DOUGLAS EMMETT INC
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2018
Commission file number 001-33106
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
|
July 27, 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
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
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 wholly-owned properties that have been owned and operated by us in a consistent manner, and reported in our consolidated results during the entire span of both periods being compared. We exclude from our same property subset any properties (i) acquired during the comparative periods; (ii) sold, held for sale, contributed or otherwise removed from our consolidated financial statements during the comparative periods; or (iii) that underwent a major repositioning project that we believed significantly affected its results during the comparative periods.
|
|
Short-Term Leases
|
Represents leases that expired on or before the reporting date or had a term of less than one year, including hold over tenancies, month to month leases and other short term occupancies.
|
|
Total Portfolio
|
Includes our Consolidated Portfolio plus the properties owned by our Funds.
|
4
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 for the fiscal year ended
December 31, 2017
. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
5
|
Douglas Emmett, Inc.
(In thousands, except share data)
|
|||||||
|
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Unaudited
|
|||||||
|
Assets
|
|
|
|
|
|||
|
Investment in real estate:
|
|
|
|
|
|||
|
Land
|
$
|
1,064,189
|
|
$
|
1,062,345
|
|
|
|
Buildings and improvements
|
7,945,119
|
|
7,886,201
|
|
|||
|
Tenant improvements and lease intangibles
|
802,868
|
|
756,190
|
|
|||
|
Property under development
|
111,760
|
|
124,472
|
|
|||
|
Investment in real estate, gross
|
9,923,936
|
|
9,829,208
|
|
|||
|
Less: accumulated depreciation and amortization
|
(2,136,480
|
)
|
(2,012,752
|
)
|
|||
|
Investment in real estate, net
|
7,787,456
|
|
7,816,456
|
|
|||
|
Cash and cash equivalents
|
170,391
|
|
176,645
|
|
|||
|
Tenant receivables, net
|
3,261
|
|
2,980
|
|
|||
|
Deferred rent receivables, net
|
115,211
|
|
106,021
|
|
|||
|
Acquired lease intangible assets, net
|
3,741
|
|
4,293
|
|
|||
|
Interest rate contract assets
|
116,090
|
|
60,069
|
|
|||
|
Investment in unconsolidated real estate funds
|
109,835
|
|
107,735
|
|
|||
|
Other assets
|
11,999
|
|
18,442
|
|
|||
|
Total Assets
|
$
|
8,317,984
|
|
$
|
8,292,641
|
|
|
|
Liabilities
|
|
|
|
|
|||
|
Secured notes payable and revolving credit facility, net
|
$
|
4,106,495
|
|
$
|
4,117,390
|
|
|
|
Interest payable, accounts payable and deferred revenue
|
125,419
|
|
103,947
|
|
|||
|
Security deposits
|
50,509
|
|
50,414
|
|
|||
|
Acquired lease intangible liabilities, net
|
62,789
|
|
75,635
|
|
|||
|
Interest rate contract liabilities
|
—
|
|
807
|
|
|||
|
Dividends payable
|
42,486
|
|
42,399
|
|
|||
|
Total liabilities
|
4,387,698
|
|
4,390,592
|
|
|||
|
Equity
|
|
|
|
|
|||
|
Douglas Emmett, Inc. stockholders' equity:
|
|
|
|
|
|||
|
Common Stock, $0.01 par value, 750,000,000 authorized, 169,917,966 and 169,564,927 outstanding at June 30, 2018 and December 31, 2017, respectively
|
1,699
|
|
1,696
|
|
|||
|
Additional paid-in capital
|
3,277,643
|
|
3,272,539
|
|
|||
|
Accumulated other comprehensive income
|
87,486
|
|
43,099
|
|
|||
|
Accumulated deficit
|
(905,085
|
)
|
(879,810
|
)
|
|||
|
Total Douglas Emmett, Inc. stockholders' equity
|
2,461,743
|
|
2,437,524
|
|
|||
|
Noncontrolling interests
|
1,468,543
|
|
1,464,525
|
|
|||
|
Total equity
|
3,930,286
|
|
3,902,049
|
|
|||
|
Total Liabilities and Equity
|
$
|
8,317,984
|
|
$
|
8,292,641
|
|
|
See accompanying notes to the consolidated financial statements.
6
Douglas Emmett, Inc.
(Unaudited; in thousands, except per share data)
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
|||||||||||
|
Revenues
|
|
|
|
|
|
|
|
|
|||||||
|
Office rental
|
|
|
|
|
|
|
|
|
|||||||
|
Rental revenues
|
$
|
150,161
|
|
$
|
135,665
|
|
$
|
297,932
|
|
$
|
268,681
|
|
|||
|
Tenant recoveries
|
14,654
|
|
12,801
|
|
25,707
|
|
23,851
|
|
|||||||
|
Parking and other income
|
28,946
|
|
27,076
|
|
57,455
|
|
53,358
|
|
|||||||
|
Total office revenues
|
193,761
|
|
175,542
|
|
381,094
|
|
345,890
|
|
|||||||
|
Multifamily rental
|
|
|
|
|
|
|
|
|
|||||||
|
Rental revenues
|
23,655
|
|
22,237
|
|
46,716
|
|
44,478
|
|
|||||||
|
Parking and other income
|
2,053
|
|
1,853
|
|
3,906
|
|
3,745
|
|
|||||||
|
Total multifamily revenues
|
25,708
|
|
24,090
|
|
50,622
|
|
48,223
|
|
|||||||
|
Total revenues
|
219,469
|
|
199,632
|
|
431,716
|
|
394,113
|
|
|||||||
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|||||||
|
Office expenses
|
61,818
|
|
57,887
|
|
122,174
|
|
112,772
|
|
|||||||
|
Multifamily expenses
|
6,908
|
|
5,878
|
|
13,606
|
|
11,825
|
|
|||||||
|
General and administrative
|
9,437
|
|
8,592
|
|
19,004
|
|
18,748
|
|
|||||||
|
Depreciation and amortization
|
73,379
|
|
68,793
|
|
145,877
|
|
136,167
|
|
|||||||
|
Total operating expenses
|
151,542
|
|
141,150
|
|
300,661
|
|
279,512
|
|
|||||||
|
Operating income
|
67,927
|
|
58,482
|
|
131,055
|
|
114,601
|
|
|||||||
|
Other income
|
2,792
|
|
2,331
|
|
5,422
|
|
4,493
|
|
|||||||
|
Other expenses
|
(2,086
|
)
|
(1,773
|
)
|
(3,819
|
)
|
(3,497
|
)
|
|||||||
|
Income, including depreciation, from unconsolidated real estate funds
|
1,668
|
|
1,113
|
|
3,174
|
|
3,290
|
|
|||||||
|
Interest expense
|
(33,268
|
)
|
(38,000
|
)
|
(66,168
|
)
|
(74,954
|
)
|
|||||||
|
Net income
|
37,033
|
|
22,153
|
|
69,664
|
|
43,933
|
|
|||||||
|
Less: Net income attributable to noncontrolling interests
|
(5,349
|
)
|
(1,909
|
)
|
(9,774
|
)
|
(4,640
|
)
|
|||||||
|
Net income attributable to common stockholders
|
$
|
31,684
|
|
$
|
20,244
|
|
$
|
59,890
|
|
$
|
39,293
|
|
|||
|
Net income attributable to common stockholders per share – basic
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.35
|
|
$
|
0.25
|
|
|||
|
Net income attributable to common stockholders per share – diluted
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.35
|
|
$
|
0.25
|
|
|||
|
Dividends declared per common share
|
$
|
0.25
|
|
$
|
0.23
|
|
$
|
0.50
|
|
$
|
0.46
|
|
|||
See accompanying notes to the consolidated financial statements.
7
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited and in thousands)
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
|||||||||||
|
Net income
|
$
|
37,033
|
|
$
|
22,153
|
|
$
|
69,664
|
|
$
|
43,933
|
|
|||
|
Other comprehensive income (loss): cash flow hedges
|
18,994
|
|
(4,193
|
)
|
63,363
|
|
5,636
|
|
|||||||
|
Comprehensive income
|
56,027
|
|
17,960
|
|
133,027
|
|
49,569
|
|
|||||||
|
Less: Comprehensive (income) loss attributable to noncontrolling interests
|
(10,878
|
)
|
297
|
|
(28,750
|
)
|
(4,561
|
)
|
|||||||
|
Comprehensive income attributable to common stockholders
|
$
|
45,149
|
|
$
|
18,257
|
|
$
|
104,277
|
|
$
|
45,008
|
|
|||
See accompanying notes to the consolidated financial statements.
