 87 | % | 13 | % | 100 | % | ||||||||||||
Rental expenses | $ | 96,907 | $ | 13,127 | $ | 110,034 | $ | 95,622 | $ | 13,459 | $ | 109,081 | ||||||||||||
Percentage of total | 88 | % | 12 | % | 100 | % | 88 | % | 12 | % | 100 | % | ||||||||||||
Rental revenues less rental expenses | $ | 236,440 | $ | 38,782 | $ | 275,222 | $ | 174,084 | $ | 27,876 | $ | 201,960 | ||||||||||||
Percentage of total | 86 | % | 14 | % | 100 | % | 86 | % | 14 | % | 100 | % | ||||||||||||
Douglas Emmett, Inc
Notes to Consolidated Financial Statements (continued)
(in thousands, except shares and per share data)
| Three Months Ended March 31, 2008 | ||||||||||||
| Office | Multifamily | Total | ||||||||||
| Rental revenues | $ | 117,044 | $ | 17,784 | $ | 134,828 | ||||||
| Percentage of total | 87 | % | 13 | % | 100 | % | ||||||
| Rental expenses | $ | 31,364 | $ | 3,877 | $ | 35,241 | ||||||
| Percentage of total | 89 | % | 11 | % | 100 | % | ||||||
| Rental revenues less rental expenses | $ | 85,680 | $ | 13,907 | $ | 99,587 | ||||||
| Percentage of total | 86 | % | 14 | % | 100 | % | ||||||
| Three Months Ended March 31, 2007 | ||||||||||||
| Office | Multifamily | Total | ||||||||||
| Rental revenues | $ | 110,898 | $ | 17,005 | $ | 127,903 | ||||||
| Percentage of total | 87 | % | 13 | % | 100 | % | ||||||
| Rental expenses | $ | 33,294 | $ | 4,923 | $ | 38,217 | ||||||
| Percentage of total | 87 | % | 13 | % | 100 | % | ||||||
| Rental revenues less rental expenses | $ | 77,604 | $ | 12,082 | $ | 89,686 | ||||||
| Percentage of total | 87 | % | 13 | % | 100 | % | ||||||
| Three Months Ended September 30, | Nine months Ended September 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Douglas Emmett, Inc. | Predecessor | Douglas Emmett, Inc. | Predecessor | |||||||||||||
Rental revenues less rental expenses | $ | 93,783 | $ | 65,611 | $ | 275,222 | $ | 201,960 | ||||||||
Add: | ||||||||||||||||
Interest and other income | 205 | 1,426 | 659 | 3,974 | ||||||||||||
Gain on investments in interest rate contracts, net | — | — | — | 5,992 | ||||||||||||
Less: | ||||||||||||||||
General and administrative expenses | (5,862 | ) | (10,415 | ) | (16,024 | ) | (13,551 | ) | ||||||||
Loss on investments in interest rate contracts, net | — | (53,975 | ) | — | — | |||||||||||
Deficit distributions to minority partners, net | — | (11,554 | ) | — | (5,306 | ) | ||||||||||
Interest expense | (41,504 | ) | (28,508 | ) | (118,119 | ) | (86,563 | ) | ||||||||
Depreciation and amortization | (50,629 | ) | (31,604 | ) | (152,244 | ) | (85,220 | ) | ||||||||
Minority interests | 1,222 | 47,338 | 3,188 | (17,096 | ) | |||||||||||
Preferred minority investor | — | (4,025 | ) | — | (12,075 | ) | ||||||||||
Net loss | $ | (2,785 | ) | $ | (25,706 | ) | $ | (7,318 | ) | $ | (7,885 | ) | ||||
loss:
| Three Months Ended March 31, | ||||||||
| 2008 | 2007 | |||||||
| Rental revenues less rental expenses | $ | 99,587 | $ | 89,686 | ||||
| Interest and other income | 409 | 82 | ||||||
| General and administrative expenses | (5,285 | ) | (5,042 | ) | ||||
| Interest expense | (41,203 | ) | (38,302 | ) | ||||
| Depreciation and amortization | (56,749 | ) | (51,121 | ) | ||||
| Minority interests | 741 | 1,424 | ||||||
| Net loss | $ | (2,500 | ) | $ | (3,273 | ) | ||
the office building that we now own. The total sales price was not material.