8
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
|
|
Six Months Ended June 30,
|
||||||
|
2018
|
2017
|
||||||
|
Operating Activities
|
|
|
|
|
|||
|
Net income
|
$
|
69,664
|
|
$
|
43,933
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|||
|
Income, including depreciation, from unconsolidated real estate funds
|
(3,174
|
)
|
(3,290
|
)
|
|||
|
Depreciation and amortization
|
145,877
|
|
136,167
|
|
|||
|
Net accretion of acquired lease intangibles
|
(12,295
|
)
|
(8,476
|
)
|
|||
|
Straight-line rent
|
(9,191
|
)
|
(6,030
|
)
|
|||
|
Increase in the allowance for doubtful accounts
|
1,335
|
|
504
|
|
|||
|
Deferred loan costs amortized and written off
|
4,279
|
|
4,522
|
|
|||
|
Amortization of loan premium
|
(102
|
)
|
—
|
|
|||
|
Non-cash market value adjustments on interest rate contracts
|
—
|
|
25
|
|
|||
|
Amortization of stock-based compensation
|
5,964
|
|
5,311
|
|
|||
|
Operating distributions from unconsolidated real estate funds
|
3,174
|
|
3,290
|
|
|||
|
Change in working capital components:
|
|
|
|
|
|||
|
Tenant receivables
|
(1,616
|
)
|
(868
|
)
|
|||
|
Interest payable, accounts payable and deferred revenue
|
4,974
|
|
16,718
|
|
|||
|
Security deposits
|
95
|
|
2,392
|
|
|||
|
Other assets
|
6,896
|
|
4,404
|
|
|||
|
Net cash provided by operating activities
|
215,880
|
|
198,602
|
|
|||
|
Investing Activities
|
|
|
|
|
|||
|
Capital expenditures for improvements to real estate
|
(73,127
|
)
|
(51,370
|
)
|
|||
|
Capital expenditures for developments
|
(26,474
|
)
|
(23,646
|
)
|
|||
|
Property acquisitions
|
—
|
|
(354,023
|
)
|
|||
|
Deposits for property acquisitions
|
—
|
|
(10,000
|
)
|
|||
|
Acquisitions of additional interests in unconsolidated real estate funds
|
—
|
|
(2,571
|
)
|
|||
|
Capital distributions from unconsolidated real estate funds
|
3,774
|
|
39,962
|
|
|||
|
Net cash used in investing activities
|
(95,827
|
)
|
(401,648
|
)
|
|||
|
Financing Activities
|
|
|
|
|
|||
|
Proceeds from borrowings
|
535,000
|
|
933,000
|
|
|||
|
Repayment of borrowings
|
(546,979
|
)
|
(986,069
|
)
|
|||
|
Loan cost payments
|
(2,924
|
)
|
(6,889
|
)
|
|||
|
Contributions from noncontrolling interests in consolidated JVs
|
—
|
|
188,248
|
|
|||
|
Distributions paid to noncontrolling interests
|
(26,114
|
)
|
(19,202
|
)
|
|||
|
Dividends paid to common stockholders
|
(84,868
|
)
|
(70,075
|
)
|
|||
|
Taxes paid on exercise of stock options
|
(314
|
)
|
(52,704
|
)
|
|||
|
Repurchase of OP Units
|
(108
|
)
|
—
|
|
|||
|
Proceeds from issuance of common stock, net
|
—
|
|
276,961
|
|
|||
|
Net cash (used in) provided by financing activities
|
(126,307
|
)
|
263,270
|
|
|||
|
(Decrease) increase in cash and cash equivalents and restricted cash
|
(6,254
|
)
|
60,224
|
|
|||
|
Cash and cash equivalents and restricted cash - beginning balance
|
176,766
|
|
113,048
|
|
|||
|
Cash and cash equivalents and restricted cash - ending balance
|
$
|
170,512
|
|
$
|
173,272
|
|
|
9
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Supplemental Cash Flows Information
|
|
Six Months Ended June 30,
|
||||||
|
|
2018
|
2017
|
|||||
|
Operating Activities
|
|||||||
|
Cash paid for interest, net of capitalized interest
|
$
|
61,228
|
|
$
|
69,001
|
|
|
|
Capitalized interest paid
|
$
|
1,558
|
|
$
|
1,150
|
|
|
|
Non-cash Investing Transactions
|
|||||||
|
Accrual for additions to real estate and developments
|
$
|
16,329
|
|
$
|
417
|
|
|
|
Capitalized stock-based compensation for improvements to real estate and developments
|
$
|
948
|
|
$
|
475
|
|
|
|
Removal of fully depreciated and amortized tenant improvements and lease intangibles
|
$
|
22,157
|
|
$
|
22,077
|
|
|
|
Removal of fully amortized acquired lease intangible assets
|
$
|
1,180
|
|
$
|
71
|
|
|
|
Removal of fully accreted acquired lease intangible liabilities
|
$
|
8,899
|
|
$
|
2,935
|
|
|
|
Non-cash Financing Transactions
|
|||||||
|
Gain recorded in AOCI - Adoption of ASU 2017-12 - consolidated derivatives
|
$
|
211
|
|
$
|
—
|
|
|
|
Gain (loss) recorded in AOCI - consolidated derivatives
|
$
|
58,890
|
|
$
|
(4,016
|
)
|
|
|
Gain recorded in AOCI - unconsolidated Funds' derivatives (our share)
|
$
|
6,404
|
|
$
|
867
|
|
|
|
Dividends declared
|
$
|
84,955
|
|
$
|
72,194
|
|
|
|
Common stock issued in exchange for OP Units
|
$
|
5,481
|
|
$
|
8,856
|
|
|
See accompanying notes to the consolidated financial statements.
10
1
. Overview
Organization and Business Description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and Honolulu, Hawaii. Through our interest in our Operating Partnership and its subsidiaries, consolidated JVs and unconsolidated Funds, we focus on owning, acquiring, developing and managing a significant market share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities. The terms "us," "we" and "our" as used in the financial statements refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis. At
June 30, 2018
, our Consolidated Portfolio consisted of (i) a
16.6 million
square foot office portfolio, (ii)
3,522
multifamily apartment units and (iii) fee interests in
two
parcels of land from which we receive rent under ground leases. We also manage and own equity interests in unconsolidated Funds which, at
June 30, 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
June 30, 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
June 30, 2018
, the total consolidated assets, liabilities and equity of the VIEs was
$8.32 billion
(of which
$7.79 billion
related to investment in real estate),
$4.39 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.
11
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
2
. Summary of Significant Accounting Policies
We adopted ASUs during the
six
months ended
June 30, 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
six
months ended
June 30, 2018
we adopted the ASUs listed below:
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which provides guidance for the accounting of revenue from contracts with customers, and supersedes Topic 605, "Revenue Recognition", and most industry-specific guidance throughout the industry topics of the Codification. In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)", which amends Topic 606 and clarifies the guidance for principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing" which amends Topic 606 and provides guidance for identifying performance obligations and licensing. In May 2016, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients" which amends Topic 606 and provides guidance for a variety of revenue recognition related topics. In February 2017, the FASB issued ASU No. 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" (Subtopic 610-20), which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. Sales of real estate are now accounted for under Subtopic 610-20 which focuses on a transfer of control. The amendments in these ASUs were effective in the first quarter of 2018 and were required to be applied on a retrospective basis.
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
$25.7 million
and
$24.0 million
for the
three months
ended
June 30, 2018
and
2017
, and
$50.8 million
and
$47.2 million
for the
six months
ended
June 30, 2018
and
2017
, respectively, and are included in Office parking and other income in our consolidated statements of operations. Office parking receivables were
$1.0 million
as of
June 30, 2018
and
December 31, 2017
. Office parking receivables are included in Tenant receivables in our consolidated balance sheets.
12
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 such an adjustment to AOCI and accumulated deficit of
$211 thousand
. See Note
10
.
ASUs Not Yet Adopted
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The primary difference between Topic 842 and current GAAP is the recognition of lease assets and liabilities on the balance sheet by lessees for leases classified as operating leases under current GAAP. The accounting applied by lessors is largely unchanged from current GAAP, for example, the vast majority of operating leases will remain classified as operating leases, and lessors will continue to recognize lease income for those leases on a straight-line basis over the lease term.
Topic 842 requires separation of the lease from the non-lease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Only the lease components should be accounted for in accordance with Topic 842. The consideration in the contract is allocated to the lease and non-lease components on a relative standalone selling price basis and the non-lease component would be accounted for in accordance with ASC 606 ("Revenue from Contracts with Customers"). In July 2018, the FASB issued ASU No. 2018-11 which includes an optional practical expedient for lessors to elect, by class of underlying asset, to not separate the lease from the non-lease components if certain criteria are met.
Topic 842 defines initial direct costs of a lease (which we have historically capitalized) as costs that would not have been incurred had the lease not been executed. Costs to negotiate a lease that would have been incurred regardless of whether the lease was executed, such as employee salaries, are not considered to be initial direct costs, and may not be capitalized.
We 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 ASUs to determine if this ground lease should be accounted for as a finance lease with a corresponding right-of-use asset.
The ASUs are effective in the first quarter of 2019 and are required to be adopted using a modified retrospective approach, which includes optional practical expedients related to leases that commenced before the effective date. ASU No. 2018-11 includes an optional practical expedient which allows the new requirements to be applied on the date of adoption rather than the beginning of the earliest comparative period presented.
We are in the process of evaluating the impact of the ASUs, and the related practical expedients, on our financial statements and we plan to adopt the ASUs in the first quarter of 2019.
13
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
3
. Investment in Real Estate
Property previously held for sale
During the first quarter we actively marketed 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. The net assets were presented in our first quarter balance sheet as property held-for-sale. During the second quarter we ceased marketing the assets for sale and reclassified the net assets in our balance sheet to investment in real estate.
Acquisitions during the
six months
ended
June 30, 2017
We account for our property acquisitions as asset acquisitions. Prior to January 1, 2017, we accounted for our property acquisitions as business combinations. The acquired properties results of operations are included in our results of operations from the respective acquisition dates.
On
April 25, 2017
, a consolidated JV that we manage and in which we own an equity interest acquired
two
Class A office properties. The table below summarizes the purchase price allocations for the acquisitions. The contract and purchase prices differ due to prorations and similar matters:
|
(In thousands)
|
1299 Ocean
|
429 Santa Monica
|
|||||
|
Submarket
|
Santa Monica
|
Santa Monica
|
|||||
|
Acquisition date
|
April 25
|
April 25
|
|||||
|
Contract price
|
$
|
275,800
|
|
$
|
77,000
|
|
|
|
Building square footage
|
206
|
87
|
|||||
|
Investment in real estate:
|
|
|
|||||
|
Land
|
$
|
22,748
|
|
$
|
4,949
|
|
|
|
Buildings and improvements
|
260,188
|
|
69,286
|
|
|||
|
Tenant improvements and lease intangibles
|
5,010
|
|
3,248
|
|
|||
|
Acquired above- and below-market leases, net
|
(10,683
|
)
|
(722
|
)
|
|||
|
Net assets and liabilities acquired
|
$
|
277,263
|
|
$
|
76,761
|
|
|
14
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 leases:
|
(In thousands)
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Above-market tenant leases
|
$
|
5,997
|
|
$
|
7,177
|
|
|
|
Above-market tenant leases - accumulated amortization
|
(3,209
|
)
|
(3,846
|
)
|
|||
|
Above-market ground lease where we are the lessor
|
1,152
|
|
1,152
|
|
|||
|
Above-market ground lease - accumulated amortization
|
(199
|
)
|
(190
|
)
|
|||
|
Acquired lease intangible assets, net
|
$
|
3,741
|
|
$
|
4,293
|
|
|
|
Below-market tenant leases
|
$
|
118,707
|
|
$
|
127,606
|
|
|
|
Below-market tenant leases - accumulated accretion
|
(59,350
|
)
|
(55,428
|
)
|
|||
|
Above-market ground lease where we are the tenant
|
4,017
|
|
4,017
|
|
|||
|
Above-market ground lease - accumulated accretion
|
(585
|
)
|
(560
|
)
|
|||
|
Acquired lease intangible liabilities, net
|
$
|
62,789
|
|
$
|
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 June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
(In thousands)
|
2018
|
2017
|
2018
|
2017
|
|||||||||||
|
Net accretion of above- and below-market tenant lease assets and liabilities
(1)
|
$
|
6,134
|
|
$
|
4,275
|
|
$
|
12,277
|
|
$
|
8,458
|
|
|||
|
Amortization of an above-market ground lease asset
(2)
|
(4
|
)
|
(4
|
)
|
(8
|
)
|
(8
|
)
|
|||||||
|
Accretion of an above-market ground lease liability
(3)
|
13
|
|
13
|
|
26
|
|
26
|
|
|||||||
|
Total
|
$
|
6,143
|
|
$
|
4,284
|
|
$
|
12,295
|
|
$
|
8,476
|
|
|||
______________________________________________
|
(1)
|
R
ecorded as a net increase to office and multifamily rental revenues.
|
|
(2)
|
Recorded as a decrease to office parking and other income.
|
|
(3)
|
Recorded as a decrease to office expense.
|
15
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
June 30, 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:
|
Six Months Ended June 30,
|
|||||||
|
(In thousands)
|
2018
|
2017
|
|||||
|
Operating distributions received
|
$
|
3,174
|
|
$
|
3,290
|
|
|
|
Capital distributions received
|
3,774
|
|
39,962
|
|
|||
|
Total distributions received
|
$
|
6,948
|
|
$
|
43,252
|
|
|
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)
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Total assets
|
$
|
708,436
|
|
$
|
704,186
|
|
|
|
Total liabilities
|
$
|
525,144
|
|
$
|
523,767
|
|
|
|
Total equity
|
$
|
183,292
|
|
$
|
180,419
|
|
|
|
|
Six Months Ended June 30,
|
||||||
|
(In thousands)
|
2018
|
2017
|
|||||
|
Total revenues
|
$
|
38,963
|
|
$
|
37,071
|
|
|
|
Operating income
|
$
|
11,504
|
|
$
|
9,723
|
|
|
|
Net income
|
$
|
3,180
|
|
$
|
2,853
|
|
|
6
. Other Assets
Other assets consisted of the following:
|
(In thousands)
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Restricted cash
|
$
|
121
|
|
$
|
121
|
|
|
|
Prepaid expenses
|
2,952
|
|
9,235
|
|
|||
|
Other indefinite-lived intangibles
|
1,988
|
|
1,988
|
|
|||
|
Furniture, fixtures and equipment, net
|
839
|
|
1,155
|
|
|||
|
Other
|
6,099
|
|
5,943
|
|
|||
|
Total other assets
|
$
|
11,999
|
|
$
|
18,442
|
|
|
16
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 June 30, 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
|
31,929
|
|
32,213
|
|
N/A
|
4.55%
|
N/A
|
||||||||
|
Revolving credit facility
(6)
|
8/21/2020
|
81,000
|
|
—
|
|
LIBOR + 1.40%
|
N/A
|
N/A
|
||||||||
|
Total Wholly Owned Subsidiary Debt
|
3,160,329
|
|
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)
|
4,140,329
|
|
4,152,308
|
|
||||||||||||
|
Unamortized loan premium, net
|
4,089
|
|
4,191
|
|
||||||||||||
|
Deferred loan costs, net
|
(37,923
|
)
|
(39,109
|
)
|
||||||||||||
|
Total Consolidated Debt, net
|
$
|
4,106,495
|
|
$
|
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
June 30, 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
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table summarizes our fixed and floating rate debt:
|
(In thousands)
|
Principal Balance as of June 30, 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
|
31,929
|
|
459,908
|
|
||||
|
Aggregate floating rate loans
|
226,000
|
|
145,000
|
|
||||
|
Total Debt
|
$
|
4,140,329
|
|
$
|
4,152,308
|
|
||
The following table summarizes certain debt statistics at
June 30, 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)
|
5.9 years
|
|
Weighted average remaining fixed interest period
|
3.2 years
|
|
Weighted average annual interest rate
|
3.07%
|
Future Principal Payments
At
June 30, 2018
, the minimum future principal payments due on our secured notes payable and revolving credit facility were as follows:
|
Twelve months ending June 30:
|
Excluding Maturity Extension Options
|
Including Maturity Extension Options
(1)
|
||||||
|
(In thousands)
|
||||||||
|
2019
|
$
|
702
|
|
$
|
702
|
|
||
|
2020
|
145,735
|
|
145,735
|
|
||||
|
2021
|
376,769
|
|
81,769
|
|
||||
|
2022
|
640,805
|
|
340,805
|
|
||||
|
2023
|
1,675,842
|
|
1,520,842
|
|
||||
|
Thereafter
|
1,300,476
|
|
2,050,476
|
|
||||
|
Total future principal payments
|
$
|
4,140,329
|
|
$
|
4,140,329
|
|
||
____________________________________________
|
(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
$20.2 million
and
$18.0 million
at
June 30, 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 June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
(In thousands)
|
2018
|
2017
|
2018
|
2017
|
|||||||||||
|
Loan costs expensed
|
$
|
—
|
|
$
|
376
|
|
$
|
404
|
|
$
|
376
|
|
|||
|
Deferred loan cost amortization
|
1,970
|
|
2,424
|
|
3,875
|
|
4,522
|
|
|||||||
|
Total
|
$
|
1,970
|
|
$
|
2,800
|
|
$
|
4,279
|
|
$
|
4,898
|
|
|||
18
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)
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Interest payable
|
$
|
10,592
|
|
$
|
9,829
|
|
|
|
Accounts payable and accrued liabilities
|
75,748
|
|
62,741
|
|
|||
|
Deferred revenue
|
39,079
|
|
31,377
|
|
|||
|
Total interest payable, accounts payable and deferred revenue
|
$
|
125,419
|
|
$
|
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
June 30, 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
June 30, 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. As of
June 30, 2018
, we, including our consolidated JVs' and our unconsolidated Funds, did not have any interest rate swaps with fair values that were in a liability position.