Statements.
The risks included here are not exhaustive,
Basis of Presentation
The accompanying consolidated financial statements as of December 31, 2006 and September 30, 2007, and for the three and nine months ended September 30, 2007, are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries including our operating partnership. Douglas Emmett, Inc. is a Maryland corporation formed on June 28, 2005 which did not have any meaningful operating activity until the consummation of our IPO and the related acquisition of our predecessor and certain other entities in October 2006. For a detailed descriptiondate of this transaction and our resulting organization, see footnote 1 “Organization and Basis of Presentation” to our consolidated financial statements included in this Quarterly Report on Form 10-Q and footnote 1 “Organization and Description of Business” to our consolidated financial statements included in our 2006 Annual Report on Form 10-K. The financial statements for the three and nine months ended September 30, 2006 represent the consolidated financial statements of our predecessor. They include the accounts of DERA and the institutional funds, but do not include the accounts of the non-predecessor entities which were acquired at the time of our IPO. Because the 2007 and 2006 periods reflect significant differences in both the assets included and the ongoing economic impact resulting from our formation transactions, the results are in many cases not directly comparable and we urge readers to be even more than usually cautious in using them to predict future results.
Report.
policies.
As discussed under “Basis of Presentation” above, our results of operations for 2007 periods contain the consolidated results of Douglas Emmett, Inc. and its subsidiaries, including our operating partnership, while our results of operations for 2006 periods reflect those of our predecessor, which includes the accounts of DERA and the institutional funds. Our results of operations were significantly affected by our acquisition and repositioning activities in both 2006 and 2007. As a consequence, our results are not comparable from period to period due to the varying timing of acquisitions, including the eight properties acquired at the time of our IPO, and the impact of lease-up periods or increased vacancy resulting from repositioning activities. Generally, repositioning activities consist of a range of improvements to a property, involving a complete structural renovation of a building to significantly upgrade the character of the property, or merely targeted remodeling of common areas and tenant spaces to make the property more attractive to certain identified tenants. We often strategically purchase properties with large vacancies or expected near-term lease roll-over, identify them as repositioning properties and use our well developed knowledge of the property and submarket to determine the optimal use and tenant mix Each repositioning has resulted in a period of varying degrees of depressed rental revenue and occupancy levels for the affected property, which impacts our results and, accordingly, comparisons of our performance from period to period. The repositioning process generally occurs in stages over the course of months or even years.
Through our interest in Douglas Emmett Properties, LP (our operating partnership) and its subsidiaries, at September 30, 2007 our office portfolio consisted of 47 properties with approximately 11.6 million rentable square feet, including an approximate 50,000 square foot building that we acquired in May 2007 in our Century City submarket, and our multifamily portfolio consists of nine properties with a total of 2,868 units. As of September 30, 2007, our office portfolio was 95.7% leased, and our multifamily properties were 99.3% leased. Our office portfolio contributed approximately 84.9% of our annualized rent as of September 30, 2007, while our multifamily portfolio contributed the remaining 15.1%this Report):
· | In March 2008, we acquired a 1.4 million square foot office portfolio consisting of six Class “A” buildings located in its core Los Angeles submarkets – Santa Monica, Beverly Hills, Sherman Oaks/Encino and Warner Center/Woodland Hills – for a contract price of approximately $610 million. |
· | In February 2008, we acquired a 78,298 square-foot office building located in Honolulu, Hawaii. As part of the same transaction, we also acquired all of the assets of The Honolulu Club, a private membership athletic and social club, which is located in the building. The aggregate contract price was approximately $18 million and the purchase was made in a consolidated joint venture with our local partner. |
Our repositioning efforts impacted our operating results in both 2006 and 2007. Upon completion of our repositioning efforts, we expect that we will be able to stabilize occupancy at these properties at levels consistent with the rest of our portfolio. In our office portfolio, our repositioning properties include the results of Warner Center Towers, The Trillium and Bishop Place for all periods presented. In addition, Harbor Court was a repositioning property during 2006. Our office acquisition properties consist of four properties acquired at the time of our IPO in October 2006 (Brentwood Court, Brentwood Plaza, Brentwood San Vicente Medical and San Vicente Plaza) and one additional office property acquired in May 2007, as described above. In addition, in our multifamily portfolio, we acquired four properties during the periods being reported: Royal Kunia in March 2006 and Barrington/Kiowa, Barry and Kiowa at the time of our formation transactions in October 2006.