19
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)
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Consolidated derivatives
(1)
|
$
|
117,876
|
|
$
|
60,093
|
|
|
|
Unconsolidated Funds' derivatives
(2)
|
$
|
19,582
|
|
$
|
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)
|
Six Months Ended June 30,
|
||||||
|
|
2018
|
2017
|
|||||
|
Derivatives Designated as Cash Flow Hedges:
|
|
|
|||||
|
Consolidated derivatives:
|
|||||||
|
Gain recorded in AOCI - adoption of ASU 2017-12
(1)(2)
|
$
|
211
|
|
$
|
—
|
|
|
|
Gain (loss) recorded in AOCI
(1)(2)
|
$
|
58,890
|
|
$
|
(4,016
|
)
|
|
|
(Gain) loss reclassified from AOCI to Interest Expense
(1)
|
$
|
(2,063
|
)
|
$
|
8,955
|
|
|
|
Total Interest Expense presented in the consolidated statements of operations
|
$
|
(66,168
|
)
|
$
|
(74,954
|
)
|
|
|
Gain related to ineffectiveness recorded in Interest Expense
|
$
|
—
|
|
$
|
25
|
|
|
|
Unconsolidated Funds' derivatives (our share)
(3)
:
|
|||||||
|
Gain recorded in AOCI
(1)
|
$
|
6,404
|
|
$
|
867
|
|
|
|
Gain reclassified from AOCI to Income, including depreciation, from unconsolidated real estate funds
(1)
|
$
|
(79
|
)
|
$
|
(170
|
)
|
|
|
Total Income, including depreciation, from unconsolidated real estate funds presented in the consolidated statements of operations
|
$
|
3,174
|
|
$
|
3,290
|
|
|
___________________________________________________
|
(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
June 30, 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
|
$
|
30,465
|
|
|
Unconsolidated Funds' derivatives (our share):
|
|||
|
Gains to be reclassified from AOCI to Income, including depreciation, from unconsolidated real estate funds
|
$
|
2,053
|
|
20
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
10
. Equity
Transactions
During the
six
months ended
June 30, 2018
, we (i) acquired
339 thousand
OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, (ii) acquired
3 thousand
OP Units for
$108 thousand
in cash and (iii) issued
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
six
months ended
June 30, 2017
, we (i) acquired
659 thousand
OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, (ii) issued
1.3 million
shares of our common stock for the exercise of
3.9 million
stock options on a net settlement basis (net of the exercise price and related taxes) and (iii) issued
9.1 million
shares of our common stock under our ATM program for net proceeds of
$346.0 million
.
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
|
59,890
|
|
9,774
|
|
69,664
|
|
|||||
|
Cash flow hedge fair value adjustments
|
44,387
|
|
18,976
|
|
63,363
|
|
|||||
|
Dividends and distributions
|
(84,955
|
)
|
(26,114
|
)
|
(111,069
|
)
|
|||||
|
Exchange of OP units for common stock
|
5,481
|
|
(5,481
|
)
|
—
|
|
|||||
|
OP Units redeemed with cash
|
(59
|
)
|
(49
|
)
|
(108
|
)
|
|||||
|
Exercise of stock options
(2)
|
(314
|
)
|
—
|
|
(314
|
)
|
|||||
|
Stock-based compensation
|
—
|
|
6,912
|
|
6,912
|
|
|||||
|
Balance as of June 30, 2018
|
$
|
2,461,743
|
|
$
|
1,468,543
|
|
$
|
3,930,286
|
|
||
__________________________________________________
(1) Reflects the adoption of ASU No. 2017-12.
See Note
2
for 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
|
39,293
|
|
4,640
|
|
43,933
|
|
|||||
|
Cash flow hedge fair value adjustments
|
5,715
|
|
(79
|
)
|
5,636
|
|
|||||
|
Contributions to consolidated JV
|
—
|
|
188,248
|
|
188,248
|
|
|||||
|
Dividends and distributions
|
(72,194
|
)
|
(19,202
|
)
|
(91,396
|
)
|
|||||
|
Exchange of OP units for common stock
|
8,856
|
|
(8,856
|
)
|
—
|
|
|||||
|
Exercise of stock options
(1)
|
(52,704
|
)
|
—
|
|
(52,704
|
)
|
|||||
|
Stock-based compensation
|
—
|
|
5,786
|
|
5,786
|
|
|||||
|
Sale of common stock, net of offering costs
|
276,961
|
|
—
|
|
276,961
|
|
|||||
|
Balance as of June 30, 2017
|
$
|
2,127,070
|
|
$
|
1,263,465
|
|
$
|
3,390,535
|
|
||
__________________________________________________
(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
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
June 30, 2018
when we and our Operating Partnership had
169.9 million
shares of common stock and
27.4 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 b
asis. LTIP Units have been granted to our key employees and non-employee directors as part of their compensation. These awards generally vest over a service period and once vested can generally be converted to OP Units provided our stock price increases by more than a specified hurdle.
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:
|
|
Six Months Ended June 30,
|
||||||
|
(In thousands)
|
2018
|
2017
|
|||||
|
Net income attributable to common stockholders
|
$
|
59,890
|
|
$
|
39,293
|
|
|
|
Transfers from noncontrolling interests:
|
|||||||
|
Exchange of OP Units with noncontrolling interests
|
5,481
|
|
8,856
|
|
|||
|
Repurchase of OP Units from noncontrolling interests
|
(59
|
)
|
—
|
|
|||
|
Net transfers from noncontrolling interests
|
5,422
|
|
8,856
|
|
|||
|
Change from net income attributable to common stockholders and transfers from noncontrolling interests
|
$
|
65,312
|
|
$
|
48,149
|
|
|
22
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
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:
|
Six Months Ended June 30,
|
|||||||
|
(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 (loss) before reclassifications
|
58,890
|
|
(4,016
|
)
|
|||
|
Reclassification of (gains) losses from AOCI to Interest Expense
|
(2,063
|
)
|
8,955
|
|
|||
|
Unconsolidated Funds' derivatives (our share):
|
|||||||
|
Other comprehensive income before reclassifications
|
6,404
|
|
867
|
|
|||
|
Reclassification of gains from AOCI
to Income, including depreciation, from unconsolidated real estate funds
|
(79
|
)
|
(170
|
)
|
|||
|
Net current period OCI
|
63,363
|
|
5,636
|
|
|||
|
OCI attributable to noncontrolling interests
|
(18,976
|
)
|
79
|
|
|||
|
OCI attributable to common stockholders
|
44,387
|
|
5,715
|
|
|||
|
Ending balance
|
$
|
87,486
|
|
$
|
20,871
|
|
|
___________________________________________________
|
(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.
|
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
$2.9 million
and
$2.6 million
for the
three months
ended
June 30, 2018
and
2017
, and
$6.0 million
and
$5.3 million
for the
six months
ended
June 30, 2018
and
2017
respectively. These amounts are net of capitalized stock-based compensation of
$496 thousand
and
$247 thousand
for the
three months
ended
June 30, 2018
and
2017
, and
$948 thousand
and
$475 thousand
for the
six months
ended
June 30, 2018
and
2017
respectively. No options were exercised for the
three months
ended
June 30, 2018
and
2017
. The intrinsic value of options exercised was
$803 thousand
and
$102.1 million
for the
six months
ended
June 30, 2018
and
2017
respectively.
23
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)
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 June 30,
|
|
Six Months Ended June 30,
|
||||||||||||
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
||||||||
|
Numerator (In thousands):
|
|
|
|
|
|
|
|
|
|||||||
|
Net income attributable to common stockholders
|
$
|
31,684
|
|
$
|
20,244
|
|
$
|
59,890
|
|
$
|
39,293
|
|
|||
|
Allocation to participating securities: Unvested LTIP Units
|
(156
|
)
|
(97
|
)
|
(294
|
)
|
(196
|
)
|
|||||||
|
Numerator for basic and diluted net income attributable to common stock holders
|
$
|
31,528
|
|
$
|
20,147
|
|
$
|
59,596
|
|
$
|
39,097
|
|
|||
|
Denominator (In thousands):
|
|||||||||||||||
|
Weighted average shares of common stock outstanding - basic
|
169,916
|
|
155,898
|
|
169,759
|
|
154,203
|
|
|||||||
|
Effect of dilutive securities: Stock options
(1)
|
10
|
|
54
|
|
17
|
|
607
|
|
|||||||
|
Weighted average shares of common stock and common stock equivalents outstanding - diluted
|
169,926
|
|
155,952
|
|
169,776
|
|
154,810
|
|
|||||||
|
Basic EPS:
|
|
|
|||||||||||||
|
Net income attributable to common stockholders per share
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.35
|
|
$
|
0.25
|
|
|||
|
Diluted EPS:
|
|
|
|
|
|||||||||||
|
Net income attributable to common stockholders per share
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.35
|
|
$
|
0.25
|
|
|||
____________________________________________________
|
(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 June 30,
|
Six Months Ended June 30,
|
|||||||||
|
(In thousands)
|
2018
|
2017
|
2018
|
2017
|
|||||||
|
OP Units
|
26,637
|
|
24,797
|
|
26,790
|
|
24,730
|
|
|||
|
Vested LTIP Units
|
807
|
|
313
|
|
803
|
|
536
|
|
|||
24
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
June 30, 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)
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Fair value
|
$
|
4,090,917
|
|
$
|
4,195,489
|
|
|
|
Carrying value
|
$
|
4,063,418
|
|
$
|
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)
|
June 30, 2018
|
December 31, 2017
|
|||||
|
Derivative Assets:
|
|||||||
|
Fair value - consolidated derivatives
(1)
|
$
|
116,090
|
|
$
|
60,069
|
|
|
|
Fair value - unconsolidated Funds' derivatives
(2)
|
$
|
19,308
|
|
$
|
9,437
|
|
|
|
Derivative Liabilities:
|
|||||||
|
Fair value - consolidated derivatives
(1)
|
$
|
—
|
|
$
|
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.
|
25
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 June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
2018
|
2017
|
2018
|
2017
|
||||||||||||
|
Office Segment
|
|||||||||||||||
|
Total office revenues
|
$
|
193,761
|
|
$
|
175,542
|
|
$
|
381,094
|
|
$
|
345,890
|
|
|||
|
Office expenses
|
(61,818
|
)
|
(57,887
|
)
|
(122,174
|
)
|
(112,772
|
)
|
|||||||
|
Office segment profit
|
131,943
|
|
117,655
|
|
258,920
|
|
233,118
|
|
|||||||
|
Multifamily Segment
|
|||||||||||||||
|
Total multifamily revenues
|
25,708
|
|
24,090
|
|
50,622
|
|
48,223
|
|
|||||||
|
Multifamily expenses
|
(6,908
|
)
|
(5,878
|
)
|
(13,606
|
)
|
(11,825
|
)
|
|||||||
|
Multifamily segment profit
|
18,800
|
|
18,212
|
|
37,016
|
|
36,398
|
|
|||||||
|
Total profit from all segments
|
$
|
150,743
|
|
$
|
135,867
|
|
$
|
295,936
|
|
$
|
269,516
|
|
|||
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 June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
|||||||||||
|
Total profit from all segments
|
$
|
150,743
|
|
$
|
135,867
|
|
$
|
295,936
|
|
$
|
269,516
|
|
|||
|
General and administrative
|
(9,437
|
)
|
(8,592
|
)
|
(19,004
|
)
|
(18,748
|
)
|
|||||||
|
Depreciation and amortization
|
(73,379
|
)
|
(68,793
|
)
|
(145,877
|
)
|
(136,167
|
)
|
|||||||
|
Other income
|
2,792
|
|
2,331
|
|
5,422
|
|
4,493
|
|
|||||||
|
Other expenses
|
(2,086
|
)
|
(1,773
|
)
|
(3,819
|
)
|
(3,497
|
)
|
|||||||
|
Income, including depreciation, from unconsolidated real estate funds
|
1,668
|
|
1,113
|
|
3,174
|
|
3,290
|
|
|||||||
|
Interest expense
|
(33,268
|
)
|
(38,000
|
)
|
(66,168
|
)
|
(74,954
|
)
|
|||||||
|
Net income
|
37,033
|
|
22,153
|
|
69,664
|
|
43,933
|
|
|||||||
|
Less: Net income attributable to noncontrolling interests
|
(5,349
|
)
|
(1,909
|
)
|
(9,774
|
)
|
(4,640
|
)
|
|||||||
|
Net income attributable to common stockholders
|
$
|
31,684
|
|
$
|
20,244
|
|
$
|
59,890
|
|
$
|
39,293
|
|
|||
26
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
June 30, 2018
:
|
Twelve months ending June 30:
|
(In thousands)
|
||
|
2019
|
$
|
563,563
|
|
|
2020
|
527,436
|
|
|
|
2021
|
456,384
|
|
|
|
2022
|
364,772
|
|
|
|
2023
|
291,970
|
|
|
|
Thereafter
|
670,467
|
|
|
|
Total future minimum base rentals
(1)
|
$
|
2,874,592
|
|
_____________________________________________________
|
(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
June 30, 2018
and
2017
and
$366 thousand
for the
six months
ended
June 30, 2018
and
2017
respectively. 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
June 30, 2018
:
|
Twelve months ending June 30:
|
(In thousands)
|
||
|
2019
|
$
|
733
|
|
|
2020
|
733
|
|
|
|
2021
|
733
|
|
|
|
2022
|
733
|
|
|
|
2023
|
733
|
|
|
|
Thereafter
|
46,544
|
|
|
|
Total future minimum lease payments
|
$
|
50,209
|
|
27
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
six
months ended
June 30, 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
June 30, 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
June 30, 2018
, we had leased
194
apartments. In West Los Angeles, we plan to build a high-rise apartment building with
376
apartments. As of
June 30, 2018
, we had an aggregate remaining contractual commitment for these development projects of approximately
$230.6 million
. As of
June 30, 2018
, we had an aggregate remaining contractual commitment for capital expenditure projects, repositionings and tenant improvements of approximately
$46.6 million
.
28
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
June 30, 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
June 30, 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
June 30, 2018
, assuming a zero-percent LIBOR interest rate during the remaining life of the swap, the maximum future payments under the swap agreement were
$2.7 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
June 30, 2018
, assuming a zero-percent LIBOR interest rate during the remaining life of the swap, the maximum future payments under the swap agreement were
$29.1 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.
|
29
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. Through our interest in our Operating Partnership and its subsidiaries, our consolidated JVs and our unconsolidated Funds, we are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and in Honolulu, Hawaii. We focus on owning, acquiring, developing and managing a substantial share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities. As of
June 30, 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)
|
16,583
|
18,418
|
|||
|
Leased rate
|
91.6%
|
91.7%
|
|||
|
Occupied rate
|
88.9%
|
88.9%
|
|||
|
Multifamily
|
|||||
|
Properties
(3)
|
10
|
10
|
|||
|
Units
|
3,522
|
3,522
|
|||
|
Leased rate
|
99.7%
|
99.7%
|
|||
|
Occupied rate
|
96.2%
|
96.2%
|
|||
__________________________________________________
|
(1)
|
Our Consolidated Portfolio includes the properties in our consolidated results. Through our subsidiaries, we own 100% of these properties except for
ten
office properties totaling
2.8 million
square feet, which we own through
three
consolidated JVs. Our Consolidated Portfolio also includes
two
parcels of land from which we receive ground rent from ground leases to the owners of a Class A office building and a hotel.
|
|
(2)
|
Our Total Portfolio includes our Consolidated Portfolio as well as
eight
properties totaling
1.8 million
square feet owned by our unconsolidated Funds. See Note
5
to our consolidated financial statements in
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
June 30, 2018
, annualized rent from our Consolidated Portfolio was derived as follows:
______
30
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. We expect construction to take about 3 years.
|
|
•
|
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 are also investing 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. We expect to complete the project around year end and as of
June 30, 2018
, we had leased
194
of the new units.
|
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 project in Honolulu, described above under "Developments", as of
June 30, 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.
31
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:
|
|
Six Months Ended
|
Year Ended December 31,
|
||||||||||
|
June 30, 2018
|
2017
|
2016
|
2015
|
2014
|
||||||||
|
Average straight-line rental rate
(1)(2)
|
$50.77
|
$44.48
|
$43.21
|
$42.65
|
$35.93
|
|||||||
|
Annualized lease transaction costs
(3)
|
$5.71
|
$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. Excludes leases substantially negotiated by the seller in the case of acquired properties and leases for tenants relocated due to repositioning projects.
|
Office Rent Roll
The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio during the
six months
ended
June 30, 2018
:
|
Rent Roll
(1)(2)
|
Starting Cash Rent
|
Straight-line Rent
|
Expiring Cash Rent
|
|||||
|
Leases signed during the period
|
$47.91
|
$50.77
|
N/A
|
|||||
|
Prior leases for the same space
|
$35.35
|
$37.61
|
$41.83
|
|||||
|
Percentage change
|
35.5%
|
35.0%
|
14.6%
|
(3)
|
||||
___________________________________________________
|
(1)
|
Represents the average initial stabilized cash and straight-line rents on new and renewal leases signed during the quarter compared to the prior lease on the same space, excluding Short-Term Leases 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.
|
32
Multifamily Rental Rates
The table below presents the average annual rental rate per leased unit for new tenants.
|
|
Six Months Ended
|
Year Ended December 31,
|
||||||||||
|
June 30, 2018
|
2017
|
2016
|
2015
|
2014
|
||||||||
|
Average annual rental rate - new tenants
(1)
|
$27,786
|
$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
six months
ended
June 30, 2018
, average rent on leases to new tenants was
0.9%
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:
|
June 30, 2018
|
2017
|
2016
|
2015
|
2014
|
|||||||
|
Office portfolio
|
88.9%
|
89.8%
|
90.4%
|
91.2%
|
90.5%
|
|||||||
|
Multifamily portfolio
|
96.2%
|
96.4%
|
97.9%
|
98.0%
|
98.2%
|
|||||||
|
|
Six Months Ended
|
Year Ended December 31,
|
||||||||||
|
Average Occupancy
Rates
(1)(2)
:
|
June 30, 2018
|
2017
|
2016
|
2015
|
2014
|
|||||||
|
Office portfolio
|
89.1%
|
89.5%
|
90.6%
|
90.9%
|
90.0%
|
|||||||
|
Multifamily portfolio
|
96.3%
|
97.2%
|
97.6%
|
98.2%
|
98.5%
|
|||||||
___________________________________________________
|
(1)
|
Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were below that of our existing portfolio.