In the secondfirst quarter of 2007, based on2008, we completed the following transactions (see Note 7 to our most recent judgment of the ongoing reassessment process, we reduced the accrual for property tax expenses expected to result from the reassessment of propertiesconsolidated financial statements included in connection with our IPO. However, until that process is final, our accruals are only estimates of the actual outcome. We will continue to evaluate potential increases in property taxes and will adjust future accruals if we believe appropriate.
this Report):
| · | We obtained a non-recourse $340 million term loan secured by four of our previously unencumbered office properties. At March 31, 2008, $225 million was outstanding, and the remaining $115 million was funded on May 1, 2008. |
| · | We obtained a $380 million bridge loan from an affiliate of the seller in the March 2008 acquisitions described above. |
| · | The joint venture, in which we have a two-thirds interest, obtained an $18 million loan that financed the February 2008 acquisition described above. |
| Comparison of three months ended March 31, 2008 to three months ended March 31, 2007 |
Revenue
Office Revenue
Total Office Revenue. Total office revenue consists of rent,rental revenue, tenant recoveries and parking and other income. Total office portfolio revenue increased by $23.2$6.1 million, or 25.7%,5.5 %, to $113.4$117.0 million for the three months ended September 30, 2007March 31, 2008 compared to $90.3$110.9 million for the three months ended September 30, 2006March 31, 2007 for the reasons described below.
Total Multifamily Revenue.Total multifamily revenue consists of rent, and parking income and other income. Total multifamily portfolio revenue increased by $2.9$0.8 million, or 19.8%4.6%, to $17.5$17.8 million for the three months ended September 30, 2007March 31, 2008, compared to $14.6$17.0 million for the three months ended September 30, 2006,March 31, 2007. The increase is primarily due to the four multifamily property acquisitionsan increase in our formation transactions. In addition, a portion of the multifamilyoccupancy and an increase was duein rents charged to the rollover to market rents (since July 1, 2006) of several of ourboth new and existing tenants, including increases for select Santa Monica multifamily units. These units which were under leases signed prior to a 1999 change in California lawLaw that allows landlords to raisereset rents to market rates when a tenant moves out ( “Pre-1999 Units”). The remainder of the increase was primarily due to increases in rents charged to other existing and new tenants. In addition, we recognized approximately $1.9 million of incremental rent related to the amortization of net below-market rents that resulted from the mark to market adjustments to our leases that we recorded in connection with our IPO.
Operating Expenses
Office Expense. Total portfolio office rental expense decreased by $1.7 million, or 4.9%, to $32.8 million for the three months ended September 30, 2007 compared to $34.5 million for the three months ended September 30, 2006, reflecting higher utilities costs in 2006 as a result of a warmer than average summer, partially offset by higher costs in 2007 as a result of additional properties in our portfolio.
General and Administrative. General and administrative expenses for the three months ended September 30, 2007 decreased $4.6 million to $5.9 million for the three months ended September 30, 2007 compared to $10.4 million for the three months ended September 30, 2006. The decrease is primarily due to the accrual in 2006 of a one time discretionary cash bonus paid by our predecessor to its employees prior to the consummation of the IPO. This comparative decrease was partially offset by various costs incurred subsequent to our IPO associated with our status as a publicly-traded REIT, including legal and audit fees, directors and officers insurance and costs related to our compliance with section 404 of Sarbanes-Oxley.
Depreciation and Amortization. Depreciation and amortization expense increased $19.0 million, or 60.2%, to $50.6 million for the three months ended September 30, 2007 compared to $31.6 million for the three months ended September 30, 2006. The increase was primarily due to depreciation of the higher cost basis for each existing property in our portfolio as a result of recording these real estate assets at market value in connection with our IPO and formation transactions, as well as incremental depreciation related to the nine office and multifamily properties we acquired as described above.
Non-Operating Income and Expenses
Gain on Investments in Interest Rate Contracts, Net. We recognized a net loss of $54.0 million on investments in interest rate contracts for the three months ended September 30, 2006 due to changes in the fair market value of our in-place interest rate swap contracts during the applicable three-month period. In conjunction with our IPO, we entered into a series of interest rate swaps that effectively offset any future changes in the fair value of our predecessor’s existing interest rate contracts.out. Therefore, no comparable gain or loss was recognized during the three months ended September 30, 2007.
Interest Expense. Interest expense increased $13.0 million, or 45.6%, to $41.5 million for the three months ended September 30, 2007 compared to $28.5 million for the three months ended September 30, 2006. The increase was primarily due to an increase in our average outstanding debt related to $545 million borrowed in the fourth quarter of 2006 to fund a portion of the formation transactions related to our IPO and the $150 million of incremental debt borrowed during the second quarter of 2007 fund repurchases of equity and the purchase of our new property in Century City. The remaining increase in interest expense was primarily due to borrowings outstanding under our corporate revolver during the three months ended September 30, 2007.
Deficit Distribution to Minority Partners, Net. Deficit distribution to minority partners, net was a $11.6 million net distribution for the three months ended September 30, 2006. The expense was primarily due to distributions to limited partners exceeding the net income attributable to the limited partners in three of the institutional funds included in our predecessor. This category was not applicable subsequent to our IPO and therefore no such amount was recorded in 2007.
Minority Interests.Minority interest income totaling $1.2 million was recognized for the three months ended September 30, 2007 compared to a $43.3 million expense for the three months ended September 30, 2006 resulting in a net difference of $42.1 million. The amount in 2006 represents the limited partners’ ownership interest in our predecessor, including a preferred minority investor. The amount in 2007 represents the portion of results attributable to minority ownership interests in our operating partnership.
Comparison of nine months ended September 30, 2007 to nine months ended September 30, 2006
Revenue
Office Revenue
Total Office Revenue. Total office portfolio revenue increased by $63.6 million, or 23.6%, to $333.3 million for the nine months ended September 30, 2007 compared to $269.7 million for the nine months ended September 30, 2006 for the reasons described below.
Rent. Total office portfolio rent increased by $51.6 million, or 22.7%, to $279.1 million for the nine months ended September 30, 2007 compared to $227.4 million for the nine months ended September 30, 2006, primarily due to incremental rent from the four properties we acquired in the fourth quarter of 2006 and one property we acquired in the second quarter of 2007, as described above, and gains in occupancy at our four repositioning properties. Rent also increased for the remainder of our office portfolio that was not acquired or repositioned during the periods presented, primarily due to gains in occupancy and increases in average rental rates for new and renewal leases signed since January 1, 2006. In addition, we recognized approximately $23.1 million of incremental rent related to the amortization of net below-market rents that resulted from the mark to market adjustments to our leases that we recorded in connection with our IPO.