|
|
(2)
|
Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period.
|
33
Office Lease Expirations
As of
June 30, 2018
, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio as follows:
____________________________________________________
(1) Average of the percentage of leases at
June 30
,
2015
,
2016
,
2017
with the same remaining duration as the leases for the labeled year had at
June 30, 2018
. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
34
Results of Operations
Comparison of
three months
ended
June 30, 2018
to
three months
ended
June 30, 2017
|
(In thousands)
|
|||||||||||||||||||
|
2018
|
2017
|
Favorable (Unfavorable)
|
Percentage
|
Commentary
|
|||||||||||||||
|
Revenues
|
|||||||||||||||||||
|
Office rental revenue
|
$
|
150,161
|
|
$
|
135,665
|
|
$
|
14,496
|
|
10.7
|
%
|
The increase was due to rental revenues of $7.0 million from properties that we acquired in 2017 and an increase in rental revenues of $7.5 million from the properties that we owned throughout both periods. The increase from properties that we owned throughout both periods was primarily due to an increase in rental rates, partially offset by a decrease in occupancy.
|
|||||||
|
Office tenant recoveries
|
$
|
14,654
|
|
$
|
12,801
|
|
$
|
1,853
|
|
14.5
|
%
|
The increase was due to tenant recoveries of $0.5 million from properties that we acquired in 2017 and an increase in tenant recoveries of $1.4 million from the properties that we owned throughout both periods. The increase from properties that we owned throughout both periods was primarily due to an increase in recoverable operating expenses.
|
|||||||
|
Office parking and other income
|
$
|
28,946
|
|
$
|
27,076
|
|
$
|
1,870
|
|
6.9
|
%
|
The increase was due to parking and other income of $0.8 million from properties that we acquired in 2017 and an increase of $1.1 million in parking and other income from properties that we owned throughout both periods. The increase in parking and other income from properties that we owned throughout both periods primarily reflects increases in rates, partially offset by a decrease in occupancy.
|
|||||||
|
Multifamily revenue
|
$
|
25,708
|
|
$
|
24,090
|
|
$
|
1,618
|
|
6.7
|
%
|
The increase was primarily due to an increase in rental revenues of $1.4 million which was primarily due to an increase in rental rates and revenues from our new Moanalua development apartments recently placed into service, partially offset by a decrease in average occupancy.
|
|||||||
|
Operating expenses
|
|||||||||||||||||||
|
Office rental expenses
|
$
|
61,818
|
|
$
|
57,887
|
|
$
|
(3,931
|
)
|
(6.8
|
)%
|
The increase was due to rental expenses of $2.4 million from properties that we acquired during 2017 and an increase of $1.5 million in rental expenses from properties that we owned throughout both periods. The increase from properties that we owned throughout both periods was primarily due to an increase in scheduled services expenses, personnel expenses and real estate taxes.
|
|||||||
|
Multifamily rental expenses
|
$
|
6,908
|
|
$
|
5,878
|
|
$
|
(1,030
|
)
|
(17.5
|
)%
|
The increase was primarily due to an increase in personnel expenses, utility expenses and real estate taxes.
|
|||||||
35
|
(in thousands)
|
|||||||||||||||||||
|
2018
|
2017
|
Favorable (Unfavorable)
|
Percentage
|
Commentary
|
|||||||||||||||
|
General and administrative
|
$
|
9,437
|
|
$
|
8,592
|
|
$
|
(845
|
)
|
(9.8
|
)%
|
The increase was primarily due to an increase in personnel expenses.
|
|||||||
|
Depreciation and amortization
|
$
|
73,379
|
|
$
|
68,793
|
|
$
|
(4,586
|
)
|
(6.7
|
)%
|
The increase was due to depreciation and amortization of $3.7 million from properties that we acquired during 2017 and an increase of $0.9 million from properties that we owned throughout both periods.
|
|||||||
|
Non-Operating Income and Expenses
|
|||||||||||||||||||
|
Other income
|
$
|
2,792
|
|
$
|
2,331
|
|
$
|
461
|
|
19.8
|
%
|
The increase was primarily due to an increase in interest income due to higher money market interest rates.
|
|||||||
|
Other expenses
|
$
|
(2,086
|
)
|
$
|
(1,773
|
)
|
$
|
(313
|
)
|
(17.7
|
)%
|
The increase was primarily due to acquisition expenses for properties we ultimately did not acquire.
|
|||||||
|
Income, including depreciation, from unconsolidated real estate funds
|
$
|
1,668
|
|
$
|
1,113
|
|
$
|
555
|
|
49.9
|
%
|
The increase was primarily due to an increase in rental revenues for our unconsolidated Funds, which primarily reflects increases in rental rates, partially offset by a decrease in occupancy.
|
|||||||
|
Interest expense
|
$
|
(33,268
|
)
|
$
|
(38,000
|
)
|
$
|
4,732
|
|
12.5
|
%
|
The decrease was primarily due to lower debt balances.
|
|||||||
|
|
|||||||||||||||||||
36
Comparison of
six
months ended
June 30, 2018
to
six
months ended
June 30, 2017
|
(In thousands)
|
|||||||||||||||||||
|
2018
|
2017
|
Favorable (Unfavorable)
|
Percentage
|
Commentary
|
|||||||||||||||
|
Revenues
|
|||||||||||||||||||
|
Office rental revenue
|
$
|
297,932
|
|
$
|
268,681
|
|
$
|
29,251
|
|
10.9
|
%
|
The increase was due to rental revenues of $17.4 million from properties that we acquired in 2017 and an increase in rental revenues of $11.8 million from the properties that we owned throughout both periods. The increase from properties that we owned throughout both periods was primarily due to an increase in rental rates, partially offset by a decrease in occupancy.
|
|||||||
|
Office tenant recoveries
|
$
|
25,707
|
|
$
|
23,851
|
|
$
|
1,856
|
|
7.8
|
%
|
The increase was due to tenant recoveries of $1.1 million from properties that we acquired in 2017 and an increase in tenant recoveries of $0.8 million from the properties that we owned throughout both periods. The increase from properties that we owned throughout both periods was primarily due to an increase in recoverable operating costs.
|
|||||||
|
Office parking and other income
|
$
|
57,455
|
|
$
|
53,358
|
|
$
|
4,097
|
|
7.7
|
%
|
The increase was due to parking and other income of $1.7 million from properties that we acquired in 2017 and an increase of $2.4 million in parking and other income from properties that we owned throughout both periods. The increase in parking and other income from properties that we owned throughout both periods primarily reflects increases in rates, partially offset by a decrease in occupancy.
|
|||||||
|
Multifamily revenue
|
$
|
50,622
|
|
$
|
48,223
|
|
$
|
2,399
|
|
5.0
|
%
|
The increase was primarily due to an increase in rental revenues of $2.2 million which was primarily due to an increase in rental rates and revenues from our new Moanalua development apartments recently placed into service, partially offset by a decrease in average occupancy.
|
|||||||
|
Operating expenses
|
|||||||||||||||||||
|
Office rental expenses
|
$
|
122,174
|
|
$
|
112,772
|
|
$
|
(9,402
|
)
|
(8.3
|
)%
|
The increase was due to rental expenses of $6.0 million from properties that we acquired during 2017 and an increase of $3.4 million from properties that we owned throughout both periods. The increase from properties that we owned throughout both periods was primarily due to an increase in scheduled services expenses, personnel expenses and utility expenses.
|
|||||||
|
Multifamily rental expenses
|
$
|
13,606
|
|
$
|
11,825
|
|
$
|
(1,781
|
)
|
(15.1
|
)%
|
The increase was primarily due to an increase in personnel expenses, utility expenses, real estate taxes and legal fees.
|
|||||||
|
General and administrative expenses
|
$
|
19,004
|
|
$
|
18,748
|
|
$
|
(256
|
)
|
(1.4
|
)%
|
The increase was primarily due to an increase in personnel expenses and legal expenses, partially offset by a decrease in payroll tax expense due to options that were exercised in the prior period.
|
|||||||
|
Depreciation and amortization
|
$
|
145,877
|
|
$
|
136,167
|
|
$
|
(9,710
|
)
|
(7.1
|
)%
|
The increase was due to depreciation and amortization of $9.1 million from properties that we acquired during 2017 and an increase of $0.6 million from properties that we owned throughout both periods.
|
|||||||
37
|
(In thousands)
|
|||||||||||||||||||
|
2018
|
2017
|
Favorable (Unfavorable)
|
Percentage
|
Commentary
|
|||||||||||||||
|
Non-Operating Income and Expenses
|
|||||||||||||||||||
|
Other income
|
$
|
5,422
|
|
$
|
4,493
|
|
$
|
929
|
|
20.7
|
%
|
The increase was primarily due to an increase in interest income due to higher money market interest rates.
|
|||||||
|
Other expenses
|
$
|
(3,819
|
)
|
$
|
(3,497
|
)
|
$
|
(322
|
)
|
(9.2
|
)%
|
The increase was primarily due to acquisition-related expenses.
|
|||||||
|
Income, including depreciation, from unconsolidated real estate funds
|
$
|
3,174
|
|
$
|
3,290
|
|
$
|
(116
|
)
|
(3.5
|
)%
|
The decrease was primarily due to an increase in interest expense due to refinancing a loan for one of our funds in 2017 at a higher interest rate.
|
|||||||
|
Interest expense
|
$
|
(66,168
|
)
|
$
|
(74,954
|
)
|
$
|
8,786
|
|
11.7
|
%
|
The decrease was primarily due to lower debt balances.
|
|||||||
38
Non-GAAP Supplemental Financial Measure: FFO
Usefulness to Investors
We report FFO because it is a widely reported measure of the performance of equity REITs, and is also used by some investors to identify trends in occupancy rates, rental rates and operating costs from year to year, and to compare our performance with other REITs. FFO is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. FFO has limitations as a measure of our performance because it excludes depreciation and amortization of real estate, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. FFO should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to the FFO of other REITs. See "Results of Operations" above for a discussion of the items that impacted our net income.