Tenant Recoveries. Total office portfolio tenant recoveries increased by $6.7 million, or 50.2%, to $19.9 million for the nine months ended September 30, 2007 compared to $13.3 million for the nine months ended September 30, 2006 primarily due to incremental recoveries from the four properties acquired in the fourth quarter of 2006 and one property acquired in the second quarter of 2007, as described above. The overall increase is also attributable to increases in tenant recoveries at our repositioning properties due to increases in occupancy and recoveries related to increases in operating expenses, as discussed below, for the remainder of our office portfolio.
Parking and Other Income. Total office portfolio parking and other income increased by $5.3 million, or 18.4%, to $34.3 million for the nine months ended September 30, 2007 compared to $29.0 million for the nine months ended September 30, 2006. This increase was primarily due to gains in occupancy in our repositioning properties and parking rate increases implemented in July 2006 and July 2007 across the portfolio.
Multifamily Revenue
Total Multifamily Revenue. Total multifamily portfolio revenue increased by $10.6 million, or 25.6%, to $51.9 million for the nine months ended September 30, 2007 compared to $41.3 million for the nine months ended September 30, 2006, primarily due to the four multifamily property acquisitions in our formation transactions, as well as Villas at Royal Kunia, which we acquired in March 2006. In addition, a portion of the multifamily increase was due to the rollover to market rents of several of these rent-controlled units, or “Pre-1999 Units”, since JanuaryApril 1, 2006. The remainder of2007.
Office Expense.. Total portfolio officemultifamily rental expense increaseddecreased by $1.3$1.0 million, or 1.3%21.2%, to $96.9$3.9 million for the ninethree months ended September 30, 2007March 31, 2008, compared to $95.6$4.9 million for the ninethree months ended September 30, 2006, reflectingMarch 31, 2007. This is primarily due to a reduction in the additionalaccrual of property tax expenses based on our judgment of the ongoing reassessment process of properties acquired in connection with our formation transactions, increases in contractual expenses, including janitorialIPO.
General and Administrative. General and administrative expenses for the nine months ended September 30, 2007amortization expense increased $2.5$5.6 million, or 11.0%, to $16.0$56.7 million for the ninethree months ended September 30, 2007March 31, 2008, compared to $13.6$51.1 million for the ninethree months ended September 30, 2006.March 31, 2007. The increase is primarily due to publicly-traded REIT related costs subsequent to our IPO, including legal and audit fees, directors and officers insurance and costs related to our compliance with section 404 of Sarbanes-Oxley. The comparable increase in expense is partially offset by an accrual in 2006 for a one time discretionary cash bonus paid by our predecessor to its employees prior to the consummationfinalization of the IPO.
Depreciationpurchase price allocation and Amortization. Depreciation and amortization expense increased $67.0 million, or 78.6%, to $152.2 million for the nine months ended September 30, 2007 compared to $85.2 million for the nine months ended September 30, 2006. The increase was primarily due to depreciationrelated lives of the higher cost basis for each existing property in our portfolio as a result of recording these real estate assets combined at market value in connection withthe time of our IPO and formation transactions, as well as incremental depreciation related tofrom the nine office and multifamily properties we acquired subsequent to April 1, 2007, including the seven additional properties we acquired in the first quarter of 2008, as described above.
Interest Expense.. Interest expense increased $31.6$2.9 million, or 36.5%7.6%, to $118.1$41.2 million for the ninethree months ended September 30, 2007March 31, 2008, compared to $86.6$38.3 million for the ninethree months ended September 30, 2006.March 31, 2007. The increase was primarily due to an increase in our average outstanding debt related toincremental interest from the $545 million borrowed in the fourth quarter of 2006 to fund a portion of the formation transactions related to our IPO and an additional $150 million borrowed during the second quarter of 2007, to fund our equity repurchase program and the purchase of our new property in Century City. The remaining increase in interest expense was primarily due to borrowings outstanding under our corporate revolver, and the additional $623 million borrowed during the nine months ended September 30, 2007.
Deficit Recoverycurrent quarter to fund the purchase of our new acquisition properties. These increases were partially offset by the $1.2 million credit valuation adjustment resulting from Minority Partners, Net. Deficit recovery from minority partners, net was a $5.3 million net recovery for the nine months ended September 30, 2006. The revenue was primarily due to the net income attributable to limited partners exceeding distributions to the limited partners in threeinitial application of the institutional funds included in our predecessor, resulting in the reversal of a portion of the deficit distribution expense incurred in prior periods. This category was not applicable subsequent to our IPO and therefore no such amount was recorded in 2007.FAS 157.
Minority Interests.Minority interest income totaling $3.2 million was recognized for the nine months ended September 30, 2007 compared to a $29.2 million expense for the nine months ended September 30, 2006 resulting in a net difference of $32.4 million. The amount in 2006 represents the limited partners’ ownership interest in our predecessor, including a preferred minority investor. The amount in 2007 represents the portion of results attributable to minority ownership interests in our operating partnership.
In June 2007, we borrowed an additional $150 million of long term variable rate debt. This included an increase of $132 million in our existing loan facilities with Fannie Mae, plus additional loan facilities with Fannie Mae totaling $18 million. These loans are secured by our residential properties with maturity dates ranging from June 1, 2012 to June 1, 2017. Concurrent with the incremental borrowings, we entered into interest rate contracts to swap the underlying variable rates to fixed rates. These contracts are designated as hedges and result in a weighted average fixed interest rate of approximately 5.87%.
Report.
At September 30, 2007, our total borrowings under secured loans represented 42.8% of our total market capitalization of $6.9 billion. Total market capitalization includes our consolidated debt, excluding the unamortized loan premium, and the value of common stock and operating partnership units each based on our common stock closing price on the New York Stock Exchange of $24.73 per share on September 28, 2007, the last trading day of the quarter.
During the nine months ended September 30, 2007, we repurchased approximately 6.4 million share equivalents in private transactions for total consideration of approximately $154.4 million. We may make additional purchases from time to time in private transactions or in the public markets, but do not have any commitments to do so.
The nature of our business, and the requirement imposed by REIT rules that we distribute a substantial majority of our taxable income on an annual basis, will cause us to have substantial liquidity needs over both the short term and the long term. During 2007, we have paid three quarterly dividends of $0.175 per share, which equals an annual rate of $0.70 per share. In addition, on January 15, 2007 we paid a dividend of $0.12 per share, which represented a prorated quarterly dividend for the period from October 31, 2006 to December 31, 2006.
We expect that our liquidity needs will consist primarily of funds necessary to pay for distributions to our stockholders, acquisitions, redevelopment and repositioning of properties, non-recurring capital expenditures, any equity repurchases and repayment of indebtedness at maturity. We expect to meet our operating liquidity requirements and distributions to our stockholders through cash provided by operations and, if necessary, by drawing upon our revolving credit facility. We anticipate that cash provided by operations and borrowings under our senior secured revolving credit facility will be sufficient to meet our liquidity requirements for at least the next 12 months.
We expect to satisfy our long term liquidity requirements through cash flow from operations, long-term secured and unsecured indebtedness, the issuance of debt and equity securities, including units in our operating partnership, property dispositions and joint venture transactions.
Cash Flows
Net cash provided by operating activities increased $16.2 million to $124.3 million for the nine months ended September 30, 2007, compared to $108.0 million for the nine months ended September 30, 2006. The increase reflects higher net cash flow from existing properties that generated higher quarter over quarter results, as described in results of operations above, as well as incremental net cash flow from acquired properties. This increase was partially offset by higher payments of financing costs in 2007 as a result of a greater average outstanding debt balance.
Net cash used in investing activities decreased $80.7 million to $72.6 million for the nine months ended September 30, 2007 compared to $153.3 million for the nine months ended September 30, 2006. The decrease was primarily due to a lower level of spending on property acquisitions in
Cash flow related to financing activities decreased from an inflow of $56.3 million in the first nine months of 2006 to an outflow of $54.2 million for the first nine months of 2007. During 2007, the net cash outflow represents the payment of dividends and distributions, partially offset by borrowings in excess of equity repurchases.
Contractual Obligations
During the third quarter of 2007,2008, there were no material changes outside the ordinary course of our business in the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year ended December 31, 2006.
2007.
2007.
Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.
During 2006 and the first nine months of 2007, we made many changes to our accounting and finance environment in order to meet our new obligations as a public company. Although we had been preparing audited financial statements for many years, they did not need to comply with all of the requirements imposed on public companies. For example, our predecessor historically prepared financial statements for its funds on a “fair value” basis, which differs from the “historical cost” basis on which we now report. These changes and our new obligations as a public company required an expansion of our finance and accounting staff as well as changes in our disclosure controls and procedures during 2006 and the first nine months of 2007.
We anticipate further changes to our accounting and finance environment during the remainder of 2007 including the expansion of our accounting and finance staff. In particular, we were not required to comply with Section 404 of the Sarbanes Oxley Act of 2002 with respect to 2006, but will have to do so by the end of 2007. This will require us to document our internal controls over financial reporting. We also intend to take steps to make our internal controls and procedures more efficient through system improvements and automation. For example, because our current accounting software was better adapted to our predecessor’s needs, we intend to upgrade to a new accounting software package which is more commonly used by public REITs. As a result, during 2007 we will continue to make refinements to our disclosure controls and procedures as well as our internal controls over financial reporting.
Item 1. Legal Proceedings |
We are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe thatMost of these matters are generally covered by insurance. Management believesinsurance and we do not believe that the ultimate settlementoutcome of these actions will not have a material adverse effect on our financial position, results of operations or cash flows.
There have been no
Sales |
Sales. We did not make any unregistered sales of our securities during the quarter ended September 30, 2007.March 31, 2008.
| ISSUER PURCHASES OF EQUITY SECURITIES | ||
| Period | (a) Total Number of Share Equivalents Purchased | (b) Average Price Paid per Share (or Unit) |
| January 2008 | - | - |
| February 2008 | 1,000,000 | $21.55 |
| March 2008 | 105,867 | $20.86 |
| Total | 1,105,867 | $21.48 |
Period | (a) Total Number of Share Equivalents Purchased | (b) Average Price Paid per Share (or Unit) | |||
July 2007 | 4,349,301 | $ | 24.15 | ||
August 2007 | — | — | |||
September 2007 | — | — | |||
Total | 4,349,301 | $ | 24.15 | ||
None of theseAll purchases were made in private unsolicited transactions, not pursuant to a publicly announced program. All purchases were made in private unsolicited transactions.
Not applicable.
Item 5. Other Information (a) Additional Disclosures. |
None.
| ||
| Exhibit Number | Description | |
| 31.1 | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1) | |
| 32.2 | Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1) | |
| 10.1 | $18,000,000 Loan Agreement dated as of February 12, 2008 among DEG III, | |
| 10.2 | $340,000,000 Loan Agreement dated as of March 18, 2008 among Douglas Emmett 2007, LLC; Douglas Emmett Realty Fund 2002; Douglas Emmett 1995, LLC; the lenders party thereto, EuroHypo AG and ING Real Estate | |
| 10.3 | $380,000,000 Loan Agreement dated as of | |
| (1) | In accordance with SEC Release No. 33-8212, the following exhibit is being furnished, and is not being filed as part of this Report on Form 10 Q or as a separate disclosure document, and is not being incorporated by reference into any Securities Act of 1933 registration statement. |
DOUGLAS EMMETT, INC. | ||||||||||
| Date: | May 8, 2008 | By: | /s/ Jordan L. Kaplan | |||||||
| Jordan L. Kaplan | ||||||||||
| President and Chief Executive Officer | ||||||||||
| Date: | May 8, 2008 | By: | /s/ William Kamer | |||||||
| William Kamer | ||||||||||
| Chief Financial Officer | ||||||||||
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