Comparison of
three months
ended
June 30, 2018
to
three months
ended
June 30, 2017
For the
three months
ended
June 30, 2018
, FFO
increased
by
$15.9 million
, or
18.7%
, to
$100.8 million
, compared to
$84.9 million
for the
three months
ended
June 30, 2017
. The increase was primarily due to (i) an increase in operating income from our office portfolio due to acquisitions in 2017 and increasing rental rates, and (ii) a decrease in interest expense due to lower debt balances.
Comparison of
six
months ended
June 30, 2018
to
six
months ended
June 30, 2017
For the
six months
ended
June 30, 2018
, FFO
increased
by
$28.2 million
, or
16.7%
, to
$196.8 million
, compared to
$168.6 million
for the
six months
ended
June 30, 2017
. The increase was primarily due to (i) an increase in operating income from our office portfolio due to acquisitions in 2017 and increasing rental rates, and (ii) a decrease in interest expense due to lower debt balances.
Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in our Operating Partnerships - which includes our share of our consolidated JVs and our unconsolidated Funds FFO) to net income attributable to common stockholders computed in accordance with GAAP:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
(In thousands)
|
2018
|
2017
|
2018
|
2017
|
|||||||||||||
|
Net income attributable to common stockholders
|
$
|
31,684
|
|
$
|
20,244
|
|
$
|
59,890
|
|
$
|
39,293
|
|
|||||
|
Depreciation and amortization of real estate assets
|
73,379
|
|
68,793
|
|
145,877
|
|
136,167
|
|
|||||||||
|
Net income attributable to noncontrolling interests
|
5,349
|
|
1,909
|
|
9,774
|
|
4,640
|
|
|||||||||
|
Adjustments attributable to unconsolidated Funds
(1)
|
4,052
|
|
4,020
|
|
8,149
|
|
8,056
|
|
|||||||||
|
Adjustments attributable to consolidated JVs
(2)
|
(13,670
|
)
|
(10,044
|
)
|
(26,912
|
)
|
(19,565
|
)
|
|||||||||
|
FFO
|
$
|
100,794
|
|
$
|
84,922
|
|
$
|
196,778
|
|
$
|
168,591
|
|
|||||
_______________________________________________
|
(1)
|
Adjusts for our share of our unconsolidated Funds depreciation and amortization of real estate assets.
|
|
(2)
|
Adjusts for the net income and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in our consolidated JVs.
|
39
Non-GAAP Supplemental Financial Measure: Same Property NOI
Usefulness to Investors
We report Same Property NOI to facilitate a comparison of our operations between reported periods. Many investors use Same Property NOI to evaluate our operating performance and to compare our operating performance with other REITs, because it can reduce the impact of investing transactions on operating trends. NOI is a non-GAAP financial measure for which we believe that net income is the most directly comparable GAAP financial measure. We report NOI because it is a widely recognized measure of the performance of equity REITs, and is used by some investors to identify trends in occupancy rates, rental rates and operating costs and to compare our operating performance with that of other REITs. NOI has limitations as a measure of our performance because it excludes depreciation and amortization expense, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures, tenant improvements and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. Other REITs may not calculate Same Property NOI in the same manner. As a result, our Same Property NOI may not be comparable to the Same Property NOI of other REITs. Same Property NOI should be considered only as a supplement to net income as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. See "Results of Operations" above for a discussion of the items that impacted our net income.
As of
June 30, 2018
, our same properties included
47
office properties, aggregating
11.8 million
Rentable Square Feet, and
9
multifamily properties with an aggregate
2,640
units.
Comparison of
three months
ended
June 30, 2018
to
three months
ended
June 30, 2017
|
Three Months Ended June 30,
|
Favorable
|
|||||||||||||||
|
(In thousands)
|
2018
|
2017
|
(Unfavorable)
|
Percentage
|
Commentary
|
|||||||||||
|
Office revenues
|
$
|
124,082
|
|
$
|
119,014
|
|
$
|
5,068
|
|
4.3
|
%
|
The increase was primarily due to an increase in rental and parking rates, as well as higher tenant recovery revenues reflecting increased recoverable operating costs.
|
||||
|
Office expenses
|
(40,667
|
)
|
(39,531
|
)
|
(1,136
|
)
|
(2.9
|
)%
|
The increase was primarily due to an increase in scheduled services expenses, repairs and maintenance, personnel expenses and real estate taxes.
|
|||||||
|
Office NOI
|
83,415
|
|
79,483
|
|
3,932
|
|
4.9
|
%
|
||||||||
|
Multifamily revenues
|
21,170
|
|
20,451
|
|
719
|
|
3.5
|
%
|
The increase was due to an increase in rental revenues due to an increase in rental rates, partially offset by a decrease in occupancy and an increase in parking and other income.
|
|||||||
|
Multifamily expenses
|
(5,341
|
)
|
(4,823
|
)
|
(518
|
)
|
(10.7
|
)%
|
The increase was primarily due to an increase in scheduled services expenses, repairs and maintenance, personnel expenses and utility expenses.
|
|||||||
|
Multifamily NOI
|
15,829
|
|
15,628
|
|
201
|
|
1.3
|
%
|
||||||||
|
Total NOI
|
$
|
99,244
|
|
$
|
95,111
|
|
$
|
4,133
|
|
4.3
|
%
|
|||||
40
Reconciliation to GAAP
The table below presents a reconciliation of our same property NOI to net income attributable to common stockholders:
|
Three Months Ended June 30,
|
|||||||
|
(In thousands)
|
2018
|
2017
|
|||||
|
Same Property NOI
|
$
|
99,244
|
|
$
|
95,111
|
|
|
|
Non-comparable office revenues
|
69,679
|
|
56,528
|
|
|||
|
Non-comparable office expenses
|
(21,151
|
)
|
(18,356
|
)
|
|||
|
Non-comparable multifamily revenues
|
4,538
|
|
3,639
|
|
|||
|
Non-comparable multifamily expenses
|
(1,567
|
)
|
(1,055
|
)
|
|||
|
NOI
|
150,743
|
|
135,867
|
|
|||
|
General and administrative
|
(9,437
|
)
|
(8,592
|
)
|
|||
|
Depreciation and amortization
|
(73,379
|
)
|
(68,793
|
)
|
|||
|
Operating income
|
67,927
|
|
58,482
|
|
|||
|
Other income
|
2,792
|
|
2,331
|
|
|||
|
Other expenses
|
(2,086
|
)
|
(1,773
|
)
|
|||
|
Income, including depreciation, from unconsolidated real estate funds
|
1,668
|
|
1,113
|
|
|||
|
Interest expense
|
(33,268
|
)
|
(38,000
|
)
|
|||
|
Net income
|
37,033
|
|
22,153
|
|
|||
|
Less: Net income attributable to noncontrolling interests
|
(5,349
|
)
|
(1,909
|
)
|
|||
|
Net income attributable to common stockholders
|
$
|
31,684
|
|
$
|
20,244
|
|
|
41
Comparison of
six months
ended
June 30, 2018
to
six months
ended
June 30, 2017
|
Six Months Ended June 30,
|
Favorable
|
|||||||||||||||
|
(In thousands)
|
2018
|
2017
|
(Unfavorable)
|
Percentage
|
Commentary
|
|||||||||||
|
Office revenues
|
$
|
245,113
|
|
$
|
236,307
|
|
$
|
8,806
|
|
3.7
|
%
|
The increase was primarily due to an increase in rental and parking rates, as well as higher tenant recovery revenues reflecting increased recoverable operating costs.
|
||||
|
Office expenses
|
(80,667
|
)
|
(77,770
|
)
|
(2,897
|
)
|
(3.7
|
)%
|
The increase was primarily due to an increase in scheduled services expenses, repairs and maintenance, personnel expenses, utility expenses, legal fees and real estate taxes.
|
|||||||
|
Office NOI
|
164,446
|
|
158,537
|
|
5,909
|
|
3.7
|
%
|
||||||||
|
Multifamily revenues
|
42,015
|
|
40,950
|
|
1,065
|
|
2.6
|
%
|
The increase was primarily due to an increase in rental revenues due to an increase in rental rates, partially offset by a decrease in occupancy.
|
|||||||
|
Multifamily expenses
|
(10,671
|
)
|
(9,726
|
)
|
(945
|
)
|
(9.7
|
)%
|
The increase was primarily due to an increase in scheduled services expenses, repairs and maintenance, personnel expenses and utility expenses.
|
|||||||
|
Multifamily NOI
|
31,344
|
|
31,224
|
|
120
|
|
0.4
|
%
|
||||||||
|
Total NOI
|
$
|
195,790
|
|
$
|
189,761
|
|
$
|
6,029
|
|
3.2
|
%
|
|||||
Reconciliation to GAAP
The table below presents a reconciliation of our same property NOI to net income attributable to common stockholders:
|
Six Months Ended June 30,
|
|||||||
|
(In thousands)
|
2018
|
2017
|
|||||
|
Same Property NOI
|
$
|
195,790
|
|
$
|
189,761
|
|
|
|
Non-comparable office revenues
|
135,981
|
|
109,583
|
|
|||
|
Non-comparable office expenses
|
(41,507
|
)
|
(35,002
|
)
|
|||
|
Non-comparable multifamily revenues
|
8,607
|
|
7,273
|
|
|||
|
Non-comparable multifamily expenses
|
(2,935
|
)
|
(2,099
|
)
|
|||
|
NOI
|
295,936
|
|
269,516
|
|
|||
|
General and administrative
|
(19,004
|
)
|
(18,748
|
)
|
|||
|
Depreciation and amortization
|
(145,877
|
)
|
(136,167
|
)
|
|||
|
Operating income
|
131,055
|
|
114,601
|
|
|||
|
Other income
|
5,422
|
|
4,493
|
|
|||
|
Other expenses
|
(3,819
|
)
|
(3,497
|
)
|
|||
|
Income, including depreciation, from unconsolidated real estate funds
|
3,174
|
|
3,290
|
|
|||
|
Interest expense
|
(66,168
|
)
|
(74,954
|
)
|
|||
|
Net income
|
69,664
|
|
43,933
|
|
|||
|
Less: Net income attributable to noncontrolling interests
|
(9,774
|
)
|
(4,640
|
)
|
|||
|
Net income attributable to common stockholders
|
$
|
59,890
|
|
$
|
39,293
|
|
|
42
Liquidity and Capital Resources
Short-term liquidity
Excluding acquisitions, development projects and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand, cash generated by operations and our revolving credit facility. See Note
7
to our consolidated financial statements in Item 1 of this Report for more information regarding our revolving credit facility.
Long-term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development projects and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to the requirement to distribute a substantial majority of our income on an annual basis imposed by REIT federal tax rules. We plan to meet our long-term liquidity needs through long-term secured non-recourse indebtedness, the issuance of equity securities, including common stock and OP Units, and JV transactions. We have an ATM program which would allow us, subject to market conditions, to sell up to
$400 million
of shares of common stock as of the date of this Report.
To mitigate the impact of changing interest rates on our cash flows from operations, most of our long-term secured loans carry fixed interest rates, and we generally enter into interest rate swap agreements with respect to our loans with floating interest rates. These swap agreements generally expire between one to two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. See Notes
7
and
9
to our consolidated financial statements in Item 1 of this Report for more information regarding our debt and derivative contracts, respectively.
Contractual Obligations
See Note
7
to our consolidated financial statements in
Item 1
of this Report for information regarding our minimum future principal payments due on our secured notes payable and revolving credit facility, as well as the interest rates that determine our future periodic interest payments, Note
15
for information regarding our minimum future ground lease payments, and Note
16
for information regarding our contractual obligations related to our developments, capital expenditure projects and repositionings.
Off-Balance Sheet Arrangements
Unconsolidated Funds Debt
Our unconsolidated Funds have their own secured non-recourse debt, and we have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to those loans. We have also guaranteed the related swaps. Our Funds have agreed to indemnify us for any amounts that we would be required to pay under these agreements. As of
June 30, 2018
, all of the obligations under the respective loans and swap agreements have been performed in accordance with the terms of those agreements. See Note
16
to our consolidated financial statements in Item 1 of this Report.
43
Cash Flows
Comparison of
six
months ended
June 30, 2018
to
six
months ended
June 30, 2017
|
Six Months Ended June 30,
|
|||||||||||||||||
|
(In thousands)
|
2018
|
2017
|
Increase (Decrease)
|
Percentage
|
|||||||||||||
|
Cash flows provided by operating activities
(1)
|
$
|
215,880
|
|
$
|
198,602
|
|
$
|
17,278
|
|
8.7
|
%
|
||||||
|
Cash flows used in investing activities
(2)
|
$
|
(95,827
|
)
|
$
|
(401,648
|
)
|
$
|
(305,821
|
)
|
(76.1
|
)%
|
||||||
|
Cash flows (used in) provided by financing activities
(3)
|
$
|
(126,307
|
)
|
$
|
263,270
|
|
$
|
(389,577
|
)
|
(148.0
|
)%
|
||||||
___________________________________________________
|
(1)
|
Our cash flows
provided by
operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectability of rent and recoveries from our tenants, and the level of our operating expenses and general and administrative costs, and interest expense. The
increase
was primarily due to (i) an increase in operating income from our office portfolio due to acquisitions in 2017 and increasing rental rates and (ii) a decrease in interest expense due to lower debt balances.
|
|
(2)
|
Our cash flows
used in
investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The
decrease
is primarily due to a $354.0 million paid for properties acquired in 2017, partially offset by (i) an increase of $21.8 million for capital expenditures for improvements to real estate and (ii) a decrease of $36.2 million in the capital distributions received from our Funds.
|
|
(3)
|
Our cash flows
used in
financing activities are generally impacted by our borrowings and capital activities, as well as dividends and distributions paid to common stockholders and noncontrolling interests, respectively. The
decrease
is primarily due to (i) $188.2 million in contributions from non-controlling interests in 2017 and (ii) $277.0 million in proceeds from the issuance of common stock during 2017, partially offset by (iii) a decrease of $52.4 million in payroll taxes paid related to the exercise of stock options and (iv) a decrease of $41.1 million in net borrowings.
|
Critical Accounting Policies
We adopted ASUs during the period covered by this Report that changed our accounting policy for revenue recognition - see Note
2
to our consolidated financial statements in Item 1 of this Report for a discussion of recently issued and adopted accounting literature. We have not made any other changes during the period covered by this Report to our critical accounting policies disclosed in our
2017
Annual Report on Form 10-K. Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP, and which requires us to make estimates of certain items, which affect the reported amounts of our assets, liabilities, revenues and expenses. While we believe that our estimates are based upon reasonable assumptions and judgments at the time that they are made, some of our estimates could prove to be incorrect, and those differences could be material. Some of our estimates are subject to adjustment as we believe appropriate, based on revised estimates, and reconciliation to actual results when available.
We use derivative instruments to hedge interest rate risk related to our floating rate borrowings. However, our use of these instruments exposes us to credit risk from the potential inability of our counterparties to perform under the terms of those agreements. We attempt to minimize this credit risk by contracting with a variety of high-quality financial counterparties. See Notes
7
and
9
to our consolidated financial statements in
Item 1
of this Report for more information regarding our debt and derivatives. At
June 30, 2018
,
5.5%
of our consolidated debt was unhedged floating rate debt. A fifty-basis point change in the one month USD LIBOR interest rate would result in an annual impact to our earnings (through interest expense) of
$1.1 million
. We calculate interest sensitivity by multiplying the amount of unhedged floating rate debt by fifty-basis points.
44
As of
June 30, 2018
, the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of management, including our CEO and CFO, regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at the end of the period covered by this Report. Based on the foregoing, our CEO and CFO concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow for timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting that occurred during the quarter ended
June 30, 2018
, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
45
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.
Except for any additional relevant information disclosed in our public reports during
2018
, we are not aware of any other material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
None.
None.
Not applicable.
None.
|
Exhibit Number
|
Description
|
|
|
31.1
|
||
|
31.2
|
||
|
32.1*
|
||
|
32.2*
|
||
|
101.INS
|
XBRL Instance Document.
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
________________________________________________
* In accordance with SEC Release No. 33-8212, these exhibits are being furnished, and are not being filed as part of this Report on Form 10-Q or as a separate disclosure document, and are not being incorporated by reference into any Securities Act registration statement.
46
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
DOUGLAS EMMETT, INC.
|
|||
|
Date:
|
August 3, 2018
|
By:
|
/s/ JORDAN L. KAPLAN
|
|
|
|
|
Jordan L. Kaplan
|
||
|
|
|
President and CEO
|
||
|
Date:
|
August 3, 2018
|
By:
|
/s/ MONA M. GISLER
|
|
|
|
|
Mona M. Gisler
|
||
|
|
|
CFO
|
||
47
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits